Summer time and the livin’ is easy. Well, maybe not so much for federal regulators.
A perceived uptick in agency activity is probably no fluke. To start with, presidential elections in November could mean either a new set of regulatory priorities or a demand to roll back what is already in place. For agency heads, whose days may be numbered, the next several weeks offer them a time to power through unfinished business.
The urgency may be especially apparent for the Consumer Financial Protection Bureau, which has spent most of the summer thus far spitting out a steady stream of rules and proposals. In the past several days alone—from the end of July to mid-August—it dug into rules for mortgage servicers and controversial requirements for debt collectors that will likely be extended to banks and credit card companies in the very near future.
Among those efforts are new rules “to ensure that homeowners and struggling borrowers are treated fairly by mortgage servicers.”
Mortgage servicers are responsible for collecting payments from the mortgage borrower and forwarding those payments to the owner of the loan. They typically handle customer service, collections, loan modifications, and foreclosures.
To address what it called “widespread mortgage servicing problems,” the CFPB established rules for servicers that went into effect in January 2014. Amendments to those rules were proposed in November 2014, and the new final rule adopts many of those provisions, albeit with alterations suggested during a public comment period.
Among the requirements for mortgage servicers: extending the right to be evaluated for options to avoid foreclosure to more than once a year; expanding consumer protections to surviving family members and “successors in interest”; providing periodic statements or early intervention loss mitigation information to borrowers; when mortgages are transferred from one servicer to another, the new entity must comply with the same loss mitigation requirements; and clarifying servicers’ obligations to avoid dual-tracking and prevent wrongful foreclosures.
A significant takeaway from this announcement of additional protections in mortgage disclosures and the foreclosure process is what it shows about the CFPB’s approach to rulemaking and its regulatory priorities,” says Quyen Truong, a partner at law firm Stroock & Stroock & Lavan and former assistant director and deputy general counsel of the CFPB. “It demonstrates that mortgages continue to be a priority.”
“A significant takeaway from this announcement of additional protections in mortgage disclosures and the foreclosure process is what it shows about the CFPB’s approach to rulemaking and its regulatory priorities. It demonstrates that mortgages continue to be a priority.”
Quyen Truong, Partner, Stroock & Stroock & Lavan
“Even after adopting a whole new set of requirements relating to mortgages under the very demanding schedule set by the Dodd-Frank Act, the Bureau doesn’t consider its work to be done,” she adds. “There is a long list of issues that the CFPB wants to tackle, and so it is very significant that mortgages continue to be at the top, or at least near the top, of that list of priorities. The industry should expect that mortgages will remain a key focus for the Bureau across the board, from regulatory to enforcement activity,”
“The CFPB is special in the way that it is committed to continuing to analyze issues and fine-tune its rules after adoption and take into account the practical reality of implementing the regulatory frameworks it adopts,” Truong added. “It recognizes that things may work out differently in the real world than it contemplated when devising a rule.”
To underscore her point, as July drew to a close, the Bureau updated its “know before you owe” rules for mortgage disclosures, also known as the TILA/RESPA Integrated Disclosure (for the Truth in Lending Act and the Real Estate Settlement Procedures Act).
Those rules originally took effect in October 2015, creating new forms that consumers receive when applying for and closing on a mortgage and what those forms must include. The newly proposed amendments include a variety of technical corrections, many of them suggested by the industry. They got the benefit of clarification on a range of implementation issues, but not proposed new cure procedures for technical errors—something the industry pushed hard for.
“The technical errors cure procedures may be the most significant among the issues not addressed in these proposed amendments,” Truong says. “The CFPB took pains to say that it would not contemplate adopting any cure measure beyond the ones that currently exist under TILA-RESPA.” That “is an indication that the Bureau believes it has addressed, through this proposal, all of the major concerns of the industry that it is willing to tackle in the near term.”
SCOPE OF PROPOSALS
Below is an excerpt from the CFPB’s outline of proposals under consideration.
Debt collection is a multi-billion-dollar industry composed of debt owners, debt collection companies, law firms, and a wide variety of related service providers. Debt owners include original creditors as well as debt buyers who purchase debts from original creditors or from other debt buyers. Debt owners either use their own collectors (e.g., an in-house collection department) to recover in their own names on defaulted debts, place the debts with debt collection companies or law firms that specialize in the collection of these debts, sell the debts to debt buyers who may collect using their own collectors or using debt collection companies, hold but not actively collect on the debt, or some combination of these measures. Most debt collection firms are small, with over 75percentof firms employing fewer than 20 people each. However, most revenue is generated by larger firms, with about two-thirds of industry revenue generated by collection firms with at least 100 employees.
The proposals under consideration discussed below would apply to small entities in the following categories for debts acquired in default: collection agencies, debt buyers, collection law firms, and loan servicers. While not all of the proposals under consideration will affect every small entity in every line of business, the majority of proposals under consideration are likely to affect most of the small entities invited to participate regardless of business type. For that reason, the Outline first covers the substantive proposals before turning to potential impacts on the various categories of small entities.
