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 ready to punish collectors who it believes see unfair treatment of borrowers.
The agency is expected to finalize a rule in the next month restricting collectors' communication with debtors. Financial institutions backed the bureau's mid-of-the-road proposal last year, which was not as strict as the restrictions originally proposed by former Obama-appointed CFPB director Richard Cordray.
However, observers say the recent CFPB enforcement actions against two collection agencies are a sign that the agency continues to intend to crack down on certain activities, even if those activities are not highlighted in the upcoming rule.
"This is definitely a shot for the debt collection industry," said Joann Needleman, head of the Consumer Financial Services Group at law firm Clark Hill, of the two most recent moves.
Last week, the CFPB filed a lawsuit against Encore Capital Group, the country's largest giant debt buyer and collector. She alleged the San Diego company and its subsidiaries violated a 2015 informed consent form by filing at least 100 lawsuits against consumers for debt collection after the law the restrictions had expired. The CFPB also said that, among other things, Encore failed to provide consumers with the necessary documentation to verify the debt.
"The office is committed to holding these companies and individuals accountable for the threats, harassment and deception of consumers," said CFPB Director Kathy Kraninger.
"Failure to provide these consumers with the [original account-level documentation] they requested [original documentation] compromised consumers' ability to determine whether their debts were actually owed," the CFPB said in the complaint.
On the same day, the office filed a lawsuit with the New York attorney general against a network of five companies outside of Buffalo for allegedly using misleading, harassing, and inappropriate methods to collect debts. The complaint accuses the companies of violating the Fair Collection Practices Act including threats of arrest or other legal action they did not want to pursue.
"This lawsuit should send a clear message to debt collection agencies that are in breach of the law that we will take steps to stop such practices and protect consumers," said CFPB Director Kathy Kraninger in a statement accompanying the complaint. "The Bureau is committed to holding these companies and individuals accountable for the threats, harassment and deception of consumers."
Observers said enforcement measures are in line with policy makers' suggestion that debt collectors should stop taking aggressive action once consumers cope with the aftermath of the coronavirus pandemic. They also imply that the agency could punish companies more severely for "unfair, misleading or abusive acts and practices".
As the virus spread last spring, many banks and auto lenders began self-imposed moratoriums on debt collection. Most of the courthouses were closed, making collection difficult. Banks were also at the forefront of helping small business owners apply for credit and didn't want to be investigated by regulators by collecting debt when so many workers were out of work.
Big debt buyers, however, took the opposite position, experts said. They continued to file lawsuits against defaulting consumers.
"Since COVID started there has been a big drum beat to stop the collections," Needleman said. "We're going back to the era when legal collections had to be scrutinized again."
In particular, the lawsuit against Encore and three of its subsidiaries hit a nerve in the industry. The office has taken action because the companies, which have combined annual sales of over $ 1 billion and net income of $ 75 million, are still subject to a 2015 Consent Ordinance in violations of the FDCPA, Consumer Financial Protection Act and the Fair Credit Reporting Act are invoked. According to the new complaint, the companies allegedly withdrew statute-barred debts without, among other things, disclosing certain information to consumers.
"It looks like the CFPB said Encore didn't take the previous consent decree seriously and they are now bringing out the big stick," said Robert Foehl, a senior business law and ethics officer at Ohio University and a former chief Legal Officer at ACA International, a debt collection group. "It's like a thumb in the eye when a regulator finds that a financial institution hasn't corrected some of the things they pointed out. You feel like they're not being taken seriously."
According to CFPB, Encore filed more than 100 lawsuits and did not respond to more than 250 requests from consumers for original account-level documentation within 30 days. Encore files millions of consumer lawsuits annually.
Greg Call, Encore's executive vice president, general counsel and chief administrative officer, said he was disappointed that the CFPB filed the lawsuit. The approval ordinance of the CFPB for 2015 expired after five years.
"Our efforts in 2015 to implement the new CFPB requirements under the Consent Regulation were quite thorough and effective, but for a very small percentage of transactions, our execution was not immediately perfect," said Call. We have long since refined our processes and made the changes necessary to improve our business operations and appropriate relief for affected accounts over three years ago. "
Needleman said the action against Encore appears to be penalizing activities excluded from the agency's 2018 collection proposal, suggesting that the agency's enforcement of debt collection agency laws may be tougher than its rulemaking.
The CFPB's proposal last year would limit the number of times collection agencies can call borrowers about unpaid debt. It would also allow collectors to use email and text without first seeking consumer consent. Consumers could opt out of such communications.
In Kranninger's plan, however, there was no requirement that collectors must verify in advance that the debts they are trying to collect belong to the person contacted. Consumer advocates have criticized the CFPB for abandoning the verification requirements that were at the core of a 2013 rule-making proposal under Cordray.
"It is interesting that the CFPB abandoned the original account-level documentation in their proposal and they still enforce it because they believe it is a UDAAP violation," said Needleman.
With a final rule expected shortly, the collection agencies are still trying to advocate changes in the handling of debts that have passed the statute of limitations.
Earlier this year, the bureau issued a supplementary rule suggestion that debt collection agencies must give consumers early notice that they are unable to collect debts that exceed a statute of limitations. The proposed rule would prohibit collectors from suing or suing any debt that they know or should know is statute-barred.
"Most people don't even understand the statute of limitations, and in many laws the statute of limitations can be reset if the person who owes the debt makes a payment or even promises to make a payment," Foehl said. "With this rule creation a lot of needle has to be threaded."