The Debt Collection Industry and the CFPB: The Beginning of a Supervisory Relationship and Specific Concerns for Attorneys

About the Authors:

R. Frank Springfield is a partner and Zachary D. Miller is an associate at Burr & Forman in Birmingham, Alabama.

Prior to the enactment and implementation of Title X of the Dodd-Frank Act (Pub. L. No. 111-203, 124 Stat. 1376 (2011)), the actions of the nation's large debt collectors had been governed by federal statutes, but debt collectors had never been subject to direct supervision by the federal government. The Federal Trade Commission (FTC) had enforcement authority under the federal Fair Debt Collection Practices Act (FDCPA), codified at 15 U.S.C. § 1692, et seq., but the agency exercised that authority rarely. Thus, the primary legal risk to collectors under federal law was consumer lawsuits brought under the FDCPA. This risk was quite real, with recent estimates from a company tracking FDCPA litigation showing that there were 11,495 FDCPA lawsuits filed in 2012. See FDCPA and Other Consumer Lawsuit Statistics, Dec. 16-31 & Year-End Review, 2012, WebRecon, available at https://www.webrecon.com/b/news-and-stats (Jan. 17, 2013). While this number indicates a 7 percent decline from 2011, it is still 311 percent higher than the number of lawsuits filed in 2004. These cases are fueled by the FDCPA's civil liability provision, which allows a plaintiff to recover $1,000 in statutory damages from any collector found in violation of the statute, as well as actual damages and attorney's fees. Additionally, the FDCPA contains a class action remedy, allowing a consumer to recover up to $500,000 on behalf of other consumers, or 1 percent of the net worth of the debt collector. With a collector only permitted to recover attorney's fees for a lawsuit filed in "bad faith and for the purpose of harassment," consumers filing FDCPA actions are met with a "low risk, high reward" scenario that has encouraged litigation.

Despite the large number of FDCPA cases filling the nation's federal courts, Congress opened the door for additional oversight of the debt collection industry with the passage of the Dodd-Frank Act. The Dodd-Frank Act charges the newly-created Consumer Financial Protection Bureau (CFPB) with crafting rules and regulations that deal with so-called "nonbank financial companies." However, for nonbanks, the CFPB generally can supervise only "larger participants." Thus, before the CFPB can supervise and examine these entities, it must create a rule defining entities that are "larger participants" in these markets.

The CFPB Defines "Larger Participants" of Debt Collection Industry

On October 24, 2012, the CFPB published its rule, defining "larger participants" of the consumer debt collection market. Under the rule, the CFPB, as of January 2013, supervises any third-party debt collector, debt buyer, and collection attorney with more than $10 million in annual receipts from consumer debt collection activities. The $10 million threshold should permit the CFPB to supervise approximately 175 of the nation's 4,000 "debt collectors." Now, with the market of supervised firms established, the industry is subject to the full supervision authority of the CFPB.

According to the CFPB, it will be using its supervisory powers to assess potential risks to consumers and to examine whether debt collectors are complying with requirements of federal consumer financial law. The CFPB has listed four primary focus areas of its supervisory process: (1) whether debt collectors are providing consumers with required disclosures; (2) whether debt collectors are using accurate data in their pursuit of debt, (3) whether debt collectors have a consumer complaint and dispute resolution process; and (4) whether debt collectors "communicate civilly and honestly with consumers."

The CFPB's Role in Supervising Debt Collection Attorneys

While the debt collection industry prepares for CFPB supervision, debt collection attorneys also need to pay particular attention to CFPB developments. Since the decision in Heintz v. Jenkins, 514 U.S. 291 (1995), attorneys engaged in consumer debt collection activity have been aware that the FDCPA governs their actions. This may include attorneys that are regularly engaged only in consumer debt-collection litigation on behalf of their creditor clients. However, federal regulation of the practice of law has typically ended there, with lawyers engaged in representing consumer finance clients in non-collection settings comfortably exempt from supervision or regulation by the federal government. With the Dodd-Frank Act, however, federal consumer financial regulation now could reach non-collection activities.

