• Paul Peter Nicolai

What Creditors Need to Know About the New Federal Debt Collection Rule

The Consumer Financial Protection Bureau (“CFPB”) has finalized two parts of its debt collection rule under the Fair Debt Collection Practices Act (“FDCPA”). They become effective on November 30, 2021. There are implications for creditors. This memo highlights some points creditors should know.

Not Limited to Third-Party Collectors.

The regulation could affect a creditor regardless whether it is doing first-party or third-party collections or is a debt buyer. If a creditor is a “debt collector” under the FDCPA, the regulation applies and it must comply. Even if a creditor is not a “debt collector” directly subject to it, the regulation could impact collection functions.

Most creditors hiring third-party debt collectors have oversight responsibilities. Part of that entails evaluating a vendor’s ability to comply with law. Creditors must know the regulation to analyze collection agencies to fulfill their oversight responsibilities.

Other laws may require or cause creditors performing first-party collections to follow all or part of the regulation. The FDCPA and the regulation have broad prohibitions on using unfair, unconscionable, false, deceptive, misleading, harassing, abusive or oppressive practices or means to collect a consumer debt. They also identify specific prohibited collection conduct. The specific prohibitions under the FDCPA and the regulation could inform regulator views of collection conduct that is unfair, deceptive or abusive when exercising their enforcement authority against creditors and their first-party collectors.

Commentary accompanying the final rule declines to say whether a particular action would violate the federal Consumer Financial Protection Act. As a result, creditors and first-party collectors may choose to follow all or part of the regulation to reduce the risk of engaging in prohibited acts when collecting debts. Creditors should take a look at how and to what extent the regulation impacts collection practices.

Communication Practices.

The CFPB intended to provide guidance and more legal certainty on debt collector’s use of communication channels like voicemail, email and text messaging. Many have stayed away from using these channels because of uncertainty created by court decisions. At the same time, the regulation limits the number of telephone calls a debt collector may place. Because it limits a traditional channel and provides guides for using new practices, the rule could encourage debt collectors to use new communication technologies.

The regulation also has new provisions that give consumers choices when it comes to receiving collection communications. If a consumer prefers to communicate with a debt collector through email but not text messages, the regulation requires a debt collector to respect that preference subject to exceptions. The degree to which the regulation gives consumers control of how a debt collector communicates with them may cause communication practices to evolve.

Changes to collection communication practices by debt collectors could require adjustments by creditors. Creditors may have to change vendor management tools to monitor new communication practices and perform oversight of activities for a time after the collector starts using the new communication practice.

More Involvement.

The new regulation could require a creditor to play a bigger role in third-party collections. It gives a safe harbor from the prohibition on unauthorized third party disclosures if a debt collector follows certain procedures when sending emails and text messages to consumers.

Those procedures require a debt collector to verify an email address or telephone number for text messages using one of the regulation's verification methods. For email, one method is the creditor sending advance notice to consumers on the debt collector’s future email communications. While other methods are available, the context may necessitate sending the specific notice to enable the debt collector to qualify for the safe harbor when corresponding with a consumer via email.

The regulation could also require a creditor to transfer more information to debt collectors. Debt collectors are required to disclose more debt validation information to consumers to help consumers identify the debt. The CFPB acknowledged debt collectors depend on creditors to provide the account information debt collectors must disclose to consumers. The CFPB said creditors will be incentivized to provide the account information to debt collectors to enable them to legally collect debts.

Judgment Calls.

Instead of prescriptive practices or express limits, the CFPB chose to use safe harbors and rebuttable presumptions. Like the FDCPA, the regulation has broad prohibitions on some collection conduct. This gives flexibility but also leaves debt collectors and creditors to use discretion and make judgment calls. Situations may come up that justify the risk of operating outside a safe harbor or placing a call that exceeds the call frequency presumption

More Complicated Than it Looks.

The regulation may seem clear, but when applied to the real world, situations could come up which make complications appear. Just because a practice is allowed by one part of the regulation does not mean it is permitted under other provisions.

State Law

US states and some cities regulate debt collection. State and local collection laws vary in scope from the federal law and regulations in terms of who is subject to it and what practices it covers. These state and local laws were developed around a static federal debt collection statute. The new provisions could create new state law compliance questions.