CFPB Debt Collection Proposals Would Create Problematic New Substantiation Standard

This article previously appeared on Ballard Spahr’s CFPB Monitor and is re-published here with permission.

Gary Becker

The debt collection proposals outlined by the CFPB for the SBREFA panel are driven in large part by the CFPB’s reliance on the data derived from its complaint portal and a consumer survey conducted by the Bureau over several months in 2014-15. The survey results are remarkable in how closely they mirror the complaint portal data. Both sources indicate that the most common complaints made by consumers are that collectors have the wrong person or are asking for the wrong amount. The CFPB has never attempted to demonstrate systematically whether the complaints in the portal have any factual validity. And despite the fact that the survey developers apparently employed sophisticated methodology in targeting respondents, the Bureau also made no effort to take a subset of survey responses and attempt to verify whether or not the complaints had any basis in fact.

There is some very telling extrinsic evidence that the complaint data from both sources is flawed. One would not have to look long at the 10,000 FDCPA cases that are filed each year to determine that only a very small fraction of them involve the wrong person or the wrong balance—despite the fact that there could be no easier cases for consumers to win or lawyers to solicit. So it is not without some irony that the CFPB is now driving a series of reforms predicated on the belief that the collection industry operates on incomplete or inaccurate information when the CFPB has made no effort at external validation of its own data.

The proposals under consideration would require a debt collector to “substantiate” that a consumer owes a debt before starting collection. The CFPB’s proposed standard—that the collector “form a reasonable basis for claims of indebtedness”—follows from the Bureau’s view that “when a collector seeks to have a specific consumer pay a specific debt, the collector is at least implicitly claiming that the individual owes the debt or amount.” This view turns existing law on its head.

Under the FDCPA, a collector sending an initial collection letter only implicitly claims that it is familiar with the general business practices of its client such that its billing and accounting practices are reliable to a point where the collector may contact the consumer about a debt. An “implicit claim” that the specific consumer owes the precise amount in question is exactly what a generation of compliance lawyers have labored to eliminate from initial collection letters since the FDCPA’s inception. Many initial letters do not even ask for payment. There is no tacit message that the collector has reached back and conducted an audit of the client before sending its letter. If the consumer knows that the collector has made a mistake, the Validation Notice invites the consumer to make his or her objections.

The CFPB’s proposals set forth the following five sets of “fundamental information” that should be available to a collector so that it can form a reasonable basis as to a claim of indebtedness:

The full name, last known address and last known telephone number of the consumer. There are cases where phone numbers have been reassigned, which usually means the phone numbers will be deleted from the creditor’s system. And there may be accounts with other valid information that collectors can use to correctly identify consumers. Will accounts that require initial skip tracing be suspect?
The account number of the consumer with the debt owner at the time the account went into default. For some consumer creditors, account numbers change when accounts charge-off, although most creditors retain the original account numbers in their systems. There are creditors, however, such as hospitals and clinics, that do not provide consumers with individual account numbers, but rather assign a specific account number to each visit or type of service. It would be confusing for a collector to have to send the consumer multiple collection letters for a related series of medical services. Will the collector need to develop tests or algorithms to ascertain if the account numbers are valid or properly assigned or will the collector be allowed to rely on the account numbers it receives? In cases where judgments are collected, there are no account numbers for the simple reason that judgments are not accounts. What then?
The date of default; the amount owed at default and the date and amount of any credit applied after default. Many consumer lenders move their delinquent accounts to separate recovery platforms at the date of charge-off because charge-off, not the date of first delinquency, is the relevant date for collection purposes. As a result, collectors who receive accounts from these lenders see most data only from the charge-off date. Many lenders, including most larger ones, will have to invest significant time and expense in changing their own internal systems to capture and share this information.
Each charge for interest or fees imposed after default and the contractual or statutory source for such interest and fees. What level of review is the collector to conduct with this data? Will the creditor provide statutory and contractual annotations for each charge? How can a debt collector interpret the contractual or statutory sources for interest and fees without having an attorney conduct a legal review?
The complete chain of title from the debt owner at the time of the default to the collector. Major debt buyers already have the resources and sophistication to conduct the kind of due diligence necessary to resolve complex chain of title questions. Large collection agencies and some large national collection law firms will be able to retain the kind of legal talent necessary to interpret and resolve these issues. It is unlikely that smaller agencies and law firms will be in a position to conduct these reviews—either because they will not be able to afford the legal resources or because credit grantors may not be inclined to share confidential information about securitization pools, accounts receivable financing, and other arrangements which affect title to their accounts with a large group of external vendors.
A written representation from the debt owner that its data is accurate. The proposals contemplate that a creditor at time of default or a debt buyer would provide the collector with written assurance that it has “adopted written policies and procedures to ensure the accuracy of transferred information and that the transferred information is identical to the information in the debt owner’s records.” This “Representation of Accuracy” could be a very useful resource for collectors—especially smaller companies that do not have the ability to become familiar with the operation of large or distant creditors. However, if the document has the potential to create a roadmap for litigants to go after the deeper pockets of many creditors, it is unlikely to see widespread adoption.

The proposals would not mandate that a collector have access to all five categories of “fundamental information” or a Representation of Accuracy from the debt owner. But it appears that demonstrated reliance on these elements may provide some sort of safe harbor. The collector has the option of forming reasonable support for substantiating the debt with alternative information. However, in so doing, the collector has the burden of justifying its alternative approach.

Once the “fundamental information” is obtained, the collector has the responsibility to review the information, looking for “warning signs” that the information for an individual debt or an entire portfolio is not clearly understandable, facially implausible, or contradictory. The collector must also review the entire portfolio with an eye towards whether a significant percentage of accounts have missing or implausible information, or unresolved disputes.

Under the proposals, collectors would be responsible for failing to respond to any warning signs that they detect or should have detected. And this responsibility does not end after the first collection letter is sent. Collectors will have a continuing duty to respond to unspecified warning signs that might arise during the collection process in some unspecified way, and then would have to take additional steps to further substantiate those accounts (or even an entire debt portfolio) before proceeding.

My nearly 30 years of experience in the collections industry, which includes managing a national collections agency and founding one of the country’s largest collection law firms, allows me to assess the CFPB’s proposals from a unique vantage point. It is perhaps fair to say that there are suggested practices in these proposals, which if adopted pragmatically, could make good business and legal sense for many collectors. And there is no question that there are a substantial number of collectors with internal practices and controls that exceed those contemplated by the proposals under consideration. The question is whether a regulatory framework can be devised that can be assimilated and complied with by many of the smaller and very small businesses that make up the collection industry. That prospect seems unlikely.