12 Jul Federal Regulatory Update
On July 10, 2013, the Consumer Financial Protection Bureau (the “Bureau”) issued CFPB Bulletin 2013-07 regarding unfair, deceptive, or abusive acts or practices (collectively, UDAAPs) in the collection of consumer debts, and Bulletin 2013-08 to provide guidance to creditors, debt buyers, and third-party collectors regarding representations about the effect of debt payments on credit reports and scores.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), all covered persons or service providers are required to refrain from committing UDAAPs in violation of the Act. The Bureau may closely review any covered person or service provider’s debt collection efforts for potential violations of federal consumer financial laws.
Original lenders and other covered persons and service providers under the Act involved in collecting debt related to any consumer financial product or service are subject to the prohibition against UDAAPs in the Act. Whether conduct constitutes a UDAAP may depend on additional facts and analysis.
All parties covered by the Fair Debt Collection Practices Act (the “FDCPA”) must comply with obligations they have under the FDCPA as well as obligations regarding UDAAPs under the Act.
The Act prohibits conduct that constitutes an unfair act or practice. An act or practice is unfair when:
- It causes or is likely to cause substantial injury to consumers;
- The injury is not reasonably avoidable by consumers; and
- The injury is not outweighed by countervailing benefits to consumers or to competition.
A “substantial injury” typically takes the form of monetary harm, such as fees or costs paid by consumers because of the unfair act or practice. The injury need not be monetary. Although emotional impact and other subjective types of harm will not ordinarily amount to substantial injury, in certain circumstances emotional impact may amount to or contribute to substantial injury. Actual injury is not required. A significant risk of concrete harm is sufficient.
An injury is not “reasonably avoidable” by consumers when an act or practice interferes with or hinders a consumer’s ability to make informed decisions or take action to avoid that injury. Injury caused by transactions that occur without a consumer’s knowledge or consent is not reasonably avoidable. Injuries that can only be avoided by spending large amounts of money or other significant resources may not be reasonably avoidable. An act or practice is not unfair if the injury it causes or is likely to cause is outweighed by its consumer or competitive benefits. Public policy may be considered to determine whether an act or practice is unfair, but may not serve as the primary basis for such determination.
Deceptive Acts or Practices
The Act prohibits conduct that constitutes a deceptive act or practice. An act or practice is deceptive when:
- The act or practice misleads or is likely to mislead the consumer;
- The consumer’s interpretation is reasonable under the circumstances; and
- The misleading act or practice is material.
To determine whether an act or practice has actually misled or is likely to mislead a consumer, the totality of the circumstances is considered. Deceptive acts or practices can take the form of a representation or omission. The Bureau also looks at implied representations, including any implications that statements about the consumer’s debt can be supported. Ensuring that claims are supported before they are made will minimize the risk of omitting material information and/or making false statements that could mislead consumers.
To determine if the consumer’s interpretation of the information was reasonable under the circumstances when representations target a specific audience, such as older Americans or financially distressed consumers, the communication may be considered from the perspective of a reasonable member of the target audience. A statement or information can be misleading even if not all consumers in the targeted group would be misled, so long as a significant minority would be misled. If a representation conveys more than one meaning to reasonable consumers, one of which is false, the speaker may still be liable for the misleading interpretation. “Material information” is information that is likely to affect a consumer’s choice of, or conduct regarding, the product or service. Information that is likely important to consumers is material.
With regard to a disclosure or qualifying statement that might prevent consumers from being misled that, on its own, would be deceptive, the Bureau looks to the following factors in assessing whether the disclosure or qualifying statement is adequate to prevent the deception:
- Whether the disclosure is prominent enough for a consumer to notice;
- Whether the information is presented in a clear and easy to understand format;
- The placement of the information; and
- The proximity of the information to the claims it qualifies.
Abusive Acts or Practices
The Act prohibits an abusive act or practice. An act or practice is abusive when it:
- Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
- Takes unreasonable advantage of:
- A consumer’s lack of understanding of the material risks, costs, or conditions of the product or service;
- A consumer’s inability to protect his or her interests in selecting or using a consumer financial product or service; or
- A consumer’s reasonable reliance on a covered person to act in his or her interests.
Although abusive acts or practices may also be unfair or deceptive, each of these prohibitions are separate and distinct and are governed by separate legal standards.
