In April, 2016, I was fortunate to have attended two collection industry functions at which speakers from the Federal Trade Commission and the Consumer Financial Protection Bureau provided their thoughts on enforcement and rule making. These highlights from their presentations are helpful in understanding what to expect from our primary federal regulators going forward.
Chris Koegel, assistant director of financial practices at the Federal Trade Commission discussed the FTC’s top enforcement priorities: Debt buying and Operation Collection Protection 1. Debt Buying. While debt sales continue in legitimate forums, the FTC says phantom debt collection causes extreme consumer harm to people who least can afford it and it has a negative effect on the economy. Those who use egregious practices to attempt to collect non-existent debt damage the credit and collection industry and make our jobs harder. These posers possess sensitive information about consumers and the FTC is trying to figure out how they get it.
Koegel provided the April, 2015, enforcement action with Cornerstone and Company, LLC, its owner, Brandon Lambert, and a separate action with Bayview Solutions and its owner Aron Tomko, as an example of this initiative. The FTC alleged these debt brokers posted unencrypted documents containing consumers’ private information including credit care and bank account numbers, online and not protected in any way. Enforcement followed the model of data security and data breach cases in which the defendants had to notify affected consumers their information had been exposed, explain to consumers steps they could take to protect themselves, and establish and maintain security programs that must be evaluated every two years by a certified third party.
More recently, the FTC in conjunction with Illinois Attorney General Lisa Madigan brought an action in March, 2016, against Chicago companies using the names Stark Law, Stark Recovery and Capital Harris Miller & Associates, among others. The complaint cited violations of the FDCPA, the FTC Act, the Illinois Collection Agency Act, the Illinois Consumer Fraud and Deceptive Business Practices Act, and sought injunctive relief, restitution, refunds, disgorgement of ill-gotten monies, rescission of contracts and other relief. The companies purportedly sought to collect payday loans consumers didn’t owe or they didn’t have the authority to collect, and used false threats of litigation, false threats of criminal prosecution, harassing phone calls both to consumers and third parties, and failure to obtain a license under the Illinois Collection Agency Act. In addition, the action alleges defendants sold bogus debt portfolios. According to Koegel, the lesson here is to pay attention to portfolios you are offered to buy. If you experience problems with the collection of debts in a portfolio, stop collecting it and do not resell it. 2. Operation Collection Protection. Koegel described Operation Collection Protection as the first federal, state and local sweep of debt collectors. It is designed to stop people who were operating criminally, but also catch legitimate debt collectors who had multiple compliance issues. The partnership between federal, state, and local regulators continues. Koegel reported they have monthly conference calls, and hope to demonstrate improved consistency in enforcement efforts. The FTC wants to work with legitimate members of the industry, and Koegel referenced the FTC’s Debt Collection Dialogues in 2015 as an example of this effort.
How does one become a target of the FTC and Operation Collection Protection? A targeting team monitors the following resources and instances to identify potential enforcement targets:
1. The Consumer Sentinel complaint database. Who is amassing a great number of complaints? (This is an older complaint database than the one the CFPB is amassing. It combines complaints from a number of federal and state agencies and the Better Business Bureau. The database is not made public, nor are those complained about notified of complaints or given the opportunity to resolve them.)
2. News stories about the practices of a debt collector.
3. Relative harm to consumers, such as the phantom debt collectors, and the egregiousness of the harm.
4. How many lawsuits have been filed against the debt collector and how do they react to them?
5. Attorney General actions brought against a debt collector, such as assurances of voluntary compliance and consent agreements.
6. BBB complaints and how you respond – the seriousness of the allegations.
7. Consideration of how would the enforcement action meet their strategic requirements at the FTC.
Recognizing debt collectors play an important role in the economy, Koegel explained the FTC is trying to strike a balance between the role of legitimate agencies and consumer protection.
Tom Pahl, managing counsel in the Office of Regulations at the CFPB, is head of the team working on the debt collection rules. He discussed:
1. Using rules to deal with debt collection problems.
2. Debt collection is a high priority for rulemaking as a tool. Pahl compared the debt collection rules to the only two tools needed in most households: WD-40 to make things go and duct tape to make things stop.
Pahl reminded us the one rule already published related to debt collection is the Large Market Participant (LMP) rule which defines the agencies which will be subject to supervisory examinations by virtue of their size, as demonstrated by their ability to generate revenue in excess of $10 million annually, exclusive of revenue generated by the collection of medical debt. 175 companies are eligible for supervision, which the CFPB calculates represents 60% of the revenue stream in the collection industry.
Pahl suggested the CFPB has provided debt collectors plenty of resources they can use to ensure they are in compliance prior to publication of the rules, including its quarterly Supervisory Highlights reports, which the CFBP expects all entities subject to its jurisdiction to read in full while thinking about how advice provided to others in the financial services industry might also apply to our own practices. Its compliance bulletins are also required reading. He referenced in particular the CFPB’s recent bulletin 2015-07 relating to in person collection visits.
Pahl compared the enforcement activity of the CFPB—25 debt collection cases involving UDAAP and FDCPA— as small compared to the 50,000 or so private actions brought in recent years. He emphasized the CFPB cases are meant to bring clarity in expectations about how debt collectors should operate and address issues that have not been dealt with before. He reiterated CFPB Director Richard Cordray’s recent public comments that these cases carry the weight of precedent. Similarly, law enforcement sometimes is expressed in amicus briefs the CFPB files in actions brought by other entities. These provide important insights and should be read by industry. (Briefs can be found on the newly re-designed CFPB website: http://www.consumerfinance. gov/policy-compliance/amicus/ )
Pahl reasoned the high level of consumer complaints shows rules are necessary and should advance rulemaking. The complaints appear to indicate that debt collection ecosystem does not flow well.
Rules will address the information needed to substantiate debts, according to Pahl. They will provide options to manage the frequency of communication, and are likely to require increased disclosures related to consumer rights. He revealed the rulemaking team has conducted three debt collection research projects:
1. Surveyed 11,000 consumers, 2,000 of whom responded. They are finishing the analysis of the data.
2. Focus groups on validation notices and other proposed disclosures. They conducted cognitive interviews with other consumers on the content of sample notices. Pahl intimated that written communications with consumers may need to expand to a second page.
3. User experience testing on the format and design of notices. The costs incurred related to compliance are not unknown to the CFPB, and he said they realize a balance of costs versus information overload are all important considerations. They want to evaluate the effectiveness of their proposed ideas.
“Why is it taking so long to publish debt collection rules?” Pahl said he is often asked. His answer has three parts:
1. They had to start from scratch, not revising existing rules. Scratch cakes always take longer than boxed cakes.
2. The rules will cover a wide variety of acts and practices. 3. The vast amount of research they had to do.
Debra Ciskey is the Compliance Officer at Wakefield & Associates. Inc. She is a member of the board of directors and a certified instructor for ACA International.