Susan Eckert of Promontory Financial Group also contributed to this post.
In the first part of our article, we discussed the changing regulatory environment for debt collection, noting that third party collectors and debt buyers should be preparing themselves for bank-like compliance. In part two, we look at how banks have been regulated in the past and explore the key points of focus for the CFPB:
Increasing complexity in the challenge of maintaining data integrity
Adapting disclosures to help consumers recognize and dispute debts
Clarifying responsible use of new technologies
Although bringing first-party activities under the new debt-collection regulations would significantly expand the FDCPA’s formal reach, doing so may be necessary to address systemic information flaws. The CFPB and the FTC have described these flaws as the most pressing in debt collection based on frequent consumer complaints regarding collection calls for debts that are not theirs or for erroneous amounts.
The frequency of debt sales puts a priority on accurate information management. Each successive buyer faces the prospect of making collection and sale decisions based on progressively less accurate and complete information, due largely to inconsistent file information and documentation requirements, as well as incompatible information-management systems. In some cases, debt buyers may obtain account documentation only if they pay additional fees.
Whether contractual agreements for transferred debts adequately safeguard data integrity is a question that the OCC has taken on aggressively. Even after sale, the originating lender and interim collectors have a stake in the accuracy of information about the nature, amount, and status of a debt. For example, a collector that eventually uses litigation to recover on a pool of charged-off loans must rely on prior owners’ affidavits to establish debtor identity and the amount owed. A recent OCC enforcement action4 cited lax oversight of the affidavit process in this context as an unsafe and unsound practice.
The CFPB’s ANPR emphasizes data integrity and related issues, including information transferred to debt buyers or collection vendors, the relationship between the sale price of transferred debts and the amount of transferred information, the information that creditors or sellers retain, and the access rights of vendors and debt buyers to underlying account documentation.
Consumer Disclosure and Dispute Resolution
The CFPB’s proposal focuses attention on whether consumers have enough information to identify the debt being collected and understand their rights to challenge claims. With respect to the latter, key questions are whether current practices appropriately inform consumers of their ability to dispute claims and whether consumers unknowingly waive certain protections.
Here too, the frequency of outsourcing and debt buying is likely to be important. Since the institution and account from which the debt originated may not be provided and consumers are unlikely to have a direct connection to subsequent debt collectors, the transfer of debts may confuse consumers and undermine their ability to acknowledge or dispute claims. The CFPB is considering disclosure requirements to ensure the clarity, accuracy, and thoroughness of information provided during the collection process. One option under consideration is that the debt be identified by the original creditor, with the relevant account information, and a breakdown of the principal, interest, and fees owed.
Activities related to time-barred debt present a specialized issue. The ANPR seeks to identify what information consumers need to know and understand about their ability to contest certain collection activities for debts older than the applicable statute of limitations, and how to present that information effectively. As a hint of things to come, amicus briefs filed by the CFPB argue that the FDCPA requires collectors offering time-limited settlement options to inform consumers that the underlying debts cannot be collected through litigation, even where the collector has not raised the prospect of litigation.
New Technologies and the Regulatory Framework
The bureau’s proposal reflects the need to clarify the legality of using various technologies for collection purposes. The eventual rule is likely to mark the first time that a federal agency has comprehensively extended consumer protections to new communications technologies. Just as the CFPB’s mortgage servicing rulemaking is likely to set standards for student loan servicing, its resolution of technology- driven issues in debt collection will be an important marker for the use of technology in other areas.
The FDCPA prevented collectors from using only one form of communication — postcards — due to privacy concerns. The CFPB will have to balance the statute’s broad embrace of communications methods with privacy. Whether leaving a voice mail, registering inbound caller ID information, or sending messages via social media, debt collectors will likely get clarity regarding permissible forms of contact, requirements for stating identity and purpose, and prohibitions regarding inappropriate third-party disclosures. Further, there could be additional restrictions such as limiting text messages due to possible cost to the recipient, consistent with the Telephone Consumer Protection Act.
The bureau will also have the opportunity to reconcile conflicting requirements. One such area is determining how collectors can comply with limitations on calling before 8 a.m. or after 9 p.m. when a cellular phone is the debtor’s primary contact and may have an area code unrelated to the debtor’s current residence.
The bureau may also consider whether and to what extent technology providers should be brought into the regulatory framework. Efforts to hold payment processors accountable for actions taken by commercial clients suggest that the CFPB will be interested in leveraging all involved parties to create strong incentives in favor of responsible conduct.
Banking agencies’ actions have already laid the groundwork for the CFPB’s efforts. The OCC’s best practices for debt sales5 set the tone for collection reform by, in effect, treating such sales as a vendor-management scenario in which banks retain responsibility for the conduct of all subsequent purchasers/handlers. The agency expects national banks to:
Use scorecards to assess the compliance performance and associated reputational risks of debt buyers
Create a governance body to monitor debt sales and related controls
Conduct presale due diligence at the account level so that balances are accurately reported, title to all transferred debts is free and clear, and documentation is accurate
Enhance documentation provided to buyers to ensure responsible conduct
Limit subsequent resale through contractual requirements
Adopt contracting standards
Perform strategic assessments of buyers’ litigation strategies
Implement appropriate management reporting that tracks debt sales by business line, sales price, and repurchase risk
Subsequent vendor-management guidance from the OCC6 and Federal Reserve7 amplified these themes and clearly outlined oversight responsibilities for all vendors, including firms hired to collect debts in the original creditor’s name. Consequently, first-party collectors are asserting greater control of the overall default life cycle.
Getting Ahead of the Curve
Even in the absence of the CFPB’s final rule, the bureau and its prudential peers continue to vigorously examine lenders, vendors, and larger nonbank debt collectors. Responsible market participants need to develop two strategies — one for continually assessing and adapting their business practices and risk/compliance infrastructures, and another for engaging the bureau’s rulemaking process.
Critical evaluation of current practices on an ongoing basis is fundamental to effective risk management with respect to both safety and soundness and consumer protection. Given the current supervisory emphasis on debt collection, it is particularly important to ensure robust internal review of the adequacy of:
Collection and debt-sales policies and procedures, overall and with respect to prohibiting unfair, deceptive, or abusive acts or practices
Default-management hierarchy, from temporary and permanent workout programs to settlement offers and collateral foreclosure/repossession, including the consistency with which the various options are offered or pursued
Documentation and data-integrity processes and standards, including system(s) adequacy in light of heightened expectations
Procedures for obtaining and documenting consumer consent on issues ranging from use of cellular phones to authorizing electronic funds transfers
Monitoring and testing protocols and other controls for ensuring adherence to policies, procedures, and data integrity
Complaint management and dispute resolution processes
Credit-bureau reporting, including the dispute resolution process
Due diligence and ongoing monitoring processes for collection vendors and debt purchasers
Compliance with state and federal laws regarding recording of collection calls
Stricter regulation of collection activities will favor market participants that make proactive, speedy, and effective enhancements to processes, systems, and controls. Collection firms whose activities were subject to one of the CFPB’s first debt-collection exams or whose collection efforts have been reviewed by one of the banking agencies may find that early contact to be beneficial. In an environment of changing expectations, early investments in upgrading practices are likely to pay off. Tougher requirements will likely raise barriers to entry and allow established firms to further assert their market positions.
Susan Eckert and P-R Stark are members of Promontory Financial Group’s Consumer Protection Practice and provide clients with strategic, regulatory, and compliance advice. This article originally appeared in Promontory’s Sightlines newsletter, for which you can sign-up here.