Dodd-Frank Act Section 1027(e) provides that the CFPB may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law. However, this exception is limited, inasmuch as the statute here also states that the exception shall not be construed so as to limit the exercise by the CFPB of any supervisory, enforcement, or other authority regarding the "offering or provision of a consumer financial product or service" that (a) is not offered or provided as part of, or incidental to, the practice of law, occurring exclusively within the scope of the attorney-client relationship, (b) that is otherwise offered or provided by the attorney in question with respect to any consumer who is not receiving legal advice or services from the attorney in connection with such financial product or service. Additionally, the Dodd-Frank Act states that any attorney already subject to enumerated consumer laws is subject to the CFPB's authority.

This confusing language was addressed in a letter drafted by members of the ABA's Consumer Financial Services Committee to the CFPB on April 11, 2012, in response to the CFPB's request for comment on its then-proposed "larger participant" debt collection rule. In addressing the exclusions, the letter stated:

The first exclusion seems relatively simple, that is, if an attorney offers or provides consumer financial products or services outside of the practice of law and not within an attorney-client relationship, the attorney may be subject to [CFPB] supervision. This presumably would include an attorney offering or providing such consumer-oriented products and services as debt management counseling, fee-for-service loan modifications and pre-paid foreclosure avoidance plans. The second exception perhaps is not as plain as the first exception, but its meaning is quite similar. That is, attorneys who are engaged in offering or providing a consumer financial product or service (such as collection of consumer debt) but do not represent consumers in such activities may be subject to [CFPB] supervision.

The letter then suggested that this language of the Dodd-Frank Act was crafted with special concern that attorneys could continue to practice law, representing parties (including consumers) without undue interference from a primary federal regulator. In the commentary accompanying the final "larger participant" rule, however, the CFPB rejected this assertion, stating that the statute and legislative history does nothing to protect lawyers offering legal services by collecting consumer debts on behalf of commercial clients with interests adverse to those of consumers. The CFPB also addressed its ability to require regulated entities to reveal attorney-client privileged information. The CFPB has taken the position - and reiterated in the commentary accompanying the final rule - that it has general authority to require supervised entities to provide it with privileged information. In an attempt to preemptively address legitimate concerns over such power, the CFPB promulgated a regulation providing that complying with a request for privileged information does not constitute a waiver of privilege and that materials produced in response to the CFPB's demand will remain confidential.

However, potential conflicts may exist between CFPB supervisory authority and state bars regarding confidentiality. Additionally, there is likely to be conflict between the state bar rules and guidelines and the CFPB's approach with respect to trust accounts and professional standards. These considerations will make federal supervision of attorneys impractical at best, with 50 states already regulating the practice of law.

It is clear that the CFPB intends to take an active role in supervising attorneys engaged in debt collection practice. However, providing some comfort to attorneys engaging in foreclosure-related services, the CFPB in defining activities of attorneys subject to supervision excluded foreclosures. As discussed below, several recent decisions from federal courts of appeals have held that mortgage foreclosure by law firms on behalf of their mortgage servicer clients, even in the absence of a demand for money, constitutes "debt collection" activity under the FDCPA. The CFPB, on the other hand, addressed this type of activity in the "larger participant" rule, as follows:

Regardless of whether enforcing a security interest can, on its own, qualify as collecting debt under the FDCPA, the Bureau does not deem a person who only enforces a security interest, and does not seek payment of money or transfer of assets that are not designed as collateral for the note or instrument, to be, on that basis, a part of the consumer debt collection market defined by the Final Consumer Debt Collection Rule. However, when a person both seeks payment of money and enforces a security interest, that person can qualify as a debt collector for purposes of the Final Consumer Debt Collection Rule.

Thus, while some aspects of the CFPB authority remain unclear - including the CFPB's authority to regulate attorneys as "service providers" to larger participants - it is apparent the CFPB intends to actively supervise attorneys engaged in debt collection. This means that debt collection law firms that qualify as "larger participants" need to sharply focus on compliance with federal law, because CFPB supervision and examination is not only possible, but probable.

