April 14, 2023
The Fair Debt Collection Practices Act (FDCPA) was enacted in 1977 to protect consumers from abusive debt collection practices used by debt collectors.
With its passage, Congress established important parameters on debt collection activities, including time and place restrictions, manner and content restrictions, and restrictions on unfair, deceptive, and abusive acts and practices. Nonetheless, as a whole, the FDCPA is a set of overbroad prohibitions that often creates more questions than answers. Even after being amended a number of times, clarity in how the FDCPA is applied and interpreted is often only found once disputes escalate to litigation and a final (unappealable) decision is announced. For these reasons, many industry leaders applauded the Consumer Financial Protection Bureau’s (CFPB) final rule, effective November 30, 2021, which established Regulation F, implementing the FDCPA.
Generally, Regulation F established comprehensive federal debt collection regulations interpreting the FDCPA, which provided clear line-drawing standards and updated the FDCPA to consider the impact of technological advancements on debt collection activities and tactics. Regulation F also adds consumer rights, including initial notice requirements, additional protections before information can be reported to a consumer reporting agency, and prohibitions against collecting time-barred debts. Still, regulations can provide only so much practical guidance and clarity. As a result, developing lawsuits, regulatory actions, and regulatory guidance continue to be extremely important in shaping the scope and application of Regulation F and the FDCPA.
This white paper provides a brief overview of Regulation F’s scope, highlights ongoing issues developing among the courts that may impact Regulation F, and suggests best practices debt collectors and creditors should adopt to mitigate the legal and compliance risks presented by Regulation F and the FDCPA.
Scope of Regulation F
Generally, Regulation F applies only to “debt collectors,” defined as:
any person who uses any instrumentality of interstate commerce or mail in any business the principal purpose of which is the collection of debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due, or asserted to be owed or due, to another…includes any creditor that, in the process of collecting its own debts, uses any name other than its own that would indicate that a third person is collecting or attempting to collect such debts.
12 CFR 1006.2(i)(1) (emphasis added).
In practice, the scope of Regulation F is generally limited to third parties, such as collection agencies, debt purchasers, attorneys, and other persons regularly engaging in debt collection. Regulation F does not apply directly to creditors to whom the debt is owed. However, the CFPB has acknowledged that debt collectors depend on creditors to comply with Regulation F’s heightened notice requirements. Additionally, historically, the FDCPA has influenced actions against creditors and other non-debt collectors based on unfair, deceptive, or abusive acts or practices (UDAAP) theory, as the FDCPA contains very similar prohibitions. Plus, some state laws may even go as far as to expand the application of the FDCPA to all types of creditors rather than just the narrow subset of “debt collectors” as defined under the FDCPA. Therefore, even if you are not a “debt collector,” the standards established by the FDCPA and Regulation F may still present compliance implications and UDAAP risks for your institution.
Pay to Pay or Convenience Fees
Recently, “pay-to-pay” or “convenience” fees charged by debt collectors have been a hot topic. Judicial, legislative, and regulatory bodies, on both a state and federal level, have been closely scrutinizing whether such fees are permissible under the FDCPA and Regulation F, which prohibit a debt collector’s “collection of any amount…unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” Section 808(1) of the FDCPA. See also, 12 CFR 1006.22(b).
As background, “pay-to-pay” fees typically refer to fees that debt collectors and/or creditors may charge a debtor to enable the debtor to make payment via an expedited or more convenient method, such as electronically, online, or on the phone. Essentially, requiring the debtor to pay to make a payment. Although, in the past, many have assumed that such pay-to-pay fees are permissible under state law unless expressly prohibited, recent litigation and regulatory guidance have suggested that the opposite is true—pay-to-pay fees are impermissible unless expressly permitted by state law or the agreement creating the debt. Accordingly, debt collectors and creditors alike should review and modify their practice based on the implications of these “pay-to-pay” decisions.
In January of 2022, in its consideration of whether a mortgage servicing company may charge a “pay-to-pay” fee, the Fourth Circuit held: “Because [the mortgage servicing company] is a [debt] collector who charged an amount that was not expressly authorized by the agreement creating the debt or permitted by law, it violated the [Maryland Consumer Debt Collection Act (MCDCA)].” Alexander v. Carrington Mortg. Servs., LLC, 23 F.4th 370, 379 (4th Cir. 2022). Specifically, the debt collector was found to violate the MCDCA by incorporating the FDCPA’s prohibition against a debt collector’s “collection of any amount” because Maryland law did not expressly permit a debt collector to charge this type of fee. The Fourth Circuit determined that silence, or the mere lack of a restriction, was not enough to make such action legally permissible, but instead, “read ‘permitted by law’ to require an affirmative sanction” authorizing the collection of a pay-to-pay fee. Id. at 377.
