Yesterday, the Consumer Financial Protection Bureau (CFPB) released the report issued by its Taskforce on Consumer Financial Law. The report consists of two volumes and clocks in at 700 pages combined. Volume 1 consists of a scholarly analysis of the consumer financial law sphere, while Volume 2 focuses on 100 recommendations that the Taskforce makes to the Bureau's Director. Debt collection makes an appearance in Volume 1, but none of the recommendations specifically focus on debt collection. However, some of the recommendations might be of interest to industry members. Over the next two days, we'll provide detailed summaries of related sections. Below we discuss the four major areas where debt collection appears in Volume 1. Tomorrow in Part 2, we'll go over the related recommendations.
The intricate web of debt collection, consumer protection, and the overall impact on consumers
Section 6.2 of Volume 1 contains a comprehensive analysis of the interplay between consumer protection laws and regulations and consumer benefit/detriment, painting a picture of a sliding scale that requires a delicate balance. The Taskforce rejects a "zero-sum" approach to regulation — i.e., that deregulation will help industry and harm consumers, whereas more regulation will harm industry and help consumers in equal but opposite amounts — and instead states that there is a sweet spot that must be met or else the laws and regulations will simultaneously both help and harm the most vulnerable consumers, causing a problematic quagmire.
The debt collection market is given as an example. High-risk consumers are intended to benefit most from strict laws and regulations because they curb how debt collectors interact with consumers. However, at the same time, overly-restrictive laws and regulations increase the cost of recovery for creditors, which increases the cost of lending for creditors who in turn increase the threshold for consumer loans and credit. The end result is that the same consumers who are intended to benefit from the strict laws and regulations end up being the ones who have reduced access to credit.
Consumer choice and the perceived lack thereof in regards to debt collectors
Section 6.2 also touches on an often-raised critique that consumer advocates have against the industry: that consumers don't get to pick their debt collector. The report acknowledges this and notes that the ability of a consumer to jump to a different company's service if they are unsatisfied with the current one leads to market competition, which in turn leads to market self-regulation.
However, the report's analysis shows that it's not as one-sided as this consumer advocate argument would make one think. The report notes that consumers might not recognize the debt collection agency contacting them, but they will recognize the creditor on whose behalf the debt collector is working. This creates — indirectly — a similar reputational risk to the creditor as if it were collecting its own debts. The result? Creditors typically heavily govern and oversee how their debt collection partners interact with consumers.
Private rights of action are not always the best solution
Section 6.2 also discusses the impact of private rights of action and how these are not always the best solution for consumer protection. For one, it puts the onus on the consumer to act, find a lawyer, and go through the legal process. And, more interestingly for the ARM industry that deals with a cottage industry of plaintiffs' counsel, the report states that class counsel often take advantage of low threshold statutory damages — such as the $1,000 statutory damages of the Fair Debt Collection Practices Act (FDCPA) — to drive up their fees.
Regulatory challenges with the FDCPA
Section 9.2.2 discusses the regulatory challenges associated with the FDCPA, specifically as it relates to the statute's age. On one hand, some principles of the FDCPA — such as not using false or misleading tactics to collect debts — are timeless. However, other sections of the FDCPA cause conundrums and difficulty in adapting to modern communication methods.
The first example given by the report relates to voicemails, which the CFPB tackles in its final debt collection rule (Regulation F). The report discusses how the FDCPA requires debt collectors to reveal that they are debt collectors and attempting to collect a debt when communicating with consumers. However, leaving a voicemail with such information risks third-party disclosure if the message is overheard by someone other than the intended recipient. The courts had a hard time grappling with this issue and issued decisions with mixed — and sometimes inconsistent — results. This uncertainty caused risk-averse debt collectors to stop leaving voicemails, which in turn led to more calls placed to consumers in an attempt to reach them.
The other example given is in regards to email, another topic the CFPB addressed in Regulation F. The report states:
In its initial outline of proposals under consideration, the Bureau analogized an email to an envelope containing a letter, such that the outside of an email (the “from” and “subject” fields) would be subject to similar limitations on language as the outside of an envelope. By the proposed rule stage, however, the Bureau appeared to analogize an email to the letter itself—that is, the password to access the email account functioned like the protections afforded to a consumer’s postal mailbox, and an email sent to the correct address could contain all the same information as a letter addressed to the right consumer. Thus we see the challenges that regulators face when attempting to stay true to outdated statutory language while also predicting what interpretation may achieve the best ends for consumers and market participants.
Part 2: The Taskforce's recommendations
Tomorrow, iA will publish an article that goes into detail about the industry-related recommendations presented by the Taskforce's report.