This is the third in our series of “perspective” articles about the CFPB’s Outline of Proposed Debt Collection Rules, released last week in advance of the next step in the rulemaking process, the SBREFA hearing.
Section III of the Outline is devoted to the subject of data integrity, data transfer, and substantiation of a debt. The Bureau believes that data integrity is a major concern in the debt collection process.
The Bureau notes that the most common debt collection complaint received concerns collectors seeking to recover from the wrong consumer, or in the wrong amount, and believes that such problems arise in significant part from two sources:
Deficiencies in quality of information from creditor
First, the Bureau believes there are often substantial deficiencies in the quality and quantity of information collectors receive at placement or sale of the debt that frequently result in collectors contacting the wrong consumers, for the wrong amount, or for debts that the collector is not entitled to collect.In addition to these initial quality concerns, the Bureau believes that quality and accuracy of the information may degrade as debts are worked and transferred among creditors and debt collectors downstream. Information obtained by one collector from the consumer may not be transmitted to subsequent collectors. Conversely, incorrect information may be transferred downstream, for instance when payments made by the consumer are not appropriately applied to the debt.
Notices to consumers lack critical information
Second, the Bureau is concerned that the information that consumers receive in initial notices required under the FDCPA lack critical elements that would help consumers recognize whether the debt is in fact theirs, which may lead to more consumer complaints, a lack of response by consumers, or both.
The Bureau is considering three major interventions to address these two sets of problems:
- A requirement that debt collectors “substantiate,” or possess a reasonable basis for, claims that a particular consumer owes a particular debt. This general requirement would likely be combined with provisions describing more specific steps that collectors can take to satisfy in part their obligation to substantiate claims of indebtedness made initially, during the course of collections, and before filing litigation.
- A requirement that certain information that the consumer provides in the course of collections with one collector be passed on and reviewed by downstream collectors.
- Provision of an improved FDCPA validation notice and a Statement of Rights to provide consumers with the most critical information needed to determine whether they owe a particular debt and to navigate the debt collection process more generally.
Substantiation of Indebtedness
The Bureau is considering identifying certain fundamental information that collectors can obtain and review that, along with a representation of accuracy from the creditor and a review for warning signs (warning signs will be discussed below), would establish reasonable support for claims of indebtedness. A complete list of the items that the Bureau is considering as “fundamental” is provided in Appendix C of the Outline.
The “fundamental information” would include the following:
- The full name, last known address, and last known telephone number of the consumer;
- The account number of the consumer with the debt owner at the time the account went into default;
- The date of default, the amount owed at default, and the date and amount of any payment or credit applied after default;
- Each charge for interest or fees imposed after default and the contractual or statutory source for such interest or fees; and
- The complete chain of title from the debt owner at the time of default to the collector.
However, the proposal would not require a debt collector to obtain every item. It would allow the debt collector to substantiate indebtedness through alternative or additional information. But, in that case, a debt collector would “bear the burden of justifying its alternative approach.”
In addition to obtaining the specified information, a debt collector would need to obtain a “written representation” from the debt owner that “it has adopted and implemented reasonable written policies and procedures to ensure the accuracy of transferred information and that the transferred information is identical to the information in the debt owner’s records.” Failure to obtain the written representation would not prohibit collection, but the debt collector would again “bear the burden of justifying its alternative approach.”
The proposals under consideration would require collectors to review the information obtained from the debt owner to look for warning signs that may raise questions as to the adequacy or accuracy of the information with respect to a particular consumer or with respect to the entire portfolio in general.
Warning signs may include:
- Information for an individual debt is not in a clearly understandable form;
- Information for an individual debt is facially implausible or contradictory;
- A significant percentage of debt in the portfolio has missing or implausible information, either in absolute terms or relative to portfolios with comparable types of accounts; or
- A significant percentage of debt in the portfolio has unresolved disputes, either in absolute terms or relative to portfolios with comparable types of accounts.
If a warning sign is uncovered, the proposed rules may require a debt collector “to take further steps before it would be able to support and lawfully make claims of indebtedness regarding the account or the portfolio, as applicable.” Such steps may include:
- Obtaining and reviewing supplemental information from the original creditor or prior collectors;
- Obtaining and reviewing information from other sources, such as data vendors that provide consumer contact information; and
- At the portfolio level, obtaining and reviewing documentation “for a representative sample of accounts—or in some cases, for all accounts—in the portfolio.”
The “warning signs” review would make debt collectors responsible for undertaking some investigation in response to detected warning signs. It would not require a debt collector to confirm all of the information it receives, but it also would not permit collectors to ignore potential problems.
A collector who has each of the specific elements on the list in Appendix C, a representation of accuracy, and no warning signs of problems would have a reasonable basis for claims of indebtedness.
