Since the U.S. Supreme Court banned debtors’ prisons in 1833, there has been a continuing shift of focus from protecting the lender to safeguarding the rights of the consumer. The Fair Debt Collection Practices Act dates back to September 1977, and its purpose was to “eliminate abusive, deceptive, and unfair debt collection practices.” In 2010, the Dodd-Frank Act put teeth into the act by empowering the Consumer Financial Protection Bureau (CFPB) to supervise and enforce compliance with the law.
The law applies only to the collection of consumer debt “incurred by a consumer primarily for personal, family, or household purposes.” It does not cover the collection of business, agricultural or corporate debt. A debt collector, under the law, is someone who “regularly collects, or attempts to collect, consumer debts for another person or institution.”
The CFPB owes its beginnings to the 2008 subprime financial mess. It was a perfect storm that blew the economy off-kilter and led to a worldwide financial crisis. Banks and other lenders took significant credit risks. They approved subprime mortgage loans to borrowers with poor credit. When consumers defaulted, the mortgage-backed security market collapsed, and everyone from lenders to investors lost money.
The federal government had to step in and bail out banks teetering on the edge of bankruptcy to stop the bleeding. One result of the 2008 banking and financial crisis was the creation of the CFPB. The focus was on creating a federal agency tasked with protecting consumers from unfair, deceptive, and abusive acts or practices (UDAAP).
The CFPB bases much of its enforcement authority—both direct and indirect--on the concept of UDAAP, and will apply UDAAP using vicarious liability. In debt collection, that means that a bank or financial institution that employs a third party to collect a debt is not absolved of its obligation to prevent UDAAPs – meaning creditors can be held partly responsible for the unlawful actions of said third party.
In this post, we will highlight the federal and state regulations lenders must follow to ensure compliance with fair collection practices. We’ll also showcase how NeuAnalytics’ unique receivables management solution and third-party vendor monitoring keep organizations compliant across federal and state jurisdictions.
Federal Regulations on Debt Collections
A recap of FDCPA rules on consumer’s rights
Under the FDCPA, it is illegal for debt collectors to use abusive, deceptive, and unfair, tactics when they collect debts. Specifically:
- Debt collectors cannot contact consumers before 8 a.m. or after 9 p.m. in the consumer’s time zone, unless the collector has reason to believe there is a more convenient time for the consumer.
- Debt collectors cannot call a consumer at work if they know or suspect that the employer prohibits calls of this nature.
- Collection calls can be stopped through a letter request to the collection agency.
- The debt collector cannot discuss the debt with anyone but the consumer, the consumer’s attorney, a consumer reporting agency, the creditor, the creditor’s attorney or the debt collector’s attorney.
- The consumer must be informed about certain details of the debt in writing.
- If a consumer disputes a debt, the debt collector must stop trying to collect the debt until the collection agency sends verification of the debt in writing.
Finally, debt collectors cannot:
- Threaten physical harm
- Use obscene or profane language
- Misrepresent the amount of the debt
- Pose as an attorney or government agent if they are not
- Threaten to take legal action if such action is not within their power or not intended to be taken
- Charge interest or fees that are not permitted by the underlying credit contract or the law
- Deposit a post-dated check early
- Publicly disclose debt information through postcards or markings on the outside of envelopes
Read more about consumer’s rights on the FTC webpage, “Debt Collection FAQs.”
Regulation F of the CFPB
A tighter system for initial demand letters
The CFPB’s Regulation F is the most significant debt collection rulemaking since the FDCPA was passed over 40 years ago. Any creditor--either the original issuer or a debt buyer--faces new challenges in adjusting to the new Regulation F.
Regulation F is in full effect as of November 30, 2021. It not only tightens some of the collection restrictions already in place, but it also has the potential to change how debt collectors and creditors manage their communications with consumers and run their businesses in a sound, compliant manner.
