The CFPB issued Part II of its final collection rule on December 18, 2020. Part II supplements the final rule issued on October 30, 2020, about which our team published a series of blog posts on topics such as impacts on creditors, contact frequency limitations and limited content messages, electronic communications to send required disclosures, impact on credit reporting, mortgage servicing provisions and impacts, and meaningful attorney involvement and debt sale restrictions. Parts I and II were both adopted pursuant to the Bureau’s authority under the Fair Debt Collection Practices Act and not its UDAAP authority under the Dodd-Frank Act, and are effective November 30, 2021.
Part II of the final rule has three primary components, dealing with (1) the collection of time-barred debt, (2) passive debt collection, and (3) validation notices.
Part II includes prohibitions against taking or threatening legal action on time-barred debt, as was the case with the proposed rule. See §1006.26(b). Proposed §1006.26(b) prohibited a debt collector from bringing or threatening to bring a legal action against a consumer to collect a debt that the debt collector knows or should know is a time-barred debt. However, the Bureau finalized §1006.26(b) with two principal changes.
First, the Bureau did not adopt the “knows-or-should-know standard.” Rather, suing or threatening suit on a time-barred debt is subject to a strict liability standard. However, the Bureau stated that a debt collector may be able to invoke the “bona fide error” defense to civil liability under FDCPA section 813, depending on the circumstances.
Second, Part II clarifies that the prohibitions in §1006.26(b) do not apply to proofs of claim filed in bankruptcy proceedings. The Bureau reasoned that §1006.26(b) uses the term “legal action” and noted in Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (2017), the U.S. Supreme Court held that filing a proof of claim on a time-barred debt in a bankruptcy proceeding does not violate the FDCPA sections 807 or 808.
The most confusing aspect of Part II’s handling of time-barred debt relates to the Bureau’s handling of disclosures associated with such debts. The proposed rule contained a disclosure that would be required when a time-barred debt was being collected, but the Bureau did not include this disclosure in the final rule. Indeed, the final rule says nothing at all about disclosure. Unfortunately, the Bureau’s discussion of this issue in its analysis of the final rule hints that a disclosure may be required, but the Bureau has neither required one, nor provided the content of such a disclosure. Debt collectors will be left to decide for themselves whether to make time-barred debt disclosures as a matter of federal law, creating both confusion and the opportunities for litigation that the rule could have avoided.
Passive Debt Collection
Part II adopted a proposed ban on “passive collections,” a term that refers to a debt collector reporting a debt to a credit bureau before first contacting the consumer who allegedly owes the debt. (The FTC recently settled its first enforcement action targeting this practice.)
The Bureau finalized this prohibition, with changes specifying the required actions that a debt collector must take before furnishing information to a consumer reporting agency. Specifically, the final rule requires a debt collector to either: (1) speak to the consumer about the debt in person or by telephone, or (2) place a letter in the mail or send an electronic message to the consumer about the debt and wait a reasonable period of time to receive a notice of undeliverability. See §1006.30(a)(1). With respect to written notices, the Bureau finalized a safe harbor time period of 14 days for both electronic messages and mailed letters. Therefore, if the §1006.30(a)(1) communication is in writing, a debt collector must allow at least 14 days to pass between the communication to the consumer and furnishing information to a consumer reporting agency. The Bureau noted that there would be no violation of the rule, even if the debt collector received a notice of undeliverability after the expiration of the 14-day period. Part II also added §1006.30(a)(2) to state that §1006.30(a)(1) does not apply to a debt collector’s furnishing of information about a debt to a nationwide specialty consumer reporting agency that compiles and maintains information on a consumer’s check writing history, as described in FCRA section 603(x)(3).
Part II adopted a set of specifications for what information should be included in a validation notice, as well as when and how it should be provided to consumers. Part II also finalized a model disclosure form. See Form B-1. In general, the validation provisions (and Model Form) in the final rule were similar to those in the proposed rule from May 2019, but there were some notable changes.
Similar to the proposed rule, Part II declined to require debt collectors to always provide written, non-electronic validation notices to consumers. Part II permits a debt collector to send validation notices electronically as part of the initial communication with the consumer if the debt collector sends the notice in a manner that is reasonably expected to provide actual notice, and in a form that the consumer may keep and access later. A debt collector may also send the validation notice electronically after the initial communication when the debt collector complies section 101(c) of the E-SIGN Act.
One important difference between the proposed and final rules is that the use of the model form is no longer required, but instead simply provides a safe harbor. The Bureau stated that it made this change to allow for greater flexibility for types of debt that were not well accommodated by the model form.
The Bureau made some minor changes to the requirements for validation notices. For example, it added another choice of “itemization dates” (the date of a judgment) and moved the co-brand disclosure requirement to the optional disclosures (under the proposed rule, a co-brand name associated with a credit card would have been a required disclosure). But, in general, it adopted the validation notice requirements largely as proposed.
There were two areas in which the Bureau, disappointingly, refused to make revisions that would have made compliance with the final rule more straightforward. First, the Bureau refused to provide a definition of “original creditor,” despite industry groups’ requests that the Bureau define the “original creditor,” for purposes of a debt collector’s duty to provide the name of the original creditor, upon request, as the creditor at the time of charge off; this was intended to deal with situations in which consumer credit portfolios might be transferred between creditors. The Bureau rejected this request, reasoning that defining it as of the time of charge-off may not be accurate for all types of debt.
Second, and more disappointingly, the Bureau rendered the model form validation notice subject to continued change through judicial decisions by retaining the “required by applicable law” optional disclosures, and indeed adding a reference in the Official Commentary to the very confused and contradictory set of judicial decisions regarding situations in which the amount of a debt may change after the date of a validation notice. The Bureau rejected the industry comments that allowing judicial decisions to vary the model form would cause it to no longer be a viable form document. In a very real sense, this decision has the potential to render the “model form” subject to circuit-by-circuit, or even district-by-district, variation, as federal courts interpreting the FDCPA and the final rule require disclosures not covered by the model form itself. We had hoped that the Bureau would prescribe a true model form, not subject to change by court decisions.