Will banks be drawn into the CFPB debt collection rule?

Banks fear the Consumer Financial Protection Bureau’s debt collection proposal will unfairly put them in the agency’s crosshairs, inflate compliance costs and invite states and consumers to file lawsuits that lenders have beaten for years to block.

At issue is whether commercial banks would be subject to the plan, which is an effort to modernize federal protections for borrowers against harassment by third-party debt collectors.

The banks argue that since they own the credits they collect, the final rule should not apply to them. However, industry lawyers warn that the CFPB’s proposal is drafted so broadly that it would trap banks as well.

“The proposal will introduce substantial uncertainty and legal risk to first-party creditors” like banks, wrote Diana Banks, senior counsel for fair and responsible banking at the American Bankers Association, in a comment letter to the office. .

“Congress intended the ‘Fair Debt Collection Practices Act of 1977’ to establish protections against unscrupulous third-party debt collectors,” Banks said. “Congress did not intend, nor did it design, the FDCPA to regulate the practices of first-party creditors.”

A major problem, according to the banking industry, is that the CFPB proposal would improperly draw authority from statutory provisions affecting banks, in particular the prohibition on unfair, deceptive, or abusive acts or practices (UDAAP) codified in the Dodd-Frank Act.

This would create a kind of legal exposure that the banks thought had been eliminated by a 2017 Supreme Court decision. In Henson v. Santander Consumer USA, the court found that banks that collect their own credit—even if they purchased it from other lenders—are not legally considered “collectors” under the FDCPA.

The banks fought for 30 years to get this clarification, and now the CFPB appears to be ignoring that ruling, wrote Debra Stamper, general counsel for the Kentucky Bankers Association, in a comment letter on the CFPB’s proposal.

“Rather than incorporating Supreme Court clarifications…the [CFPB] The proposal uses a nearly identical definition to the original FDCPA,” Stamper said.

The way the CFPB’s proposal is worded appears to have opened the door for state attorneys general to sue the banks, the ABA said in its comment letter. And AGs from 28 states, including California, New York and Illinois, wrote a joint comment letter suggesting the CFPB has the legal authority to target banks.

The Group of 28 AGs “urge the CFPB to enact a rule that applies equally to the activities of first creditors and third-party debt collectors,” their letter says. There is a need to ensure that banks and debt collectors “operate on a level playing field”.

In addition to lawsuits against the AG, the ABA warned that the proposal “invites plaintiffs’ attorneys to bring lawsuits” against the banks as well.

The CFPB proposal, presented in May, aims to address growing public concerns about borrower abuse and update the FDCPA to reflect communications technologies that did not exist when the law was enacted in the late 1970s, namely cell phones , e-mails and SMS.

The CFPB proposal would limit a debt collector to seven calls per week to a borrower, and add additional restrictions on when the calls are made. Collectors can contact consumers an unlimited number of times via email or SMS as long as certain conditions are met.

The CFPB proposal was released in May, followed by a public comment period that ended in September. Meanwhile, a federal appeals court ruling in August raised the question of whether the CFPB might need to rework its proposal; the ruling said there must be a written notice in emails notifying consumers of a debt, not just hyperlinks to disclosures. Observers said it was unclear whether the court ruling would force the CFPB to change parts of its plan.

The CFPB did not respond to a request for comment on the story, though officials previously said the proposal was only intended to regulate third-party debt collectors.

However, several banking and credit union trade groups have alerted the CFPB to language in the proposal that suggests it would apply to more of those they consider to be third parties.

Public comment letters were submitted by the ABA, the Independent Community Bankers of America, the Consumer Bankers Association, the Credit Union National Association, state banking associations, individual banks and others.

The proposal appears to say that if a bank violates certain provisions, such as the limit on the number of times a consumer can be called, it would be a violation of UDAAP. This wording bothers bankers because banks must comply with UDAAP standards, which are enforceable by state attorneys general as well as the CFPB.

Such a rule would fundamentally change the business model for community banks, said Isaac Schmeling, chief services officer at CorTrust Bank, with $894 million in assets, in Mitchell, SD. Small banks communicate with their customers frequently, he said, and limiting that would hurt relationships.

“Borrowers come to us because we’ve built a relationship with them,” Schmeling said in an interview. “If we spoke to them yesterday but we can’t speak to them for another seven days, you have severed the relationship.”

Still, some attorneys who advise banks on debt collection matters have played down concerns, saying it’s clear that federal debt collection law only applies to third parties, not banks. If the CFPB made a mistake in including the banks, it’s time to correct it, said Myles Levelle, attorney at Drew Eckl & Farnham in Atlanta.

“There is no reason to sound the alarm at this stage,” said Levelle, who represents banks in debt collection cases.

But industry groups are nonetheless raising red flags. Banks that service mortgages, for example, fear being subject to UDAAP enforcement. The Mortgage Bankers Association noted that managers must already comply with industry-specific regulations such as the Real Estate Settlement Procedures Act and the Truth in Lending Act.

“Mortgage servicing is a unique form of debt collection, governed by a comprehensive regulatory regime under the CFPB Mortgage Servicing Rules” and should not be subject to fair debt collection laws, wrote Pete Mills, senior vice president of residential policy at the MBA.

Jason Lane, senior vice president of MidFirst Bank in Oklahoma City, with $20 billion in assets, said the CFPB failed to include the federal debt collection law exemption given to debts. mortgages that have been discharged by a bankruptcy court.

Without this exemption, families risk being forced from their homes by foreclosure, Lane wrote in a comment letter.

“Unlike most debts that are part of the bankruptcy process, a creditor who holds a mortgage lien on the home of a consumer who has received a bankruptcy discharge can continue to seek monthly payments instead of pursuing foreclosure” , Lane said.

The CFPB’s proposal could lead to significantly higher compliance costs for banks due to the need to upgrade software systems regardless of how the final rule is worded, other industry watchers said.

Many banks lack the proper technology to track the number of times they called consumers and the date and time of those calls, a key part of the CFPB’s proposal, said Stefanie Jackman, a lawyer. at Ballard Spahr in Atlanta, which advises banks on debt collection. laws.

“Many banks are going to have to make significant investments in technology to track and maintain all of this information,” she said.

Even if banks are excluded from debts they collect themselves, third parties are likely to make more demands on banks for additional documents, Jackman said. Many banks will not be able to handle this increased volume, she said.

Naomi C. Amerson