Notably, as the Fourth Circuit highlighted in its decision, it is not the first court to read the statute in this manner, and other circuits and regulatory bodies have also interpreted the FDCPA as requiring an affirmative sanction. For example, the Second and Seventh Circuits decided similar cases, one dating back almost 25 years, in an almost identical manner. See Tuttle v. Equifax Check, 190 F.3d 9, 13 (2d Cir. 1999); Seeger v. AFNI, Inc., 548 F.3d 1107, 1112 (7th Cir. 2008). Additionally, the Federal Trade Commission (FTC) and CFPB have both issued guidance expressing that the FDCPA generally requires affirmative authorization under state law for such pay-to-pay fees to be considered “permitted by law.” A view that the CFPB again confirmed in its recent June 29, 2022, Advisory Opinion on the matter. See CFPB Advisory Opinion 2022-14230, 87 FR 39733 (June 29, 2022). Nonetheless, such regulatory guidance is not necessarily binding, and there have been court decisions in other circuits that have landed in a different direction. Therefore, even if the CFPB views this issue as settled law, it is ultimately an issue that is open for debate among the circuit courts.
Although the FDCPA and Regulation F do not typically apply directly to creditors and are limited in their application to “debt collectors,” as seen in the Fourth Circuit opinion above, this is not universally true. Certain state laws, including the MCDCA, may expand the FDCPA’s application to include all types of debt collectors, including creditors and mortgage servicing companies. You should contact your legal counsel to determine how state law may impact the application of the FDCPA to your business. Further, even if not impacted by state law directly, all creditors and debt collectors should be wary of any practices similar to these “pay-to-pay” arrangements, which are not expressly authorized by state law or contract, as these practices could present a potential UDAAP risk.
Communications of Debt with Third Party Vendors
Another hot-button issue related to Regulation F and the FDCPA surrounds its prohibition on communications with third parties. The law demands:
[A] debt collector must not communicate, in connection with the collection of any debt, with any person other than:
(i) The consumer;
(ii) The consumer’s attorney;
(iii) A consumer reporting agency, if otherwise permitted by law;
(iv) The creditor;
(v) The creditor’s attorney; or
(vi) The debt collector’s attorney.
12 CFR 1006.6(d)(1).
While this seems relatively reasonable and straightforward, practically speaking, this is not how a debt collector operates its business. Necessarily, debt collectors may communicate with third-party vendors in connection with a debt to contact the debtor, whether by phone, mail, email, or other permissible methods. And it is this very issue of communication of debts with third-party vendors that has sparked a string of recent litigation across the country.
It all began with Hunstein v. Preferred Collection & Mgmt. Servs., 994 F.3d 1341 (11th Cir. 2021), in which the Eleventh Circuit ruled: “[the Plaintiff] has Article III standing to bring his claim under § 1692c(b)…because [Defendant’s] transmittal of [Plaintiff’s] personal debt-related information to [third party vendor] constituted a communication ‘in connection with the collection of any debt’ within the meaning of § 1692c(b).” This ruling, asserting communication with third-party vendors is a violation of the FDCPA, opened the door for plaintiffs to allege harm merely based on debtor collectors and/or creditors providing information to third-party vendors on a need-to-know basis pursuant to a written contract. As stated above, it is important to note that this opinion has since been overruled and restated to align with the U.S. Supreme Court’s recent ruling in TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021). In restating its opinion, the Eleventh Circuit concluded that Plaintiff does not have Article III standing as there was no concrete harm in this particular case. Hunstein v. Preferred Collection & Mgmt. Servs., No. 19-14434, 2022 U.S. App. LEXIS 25233 (11th Cir. Sep. 8, 2022) (emphasis added). Nonetheless, the Eleventh Circuit maintains that this type of information-sharing violates the FDCPA, thereby creating the opportunity for consumers to continue to bring claims for harm on this basis – any of which may ultimately be successful.
In contrast, in July 2022, the New York District Court dismissed six similar cases with a much more conclusive tone that “informational violations of the statute” are not a sufficient basis for Article III standing. In re FDCPA Mailing Vendor Cases, 551 F. Supp. 3d 57,66 (E.D.N.Y. 2021). Nevertheless, we will undoubtedly continue to see this issue develop in FDCPA litigation based on this third-party vendor communications theory in the years to come. Debt collectors and creditors should take steps to review their processes and consult with counsel to determine how they may be exposing themselves to potential liability on this third-party vendor communications theory.
Contact us for more information.
Baldini Lang LLC has extensive experience drafting and negotiating vendor contracts for financial institutions and assisting clients in building risk assessment programs and policies to comply with their legal requirements and establish best practice standards. Contact us for more information.
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