Mortgage Loans

A&B Abstract

This blog post is part four of a five-part series examining the Consumer Financial Protection Bureau’s (the “CFPB” or “Bureau”) proposed rule amending Regulation F (“Proposed Rule”), which implements the Fair Debt Collection Practices Act (“FDCPA”) to prescribe rules governing the activities of debt collectors.

In part one of this series, we provided a brief overview of the FDCPA and the Proposed Rule’s most impactful provisions.  In part two, we summarized the key provisions of the Proposed Rule relating to debt collector communications with consumers.  In part three, we summarized the key provisions of the Proposed Rule relating to debt collectors’ disclosures to consumers.  This post summarizes certain additional conduct provisions under the Proposed Rule.  These include provisions relating to decedent debt, the collection of time-barred debt, credit reporting restrictions, and restrictions on a debt collector’s ability to transfer, sell, or place a debt for collection.

Proposed Provisions Related to Decedent Debt

The FDCPA defines a “consumer” as any natural person obligated or allegedly obligated to pay any debt.  Under the Proposed Rule, this definition would be revised to make clear that a “consumer” includes any natural person, whether living or deceased, obligated or allegedly obligated to pay any debt.  In addition, for purposes of the Proposed Rule’s provisions regarding communications in connection with debt collection (proposed section 1006.6) and the prohibition on communicating through a medium of communication that the consumer has requested the debt collector not use (proposed section 1006.14(h)), proposed section 1006.6(a)(5) would interpret FDCPA section 805(d)’s definition of the term consumer to include:

1. The consumer’s spouse;
2. The consumer’s parent, if the consumer is a minor;
3. The consumer’s legal guardian;
4. The executor or administrator of the consumer’s estate, if the consumer is deceased; and
5. A confirmed successor in interest, as defined in Regulation X, 12 CFR 1024.31, and Regulation Z, 12 CFR 1026.2(a)(27)(ii).

Under Regulations X and Z, a successor in interest is a person to whom a borrower transfers an ownership interest either in a property securing a mortgage loan subject to subpart C of Regulation X, or in a dwelling securing a closed-end consumer credit transaction under Regulation Z, provided that the transfer is:

1. A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
2. A transfer to a relative resulting from the death of a borrower;
3. A transfer where the spouse or children of the borrower become an owner of the property;
4. A transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property; or
5. A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.

A confirmed successor in interest, in turn, means a successor in interest whose identity, and ownership interest in the relevant property type, have been confirmed by the servicer of the loan.

The Bureau has previously explained that the word “includes” in FDCPA section 805(d) indicates that section 805(d) is an exemplary, rather than an exhaustive, list of the categories of individuals who are consumers for purposes of that section. The Bureau has further explained that, “given their relationship to the individual who owes or allegedly owes the debt, confirmed successors in interest are—like the narrow categories of persons enumerated in FDCPA section 805(d)—the type of individuals with whom a debt collector needs to communicate about the debt.”  The Bureau is seeking comment on the proposed definition of “consumer” under section 1006.6(a)(5), including on the benefits and risks of communications about debts between debt collectors and confirmed successors in interest.

In addition, proposed comment 6(a)(4) would clarify that the terms “executor or administrator” also include the personal representative of the consumer’s estate.  The proposed commentary would explain that a personal representative is any person who is authorized to act on behalf of the deceased consumer’s estate.  Persons with such authority may include personal representatives under the informal probate and summary administration procedures of many states, persons appointed as universal successors, persons who sign declarations or affidavits to effectuate the transfer of estate assets, and persons who dispose of the deceased consumer’s assets extrajudicially.

The proposed comment would adapt the general description of the term personal representative from Regulation Z, 12 CFR 1026.11(c), comment 11(c)-1 (persons “authorized to act on behalf of the estate”) rather than the general description found in the Federal Trade Commission’s (“FTC”) Policy Statement on Decedent Debt (persons with the “authority to pay the decedent’s debts from the assets of the decedent’s estate.”). The Bureau has indicated that it believes this change is non-substantive. The Bureau is requesting comment on the scope of the definition of personal representative in proposed comment 6(a)(4)-1 and on any ambiguity in the illustrative descriptions of personal representatives.  Interested stakeholders should consider the potential operational challenges associated with validating and documenting whether a person is in fact the personal representative of a deceased consumer’s estate, given that disclosure regarding a consumer’s debt to the wrong person could result in a prohibited third-party disclosure.  Thus, debt collectors and other industry stakeholders should determine whether additional guidance from the Bureau is needed.

