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November 2, 2020

Stroock Client Alert

By: Quyen T. Truong

The Consumer Financial Protection Bureau’s 653-page order adopting its debt collection final rule (the “Rule”) contains a multitude of requirements and safe harbors, official comments and unofficial nuances.  The compliance deadline is set at one year from publication in the Federal Register, i.e., near year-end 2021.  The Rule applies only to third-party debt collectors subject to the Fair Debt Collection Practices Act, but has broad implications for creditors.  Rather than cataloging its details, we discuss below key takeaways – the impact on companies’ debt collection compliance and business models, the lingering liability exposure for creditors and other first-party debt collectors, the looming wave of litigation and enforcement, the next stage of debt collection regulation – and recommendations for company action.

1.    The Rule’s Call Frequency “Presumption” Requires Major Retooling of Debt Collection Business Models and Policies

In finalizing the Rule, the CFPB responded to industry concerns regarding its proposed call frequency limit (seven calls or call attempts for each debt within seven consecutive days or within seven days after having a conversation with the debtor) by converting the bright-line contact cap to a rebuttable presumption.  Seven calls is presumed lawful; more than seven, unlawful.  The presumption can be rebutted either way depending on other factors, such as whether the calls seek to provide time-sensitive information to help the debtor or to annoy, abuse or harass.  Because exceeding the presumptive call limit would provide grounds for an enforcement or plaintiff action, however, high risk attaches to company policies that set a significantly higher cap.  Debt collectors would be wise to realign their official policy and business model more closely to the Rule’s presumptive cap.  An advanced approach could incorporate more flexibility for certain categories of consumer friendly contacts.  

2.    The Rule Accelerates the Transition toward Electronic Communications for Debt Collection, But Requires Build Out of Robust Compliance Systems, Policies and Procedures

At the same time that it undercuts the traditional debt collection infrastructure, which relies on high-volume calling to trigger debt payment, the CFPB blesses the use of electronic communication through email, text and social media private messaging.  It mandates “a reasonable and simple method” for debtors to opt out, but does not require opt-in consent.  Leveraging the FDCPA section 813 bona fide error defense, the Rule also provides safe harbor from civil liability for an unintentional third-party disclosure if the debt collector’s procedures included “steps to reasonably confirm and document” that it (a) obtained and used the debtor’s email address or telephone number in accordance with one of the methods outlined under the Rule for the debt collector to obtain such address or number directly from the debtor or through notice-and-consent managed by the creditor, and (b) implemented processes to prevent using an email address or telephone number that it knew had led to unauthorized third-party disclosures.  Because the Rule’s presumptive contact cap does not cover electronic communications (although prohibitions on harassment and abuse do apply), debt collectors can increase their use of electronic communications to replace heavy reliance on high volume debt collection calls.  

But companies must build out new, automated compliance systems, policies and procedures to track the Rule’s numerous procedural steps and take advantage of its safe harbor.  For instance, a debt collector is deemed to know that an electronic communication to a telephone number or an email address has led to a prohibited third-party disclosure if any person has informed the debt collector of that fact.  Accordingly, it should implement “steps to reasonably confirm and document the debtors’ authorization of the use of their email addresses or telephone numbers, the acceptance and tracking of complaints regarding third-party disclosures, and the removal of those email addresses and phone numbers from the lists used for electronic communication.  As the creditor plays a particularly important role in regard to compliance for electronic communications (e.g., to send requisite customer notices, maintain, track and transfer to its collection agencies accurate contact information, consent and consent revocation, as well as complaints relating to each channel of contact), the creditor and its collection agencies should work hand-in-hand to deploy the new compliance framework.

3.    Liability Exposure Lingers for Creditors and Other First-Party Debt Collectors

Besides facing liability exposure for failing to manage its collection agencies’ legal compliance and for providing “substantial assistance” to their legal violations under the Consumer Financial Protection Act, creditors face the threat of liability for ignoring the Rule in conducting their own debt collection activities.  

