Can the CFPB Make Debt Collectors Reveal their Privileged Documents?

Does the Consumer Financial Protection Bureau (CFPB) have the power to tell debt collectors to turn over their attorney-client privileged communications?  The answer may depend on who you ask.

The CFPB claims to have the right to obtain privileged documents from all “supervised institutions” as well as from any “service provider” (such as a law firm or collection agency) who performs material services for a supervised institution.  Thus, the Bureau effectively believes it can obtain the privileged documents of any debt collector in the country.  Really?

Let’s look at what the CFPB has said about this. In January 2012, the CFPB issued guidance concerning its plans to collect information from the institutions it will supervise. The Bureau said it will not allow supervised institutions to refuse to produce documents to it on the grounds that they contain information covered by the attorney-client privilege.  See CFPB Bulletin 12-01. According to the CFPB, reviewing privileged documents can be “efficient” – in fact it “may often be the most efficient means for a supervisor to assess and understand an issue” – so the Bureau will feel free to request privileged materials from supervised institutions “as appropriate.”  Id.

According to the CFPB, you should not worry about this, because if you turn over your privileged information to the Bureau, this will not result in a waiver of the attorney-client privilege.  Id.  Don’t you find that comforting?

Are debt collectors expected to seek candid legal advice about how to comply with the Fair Debt Collection Practices Act (FDCPA) and other consumer protection laws, only to find that their attorney’s privileged communications will be turned over to the CFPB? Regardless of how you might feel about debt collectors, the attorney-client privilege is not something that federal regulators should be allowed to trample on.

The Supreme Court has repeatedly recognized that the attorney-client privilege is essential to the proper functioning of our system of justice, noting that it is “the oldest of the privileges for confidential communications known to the common law.”  See Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).  The purpose of the privilege is to promote compliance with the law, i.e., “to encourage full and frank communication between attorneys and their clients, and thereby promote broader public interests in the observance of law and administration of justice.”  Id.  The privilege simply will not work unless the client and the lawyer can be certain that their communications will not be disclosed.  See, e.g., Hunt v. Blackburn, 128 U.S. 464, 470 (1888) (noting that the privilege “is founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure.”).

Why should debt collectors care about the CFPB’s desire to obtain privileged documents?  After all, those “supervised institutions” regulated by the CFPB are just the really huge banks, mortgage companies, and securities firms, right? Wrong.

The CFPB recently issued a proposed rule to define “larger participants” in the market for consumer debt collection, i.e., the entities who will be subject to the Bureau’s supervisory powers.  See Docket No. CFPB-2012-0005. The CFPB wants a “larger participant” to be any consumer debt collector who has more than $10 million in “annual receipts.” Id. The Bureau estimates that this will bring approximately 175 entities, or the largest 4 percent of consumer collection firms, within the definition.  Id. 

So this means that the other 96 percent of consumer debt collection companies can just ignore this and go back to sleep, right? Wrong.

The CFPB made a point of stating, in footnote 4 of its discussion about the proposed rule, that its supervisory authority also extends to “service providers” of any covered entity. Id. The Bureau states: “Service providers to consumer debt collectors and consumer reporting agencies may include firms such as data aggregators, law firms, data and record suppliers, account maintenance services, call centers, software providers, and developers of credit scoring algorithms.” Id.

Surely collection law firms should not be concerned about the CFPB coming after their client’s privileged documents, right? Wrong again. The Bureau specifically noted that plans to exercise supervisory authority over collection law firms. Id. The Bureau’s summary of the proposed rule regarding “larger participants” states: “Collection attorneys and law firms also play a key role in the consumer debt collection market.  They sometimes are the primary (or only) debt collector with which the consumer will interact….By one estimate, approximately one in 20 delinquent accounts gets referred to a law firm that specializes in debt collection.” Id.

What is an attorney supposed to do if the CFPB comes knocking, asking for their clients’ privileged documents? The attorney likely has an ethical duty to resist the Bureaus’ request. In fact, Rule 1-6 of the American Bar Association’s Model Rules of Professional Conduct, which has been adopted by virtually every state, provides that a lawyer must not reveal information relating to the representation of a client, unless the client gives informed consent. This make sense, because the attorney-client privilege is completely worthless unless the attorney and the client can depend on confidential information remaining confidential. See, e.g., Upjohn, 449 U.S. at 393 (“if the purpose of the attorney-client privilege is to be served, the attorney and client must be able to predict with some degree of certainty whether particular discussions will be protected. An uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all.”).

The CFPB has no business regulating the practice of law, nor should it interfere with the attorney-client privilege. The regulation of the practice of law is a job for the states and the courts, not the agencies of the federal government. See, e.g., American Bar Association v. Federal Trade Commission, 430 F.3d 457,471 (D.C. Cir. 2005) (“It is undisputed that the regulation of the practice of law is traditionally the province of the states. Federal law may not be interpreted to reach into areas of State sovereignty unless the language of the federal law compels the intrusion.”) (citations omitted); Leis v. Flynt, 439 U.S. 438, 442 (1979) (“Since the founding of the Republic, the licensing and regulation of lawyers has been left exclusively to the States and the District of Columbia within their respective jurisdictions. The States prescribe the qualifications for admission to practice and the standards of professional conduct. They also are responsible for the discipline of lawyers.”).

If the CFPB wants to encourage compliance with the laws while advancing its consumer protection goals, it should do so without infringing upon the attorney-client privilege of the debt collectors that it regulates. The Supreme Court has recognized that the attorney-client privilege should be read broadly, because a narrow view of the privilege “not only makes it difficult for corporate attorneys to formulate sound advice when their client is faced with a specific legal problem, but also threatens to limit the valuable efforts of corporate counsel to ensure their client’s compliance with the law. In light of the vast and complicated array of regulatory legislation confronting the modern corporation, corporations, unlike most individuals, constantly go to lawyers to find out how to obey the law, particularly since compliance with the law in this area is hardly an instinctive matter.” See Upjohn, 449 U.S. at 392 (citations omitted). The CFPB can hardly expect debt collectors to seek out candid legal advice about compliance when the Bureau reserves the right to examine all privileged communications as part of its supervisory powers.

Tomio Narita is a partner of Simmonds & Narita LLP, a California law firm specializing in defending claims arising under the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Rosenthal Act.