In addition, we note proposed section 1006.18’s general prohibition against false, deceptive, or misleading representations, which the Bureau has indicated would apply to express or implied misrepresentations that a personal representative is liable for the deceased consumer’s debts.  The Bureau is requesting comment on whether the general prohibition against false, deceptive, or misleading representations in proposed section 1006.18 is sufficient to protect individuals who communicate with debt collectors about a deceased consumer’s debts, or whether affirmative disclosures in the decedent debt context are needed.

Proposed Provisions Regulating the Collection of Time-Barred Debts

Under current law, multiple courts have held that suits and threats of suit on time-barred debt violate the FDCPA, reasoning that such practices violate FDCPA section 807’s prohibition on false or misleading representations, FDCPA section 808’s prohibition on unfair practices, or both.  The FTC has similarly concluded that the FDCPA bars actual and threatened suits on time-barred debt.

Nevertheless, the Bureau has indicated that its enforcement experience suggests that some debt collectors may continue to sue or threaten to sue on time-barred debts.  Furthermore, in response to its Advanced Notice of Proposed Rulemaking, issued in November 2013, the Bureau indicated that some consumer advocacy groups and State Attorneys General observed that consumers are often uncertain about their rights concerning time-barred debt and that those observations have been borne out by the Bureau’s own consumer testing.

Consequently, the Proposed Rule would interpret FDCPA section 807 to provide that a debt collector must not bring or threaten to bring a legal action against a consumer to collect a debt that the debt collector “knows or should know” is a time-barred debt because such suits and threats of suit explicitly or implicitly misrepresent, and may cause consumers to believe, that the debts are legally enforceable. The Bureau has indicated that the Proposed Rule “may provide debt collectors with greater certainty as to what the law prohibits while also protecting consumers and enabling them to prove legal violations without having to litigate in each case whether lawsuits and threats of lawsuits on time-barred debt violate the FDCPA.”  However, it is unclear how the “knows or should know” standard will be applied.  The Bureau appears to have acknowledged as much, indicating that “sometimes [it] may be difficult…to determine whether a ‘know or should have known’ standard has been met” and that “[s]uch uncertainty could increase litigation costs and make enforcement of proposed section 1006.26(b) more difficult.”  Therefore, the Bureau has specifically requested comment on using a “knows or should know” standard in proposed section 1006.26(b) as well as on the advantages of using a strict liability standard in its place.

While it is notable that the Bureau did not take the additional step of prohibiting the collection of time-barred debt in a non-judicial setting, it has indicated that it is “likely to propose that debt collectors must provide disclosures to consumers when collecting time-barred debts.” The Bureau has indicated that it is currently completing its evaluation of “whether consumers take away from non-litigation collection efforts that they can or may be sued on a debt and, if so, whether that take-away changes depending on the age of the debt.” The Bureau is also evaluating how a time-barred debt disclosure might affect consumers’ understanding of whether debts can be revived. Specifically, the Bureau is considering disclosures that would inform a consumer that, because of the age of the debt, the debt collector cannot sue to recover it, and would also include, where applicable, a disclosure that would inform a consumer that the right to sue on a time-barred debt can be revived in certain circumstances.

The Bureau has indicated that it plans to conduct additional consumer testing of possible time-barred debt and revival disclosures to further inform its evaluation of any time-barred debt disclosures. The Bureau intends to issue a report on such testing and any disclosure proposals related to the collection of time-barred debt and will provide stakeholders with an opportunity to comment on such testing if the Bureau does in fact intend to use it to support disclosure requirements in a final rule.

Proposed Restrictions on Credit Reporting

The Bureau noted that some debt collectors engage in so-called “passive” collections by furnishing information to consumer reporting agencies without first communicating with consumers.  Accordingly, in order to mitigate the perceived harm that a consumer may suffer if a debt collector furnishes information to a consumer reporting agency without first communicating with the consumer, proposed section 1006.30(a) would prohibit a debt collector from furnishing information regarding a debt to a consumer reporting agency before communicating with the consumer about the debt.