Law Firms Engaging in Residential Foreclosures Subject to the FDCPA

The increased focus on federal supervision of debt collection attorneys comes at a challenging time for law firms attempting to digest recent decisions from the federal circuit courts of appeals. Courts in these cases have found that residential mortgage foreclosure constitutes "debt collection" under the FDCPA. In Glazer v. Chase Home Finance, LLC, __ F.3d __, 2013 WL 141699 (6th Cir. Jan. 14, 2013), the Sixth Circuit addressed whether mortgage foreclosure, engaged in by a licensed attorney on behalf of its mortgage servicer client, constituted "debt collection" under the FDCPA. The Sixth Circuit acknowledged that "[t]he view adopted by a majority of district courts . . . is that mortgage foreclosure is not debt collection." According to the Sixth Circuit, this view follows from the premise that the enforcement of a security interest is not debt collection. In rejecting this view, the Glazer court started with the idea that, pursuant the definition contained in Section 1692a(5) of the FDCPA, a home loan is a "debt," even if it is secured. Noting that debt collection may be performed through "communication," "conduct," or "means" under the FDCPA, the court concluded that nothing in the statute limits the applicability of the term "debt collection" to collection efforts that are not legal in nature. Then, turning to the issue at hand, the court concluded that "every mortgage foreclosure, judicial or otherwise is undertaken for the very purpose of obtaining payment on the underlying debt, either by persuasion (i.e., forcing a settlement) or compulsion (i.e., obtaining a judgment of foreclosure, selling the home at auction, and applying the proceeds from the sale to pay down the outstanding debt)." Finally, the court found that Section 1692f(6) of the FDCPA does not protect entities engaging in foreclosure, because it speaks only to "repossessors."

The Glazer decision means that the Sixth Circuit Court of Appeals has joined the ranks of the Fourth Circuit Court of Appeals in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006) and the Third Circuit Court of Appeals in Piper v. Portnoff Law Assocs., Ltd., 396 F.3d 227 (3rd Cir. 2005) in finding that mortgage foreclosure constitutes debt collection under the FDCPA. Indeed, the decision also follows on the heels of the Eleventh Circuit's recent decision Reese v. Ellis, Painter, Ratterree & Adams, LLP, 678 F.3d 1211 (11th Cir. 2012), in which the court held that because a law firm sent an acceleration letter on behalf of its client threatening non-judicial foreclosure, the law firm was a "debt collector" under the FDCPA. When addressing the policy reasons behind its decision, the Eleventh Circuit stated that if engaging in a residential foreclosure exempted a law firm from the purview of the FDCPA, it would mean a collector could harass or mislead a debtor without violating the FDCPA, so long as the subject debt was secured.

The decisions in Glazer and Reese continue the recent tradition of the federal judiciary expanding the FDCPA to cover many activities engaged in by licensed attorneys. With the decision in Heintz clearing the path for regulation of debt collection attorneys, the Supreme Court's decision in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, LPA, __ U.S. __, 130 S.Ct. 1605, 176 L.Ed.2d 519 (2010) (holding that bona fide error defense did not apply to legal errors) removing defenses available to attorneys, and the decisions in Glazer and Reese expanding the number of attorneys subject to the FDCPA, the legal industry will have to take a hard look at whether additional activities related to the consumer finance industry may also be subject to the provisions of the FDCPA.

Conclusion

With the CFPB's mandate to supervise the already litigation-dogged collection industry, and the decisions in Glazer and Reese expanding the activities of attorneys subject to the FDCPA, any lawyer or law firm engaged in some aspect of consumer debt collection or enforcement will feel obliged to comply with federal law. Moreover, law firms that do not have an active collection practice, but perform both judicial and non-judicial foreclosures for their mortgage servicing clients, should now consider the possibility of being subject to the FDCPA. These changes, however, are likely only the beginning of a trend for the new federal agency and the courts to regulate attorneys. Also, for the first time since the passage of the FDCPA, a federal agency (the CFPB) has authority to draft regulations clarifying all provisions of the FDCPA. This means that substantive expansion of the scope of the statute is quite possible in years to come. Thus, any entity with even a slight connection to consumer debt collection must now be very aware of the actions of the CFPB and decisions from federal courts on the scope of the FDCPA.

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