Examples of Unfair, Deceptive, and/or Abusive Acts or Practices
Depending on the facts and circumstances, the following non-exhaustive list of examples of conduct related to the collection of consumer debt could constitute UDAAPs and will be closely watched by the Bureau:
- Collecting or assessing a debt and/or any additional amounts in connection with a debt, including interest, fees, and charges, not expressly authorized by the agreement creating the debt or permitted by law;
- Failing to post payments timely or properly or to credit a consumer’s account with payments that the consumer submitted on time and then charging late fees to that consumer;
- Taking possession of property without the legal right to do so;
- Revealing the consumer’s debt without the consumer’s consent to the consumer’s employer and/or co-workers;
- Falsely representing the character, amount, or legal status of the debt;
- Misrepresenting that a debt collection communication is from an attorney;
- Misrepresenting that a communication is from a government source or that the source of the communication is affiliated with the government;
- Misrepresenting whether information about a payment or nonpayment would be furnished to a credit reporting agency;
- Misrepresenting to consumers that their debts would be waived or forgiven if they accepted a settlement offer when the company does not forgive or waive the debt; and
- Threatening any action that the covered person or service provider does not have the authorization or intent to pursue, including false threats of lawsuits, arrest, prosecution, or imprisonment for non-payment of a debt.
The Bureau will use all appropriate tools to assess whether supervisory, enforcement, or other actions may be necessary.
Effects on Credit Reports
An example of a potentially deceptive claim involves representations that consumers, lenders, and debt buyers (collectively “debt owners”) and third-party debt collectors may make about obsolete debt, which is debt that the Fair Credit Reporting Act (the “FCRA”) prohibits consumer reporting agencies from including on credit reports mainly due to the length of time that has passed since a consumer initially defaulted. The FCRA imposes time limits, usually 7 years, on including information about debts in certain credit reports. A debt owner or third-party debt collector representing that payments on obsolete debts will result in the removal of information about the debt from the consumer’s credit report might deceive consumers because the information likely would not have appeared on reports, even if the debt had remained unpaid.
Another example of a potentially deceptive claim involves representations that debt owners and third-party debt collectors make about non-obsolete debts. Payments on debts in collection will change credit reports only if debt owners or third-party debt collectors provide information about the payments to credit reporting agencies and the agencies add the information to credit files and credit reports. If debt owners or third-party debt collectors do not provide payment information to credit reporting agencies, then it might be deceptive for them to make representations about how debt payments will be reflected on a consumer’s credit report.
Effects on Credit Scores
Another potentially deceptive claim involves representations that debt owners and third-party debt collectors may make about how paying debts in collection will improve credit scores. Paying debts does not necessarily improve the credit score of the consumer. Consequently, debt owners or third-party debt collectors might deceive consumers if they make representations that paying debts in collection will improve a consumer’s credit score.
Effect on Creditworthiness
A third example of a potentially deceptive claim involves representations that owners of debts and third-party debt collectors may make about how paying debts in collection will improve creditworthiness or enhance the likelihood that a consumer will receive credit from a lender. Potential lenders use a variety of sources of information to assess the creditworthiness of prospective borrowers, including credit report or credit score information. Potential lenders may assign different weight to information in evaluating the creditworthiness of prospective borrowers. The nature and extent of the impact of a payment on a particular debt in collection to a prospective borrower’s creditworthiness may depend on the information potential lenders consider and how they weigh that information, factors that debt owners or third-party debt collectors often will not know. Debt owners or third-party debt collectors might deceive consumers if they make representations about the nature or extent of improved creditworthiness that result from paying debts in collection.
The Bureau’s Expectations
The examples of potentially deceptive claims concerning the effect of paying debts in collection on credit reports, credit scores, and creditworthiness above are illustrative and non-exhaustive.
Debt owners and third-party debt collectors should take steps to ensure that any claims that they make about the effect of paying debts in collection on consumers’ credit reports, credit scores, and creditworthiness are not deceptive. In the course of supervision activities or enforcement investigations, the Bureau may review communication materials, scripts, and training manuals and related documentation to assess whether owners of debts and third-party debt collectors are making the types of claims above and the factual basis for them. The Bureau will assess whether additional supervisory, enforcement, or other actions are necessary to ensure that the debt collection market functions in a fair, transparent, and competitive manner.