Debunking Three Common Myths about CFPB Regulation of Debt Collectors

John Rossman

Federal oversight of the debt collection industry by the Consumer Financial Protection Bureau (CFPB) spawned several myths that persist as the anticipated commencement of CFPB examinations of larger participants (likely in the first quarter of 2013) draws nearer.

Below are three common misunderstandings about CFPB supervision of the debt industry and the facts.

1. The annual receipts of our collection agency are less than $10 million, thus we do not need to do anything to prepare for CFPB supervision.

This statement is not true. If a smaller collection agency provides collection services to a large participant in the financial industry (such as a bank or debt buyer), the CFPB will deem that smaller collection agency a “service provider” and examine whether the large participant:

1. Requests and reviews the service providers’ policies, procedures, internal controls, and training materials to ensure that the service providers conduct appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities;

2. Includes in its contracts with its service providers clear expectations about compliance with Federal consumer financial laws as well as appropriate and enforceable consequences for violating any compliance-related responsibilities;

3. Establishes internal controls and on-going monitoring to determine whether its service providers are complying with Federal consumer financial law; and

4. Takes prompt action to address fully any problems identified through the monitoring process, including terminating the relationship where appropriate.

Thus, CFPB supervision of smaller entities that act as service providers for larger participants will either occur indirectly – by placing the supervision requirement on the larger participants – or else directly when the CFPB reviews the smaller entity examination results obtained by the larger participant.

Further, the CFPB has authority to examine any entity – regardless of size – in the debt industry if there is reason to believe that the entity poses a risk of harm to consumers.

2. Our company doesn’t have the time or resources to read the 831 pages of CFPB manuals and procedures and implement the requirements.

While it is recommended that companies in the debt industry review all materials published by the CFPB, the two sections of the CFPB examination manual most crucially relevant to the debt industry total just 41 pages and are available here:

http://thedebtcollectiondrill.com/tdcd/wp-content/uploads/2012/06/Compliance-Management-Exam-Procedures.pdf

http://thedebtcollectiondrill.com/tdcd/wp-content/uploads/2012/10/CFPB-Examination.pdf

Every company in the debt industry must read through these two sections and take steps to review and implement procedures to comply with the requirements.  Further, all debt industry companies are strongly encouraged to retain outside counsel to examine and audit the company for CFPB compliance.

3. The compliance policies of our company are sufficient for audits done by our clients and thus we do not need to do anything different to prepare for a CFPB examination.

While it is possible that a company’s existing procedures are sufficient to comply with the requirements of the CFPB, it is unlikely that any company has previously written policies and procedures addressing all topics that will be examined by the CFPB.  Below is a summary of many of the areas of focus of a CFPB examination,

The CFPB will examine the debt collectors’ compliance management system, specifically:

1.     Board of directors and management oversight. For this component, the CFPB published 8 examination objectives and 15 examination procedures.

2.     Compliance program. The CFPB published 12 examination objectives and 32 examination procedures for a compliance program, including training, monitoring and corrective action.

3.     Consumer Complaint Response. For this component, the CFPB published 6 examination objectives and 11 examination procedures.

4.     Compliance Audit. The CFPB published 5 examination objectives and 11 examination procedures for this component.

It is recommended that each of the 31 examination objectives and 69 examination procedures be addressed in the written compliance management system of a debt industry company.

The CFPB will also examine the following specific areas of concern:

1.    Entity business model

         a.     Nature of operations for FDCPA purposes

         b.    Affiliates and third-party relationships

         c.     Internal structure, controls and compliance management

         d.    Debt ownership or account transfer

                  i.     Debt purchases

                  ii.    Debt sales

                  iii.   Account transfers

2.    Communications in connection with debt collection

         a.     FDCPA

                   i.     Disclosing the debt collector’s identity and purpose/nature of the communication.

                  ii.    Time and place of communications and communications with represented consumers.

                  iii.   Harassing, oppressive or abusive communications

                  iv.   False, deceptive, or misleading communications

                  v.    Special limits on communicating with third parties

         b.    Other risks to consumers

                  i.   Use of autodialers, calls to cell phones, emails, text messages and other newer technology.

3.    Information sharing, privacy and interactions with consumer   reporting agencies

         a.     GLBA and Regulation P

         b.     FCRA and Regulation V

                  i.      Users of consumer reports

                  ii.     Furnishing information about consumers to the CRAs and responding to disputes

                  iii.    Disputes received from the CRAs

                  iv.    Other furnisher issues

                  v.     Identity theft issues including prevention of re-pollution of consumer reports

                  vi.    Information sharing among affiliates

4.    Consumer complaints, dispute resolution and debt validation

          a.     FDCPA

                  i.     Validation notices

                  ii.    Disputes and ceasing communication

         b.    Other risks to consumers

5.    Payment processing and account maintenance

         a.    FDCPA

         b.    EFTA/Regulation E

         c.    Other risks to consumer

6.    Equal Credit Opportunity Act

7.    Litigation practices, repossession and time-barred debt

This lengthy list of topics for examination – drawn directly from the CFPB Examination Procedures – is not meant to be complete or exhaustive, but rather to give an illustration of the level of detail required to adequately prepare a debt collector for CFPB supervision.

Conclusion

As we enter a new era of Federal regulation of the debt industry, it is critical to make decisions for your company about preparation for CFPB supervision based upon facts and published information.