Texting in Debt Collection? LMKWYT!

Amy Hinzmann

September 12, 2023

Due to the lack of specific reference to Regulation F in Cupp, the California case on texting under Regulation F, debt collectors are left with little certainty that they will be protected by following legislative guidelines.

Prior to Regulation F’s effective date, text messaging was generally disfavored within the industry because many debt collectors were concerned about potential FDCPA claims arising out of text messaging. The FDCPA has not been amended in the time since text messaging became widespread and it does not address texting. As a result, most debt collectors avoided the risk presented by texting without more certainty on how it would be received in court. The few debt collections that did communicate via text message typically did so only with specific consent from the consumer, which can only be obtained after contact is first established through a different communication medium.

Enter the CFPB

The CFPB made it clear in the commentary provided with Regulation F that it endorses debt collectors’ use of modern communications methods like text messaging and email. Consumers want debt collectors to use these communication methods because they find these methods to be more convenient. Regulation F therefore included a tremendous amount of guidance about texting and emailing consumers, particularly consent and opt-out requirements, providing the industry with concrete rules to fill in the ambiguity of the FDCPA and enable collectors to develop policies, procedures, and strategies for engaging consumers through consumers’ preferred communication channels.

Judicial Reaction to Regulation F

Cases litigating the safe harbor created by Regulation F are starting to trickle out. A debt collector was sued in the Northern District of California after it sent 15 text messages to a consumer over the course of a month. On its facts, Cupp is definitely not the case on which consumer attorneys or debt collectors want to build case law on. First, the plaintiff is pro se. Additionally, the decision notes that the plaintiff alleges that he did not owe the debt, without reference to whether the defendant contested that fact. Based on the opinion, it seems that there was some mistake of identity or phone number.

Regulation F In Cupp

In short: There is no mention of Reg F in Cupp. The pleadings do not even tell us if the text messages sent to the plaintiff contained opt-out language, much less whether the plaintiff attempted to opt-out. Rather, the Court simply treated the text messages as if they were phone calls and determined, based on existing FDCPA case law (not the 7-in-7 rule), that 15 such ‘calls’ in a month could be considered harassment and therefore that the FDCPA claim could not be dismissed on the pleadings.

What does this mean for debt collectors? First, it suggests that the courts may not adopt the 7-in-7 presumption at all and that courts may be willing to find an FDCPA violation even where a debt collector does comply with 7-in-7. Second, it suggests that opt-out and consent may not be dispositive in these types of claims, as we may have expected in light of the regulation’s emphasis on consent and opt-outs.

But most importantly, it suggests that Regulation F did not change nearly as much as we thought it did. FDCPA plaintiffs and defendants can still litigate claims about issues that are thoroughly addressed in Regulation F without discussing the regulation at all, relying entirely on the older case law. There are no causes of action created in Regulation F; consumers must tie their claims back to the FDCPA, which has already been extensively interpreted by the courts. We may discover, as these cases progress through the courts, that the protections for debt collectors – the safe harbors and rebuttable presumptions – are similarly meaningless unless they tie back to the FDCPA or the case law interpreting it.

What is the diligent compliance professional to do?

For the time being, it appears that any FDCPA risk assessment must assess practices and policies both under Regulation F and then separately under only the FDCPA and its existing case law. Until we have more guidance from higher courts, we have to assume that any case and any court could go either way, while also bearing in mind that the CFPB has yet to bring any enforcement actions tied to Regulation F, which it may view very differently than the courts.

What’s your strategy WRT to text, then? LOL, IDK! LMKWYT!

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The CFPB’s unhelpful policy statement on abusive practices

Jessica Lamoreux

May 31, 2023

Which of the following constitutes an abusive practice by a company trying to collect a debt:

  • Answering the phone with, “How may I help you?”
  • Closing on nights and weekends.
  • Going to court to recover an account in default.

Under a new policy proposed by the Consumer Financial Protection Bureau (CPFB), the answer could be all of the above.

The policy seeks to interpret a ban on “abusive acts or practices” in connection with a consumer financial product or service in the Consumer Financial Protection Act of 2010 (CFPA), part of the post-financial crisis Dodd-Frank reforms.

Congress added the concept of abuse to the longstanding prohibitions on unfair and deceptive conduct to combat some of the most egregious practices in the mortgage industry leading up to the financial crisis. The issue often wasn’t that customers were deceived about the terms of their loans; it was that mortgage brokers arranged and sold loans they knew the borrower couldn’t repay. Millions of families faced foreclosure as a result of these products that were “designed to fail.”

The CFPB’s new policy interprets the concept of abuse to go far beyond these predatory lending practices. Indeed, the bureau says conduct can be abusive even if the consumer was not harmed. Nor, it declared, could a company defend itself by claiming it hadn’t intended to mislead customers.

During the Trump administration, the CFPB declared it would not pursue abuse cases unless “the harms to consumers from the conduct outweighed its benefits.” The bureau has now rescinded that policy, suggesting it’s open to mandates that impose substantial burdens on financial companies while providing little benefit to consumers.

