CFPB gets tough with debt collectors as it readies rule

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The industry has largely praised the Consumer Financial Protection Bureau's cautious approach to regulating debt collection, but at the same time the agency has been willing to punish collectors that it sees treating borrowers unfairly.

The agency is expected to finish a rule next month setting limits on collectors' communications with debtors. Financial institutions supported the bureau's middle-of-the-road proposal last year, which was not as severe as restrictions initially proposed by former Obama-appointed CFPB Director Richard Cordray.

But observers say recent CFPB enforcement actions against two debt collection operations are a sign the agency still intends to crack down on certain activities, even if those activities are not highlighted in the upcoming rule.

“This is definitely a shot across the bow to the collection industry,” said Joann Needleman, leader of the consumer financial services group at the law firm Clark Hill, of the two recent actions.

This past week, the CFPB filed a lawsuit against Encore Capital Group, the nation's largest giant debt buyer and collector, claiming the San Diego company and its subsidiaries violated a 2015 consent order by filing at least 100 lawsuits against consumers to collect debts after the statute of limitations had expired. The CFPB also said Encore failed to provide consumers with the required documentation verifying debts, among other practices.

“The Bureau is committed to holding these companies and individuals accountable for threatening, harassing, and deceiving consumers," said CFPB Director Kathy Kraninger.
“The Bureau is committed to holding these companies and individuals accountable for threatening, harassing, and deceiving consumers," said CFPB Director Kathy Kraninger.

"The failure to provide these consumers with the [original account-level documentation] that they had requested impeded the consumers' ability to determine whether their debts were truly owed," the CFPB said in the complaint.

On the same day, the bureau filed a lawsuit with the New York attorney general against a network of five companies outside of Buffalo for allegedly using deceptive, harassing and improper methods to collect debts. The complaint accuses the companies of violating the Fair Debt Collection Practices Act by threatening arrests or other legal action that they did not intend to pursue, among other things.

“This lawsuit should send a clear message to debt collectors who violate the law that we will take action to stop such practices and protect consumers,” CFPB Director Kathy Kraninger said in a statement accompanying the complaint. “The Bureau is committed to holding these companies and individuals accountable for threatening, harassing, and deceiving consumers."

Observers said the enforcement actions are consistent with the suggestion from policymakers that debt collectors should suspend aggressive actions as consumers cope with the fallout from the coronavirus pandemic. They also imply the agency could take a tougher approach to punishing firms for "unfair, deceptive, or abusive acts and practices."

As the virus spread this past spring, many banks and auto lenders began self-imposed moratoriums on collecting debts. Most courthouses were closed, making collections difficult. Banks were also on the front lines helping small-business owners apply for loans and didn’t want to draw scrutiny from regulators by collecting debts when so many workers were unemployed.

Large debt buyers, however, took the opposite position, experts said. They continued to file lawsuits against defaulted consumers.

“There has been a big drumbeat to stop debt collection since COVID started," said Needleman. "We’re going back to the era for legal collections to be highly scrutinized again.”

The lawsuit against Encore and three of its subsidiaries, in particular, has struck a nerve within the industry. The bureau's action comes as the companies — which together exceed $1 billion in annual revenue and $75 million in annual net income — is still subject to a 2015 consent order alleging violations of the FDCPA, Consumer Financial Protection Act and Fair Credit Reporting Act. According to the new complaint, the companies allegedly collected time-barred debt without sending consumers certain disclosures, among other things.

“It looks like the CFPB said Encore didn’t take the previous consent decree seriously, so now they're bringing out the big stick,” said Robert Foehl, an executive-in-residence for business law and ethics at Ohio University and a former chief legal officer at ACA International, a debt collector trade group. “It’s like a thumb in the eye when a regulator finds a financial institution hasn’t corrected some of the things they’ve pointed out, they feel like they’re not being taken seriously.”

The CFPB said Encore filed more than 100 lawsuits and failed to respond within a 30-day time frame to more than 250 requests from consumers for original account-level documentation. Encore files millions of actions a year against consumers.

Greg Call, Encore's executive vice president, general counsel and chief administrative officer, said he was disappointed that the CFPB filed the lawsuit. The CFPB's 2015 consent order was set to expire after five years.

“Our efforts in 2015 to implement the CFPB’s new requirements under the consent order were quite thorough and effective, but for a very small percentage of transactions our execution was not immediately perfect," Call said. We have long since refined our processes, making the necessary changes to improve our operations, and provided appropriate relief for impacted accounts over three years ago.”

Needleman said the action against Encore appears to penalize activities that were excluded from the agency's 2018 debt collection proposal, suggesting that the agency's enforcement of laws governing debt collectors could be tougher than its rulemaking.

The CFPB's proposal last year would limit how often debt collectors can call borrowers about unpaid debts. It also would allow collectors to use emails and texts without first seeking consent from a consumer; consumers would be allowed to opt out of such communications.

But absent from Kraninger's plan was a requirement that collectors verify in advance that the debt they are trying to collect belongs to the person being contacted. Consumers advocates have criticized the CFPB for abandoning verification requirements that were a centerpiece of a 2013 rulemaking proposal under Cordray.

"It's interesting that the CFPB abandoned original account-level documentation in their proposal, and yet they are still enforcing it because they think it’s a UDAAP violation," said Needleman.

With a final rule expected soon, debt collectors are still trying to lobby for changes to how the bureau will treat debt that has passed the statute of limitations.

The bureau issued a supplemental proposed rulemaking earlier this year requiring that debt collectors disclose early on to consumers that they cannot sue to recover debt that exceeds a statute of limitations. The proposed rule would prohibit collectors from suing or threatening to sue for debts they know or should know are time-barred.

"Most people don’t even understand the statute of limitations and in many statutes, the statute can be reset if the person who owes the debt makes a payment or even promises to make a payment," said Foehl. "There’s a lot of threading of the needle that has to happen with this rulemaking."

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