Information Must Be “Passed on” and Reviewed by Downstream Collectors
The Bureau believes that the subsequent placement or sale of debt to new debt collectors may exacerbate informational problems because information the consumer provided to the prior collector may not be transferred along with the debt.
- Requirement to transfer and review certain information
To address these issues, the Bureau is considering a proposal to ensure that, prior to initiating collection activity, subsequent collectors obtain and review certain information arising from past collection activity. Specifically, the proposal under consideration would require subsequent collectors to obtain and review certain information that could either affect the subsequent collectors’ obligations to comply with the FDCPA and other federal consumer protection laws or facilitate collector behavior that may be beneficial to consumers.
The proposal under consideration would obligate prior collectors to transfer this information if the consumer provided it to them in the course of collection activity, but it generally would not require collectors to attempt affirmatively to obtain the information. Prior collectors would be required to provide this information when returning a debt to the creditor, or, if the prior collectors are debt buyers, when selling the debt to a subsequent debt buyer.
- Requirement to forward certain information after returning or selling a debt
The Bureau is considering a proposal to require debt collectors to forward certain information that they may receive from consumers after they have returned the debt to the debt owner or sold it to a subsequent debt buyer.
The proposal under consideration would require collectors to forward to the entity to which the debt collector has already transferred the debt (i.e., the owner of the debt or a subsequent debt buyer) information that could indicate that all or part of the debt could be uncollectible or is likely to lack sufficient support.
The Bureau is considering requiring collectors to forward the following information:
- payments submitted by the consumer;
- bankruptcy discharge notices;
- identity theft reports;
- disputes; and
- any assertion or implication by the consumer that his or her income and assets are exempt under federal or state laws from a judgment creditor seeking garnishment.
This section of the outline is the murkiest for the ARM industry. For this to happen the CFPB must create rules that will require either an original creditor or a debt buyer and all agencies to sufficiently program their system(s) to effectively transfer all requisite information, but also receive all requested information. This proposal doesn’t work without the original gatekeeper of the information (the creditor or debt buyer) effectively managing the data exchange process.
Proposed New Validation Notice
The Bureau is considering issuing a model validation notice. A debt collector would be free to use either the Bureau’s model or forms that the collector develops, but using the Bureau’s model would satisfy the relevant content requirements. The Bureau continues to test and refine the notice; Appendix F to the Outline is an example of what such a document might look like. Note: The proposed model has a “tear-off” coupon to allow the consumer to more easily dispute the debt or ask for additional information concerning the original creditor.
The proposals under consideration would also require debt collectors to provide a consumer with written copy of a “Statement of Rights” in the same mailing as the validation notice. Appendix G to the Outline is an example of what such a document might look like.
To ensure that consumers have this information throughout the debt collection process, the Bureau is also considering a proposal to require that debt collectors offer, in the first communication made more than 180 days after the consumer received the validation notice and accompanying Statement of Rights, an additional copy of the Statement of Rights.
The Bureau also believes that a substantial number of consumers would benefit from receiving translated versions of the validation notice and Statement of Rights. The Bureau is considering whether to adopt one of two alternative proposals related to the use of translated validation notices and Statements of Rights. Under both alternatives, the Bureau would develop model translations and refine their contents and design based on consumer testing.
The first alternative under consideration would require debt collectors beginning collection on an account to send translated versions of the validation notice and Statement of Rights to a consumer if the debt collector’s initial communication with the consumer took place predominantly in a language other than English or the debt collector received information from the creditor or a prior collector indicating that the consumer prefers to communicate in a language other than English. The Bureau has published in the Federal Register versions of the validation notice and Statement of Rights in the relevant non-English language. The Bureau anticipates that it would start by developing Spanish-language forms, but it might develop versions in other languages over time.
The second alternative under consideration would require debt collectors beginning collection on an account to include a Spanish translation on the reverse of every validation notice and Statement of Rights.
The proposals above raise a number of issues. insideARM spoke with John Rossman, Attorney at Law with Moss & Barnett, and frequent insideARM contributor. Rossman had the following observations:
“The proposed validation notice in Appendix F arguably violates the FDCPA due to overshadowing – the letter gives the consumer 30 days from when the validation notice is mailed to respond. The FDCPA provides for 30 days from the consumer’s receipt of the notice. Having conferred with the CFPB Rulemaking team for the past few years, I have immense respect for their intelligence and dedication to this difficult task. It is likely impossible to advise the consumer of exactly when the 30-day validation period expires because the period begins when the consumer receives the notice. Also, the proposed “tear-off” coupon may result in more generic disputes and motivate consumers to dispute an account when the true issue in not a dispute, but an inability to pay.
Additionally, the mailing costs associated with inclusion of the Statement of Rights and inclusion of translated version may be crushing. The inclusion of the consumer’s right to cease communications will be controversial, but the disclaimer in the bill of rights that a cease request “ . . . does not make the debt go away” should balance concerns about a flood of cease requests.”
By Tim Bauer