For example, under the FDCPA, the collection agency must provide the consumer written notification of certain aspects of the debt. Due to the high degree of confusion and legal scrutiny around the content of letters sent in the FDCPA era, Regulation F reduces a collection agency’s exposure to certain claims if they begin the debt collection process with the CFBP’s “Model Validation Notice.” 12 CFR Part 1006, Appendix B provides a sample form letter to be sent to the consumer with:
- Specific information about the debt details
- How the consumer can dispute the debt
- Additional information; i.e.:
- The name and address of the original creditor (if different)
- A link to the CFPB website to learn about consumer’s rights under federal law
- A tear-off portion return response indicating whether the consumer wants to dispute the debt or enclose a payment
Regulation F guidelines for telephone, electronic communications — Email and text messaging
Regulation F limits the frequency of calls under the so-called 7/7/7 rule. That means that a debt collector cannot place a telephone call to a consumer more than seven times in a span of seven consecutive days. Also, a debt collector who has a telephone conversation about the particular debt must wait for another seven days to call again.
The 7/7/7 rule includes voicemail, unanswered calls, and messages left on the consumer’s phone. Exceptions are busy signals, out of service, or misdirected calls and calls placed to authorized third parties, and the so-called “limited content voicemail” which is a message where the collector simply leaves the name of the business (which cannot indicate it is a collection agency), the telephone number for a callback, and the name of the person the consumer should contact.
When communicating electronically, Regulation F exempts email and text messaging from the 7/7/7 call count. It also permits the use of email and text communications with the limitations that emailing and texting requires prior consumer consent with a prominent and easy way to opt-out of such communications. Debt collectors can send emails without prior consumer consent if the creditor follows a very specific procedure to notify the consumer in advance. But in any case, debt collectors must still disclose that the communication is an attempt to collect debt, and any information provided by the consumer will be used for that purpose.
The consumer may still bring an FDCPA lawsuit if the cumulative effect of the telephone and electronic communications amounts to harassment, abuse, or unfair practices.
CFPB has the power to enforce, fine, and penalize.
Even if there are no state or local mandates around debt collection practices, federal regulations must be followed to avoid serious fines or lawsuits from consumers or enforcers. In fact, during the last ten years, the CFPB has levied $1.7 billion in civil penalties and over $14.4 billion in relief for American consumers.
Back in 2015, two big players in the business of collecting bad debts—Encore and Portfolio Recovery Associates—were fined $18 million and forced to refund or stop collection of over $160 million in consumer debts. They were penalized for the following:
- Trying to collect unsubstantiated or inaccurate debts
- Relying on misleading and robo-signed court filings to churn out their numerous lawsuits
- Telling consumers that the burden of proof was on the customer to disprove the debt
- Inadequate attorney review of the consumer’s credit file
Also, in 2021, CFPB announced increases to their maximum amount of civil penalties for violations of the Truth in Lending Act provisions. First offenders can expect fines up to $11,906 with subsequent violations penalties of $23,811 per case. For 2020, enforcement actions rose from the previous year from 22 to 48.
Some states have chosen to enact their own regulations with collection practices that differ from or expand on federal regulations. Those states have their own agencies focused on enforcing their regulations across all debt collection practices. Debt collection organizations that operate within those states must follow state debt collection laws.
State regulations can change the frequency, channel, and timeframe around contacting an individual about the owned debt. Prime examples are Arkansas, California, Colorado, Iowa, and New York, with their own regulations on communications with third-party bill collectors. Specifically:
- Arkansas prohibits the design of forms and correspondence with the intent to create a false belief that a person other than the creditor is participating in the collection of the debt. Also, when communicating with a third party to gain the consumer’s location information, the debt collector cannot disclose that the consumer owes a debt.
- California prohibits communicating with the consumer’s employer or communicating any information about a consumer debt to any member of the consumer’s family, except to verify the consumer’s address.
- Colorado prohibits communicating with a third party for location information with a statement that the consumer owes a debt.
- Iowa strictly prohibits disclosing, publishing, or communicating any information relating to the consumer’s indebtedness to another person.
- New York prohibits communications with third parties that threaten to inform the consumer’s employer of the indebtedness before a final judgment is obtained.
For a complete listing of State fair debt collection acts and practices, see the National Conference of State Legislature’s webpage.
