Ruling cuts short debt collectors’ victory lap over CFPB proposal
Debt collectors notched a victory when the Consumer Financial Protection Bureau proposed allowing more use of electronic communication. But industry lawyers are worried a recent court decision could thwart that plan.
Under the CFPB's May proposal, debt collectors could have unlimited contact with debtors through email and text messages, though consumers could opt out of such communications. Additionally, collectors could satisfy disclosure requirements with a hyperlink embedded in an email that takes consumers to a description about how they can dispute a debt.
But an August ruling by the U.S. Court of Appeals for the 7th Circuit suggested collectors need to jump through a series of hoops to ensure their email communications meet the requirements of the Fair Debt Collection Practices Act. For one thing, the decision indicated that a hyperlinked disclosure was insufficient.
The case, involving a consumer who said a collection agency violated the FDCPA by failing to send a written notice with information about the debt, was somewhat narrow. But legal experts say depending on how it is read, the ruling could upend the CFPB proposal.
“It’s a pretty significant fly in the ointment for the CFPB’s debt collection rule,” said Christopher Willis, a partner and deputy consumer practice leader at Ballard Spahr. “It’s a barrier to making the premise of the rulemaking work, which is to substitute mail and phone calls with electronic communication.”
Third-party debt collectors have been lobbying for changes to the FDCPA so they can contact consumers via email and text. Several large publicly traded companies that buy and sell debts globally have discussed on earnings calls how the use of text and emails would allow them to cut call-center costs and boost collection rates using modern communications.
Banks and other direct creditors are exempt from the FDCPA but are still closely monitoring the bureau's rulemaking.
The ruling in Lavallee v. Med-1 Solutions LLC said the collection agency's emails did not qualify as "communication" under the law and lacked required disclosures. Lawyers say the decision could impose similar restrictions on text messages.
"At most the emails provided a means to access the disclosures via a multistep online process," the decision said.
The court's finding dealt a blow to the industry's hope that policymakers will modernize debt collection rules.
"All it does is confirm the fact that courts aren’t willing to read the FDCPA for the modern age," Willis said.
While observers are still interpreting what the ruling means, they say there could be gaps between the decision and what the CFPB proposal would allow. But it is unclear whether the CFPB would change sections of its proposal specifically related to the use of emails and texts due to one court decision.
The decision suggests emailed communications and even hyperlinked disclosures would satisfy the law as long as the email included specific information to convey to the consumer that a collection agency had validated the debt. But some note more specific emails could pose certain risks.
“The 7th Circuit issues are something that can be corrected and managed, but the CFPB would want to take a look at security and privacy concerns,” said Nanci Weissgold, a partner and co-leader of consumer financial services at Alston & Bird. “It’s hard to speculate whether there will be another alternative or they will just remove this completely in the final rule.”
In the case, the collection agency sent the validation notice via email, but the consumer claimed she did not get it.
The FDCPA provides that a validation notice must be “contained in the initial communication” or provided in a written notice “containing” the validation notice that is sent within five days after an initial communication with a consumer.
Much of the issue for collection agencies comes down to cost. Debt collectors spend between 50 cents and 80 cents on each of the roughly 140 million communications sent every year to consumers through standard mail. The cost of sending an email in place of letters would be zero.
But some observers said the court decision could be helpful in providing the industry with guidance on what the law allows.
“The Lavallee decision is not all bad news,” said Kari Barber, corporate counsel at ACA International, an industry trade group. “It provided some clarification about how courts will interpret the FDCPA when the facts involve modern technology. Under these facts, the court concluded that the use of modern technology in this manner did not comply with the FDCPA. What the court didn’t do is rule out the use of text messages or email completely.”
One way around the court’s ruling would be for the CFPB to require that debt collectors include some information about a debt such as an account number or an itemization of the debt in the validation notice, lawyers said. The bureau has plenty of flexibility to make changes in a final rule.
The bureau received 12,104 public comments on its proposal to amend Regulation F that implements the FDCPA. The comment period ended Sept. 18. The CFPB first issued an advance notice of proposed rulemaking in 2013. In addition to enabling greater contact via email and text messages, the proposal would limit phone-based collection attempts for the same consumer to seven calls a week.
A final rule would likely go into effect a year after it is published in the Federal Register.
The bureau's 538-page plan marks the first major change to the FDCPA since it passed in 1977. The act prohibits debt collectors from making abusive, misleading or false representations and from unfair practices in the collection of a debt.
Claudia Wilner, a senior attorney at the National Center for Law and Economic Justice, said in a comment letter that allowing debt collectors to provide key disclosures by hyperlink is dangerous and unacceptable.
“Many people who rely on smartphones for internet access will not actually be able to access the disclosures or save them to review later,” Wilner wrote. “The CFPB should scuttle this misguided proposal.”