This is the fourth in our series of “perspective” articles about the CFPB’s Outline of Proposed Debt Collection Rules, released last week in advance of the next step in the rulemaking process, the SBREFA hearing.
Section IV of the Outline is devoted to the subjects of litigation disclosure and time-barred and obsolete debt. This article provides details and commentary on these topics.
The CFPB highlights in the Outline the results of a series of 2009 roundtables convened by the FTC and a July 2010 Study on debt buying which conclude that a majority of consumer debt collection lawsuits result in default judgments, as few consumers who are sued actually contest those allegations in court. The Bureau believes some consumers fail to defend themselves because they lack familiarity with court process, do not understand the consequences of not defending, and do not know where to find an attorney they can afford.
As a result, the CFPB is considering a proposal that would require debt collectors to provide a brief “litigation disclosure” in all written and oral communications in which they represent their intent to sue. The disclosure would inform the consumer that the debt collector intends to sue; that a court could rule against the consumer if he or she fails to defend a lawsuit; and that additional information about debt collection litigation, including contact information for others’ legal services programs, is available on the Bureau’s website and by calling the CFPB’s toll-free phone number.
The Bureau does not anticipate providing model language for this disclosure, but is interested in feedback about the usefulness of such.
Time-barred debt and obsolete debt
The Bureau is concerned that some debt collectors sue or threaten to sue on time-barred debt, and that they take advantage of consumers’ lack of understanding of statutes of limitations. Therefore they are considering a proposal to prohibit suit and threats of suit on time-barred debt.
The Bureau also believes that few consumers understand that making a payment on a time-barred debt will revive, or “re-start the clock” on that debt. Therefore they are also considering a proposal that would require disclosures, and to waive revival, in connection with the collection of time-barred debt and obsolete debt.
The Bureau would develop a disclosure and refine its contents and design based on consumer testing. The disclosure itself would consist of a brief, plain-language statement informing the consumer that, because of the age of the debt, the debt collector cannot sue to recover it.
The Bureau is considering the following in connection with these disclosures:
- Whether a collector should be required to make this disclosure only if the collector knew or should have known that the debt was time-barred, or whether a collector should be strictly liable (i.e., liability would attach regardless of the collector’s state of knowledge).
- Debt collectors would be required to include such a statement in the validation notice and in the first oral communication in which they request payment.
- Potentially, debt collectors should provide the disclosure at additional intervals, including possibly in each communication in which they seek payment.
- Subsequent debt collectors would be bound by the actions of prior collectors, and required to provide a time-barred debt disclosure in the validation notice and the first oral communication in which it requests payment (and possibly at additional intervals). Prior debt collectors on the account would have to pass along whether they had given the time-barred disclosure to the consumer. The idea is that this would avoid different collectors making different determinations about the status of the same debt.
The Bureau is also considering an “obsolescence disclosure” that would inform the consumer whether a particular time-barred debt can or cannot appear on a credit report. The Bureau is seeking input from SERs in the SBREFA hearing about the frequency with which debt collectors furnish information to reporting agencies on debts that are both time-barred and obsolete, and the challenges of providing disclosures to consumers relating to obsolescence.
The CFPB is also considering whether to prohibit collectors from collecting on time-barred debt that can be revived under state law unless they waive the right to sue on the debt. The Bureau is considering this because testing has revealed that the concept of “revival” is so counterintuitive that even a disclosure would be too confusing for consumers.
The Bureau reports that it considered alternate proposals, including bans on both the sale and collection of time-barred debt, however they are not planning to propose such alternatives because 1) other proposals may adequately address the risks and 2) these bans may have unintended consequences for consumers, such as causing more lawsuits earlier in the collection process.
Finally, the CFPB is considering a proposal to prohibit a debt collector from accepting payment on such a debt until the collector obtains the consumer’s written acknowledgement of having received a time-barred debt disclosure and an obsolescence disclosure. Debt collectors would be free to include, as a separate document that accompanies the validation notice, a form that consumers may use to acknowledge receipt. The Bureau does not anticipate providing a model form for this purpose.
The proposals above raise a number of issues. insideARM spoke with John Rossman, Attorney at Law with Moss & Barnett, and frequent insideARM contributor. Rossman had the following observations:
“The proposal for out-of-statute debt is incomplete because the actual language of the disclosure is not included. Further, I am concerned that the CFPB is considering the standard to be either whether the collector knew or should have known that the account is out of statute or imposing strict liability.
The complexity of the statute of limitations calculations – especially when taking into account borrowing statutes – is nearly impossible in many instances and imposing either of these standards on debt collectors would be harmful to the industry. It is concerning that the CFPB is considering a proposal that a debt collector cannot accept payment on a debt that is both past the statute of limitations and past credit report obsolescence unless the consumer confirms in writing that he or she received a disclosure about the statute of limitations and credit reporting.”
We also spoke with Rozanne Andersen, VP, licensed attorney and Chief Compliance Officer at Ontario Systems, who offered these thoughts:
The CFPB’s proposal for out of statute debt is perhaps the most predictable of all the proposals identified in the outline. We have long been aware of the FTC’s and the CFPB’s outright disdain for the practices related to the collection of out of statute debt and if the proposal finds its way into the final regulations, the CFPB will in my opinion effectively kill the practice altogether.
According to the CFPB, the proposals under consideration would prohibit suit and threats of suit on time-barred debt. [Page 20] I consider this to be a redundancy in the regulation. The FDCPA presently bars both of these actions regarding time barred debt and there is no need to restate current law.
Setting aside the litigation issue, the CFPB also has consumer protection concerns when a debt collector merely attempts to collect a time barred debt. They worry a consumer who does not know the statute of limitations has run on a particular debt, understand the concept of revival or grasp what the term statute of limitation means may “pay or prioritize a debt, including one the consumer does not owe, over a different obligation.” I agree with the CFPB, consumers should not be asked to pay debts they do not owe either before or after a statute of limitations expires. However, my sincerity meter moves to red when I read about the CFPB’s concern for the unsuspecting consumer who actually owes the debt and who may inadvertently pay a debt after the statute of limitations has expired or revive a statute of limitation on a debt they owe by merely making a payment.
One thing is for sure…collection agencies heavily invested in the collection of out of statute debt and obsolete debt may want to consider diversification of their portfolios sooner than later.
One additional consideration… the devil is in the details. How these rules, once finalized and effective, may be applied to existing inventories will have a significant impact on any firm holding Out of Statute accounts.
Read insideARM’s detailed coverage of the CFPB’s Outline of Proposed Rules
insideARM Perspective on CFPB Outline of Proposed Debt Collection Rules – Communication Part 1 (Contact frequency and voicemail messages)
insideARM Perspective on CFPB Outline of Proposed Debt Collection Rules – Communication Part 2 (General time, place, and manner restrictions; decedent debt; and consumer consent)
insideARM Perspective on CFPB Outline of Proposed Debt Collection Rules – Information Integrity (Data integrity, data transfer, substantiation, validation notice)
What Collectors Really Need to Know About the CFPB’s Proposed Rules - a podcast by Attorney John Rossman
Webinar: CFPB Rulemaking and Overview (August 16, repeated on August 18) – free for Compliance Professionals Forum members; $59 for others