In addition, the Bureau noted that during the Small Business Regulatory Enforcement Fairness Act (“SBREFA”) process, industry stakeholders expressed concern over the potential burden associated with documenting, such as by using certified mail, that a consumer received a communication and recommended that the Bureau consider clarifying the type of communication that would be sufficient to satisfy the requirement, including clarifying that debt collectors do not need to send the validation notice by certified mail.

To address the recommendation that came out of the SBREFA process, the Bureau is proposing comment 30(a)-1.  In particular, proposed comment 30(a)-1 would clarify that a debt collector would satisfy proposed section 1006.30(a)’s requirement to communicate if the debt collector conveyed information regarding a debt directly or indirectly to the consumer through any medium, but a debt collector would not satisfy the communication requirement if the debt collector attempted to communicate with the consumer but no communication occurred.  By way of example, a debt collector would be considered to have communicated with the consumer if the debt collector provides a validation notice to the consumer, but a debt collector would not be considered to have communicated with the consumer by leaving a limited-content message for the consumer.

The Bureau is seeking comment on proposed section 1006.30(a) and its related commentary.  In light of the record retention requirements that would be imposed under the Proposed Rule—which would require a debt collector to retain evidence of compliance with the Proposed Rule for three years—debt collectors and other industry stakeholders should consider whether additional guidance is needed regarding the level of documentation or other evidence of compliance needed to satisfy proposed section 1006.30(a) and the record retention requirements under proposed section 1006.100.

Proposed Provisions Governing Transfers of Debt

In promulgating the Proposed Rule, the Bureau noted that the “sale, transfer, and placement for collection of debts that have been paid or settled or discharged in bankruptcy, or that are subject to an identity report creates risk of consumer harm.”  Specifically, if a debt is paid or settled, or discharged in bankruptcy, the debt is either extinguished or uncollectible, and if a debt is listed on an identity theft report, the debt likely resulted from fraud, in which case the consumer may not have a legal obligation to repay it.

The Bureau has noted that when the FDCPA became law, debt sales and related transfers were uncommon. However, in more recent years, debt sales and transfers have become more frequent. As a result, the Bureau has noted that the “general growth in debt sales and transfers may have increased the likelihood that a debt that has been paid, settled, or discharged in bankruptcy may be transferred or sold.”  Additionally, identity theft may increase the number of debts that are created if consumers’ identities are stolen and their personal information is misused.

To address these perceived risks, proposed section 1006.30(b)(1)(i) generally would prohibit a debt collector from selling, transferring, or placing for collection a debt if the debt collector “knows or should know” that the debt has been paid or settled, discharged in bankruptcy, or that an identity theft report has been filed with respect to the debt.

Moreover, with respect to a debt collector that is collecting a consumer financial product or service debt, proposed section 1006.30(b)(ii) would identify as an unfair act or practice under Dodd-Frank the sale, transfer, or placement for collection of such debt.

The Proposed Rule would provide an exemption from this general prohibition for transfers made to the debt’s owner.  The Bureau is also proposing the following three additional exemptions that parallel the exemptions found in the Fair Credit Reporting Act, including:

1. Transferring the debt to a previous owner of the debt if transfer is authorized under the terms of the original contract between the debt collector and the previous owner;
2. Securitizing the debt or pledging a portfolio of such debt as collateral in connection with a borrowing; or
3. Transferring the debt as a result of a merger, acquisition, purchase and assumption transaction, or transfer of substantially all of the debt collector’s assets.

The Bureau is seeking comment on several issues related to this proposal, including:

• On whether additional categories of debt, such as debt currently subject to litigation and debt lacking clear evidence of ownership, should be included in any prohibition adopted in a final rule;
• On how frequently consumers identify a specific debt when filing an identity theft report, and on how frequently debt collectors learn that an identity theft report was filed in error and proceed to sell or transfer the debt;
• On any potential disruptions that proposed section 1006.30(b)(1)(i) would cause for secured debts, such as by preventing servicing transfers or foreclosure activity related to mortgage loans; and
• On whether any of the currently proposed categories of debts should be clarified and, if so, how; and on whether additional clarification is needed regarding the proposed “know or should know” standard.

Takeaway

While the Bureau appears to be cognizant of the potential compliance issues associated with several of the aforementioned provisions of the Proposed Rule, it is unclear how the “knows or should know” standard will be interpreted and enforced or whether the standard will result in more litigation than otherwise anticipated.  Accordingly, debt collectors and other industry stakeholders should consider commenting on these and other provisions of the Proposed Rule.