As the Consumer Financial Protection Bureau readies a proposal to rein in debt collectors, significant questions remain about how it plans to treat banks that collect their own debts as opposed to hiring third parties.
Some lawyers are even raising concerns that the CFPB lacks legal authority to regulate first-party debt collectors at all.
"Banks and other first-party debt owners are watching to see how much the CFPB will attempt to regulate them like third-party debt collectors," said David Bizar, an attorney at Seyfarth Shaw in Boston, who has represented Wells Fargo and other banks on debt-collection matters but isn't representing a client on this issue.
The CFPB has said it expects to issue the proposal by April. The banking industry has strongly urged the agency to treat first-party and third-party collectors differently.
The American Bankers Association, Consumer Bankers Association and Financial Services Roundtable co-authored a Feb. 28 letter to the CFPB, arguing it would be "incongruent with the lender-borrower relationship" for banks that collect their own debt to be regulated like outside debt collectors.
The distinction is important because third-party collectors must abide by the Fair Debt Collection Practices Act (FDCPA), while banks that collect their own debt are exempt from that law. Some banks and their legal counsel are concerned the CFPB will try to take the legal principles of the FDCPA and apply them to banks.
The CFPB's basis for regulating first-party collectors is likely to rest on its authority under the Dodd-Frank Act to cite institutions for Unfair and Deceptive Acts and Practices Act violations, banking attorneys said.
"They have consistently maintained that they can rely on [UDAP] as a basis for regulating all types of debt collection, regardless of who is collecting it," said Alan Kaplinsky, an attorney at Ballard Spahr. "There is no reason to think that they won't continue down that same path here."
One possible example of an unfair and deceptive practice would be if the collector uses "false, deceptive, or misleading representation" to try to collect debt, CFPB Director Richard Cordray said last year during a speech in Portland, Maine. That would apply to first-party and third-party collectors, he said. The CFPB also issued a bulletin on July 10, 2013 informing debt collectors that it plans to hold first-party and third-party collectors responsible for UDAP violations.
But some institutions fear that the CFPB will use their Dodd-Frank powers to extend all the requirements of the Fair Debt Collection Practices Act to first-party collectors. For instance, the FDCPA requires that certain types of notices must be provided to consumers within five days of the initial communication, said Caren Enloe, an attorney with Morris, Manning & Martin who represents banks and debt-collection firms.
"The FDCPA imposes certain requirements that would not make sense for banks," Enloe said.
In response to a question about how it plans to treat first-party and third-party collectors, an agency spokeswoman said, "The CFPB will continue to work to ensure consumers are protected across the debt collection marketplace. The Bureau can use a range of tools, including enforcement, supervision and rulemaking, as appropriate to address consumer harm."
But there is at least one lawyer who says the CFPB lacks any legal authority to regulate banks that collect their own debt. To be regulated under Dodd-Frank, a company must provide a financial service to consumers for "personal, family or household purposes," Whit Whitham, a banking attorney at Williams Mullen in Richmond, Va., wrote in a Feb. 21 public comment letter to CFPB.
But first-party collectors don't provide a financial product or service to consumers, Whitham wrote.
"To compel a consumer to part with money against his will serves the lender's interests, but it's not a service to the consumer," Whitham said in an interview.
Whitham's past clients have included Cardinal Financial in McLean, Va., and Colonial Virginia Bank in Gloucester, although he was not representing a specific client in the letter he sent to the CFPB.
Some banks may be able to successfully pursue cases against the CFPB based on Whitham's legal theory, Kaplinsky said.
"It's an interesting argument based on language in Dodd-Frank, which is hardly a model of clarity," Kaplinsky said. "It's possible a court might agree with them."
In response to Whitham's letter, a CFPB spokeswoman said, "The Bureau will consider all information that it received in the public comments in developing any proposed rules that it issues."
But consumer groups and others argue that the CFPB both can and should target first-party debt collectors.
Sergei Lemberg, a Stamford, Conn. Attorney who represents consumers in litigation with debt collectors, said the playing field isn't level when it comes to suing banks versus third-party collectors because of banks' exemption from the FDCPA.
"There is a gaping hole in the regulatory scheme," Lemberg said. "You can't sue banks in federal court, and you can only sue them in states that have laws covering banks."
He added that "the banks used to argue that they should be exempt because it would damage the relationship they have with their customer.
"I'm not sure that's true anymore," he said. The big banks "don't know their customers. You're a nobody to them."
As a result, both bankers and consumer groups are eagerly awaiting the CFPB's proposal next year.
"It's an open question" how the CFPB will regulate banks that collect their own debt, said Joann Needleman, president of the National Association of Retail Collection Attorneys. "To the extent they can do it at all is unchartered territory."