Federal and state regulators have long focused on debt collection practices, but recent news and trends— including new Consumer Financial Protection Bureau (CFPB) leadership, increased state regulatory powers, and Covid-19 pandemic enforcement developments—will make it harder for third-party debt collectors.
A supervisory and enforcement spotlight also will shine on companies collecting on their own consumer debts.
Below we share our top takeaways from recent developments and what to expect in the coming months.
Wave of Suits Against Debt Collectors Using Vendors After Hunstein
The U.S. Court of Appeals for the Eleventh Circuit recently held in Hunstein v. Preferred Collection & Mgmt. Servs. Inc. that a debt collector’s transmission of personal information to a third-party vendor is sufficient to state a claim under the Fair Debt Collections Practices Act (FDCPA) for violation of 15 U.S.C. 1692d(b) (prohibiting communication about the debt with third parties).
That prohibition was traditionally understood to be intended to stop practices like asking a debtor’s employer to pressure the debtor to pay his or her bills, but the Eleventh Circuit’s ruling dramatically expands that scope.
As the court recognized, this decision has the potential to upset the status quo in the debt collection industry and significantly increase FDCPA filings, as most debt collectors use vendors for some part of the collection process.
The plaintiffs’ bar has already begun to file class action lawsuits on this disruptive theory. We expect future cases to implicate a myriad of third-party vendors, including call centers and loan servicers, to name a few.
Debt collectors should closely examine their outsourcing practices and consider changes to bring these activities in-house, at least in the short term.
Courts Remain Divided on Standing
Recent FDCPA decisions prove that federal question jurisdiction is no longer a foregone conclusion in a growing number of federal circuit courts of appeal. Courts remain divided on how to approach standing in the context of the FDCPA, and in particular whether plaintiffs must allege actual damages to establish Article III standing.
As a result, whether a plaintiff has Article III standing varies greatly depending on jurisdiction and the type of violation alleged, as well as fact- and debtor-specific issues like whether the debtor actually lost money as a result of a violation.
In some instances, plaintiffs have tried to avoid federal jurisdiction by disclaiming actual damages to remain in what are generally perceived to be more favorable state court systems.
We expect the split among circuits and district courts to continue to deepen. In May the Seventh Circuit (perhaps the most hostile to Article III standing in FDCPA cases) practically begged the Supreme Court to weigh in, and we expect it will in the next year or two.
Beware the CFPB
The CFPB issued its long-awaited final debt collection rule in two parts over the final months of 2020, but much uncertainty remains.
Several provisions authored or supported by consumer advocacy groups and intended to increase regulation of debt collection were left out of the final rule, leading many to question whether the current administration will revisit the rule before it becomes effective.
The rule’s impact on first-party collectors also remains unclear. While it does not apply to first-party collectors on its face, the CFPB left open the possibility that violations of the FDCPA might separately constitute unfair, deceptive, or abusive acts or practices (UDAAP) violations, which may implicate first-party collectors.
The CFPB recently proposed to delay the rule’s effective date by 60 days, perhaps setting the stage for more changes to come.
New Requirements for California Debt Collectors
The California Debt Collection Licensing Act (CDCLA) takes effect on Jan. 1, 2022, imposing new licensing requirements on both first-party and third-party consumer debt collectors in California.
Subject to certain exemptions, the CDCLA requires licensure of all debt collectors that engage in the business of collecting debts in California, even if the debt collector is not physically present in California. While the CDCLA contains many licensing exemptions, it grants the California Department of Financial Protection and Innovation (DFPI) broad authority to take action under the Rosenthal Fair Debt Collection Practices Act and California Fair Debt Buying Act, including against entities exempt from licensure.
Debt collectors that engage in collection activity with California residents should closely review the CDCLA and the recently proposed regulations issued by the DFPI to determine whether they will need to obtain a license in advance of the Jan. 1, 2022, effective date.
And, as always, both third-party and first-party debt collectors should continue to be mindful of the California Rosenthal Act’s far more expansive reach and scope (relative to the FDCPA).
Increased Pandemic-Related Enforcement
The Covid-19 pandemic triggered a new wave of enforcement activity at the state and federal levels.
In recent months, the CFPB has clearly stated its objective to protect consumers impacted by the pandemic, including by rescinding policy statements issued under the Trump administration to provide greater flexibility to financial institutions due to the pandemic and by relying on its unfair, deceptive, or abusive acts and practices (UDAAP) authority to pursue pandemic-related enforcement activity.
We expect the CFPB to continue to heavily scrutinize debt collectors in connection with alleged pandemic-related UDAAP violations.
Incoming CFPB Director Rohit Chopra is also expected to increase enforcement scrutiny of student lenders and loan servicers. And with the appointment of Richard Cordray as the chief operating officer of Federal Student Aid, we expect to see increased coordination between the CFPB, the Federal Trade Commission, and the Department of Education.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Brett Natarelli is a partner in the Chicago office of Manatt and handles a range of litigation matters and provides compliance advice relating to mortgage origination and servicing issues.
Madelaine Newcomb is a Manatt Financial Services associate based in the Chicago office.