A recent Court of Appeal ruling threatens to devastate the debt collection industry, while questions about the sustainability of the Consumer Financial Protection Bureau's debt collection regime, due to take effect within months, are raised.
In a surprise decision in April, a three-judge panel of the U.S. 11th Court of Appeals said a debt collection agency violated fair collections law by using a third-party vendor to deliver an official notice to a consumer of an outstanding debt .
The decision overturned a lower court's decision to dismiss the lawsuit, which meant the case could be sent back for a final outcome. Still, the appeals court said the collector violated the ban on disclosing a debtor's information to third parties.
Companies that routinely use third-party mail providers, especially mortgage service providers, say the decision has far-reaching ramifications. Currently, the ruling only applies to collection agencies in Florida, Georgia, and Alabama, but some have raised the possibility that it could be applied more broadly.
"It was a very surprising and extremely disruptive decision," said Justin Wiseman, vice president and executive director of the Mortgage Bankers Association. “It throws a cloud of uncertainty over the members of the MBA in these states. Mortgage service providers are reviewing their supplier relationships in the light of this decision. "
The case concerns plaintiff Richard Hunstein, who is suing Johns Hopkins All Children's Hospital for guilty of medical treatment for his son. The three-judge panel ruled that its case against a Tampa, Florida collection agency, Preferred Collection and Management Services Inc., can be continued. The judges said Preferred violated the FDCPA by electronically sending information about the debt to CompuMail Inc., a debt collection provider in Concord, California. The FDCPA blocks all communication about a debt towards third parties.
For decades, financial services companies have routinely been outsourced to vendors' back office functions, such as: B. Sending collection letters and other communications to consumers.
Experts say the court's decision turned long-established industry practice on its head.
"Everyone's been doing this for years," said Aaron Weiss, attorney and stockholder at Carlton Field. "The information is sent electronically to the mail seller. That's what they do, that's their inventory." And it goes without saying that this is not a problem. Now that decision is going to change the way things are done. "
Last year the CFPB issued a comprehensive rule that clarifies how often a collection agency can have electronic communication with a consumer and what types of information collection agencies must provide to consumers at the beginning of a collection.
When the rule was posted in December, the bureau said that 85% of debt collection agencies use third-party letter sellers to send notices to consumers to validate a debt. The CFPB has not commented on the court's decision and the potential impact on the model validation notices, an integral part of the rule.
"The entire financial services industry is based on supplier management. So it's not just about mail providers, but about every service provider who passes information on to third parties, especially in the area of debt collection," said Joann Needleman, head of the Consumer Regulatory Compliance Group at the law firm Clark Hill in Philadelphia.
The decision was made because the collection agencies were already faced with a constant flurry of lawsuits and other setbacks from consumers. Last year, debt collection was the focus of 15% of all complaints at CFPB, the second highest percentage.
According to the CFPB, almost half of the complaints about the collection were attempts to collect a claim that the consumer was not owed. However, consumers also expressed complaints about the collectors' communication tactics, threats of legal action, and threats of improperly contacting someone about an outstanding debt.
It is unclear what impact the court ruling will have on the CFPB's collection regime, but many in the industry say legal restrictions on the use of third-party communication providers would make the compliance process difficult. Ahead of the court's decision, incumbent CFPB director Dave Uejio suggested postponing the compliance deadline by two months to January 2022.
"The CFPB's collection rules and many other rules affecting the financial services market clearly depend on the industry's ability to use mail sellers and other types of providers," said Mark Neeb, CEO of ACA International, the collection agency trading group . "We believe the opinion is at odds with the letter and spirit of Regulation F and the spirit of similar data protection legislation for consumers."
Some suggested that the CFPB should not need to make any changes to the rule. They point out that the lower court can still rule in favor of the defendant.
"There is nothing that could affect the timely implementation of the collection rules adopted by the CFPB," said Richard Perr, Co-Managing Partner at Kaufman Dolowich & Voluck, who represents the collection agency in the Preferred Collection case giving plaintiffs permission to go to other circuits and see how far they can push it. However, that decision only states that the case can proceed and if it were to be tried in a lawsuit it would become a controversial record of fact. "
Preferred appeals the decision to reject the dismissal of the lower court to the entire jury of the 11th circle, which has not yet agreed to hear the case.
Since the court's ruling on April 21, Neeb said 66 lawsuits have been filed, including 43 seeking class action status. The use of letter vendors violates Regulation F.
Trump-appointed Judge Kevin C. Newsom admitted the ruling would change the way the debt collection industry works.
"We are not lost that our interpretation of (FDCPA) carries the risk of disrupting the status quo in the debt collection industry," wrote Newsom in the 23-page decision, published April 21, in Business. Collection agencies share information about Consumers not only with dunning providers such as Compumail, but also with other third-party providers. Our reading … may require (at least in the short term) that collection agencies obtain (at least in the short term) many sources. Our obligation is to interpret the law as written, regardless of whether we consider the resulting consequences to be particularly useful or desirable. "
Some experts are already asking whether, given the unanimous decision of the three-judge panel, an en-banc review would be granted by the entire 11th circuit.
In the meantime, Hunstein's decision could be expanded to include the use of providers by banks and other creditors in certain states, some observers suggest. Debt collectors evaluate and implement new printing and mailing practices. Potential early-stage collections shutdowns could result in fewer opportunities for collectors to work with consumers to resolve debt before litigation, Neeb said.
Many financial service providers are considering what to do. Companies are considering how to deal with increased litigation and the outsourcing of mail providers.
"Many industry players say that if we have to strictly adhere to this, we have to do it internally so that communication is now better your back office and not a third party," said Weiss.
The CFPB rule was intended to modernize the FDCPA, which Congress passed in 1977, when companies were still using telegrams to notify consumers.
Some have raised the possibility that the Appellate Body's decision could be overturned as today's process by which a provider routes communications to a consumer has been digitized to include the high-speed printing of letters. The FDCPA never intended to ban this type of activity, they argue.
Perr said that modern communications typically don't involve public disclosure of consumer information, as no living person is actually viewing the data that collection agencies send electronically to third party vendors.
"The data is transmitted in an imperceptible, ministerial manner without being passed on to the human eye," said Perr. "It is clear that in this case, or in any case in which a mail seller is involved, no harm will be done to the plaintiff."
Since the CFPB recognized the widespread use of letter sellers in the industry, many have guessed the implications of the ruling.
"The CFPB recognized the use of letter sellers, and part of the rule was to provide better guidance on acceptable methods of communication," said Cheryl Kananowicz, division manager at Rev Spring Inc., a Nashville, Tennessee letter seller.
Meanwhile, a group of letter vendors have formed a coalition to "analyze the case, digest its potential impact, and identify effective strategies that all customers can use to adjust their business practices as needed," according to a CompuMail press release.
"We will have to live in this new structure for a while," said Kananowicz. "Is that six months or two years? I don't think anyone knows."