Further, this Small Business Regulatory Enforcement Fairness Act (SBREFA) consultation process applies to “debt collectors “that are subject to the FDCPA (and, in many cases, also subject to the Dodd-Frank Act).16The Bureau expects to convene a second proceeding in the next several months for creditors and others engaged in collection activity who are covered persons under the Dodd-Frank Act but who may not be “debt collectors” under the FDCPA. The Bureau believes that holding separate SBREFA consultation processes is the most efficient way to proceed, particularly because it will enable participants to provide more focused and specific insights.
As discussed in this Outline, the Bureau is considering proposals to address many aspects of the debt collection lifecycle. Part III focuses on proposals under consideration that affect debt collectors’ compliance obligations relating to the integrity of information. This part summarizes proposals under consideration related to the acquisition and transfer of collection accounts, as well as the proposed processes for obtaining information and conducting reviews at various stages of the debt collection process, such as after a consumer dispute or prior to filing collection-related litigation. Part III also outlines proposals under consideration for transferring information obtained during the collection process when debt is returned to a creditor or debt buyer or sent to another collection agency. Finally, part III discusses proposals under consideration relating to the validation notice and a consumer Statement of Rights.
Part IV focuses on proposals under consideration for providing information to consumers in collection, in addition to the initial disclosures discussed in part III. Specifically, part IV discusses other consumer disclosures that may be made throughout the debt collection process, including when initiating or threatening to initiate a lawsuit, and disclosures and other 16For purposes of considering the proposals under consideration summarized in this Outline, SERs should assume that “debt collector” and other terms used have the same meaning as under the FDCPA, unless the Outline sets forth a specific, different meaning.5restrictions under consideration when collecting on time-barred debt.
Part V focuses on proposals under consideration relating to communications with consumers in general, and part VI discusses two additional proposals relating to transfer of debts and recordkeeping. After summarizing the proposals that are under consideration, the Outline explains the Bureau’s initial analysis of the potential impacts of the proposals under consideration on small entities in parts VII and VIII.
Truong says the furor in the market over the technical errors problem has subsided. “You no longer see lenders having to dump loans that have very minor technical errors for a really low price because investors aren’t willing to pick them up,” she explains. “The errors would need to be more significant in order to cause a problem these days, as the market has adjusted. Nevertheless, even if the regulators were not going to pursue companies for purely technical errors, some may remain concerned about exposure to private litigation. Notwithstanding the Bureau’s announcement about not adopting additional cure procedures, I think that's something for which the industry may still advocate for.”
On July 28, the Bureau finally moved forward with proposed rules regarding debt collection that have been gestating since 2013.
Debt collectors are already prohibited by federal law from harassing, oppressing, or abusing consumers by the Fair Debt Collection Practices Act of 1977. In 2010, the Dodd-Frank Act revised that law to make the CFPB the primary regulator for the industry.
Among the proposed rules:
Collectors would need to substantiate debts before contacting consumers.
Collectors would be limited to six communication attempts per week through any point of contact before they have reached the consumer.
Imposing a 30-day waiting period after a consumer has died, during which collectors would be prohibited from communicating with surviving spouses and others.
Including more specific information about a debt in the initial collection notices sent to consumers, including their federal rights, whether the debt is too old for a lawsuit, and options for disputing the claim.
If any written notice is sent back within 30 days of the initial collection notice, a collector would have to provide written information substantiating the debt back to the consumer. They could not continue to pursue the debt until that report and verification is sent.
If a consumer disputes, in any way, the validity of the debt, collectors must stop collections until the necessary documentation is checked.
Collectors that come across any specific warning signs that debt information is inaccurate or incomplete would not be able to collect until they resolve the problem. Red flags include a portfolio with a high rate of disputes or the inability to obtain underlying documents to respond to specific disputes.
The proposed rules would apply only to third-party debt collectors, although the CFPB explicitly announced that similar requirements for banks and credit card companies are likely.
“It is significant that the CFPB expressly announced a separate track of regulation for first-party debt collectors and other parties not directly regulated in the set of regulations it is now proposing,” Truong says. “Even with the proposed rules that focus on third-party debt collectors, there will be an impact on creditors, debt buyers, and sellers.”
“Requirements for substantiation or verification of the debt at numerous points in the collection process means that the debt collector needs to get a much more detailed set of information from the creditor and the debt sellers. “It basically requires everybody to do some extra work in terms of looking at the parties they are doing business with,” she says.
A more dire prognosis comes from David Bizar, chairman of the Consumer Financial Services Litigation practice group of law firm Seyfarth Shaw: “The CFPB’s proposed debt collection rules will, if adopted, overly burden if not outright hobble the legitimate collection of defaulted consumer debts, resulting in less available credit and higher credit costs for everyone.”
He, and other critics, have a long list of concerns about how new rules would apply to real-world debt collection. Regarding the CFPB’s approach to ensuring the accuracy of data and communications, it runs the risk of establishing that the mere fact a dispute exists is enough to create a presumption that its wrong. Will the new rules create a private right of action and open up a flood of new litigation?
As the CFPB demands that a customer’s statement of rights be in their native tongue, with a model notice form soon to be issued in Spanish, will that conflict with the Truth and Lending Act’s demand that, to the contrary, the government can’t require anyone to put out these forms in a language other than in English?
A requirement to include litigation disclosures in all written and oral communications could be problematic in the latter instance. Do debt collectors face the risk that it will be easier for somebody to claim they threatened to sue them and didn’t recite the necessary disclosure?