Rohit Chopra, the bureau’s director, said the policy is meant to offer the industry a “bright line” to clarify how the law will be enforced. Its effect is likely to be the opposite, eliminating standards that have provided some guidance to financial services companies.

In nearly every section of the 9,000-word policy statement (interpreting 126 words in the act), there is room for an expansive interpretation of what constitutes abusive acts or practices. The bureau is essentially giving itself license to return to “Regulation by Enforcement,” the practice of its early years when it communicated new rules by bringing an enforcement action rather than publishing them in advance.

The impact on collections

Here I’m going to walk through three examples of how this open-ended framework could interfere with normal operations of debt collection and collection litigation. The policy also leaves many other aspects of consumer finance, especially the marketing of new products, vulnerable to a charge of abuse.

The collections process will be most affected by the bureau’s interpretation of the CFPA provision that bans financial companies from taking “unreasonable advantage” of certain situations that could give them the upper hand in dealing with consumers.

Although the policy statement offers some guidance on what is considered unreasonable, it does not make any attempt to identify instances of “reasonable advantage.” Rather, it offers a list of things that are not required for the advantage to be unreasonable, including whether the practice is typical in the industry or that a significant number of consumers misunderstood the situation.

Taken to its logical extreme, we could say that a practice is abusive if one person has an unreasonable understanding of the product and suffers no harm as a result, even though no benefit may have accrued to the entity.

The law identifies three specific ways that a financial company can have an unreasonable advantage, and the bureau’s policy statement interprets each of them in a way that could be problematic for the collections industry.

1. Taking unreasonable advantage of “a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.”

The CFPB specifically calls out that lack of understanding can include failure to understand the likelihood and consequences of defaulting on a loan. And it defines abuse to include taking advantage of gaps in understanding by consumers of the non-monetary costs of a product, like the time and inconvenience required to obtain benefit from the product.

This definition could well include a consumer who did not realize that their debt would be accelerated upon default, that they might have to go to court, or that the lawsuit would add charges like court costs to the debt amount.

Will lenders have to include a prominent and explicit description of the U.S. legal system before originating a loan?

The policy statement is not explicit.

2. Taking unreasonable advantage of “the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.”

Here the policy includes a focus on situations where consumers can’t select the company they are dealing with, including when a creditor sends an account to a collections agency.

“Even though there may be many participants in these markets, you have no choice but to deal with a specific, single servicer or debt collector that you did not choose,” said Chopra in remarks introducing the new policy.

What the director didn’t say is what would be considered taking unreasonable advantage of the fact that the consumer cannot switch debt collectors. There certainly are many differences between collection firms—their hours, the payment types they accept, and even the average time on hold before reaching a collector. Some are more willing than others to erase a negative credit bureau report in exchange for a payment.

Is the CFPB suggesting that it could be considered abuse to assign a debt to a collection firm that didn’t have the policies preferred by the consumer?

The bureau expresses no preference.

3. The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

This aspect of the policy focuses on situations “where an entity communicates to a person or the public that it will act in its customers’ best interest.” It’s meant to deal with cases like mortgage brokers who steer clients to products that produce the most profit rather than those that have the best terms for the borrower.

Here too, the agency has eliminated any guidelines that might focus enforcement on cases where there is significant harm to consumers. So it leaves open whether standard customer service language can be considered a representation of acting in the customer’s best interest.

Will collectors be banned from answering the phone saying, “How can I help you?” or from responding to a concern with, “We’d be happy to help you get this matter resolved?”

The CFPB offers no help.

There’s still time to comment

These examples are just a small fraction of the questions that the CFPB’s overbroad and ambitious policy statement leaves open. Thankfully, it’s not final yet, and the bureau is accepting comments on it until July 3.

If your company is involved in any aspect of consumer finance, now is your opportunity to ask the bureau to provide the bright line that Director Chopra promised.

Comments can highlight where the draft policy statement lacks the guidance that the industry needs to comply with this interpretation of the law. And they can predict how participants will react if the rules are left unclear.

I suspect the bureau’s current plan will wind up hurting consumers more than helping them. The credit application process will be bogged down by needless disclosures. There may be fewer innovations because new products could be more likely to be misunderstood. And fewer people could get loans because restrictions on the ability of creditors to collect a debt may encourage them to concentrate only on customers with high credit quality.

While the CFPB policy statement is meant to encourage the marketing of financial products while eliminating abusive practices, it may end up delivering none of the above.

Jessica D. Lamoreux is the Director of Risk and Compliance at Oliver Technology Corporation. She regularly presents to industry groups on a wide range of compliance-focused topics, including Regulation F. She has experience supporting compliance for both debt collection firms and original creditors.

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The Safe Harbor Wears No Clothes

Jessica Lamoreux

April 6, 2023

If a recent ruling by a federal judge in Florida holds, complying with the CFPB’s tough 2021 collections rules (Regulation F) may not be as simple as copy and paste.

One of the bright sides to the Consumer Financial Protection Bureau’s Regulation F was the Model Validation Notice (MVN), a complete template for what the industry calls a G-Notice, the information that collectors must provide debtors when beginning to collect a debt under the Fair Debt Collection Practices Act (FDCPA). Regulation F explicitly provided a ‘safe harbor,’ stating that collectors using the CFPB’s model notice would be in compliance with the validation notice requirements.

