With Democrats poised to regain leadership of the Consumer Financial Protection Bureau under the incoming Biden administration, efforts to regulate debt collectors could remain in flux.
President-elect Joe Biden is expected to replace CFPB Director Kathy Kraninger, an appointee of President Trump, after a Supreme Court decision allowing presidents to fire CFPB directors at will. Consumer advocates and some lawmakers want Kraninger's successor to rescind two recent debt collection rules and strengthen consumer protections amid the COVID-19 pandemic.
But banks and debt collectors are also hoping the CFPB weighs changes after the agency did an about-face in December by abandoning disclosures for so-called time-barred debt where state statutes of limitations have expired.
“We will continue to push for needed clarifications,” said Leah Dempsey, vice president and senior counsel at ACA International, a trade group representing debt collectors. "Our advocacy on behalf of the industry is not done."
Kraninger finalized the rules in the past two months ahead of an expected change in leadership at the bureau.
Biden could name a new acting CFPB director as early as January. But it is not clear whether a new leader at the CFPB would want to expend political capital repealing either of the rules or if any changes will be made, experts said.
Making changes to any final rule is a high bar that must meet the requirements of the Administrative Procedure Act. A challenge cannot be based merely on a difference in policy. To modify the rules, the CFPB would have to provide additional data and a rationale for doing so.
While the bureau could study the issue further, many think it will be hard to demonstrate a flaw in the rulemaking.
The CFPB even appeared to address the prospect of a challenge, noting that it has taken years to make changes to Regulation F, which implements the Fair Debt Collection Practices Act of 1977.
The rule “is the result of a deliberative process spanning more than seven years,” the bureau stated in a December press release. “The process also reflects engagement with consumer advocates, collectors, and other stakeholders.”
The first final debt collection rule released in October largely had the backing of the industry because it allows collectors for the first time to use email, text messages and voice mail to reach out to consumers about paying their debts. The rule restricts phone calls by debt collectors to seven calls a week.
But consumer advocates blasted the CFPB for requiring consumers to opt out of texts and emails rather than opt in, claiming that consumers will be bombarded with messages from collectors.
Others believe the October rule provides consumers with some leverage over collectors because consumers can set their own preferences for when and how they want to be contacted. The preferences can be revised and withdrawn at any time. Any failure by a collector to abide by a consumer's preferences can be deemed “abusive” and “unfair” conduct that can result in fines and penalties by the CFPB.
Both consumer advocates and trade groups appeared to be disappointed with the bureau’s second rule released in December that outlines the steps collectors must take to disclose to a consumer the existence of a debt. The rule also prohibits collectors from taking legal actions related to time-barred debt that has exceeded the statute of limitations.
Both rules go into effect in November 2021.
Some industry experts said the bureau’s December rule represented a departure from the bureau’s initial proposal that would have prohibited collectors from suing or threatening to sue a consumer on debts they “know or should know” exceed the statute of limitations.
“The rule codifies what courts have been saying for almost two decades and that is, you can’t sue on time-barred debt,” said Joann Needleman, an attorney in Philadelphia at the law firm Clark Hill.
Debt collectors wanted more clarity from the CFPB because states have different requirements for the treatment of time-barred debt that causes confusion for collectors and consumers.
Mark Neeb, CEO of ACA International, said time-barred debt generates a significant amount of “ongoing wasteful litigation.”
“The actions taken [by the CFPB] in the final rule miss the mark in providing clarity to the industry and consumers to untangle a complex regulatory environment in this area of the law,” Neeb said.
Consumer advocates often refer to time-barred debt as "zombie debt" because consumers may have no recollection of the debt. Moreover, the debts can be sold off for pennies on the dollar to firms that will try to collect 20 or even 30 years later.
Linda Jun, senior policy counsel at Americans for Financial Reform Education Fund, said debt collectors often try to lure consumers into paying some small amount of a time-barred debt even though consumers have no obligation to do so.
“Collectors should not be allowed to bring expired debt back to life by luring people into making a small payment that revives a debt that would otherwise be past the timeline for a lawsuit,” Jun said.
The CFPB also provided a model disclosure form that was meant to address confusion about how collectors communicate with consumers about their debt and how much is owed.
Some suggest that the industry will have to hew closely to the CFPB's model validation notice.
"While the bureau states that debt collectors can use a substantially similar form, any departure really exposes debt collectors to liability and I thought the rules were supposed to eliminate that," Needleman said.
The CFPB also prohibited collectors from sending information about a debt to a credit reporting agency before taking specific actions to contact the consumer about that debt. Collectors have several options including speaking to the consumer by phone, mailing a letter or sending an electronic "validation notice." Some collectors furnish information to a credit bureau before providing a validation notice to the consumer, often as a way to force the debtor to pay.
Advocates are raising concerns that consumers could miss the validation notices, particularly if they are sent electronically without the consumer's consent. Trade groups and collectors found the requirement problematic.
"I understand why the bureau wants some oversight here because consumers were not being made aware that some debts were being reported, but I am not sure that issue is unique to debt collectors," Needleman said. "Creditors report information [to credit bureaus] all the time that sometimes consumers are not aware of."
