The CFPB’s final collections rule: meaningful attorney involvement safe harbor removed; debt sale restrictions modified

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On November 13, 2020, from 12:00 p.m. to 1:00 p.m. ET, we will present a webinar on the CFPB’s final collection rule. 

Our blog post series has detailed a number of ways in which the CFPB’s final debt collection rule departs from last year’s NPRM.  There are two additional topics approached very differently in the final rule: (1) the proposed “meaningful attorney involvement” safe harbor; and (2) restrictions on certain types of debt sales or placements.  In the final rule, the former was dropped entirely, and the latter was significantly revised.

Meaningful Attorney Involvement

In the final rule, the CFPB declined to finalize the proposed safe harbor for meaningful attorney involvement.  Indeed, the final rule contains no provisions at all related to this subject.

The issue of meaningful attorney involvement has been a key dimension in the CFPB’s enforcement actions brought against debt collection law firms.  For example, two Bureau consent orders have previously detailed highly specific requirements for the documents that must be in the law firm’s possession, the documents the attorneys must review, and the legal issues debt collection attorneys must consider before sending a case to the courthouse to be filed.  In a CFPB enforcement action that went to trial and resulted in a judgment for the collections law firm, one of the central allegations was a lack of meaningful attorney involvement in the preparation of the firm’s pre-suit collection letters.  Another case centering on meaningful attorney involvement, brought by the CFPB in 2019, is currently stayed pending the outcome of the Supreme Court’s ruling in Collins v. Mnuchin (relating to the constitutionality of the Federal Housing Finance Agency’s structure).

Actions such as these led to the CFPB proposal of a “safe harbor” for debt collection law firms in the NPRM.  Cribbing heavily from Rule 11 of the Federal Rules of Civil Procedure, the proposed safe harbor appeared to take a somewhat more relaxed approach to what is required for “meaningful attorney involvement” than what the Bureau had required in its earlier consent orders.  Specifically, as proposed in the NPRM, an attorney would be deemed “meaningfully involved” in the document review and filing process if:

[T]he attorney: (1) drafts or reviews the pleading, written motion, or other paper; and (2) personally reviews information supporting the submission and determines, to the best of the attorney’s knowledge, information, and belief, that, as applicable: the claims, defenses, and other legal contentions are warranted by existing law; the factual contentions have evidentiary support; and the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or lack of information.

The Bureau decided to drop this safe harbor in its entirety from the final rule, citing predominantly negative comments from both industry and consumer representatives.  Industry comments focused on whether existing meaningful attorney involvement case law has been properly decided under the FDCPA, concerns about whether the Bureau had authority to promulgate a rule regarding a safe harbor that is not addressed in the FDCPA itself, whether a safe harbor would infringe on the practice of law, and whether the safe harbor would itself lead to a further lack of clarity, and thus, more litigation.  Consumer advocates, on the other hand, expressed concern that the Bureau’s approach was “too lenient and would sanction debt collection attorney practices that these commenters believe to be problematic.”

In considering these comments and eliminating the safe harbor in the final rule, the Bureau reiterated that it believes the doctrine of meaningful attorney involvement “has a valid basis in the text of FDCPA section 807” and predicted continued litigation against debt collection law firms under this theory.  We expect this theory to remain at the center of CFPB activity with respect to legal debt collection.

Debt sale and placement restrictions

In the NPRM, the CFPB proposed two specific restrictions that would have prohibited a debt collector from selling, transferring, or placing for collection a debt if the debt collector knows or should know that the debt: (1) has been paid or settled, discharged in bankruptcy, or (2) that an identity theft report has been filed with respect to the debt. In the final rule, the first prohibition was modified, while the second was removed altogether.

With respect to the restriction on debts paid, settled, or discharged in bankruptcy, the final rule remains largely unchanged from the CFPB’s proposal, but adds an exception based on several industry comments that argued for a different treatment for secured debt.  According to these commenters, “if the discharged debt is a secured debt, including but not limited to a residential mortgage, the transfer ban should not impede a creditor’s ability to maintain and exercise its security interest in the collateral that secures the discharged debt.”  Under the exception adopted, a debt collector may sell, transfer for consideration, or place for collection a debt that has been discharged in bankruptcy if the debt is secured by an enforceable lien and the debt collector provides notice to the transferee that the consumer’s personal liability for the debt was discharged in bankruptcy.

As to the proposed prohibition against selling or placing debts subject to identity theft claims, the CFPB eliminated this restriction entirely from the final rule.  While recognizing that the “transfer of these debts is a consumer protection concern,” the CFPB cited comments about the complexities raised by incorporating FCRA provisions into its debt collection rule.  Concluding that the FCRA already prohibits such sales or placements, the CFPB decided to resolve the issue by adding a comment in the Official Commentary clarifying that nothing in the final rule alters a debt collector’s obligation to comply with the FCRA section that prohibits a person from selling, transferring for consideration, or placing for collection a debt after such person has been notified in accordance with the FCRA that the debt resulted from identity theft.  Unlike the provision that appeared in the NPRM, the FCRA section permits an investigation into whether the identity theft report is false.  Indeed, industry commenters noted this distinction between the FCRA and the provision in the NPRM.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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