Local or Borough Regulations
Some states have local or borough regulations that go beyond federal and state mandates. Typical examples are found in New York City for various neighborhoods—boroughs—within the city.
For example, the New York City Council has adopted Subchapter 30: Debt Collection Agencies to its city code. Collection agencies must be licensed for a period of two years. Also, prohibited debt collection practices include:
- An attempt to collect on a payday loan. Payday loans are illegal in New York because of their exorbitantly high interest.
- An attempt to collect from or contact a consumer after the consumer asks for verification of the debt. The collector must provide proof of the debt with full identifying information, including the creditor who originated the collection action.
- Collectors have to disclose if the statute of limitations for beginning legal action has expired. Note: while debts don’t go away, debt collectors have a limited amount of time to sue on the debt.
- Collectors also request and record the language preferences from all consumers, and inform each consumer if they offer any services in any language other than English.
- Using caller ID spoofing or fake phone numbers to disguise the collection agency’s identity.
Again, local mandates must be followed by collection or third-party agencies.
How Can Creditors Manage the Layers of Complexities in State and Federal Regulations Successfully?
Get the big picture? All those federal, state, and local regulations are daunting reminders of how regulators regulate and write regulations that can ensnare the unwary. Due diligence meanders into the swampland of vicarious liability when third parties are involved.
To drain that swamp, organizations require dynamic solutions. Those solutions must overcome antiquated tech with modern reg tech and go beyond just keeping track of what is owed. They must include compliance monitoring for third-party vendors and institute third-party vendor management that provides a way to reward or penalize those vendors for good or substandard performance.
Those are just the solutions and tools NeuAnalytics provides.
NeuAnalytics has been providing dynamic solutions in debt collection for over 15 years. In fact, NeuAnalytics is the only solution in the receivables management space that can audit against all federal, state, and local regulations, both current and future. Likewise, NeuAnalytics provides the only solution that can ensure third-party agencies stay compliant and your consumers protected.
NeuAnalytics does that through:
- Software that tracks the licensing and bonding requirements of all third-party vendors. These solutions are able to keep creditors and third-party vendors in compliance with regulations before too much harm is done.
- Offering a set of checks and balances for third-party vendors to ensure all regulations are being followed and maintained.
- Custom platforms for risk management, work management, vendor management and audits, dispute, complaint, and fraud management.
- Software that can detect and raise the alarm when compliance issues arise--and intervene before it’s too late. The solutions provided by NeuAnalytics ensure your agents are following these different levels of regulations to avoid compliance-related fees, complaints, or lawsuits.
Use cases included in the NeuAnalytics platform are:
Receivables management to help the user understand the details and the big picture of the status of receivables—daily balances, payment plans, and settlements. Use that capability to model and predict collection strategies for each account—and manage vendors for better performance results.
Compliance management to arm the user with data down to the consumer level. Track whether vendors are compliant with applicable federal, state, and borough consumer protection laws.
Fraud, disputes, and complaints management with a single system allow the organization to streamline those critical workflows within those parameters. Advanced data modeling and predictive analytics detect and stop fraud before, during, and after it occurs.
It has been said that safety regulations are written in the blood of accident victims. The same holds true for consumer protection laws and regulations that have exploded on the financial scene from the 1930s bank failures to the 2008 mortgage lending fiasco.
In the lending and debt collection space, the emphasis has shifted to closer scrutiny of debt collections management. Banks and their debt collection agencies must comply with a cross-section of federal, state, and local regulations down to the borough level.
Creditors today have to manage their collectibles in a way that is both compliant and efficient. NeuAnalytics is the only platform with software to track third-party compliance, audits, and fraud management—i.e., disputes and complaints.
Whether the collector user needs to eliminate compliance and regulatory risk, raise the organization’s accounts receivable liquidation rates, or get a handle on fraud management and disputes and complaints handling, the NeuAnalytics platform has receivables, compliance, and financial operations tools the organization needs.
NeuAnalytics stands out in the industry as the only product that provides a single platform. That platform uniquely integrates business process management with compliance monitoring. Contact us and talk to one of our domain experts. We’re ready to help.