In recent months, the Consumer Financial Protection Bureau (CFPB) has made clear that it intends to make debt collection practices an area of focus in 2016. The CFPB highlighted various supervisory actions taken with regard to debt collection practices in its Fall 2015 Supervisory Highlights. In November, the CFPB published its Fall 2015 Rulemaking Agenda, which indicated that the CFPB continues to conduct research for a rulemaking on debt collection activities and noted that such activities “are the single largest source of complaints to the federal government of any industry.” Finally, of the six press releases published in December regarding CFPB enforcement actions, half involved violations relating to debt collection practices.
Banks may view these recent developments as not applicable to them since banks are generally not subject to the Fair Debt Collection Practices Act (FDCPA), which is designed to protect against the abusive, deceptive, and unfair collection practices of debt collectors. A debt collector is defined as any person who (i) regularly collects, or attempts to collect, consumer debts for another person or institution; or (ii) uses some name other than its own when collecting its own consumer debts. A bank that is collecting its own debts under its own name is not a debt collector under the FDCPA and is therefore not subject to the FDCPA requirements.
Even if a bank is not generally a debt collector under the FDCPA, there are still several reasons why banks should be aware of the actions taken by the CFPB regarding debt collection activity.
- Mortgage servicers are considered debt collectors under the FDCPA if the loans they are servicing were in default at the time they obtained the loans. Thus, banks that purchase the servicing rights on loans made by other institutions will be classified as debt collectors and required to comply with the FDCPA if the loans were in default at the time the servicing rights were acquired.
- State laws may apply. While South Dakota does not have state collection laws applicable to creditors, some states include creditors in their definition of debt collectors. For example, the debt collection statutes in Iowa and Florida would be applicable to a creditor attempting to collect debts in those states.
- Regulators may bypass the FDCPA and take action against institutions that are not debt collectors by claiming the institution’s debt collection activities are unfair, deceptive, or abusive acts or practices (UDAAP). For example, in a recently-issued Consent Order, the CFPB used its UDAAP authority to impose sanctions on EZCORP, Inc., a financial services company engaged in offering short-term, unsecured loans. As part of its collection practices, EZCORP visited consumers’ homes and places of employment to collect debts. In doing so, the CFPB claimed EZCORP improperly risked disclosing the existence of the consumer’s debt to third parties, a practice prohibited under the FDCPA without the prior consent of the consumer. However, since EZCORP was collecting on its own debts, it was not a debt collector subject to the FDCPA. As a result, the CFPB used its authority under UDAAP to impose sanctions on EZCORP for engaging in unfair acts or practices in connection with its debt collection activity.
Since many banks are not traditionally considered debt collectors, it can be tempting to ignore the actions taken by the CFPB with regard to debt collection activity. However, banks servicing the debt of other institutions or collecting debts in states other than South Dakota should be aware of the CFPB’s guidance because FDCPA requirements may apply to such activities. Banks should also be routinely reviewing their debt collection practices to ensure their practices are consistent with the information provided by the CFPB and are not likely to result in a UDAAP violation.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.