But the Florida case, Roger v. GC Services, suggests that this “safe harbor” may not offer much shelter. The plaintiff was a debtor who claimed that the validation notice he received from a collection agency was confusing and misleading, even though it was undisputed that the notice precisely followed the language of the bureau’s model. Judge Cecilia M. Altonaga of the U.S. District Court for the Southern District of Florida rejected a motion to dismiss the case, saying the collector’s notice may have violated the FDCPA notwithstanding Regulation F’s safe harbor provision. The case, which will now go to trial, could disrupt the new normal that the collections industry has adjusted to in the wake of Regulation F.

What happened?

The Rogers case revolves around one simple fact: a validation notice sent in August 2022 by GC Services to collect a bank debt did not have a date on it. The notice had a section that listed the interest and fees incurred “Between December 31, 2021 and today.” Another line read, “Total amount of the debt now.” This language matched the Model Validation Notice set forth by the CFPB.

The plaintiff argued that because the notice was undated, the debtor would not be able to interpret “today” and “now” and thus couldn’t determine whether the amount listed was the full amount owed or if additional interest or fees had accrued.

The debt collector responded that the CFPB’s model validation notice has no date and uses the same references to “today” and “now.” Indeed, the bureau includes “date the form is generated” on its list of optional—but not required—elements of a validation notice.

The motion to dismiss the case argued that this notice could not be considered misleading or confusing because it uses the exact form and language required by Regulation F. It cited the regulation’s “Safe Harbor” section that says “a debt collector who uses [the model form] complies with the information and form requirements” for validation notices.

What did the court rule?

Judge Altonaga, however, rejected this interpretation of the safe harbor. She wrote that there is no reason to assume that complying “with the information and form requirements” of Regulation F ensured compliance with the FDCPA itself.

This interpretation may raise some eyebrows in the industry, as it is not clear why anyone would follow Regulation F other than to comply with the FDCPA. After all, government enforcement actions and private lawsuits must be brought for violations of the FDCPA. Regulation F creates no enforcement mechanisms or causes of action in itself.

Indeed, the reason that collectors have worked to comply with Regulation F as fully as possible is they believed it would shield them against liability under the FDCPA. If the regulations don’t offer that protection, it is unclear what purpose or utility they have.

A Safe Harbor from what?

One of the biggest frustrations for the collections industry is that it saw this coming. Over the many years that Regulation F was being developed, the bureau was warned of several ways that the model notice was confusing and not consistent with the underlying law.

For example, the MVN specifies the items to include in a table that itemizes the debts being collected, but there is no line for some items, like court costs, that creditors can legitimately collect. As a result, the sum of the items in the table can be lower than the total amount owed. When the industry protested that this format would be confusing to debtors, the bureau ignored them.

In other situations, the bureau’s MVN requires disclosures that directly conflict with disclosures mandated under state law. Collectors were so afraid that the MVN would invite litigation claiming it was confusing or misleading that they didn’t adopt the format until Regulation F became effective in November 2021. By contrast, collectors began conforming much earlier to other aspects of the regulation, such as the rule that limited them to contacting a consumer no more than seven times in a seven-day period.

Despite the problems with the bureau’s model notice, collectors used it once the regulation was in effect precisely because of the safe harbor that was offered. Judge Altonaga’s decision raises the question of what exactly this safe harbor keeps them safe from?

What happens next?

For now, the Florida court did not set any precedent for other cases, as it only ruled on a preliminary motion to dismiss. If the court determines the G-notice in the Roger case was actually misleading, the decision could then be appealed to the Eleventh Circuit, where the industry can try to get this situation clarified.

You might wonder whether the CFPB would speak up to defend its regulation against a judge who, in effect, said the bureau misinterpreted the law. That’s unlikely as the bureau’s mission isn’t to defend debt collectors, even against its own poorly worded rules.

What does it mean for the collections industry?

One thing is clear: consumers’ rights attorneys will pounce on undated G-notices, and the safest practice is to assume that a date is required and not optional.

The bigger question is whether future courts will hold that notices that use the CFPB’s model are not completely protected from challenges under the FDCPA.

Given the many problems with the MVN, we suspect that consumers’ attorneys have already started to develop arguments about additional ways that their clients are confused by G-Notices that follow the Regulation F model.

With the Regulation F safe harbor in question, debt collectors may want to consider the relative risk of strictly following the MVN template. Ask yourself whether the validation notice you are using could be considered confusing or misleading to the least-sophisticated consumer? The answer will depend on the nature of the debts you are collecting and the applicable state law.

If you conclude that using the MVN format is likely to be confusing or misleading, you will have to make a difficult choice. You are caught between the unpredictable court system and the powerful CFPB. It is anything but a safe harbor.

Jessica D. Lamoreux is the Director of Risk and Compliance at Oliver Technology Corporation. She regularly presents to industry groups on a wide range of compliance-focused topics, including Regulation F. She has experience supporting compliance for both debt collection firms and original creditors.

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