CFPB Debt Collection Plan Doesn't Spare Banks

By Jeff Bater

Aug. 2 — Banks may have dodged the brunt of new Consumer Financial Protection Bureau proposals on debt collection, but they won't escape compliance costs for documentation requirements third-party collectors face under the agency's regulatory framework.

The bureau announced a regulatory outline July 28 that would overhaul the debt collection market by capping collector contact attempts and by helping to ensure that companies collect the correct debt. The proposals under consideration would increase protections pertaining to third-party debt collectors and others covered by the Fair Debt Collection Practices Act (FDCPA), including many debt buyers. The CFPB plans to address consumer protection issues involving first-party debt collectors, such as banks and other lenders, at another time.

Nevertheless, banks are likely to be affected by tougher standards the debt collection industry faces in verifying debts.

“This one really does have a direct effect on banks in terms of the costs that will be incurred to try to satisfy the requirements that the third-party debt collectors will inevitably be asking for in terms of documentation and making sure that the amount of the debt, the identification of the borrower, and all those things are verified across the board,” Kevin Petrasic, a partner at White & Case, told Bloomberg BNA. “I think that’s a big deal.”

The proposals, which are awaiting feedback and are a long way from final, are likely to have an “upstream effect” on creditors, including banks, Dong Hong, vice president and regulatory counsel for the Consumer Bankers Association, said in a phone interview. “So if there are more stringent requirements or more onerous requirements regarding documentation on the substantiation of debt, then that's going to place pressure upstream on the banks to provide that information to their collectors. And if the pressure is large enough, it may shift the economic pros and cons of using third-party collectors.”

Potential Liability

John K. Rossman, an attorney at Moss & Barnett in Minneapolis, said one burden banks face is a requirement to provide a written representation that they have adopted and implemented reasonable written policies and procedures to ensure that accuracy of transferred information about debts, and that the transferred information is identical to the information in the bank's records.

“Banks certainly endeavor to provide accurate information to debt collectors and most already have such policies in place,” Rossman said in an e-mail. “However, if the debt collector rules ultimately incorporate this requirement, banks will likely be subject to discovery from plaintiffs' lawyers in FDCPA and related lawsuits from plaintiffs' seeking information about the ‘reasonable written policies and procedures to ensure the accuracy of the transferred information.'”

“Further, if for some reason the information the bank provides to the debt collector is inaccurate, could this result in liability for the bank in a private cause of action (in additional to certain regulatory liability pursuant to UDAAP)?” he added, referring to unfair, deceptive, or abusive acts and practices as defined by the Dodd-Frank Act.

The CFPB has fielded about 250,000 debt collection complaints — around one-quarter of all the complaints it has received. “Last year alone, we fielded 85,000 debt collection complaints,” CFPB Director Richard Cordray said in remarks July 28 for a field hearing in Sacramento. “The largest segment had to do with continued attempts to collect a debt that the consumer said was improper, because it was not their debt in the first place or because it had already been repaid or discharged in bankruptcy.”

In its regulatory outline, the CFPB said it expects to convene a second proceeding in the next several months for creditors and others engaged in collection activity who are covered persons under the Dodd-Frank Act but who may not be treated as “debt collectors” under the FDCPA.

Experts see the CFPB using its UDAAP authority under Dodd-Frank when it gets around to releasing a proposal aimed at banks and other first-party creditors.

The Full Picture

The documentation requirements involved with the proposals announced July 28 for third-party collectors coupled with what Petrasic anticipates will be an eventual rule for banks “just magnifies the fact the original creditors are going to have to deal with both direct and indirect consequences from the CFPB's debt collection program,” he said

The CFPB is looking for a “clear chain of title and right of ownership” from one debt collector to the next, trying to avoid instances where a collection firm calls someone up without having a full picture of the situation because the firm has been sold an account that it didn’t get all the information regarding what the customer may have paid off or things like that, Petrasic said.

“I think it's a significant issue because the burden being imposed is a burden on third-party debt collectors, but it is essentially requiring them to ensure they have a clean title to claims against a consumer for debt claims when they get that information from the original creditor of the bank,” he said.

Rossman said banks will also be required to transmit to the debt collector information regarding – among other things – disputes and bankruptcy filings. “This could create a logistical quagmire for the bank seeking to coordinate a multi-channel flow of information, especially if the process includes a first-party customer service entity, a third-party debt collector and a collection attorney,” he said.

The CBA's Hong said the issues of data transfer and data integrity have been a very important component during the CFPB's three-and-a-half year look at debt collection. Member banks have done “a really good job” of abiding by a lot of the new guidance that has come out on data integrity from other regulatory bodies, like the Office of the Comptroller of the Currency, he added.

“Our practices amongst our members have gone to a pretty high level as a result of their efforts over the last several years,” Hong said. “We’re taking a look at the proposals from the CFPB now, the outline anyway, just to get a better feel if this is consistent with what the other regulators have said on this matter to make sure that they're not creating either conflicts or additional burdens that are unwarranted, given the changes the industry has made.”

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