The CFPB states that the Rule does not apply to first-party debt collectors who are not covered by the FDCPA.  In a change from the proposed rule, the CFPB specifies that no provisions in its final Rule are based on its Dodd-Frank Act section 1031 authority to promulgate rules regarding unfair, deceptive, or abusive acts and practices (UDAAPs).  The CFPB further explains that “[t]his rule also is not intended to address whether activities performed by entities that are not subject to the FDCPA may violate other laws, including the [section 1031 UDAAP] prohibitions.”  This clarification helps to address concerns that UDAAP references could be used to expand application of the Rule to include creditors and other first-party debt collectors, including their beneficial communications with consumers during the critical stages of early delinquency.  (The CFPB also clarifies that a debt buyer who collects or attempts to collect on purchased debts, but not on debts owed to another, and who does not have a business the principal purpose of which is the collection of debt, is not a debt collector under the FDCPA.)

But the CFPB “decline[d] to clarify” whether any particular actions taken by creditors and other first-party debt collectors would constitute UDAAPs.  Footnote 51 of the order adopting the Rule reiterates that the CFPB “does not take a position” on whether the third-party debt collector practices it prohibits under its FDCPA authority also would constitute UDAAPs.  A risk therefore remains that creditors and other first-party debt collectors could be deemed to commit UDAAPs if they engage in such practices.  While strict adherence to the Rule may be unnecessary, disregarding the Rule altogether entails significant risk.  Thus, vigilant creditors should revise those company policies that flout key aspects of the Rule, e.g., call limits that are set far higher than the Rule’s presumptive contact cap.  Conversely, creditors could benefit from adjusting their frameworks to align more with those devised by the CFPB for safe harbors under the Rule, as these could provide strong arguments against allegations of abuse, misrepresentation or unfair practices.

4.    Increased Litigation and Enforcement Loom Ahead

The CFPB bases a variety of requirements, prohibitions and safe harbors on standards of “reasonableness” and what the debt collector “knows or has reason to know.”  The Rule thus is likely to sow substantial uncertainty and persistent litigation related to these standards.  Companies relying on the safe harbors should recognize that safe harbors may not provide insulation from litigation and may spawn new litigation theories to the extent that they can be construed in such a way that compliance cannot be demonstrated at the pleading stage.

The states and federal authorities in future years also may interpret these standards aggressively, including pursuing enforcement actions that cast the practices prohibited under the Rule as UDAAPs under state and federal laws and thus extending these prohibitions to creditors and other first-party debt collectors. The states may pursue action under the Dodd-Frank Act Title X provisions authorizing them to enforce Title X and any regulations promulgated by the CFPB thereunder.  In addition, some states have statutes that mirror the FDCPA, expressly incorporate its provisions (e.g., California), or expressly rely on FDCPA interpretations (e.g., Florida).  And the laws in states such as California and Florida apply the FDCPA’s requirements to creditors, first-party and third-party debt collectors alike.  Most important, companies should expect states such as California and Massachusetts to refer to the Rule’s requirements (e.g., the presumptive calling cap) as a baseline for determining liability under state law.  Companies should recognize these state enforcement risks – and consider the impracticality of applying different standards for these aggressive jurisdictions – in making their compliance decisions and investments. 

5.    Next Steps in Debt Collection Regulation Promise Largely the Same Compromise Course

The CFPB plans to advance to the second stage of its debt collection rulemaking in December 2020, slated to focus primarily on consumer disclosures and tackle major issues including attempts to collect time-barred debt, credit reporting and debt validation.  The CFPB is likely to adhere to the same compromise approach in this next stage, from adopting more fluid provisions that include reasonableness components, to dropping proposed requirements and safe harbors that have triggered criticism by both the industry and consumer advocates.  It also will aim to provide more certainty for the industry in areas that have generated continual litigation – for instance, providing model forms to help stem the high volume of FDCPA lawsuits that center on the adequacy of debt validation notices.

Importantly, the potential for Congress to utilize the Congressional Review Act to invalidate the Rule no longer looms.  Although the Rule falls well within the deadline for review in the next legislative session, Congress is unlikely to exercise its CRA authority, given the long list of urgent matters competing for its attention, combined with stakeholders’ recognition that the Rule benefits their constituencies in some areas although it disadvantages them in others.

We continue to monitor developments in debt collection rulemaking, litigation and enforcement at both the federal and state levels, and work with our clients in developing practical compliance frameworks as the pandemic raises the stakes and the debt collection business model evolves.


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Quyen T. Truong

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.