March 23, 2020

The Proposed Debt Collection Rule & State Collection Laws

Susan Manship Seaman

In May 2019, the Consumer Financial Protection Bureau (“CFPB”) published a proposed debt collection rule (Regulation F) under the federal Fair Debt Collection Practices Act (“FDCPA”) to provide much-needed guidance on how a statute enacted in 1977 applies to modern debt collection practices. Since May, practioners have understandably focused on digesting the proposed rule, identifying potential challenges presented by the rule, and verifying the scope of the rule. Another important step for practitioners in processing the impact of the proposed rule is to understand how the proposed rule interacts with state collection laws

Nearly all states and some cities regulate debt collection. Notably, state collection laws can vary in scope from the FDCPA. State collection laws can apply to entities engaging in collections that are not subject to the FDCPA, such as creditors collecting their own accounts in their own names. State collection laws can apply to debts that are not subject to the FDCPA, and can set forth requirements and restrictions, such as licensing requirements, which do not appear in the FDPCA. However, state collection laws can be similar to the FDCPA in that they may contain provisions that track the FDCPA or provide that a violation of the FDCPA constitutes a violation of the state law. Additional state law considerations can arise.

The bottom line is that any entity engaged in debt collection should consider what state collection laws apply to its activities and how the FDCPA and the proposed debt collection rule might directly or indirectly regulate its activities. To help practitioners start analyzing how the proposed debt collection rule and state collection laws interact, this article summarizes how the FDCPA and the proposed debt collection rule expressly address state law.

Section 1692n: Relation to State Laws

As with other activities regulated on the federal and state level, federal law could preempt state law. The FDCPA addresses its effect on state law in section 1692n. Specifically, the FDCPA provides that it does not annul, alter, affect, or exempt any person subject to the FDCPA from complying with state laws (defined to include the District of Columbia and the U.S. territories) with respect to debt collection practices, except to the extent that those state laws are inconsistent with any provision of FDCPA, and then only to the extent of the inconsistency. The FDCPA explains that a state law is not inconsistent with the FDCPA if the protection such state law affords any consumer is greater than the protection provided by the FDCPA. The proposed debt collection rule mirrors section 1692n of the FDCPA, except that it also incorporates the proposed rule so that any state law is preempted if the state law is inconsistent with the FDCPA or the proposed rule. Congress adopted an express conflict preemption standard in the FDCPA. As one federal court summarized, “state law can impose additional restrictions but not contrary ones.”[1]  Whether the FDCPA preempts state collection laws is a key determination in analyzing what potential penalties—including under the FDCPA, the state collection law, or both—apply to a collection violation.

Section 1692o: Exemption for State Regulation

The original Section 817 of the FDCPA (codified as 15 U.S.C. § 1692o) permitted the Federal Trade Commission (“FTC”) to exempt by regulation any class of debt collection practices within any state if the FTC determined that under the laws of that state the class of debt collection practices is subject to requirements substantially similar to those imposed by the FDCPA, and that there is adequate provision for enforcement by the state. The FTC promulgated rules that set forth a procedure for states to apply for an exemption under section 1692o and provided that a state law requirement may qualify for a FDCPA exemption if the state law is substantially similar to or provides greater protections to consumers than the FDCPA. The FTC’s rule changed the preemption standard in section 1692o slightly. In 1995, the FTC granted the State of Maine an exemption to the FDCPA.

The Dodd-Frank Act transferred the FDCPA exemption granting authority to the CFPB. In 2011, the CFPB issued a rule under Regulation F that substantially duplicated the FTC’s rule related to state exemptions to the FDCPA. The 2019 proposed rule retains the same procedures and criteria that currently appear in the CFPB’s Regulation F, but the proposed rule provides that a state law requirement must be substantially similar to or provide greater protections than those imposed under the FDCPA and the proposed rule. Like the FDCPA and the current Regulation F, the proposed rule does not specifically explain the term “class of debt collection practices.” Maine sought a FDPCA exemption for certain collection practices, including, but not limited to, collection by the means of the mail and other interstate or intrastate written communications and in-person collection. Because the CFPB must grant exemptions by regulation, the public will be notified if an exemption application is filed and an exemption is finalized. The CFPB can revoke a state exemption at any time on certain grounds by filing a proposed rule to revoke the exemption and allowing a public comment period.

States may be motivated to pursue an exemption from the CFPB for a class of debt collection practices, if for example, questions exist as to whether the state law regulating a class of debt collection practices is preempted by the FDCPA and a state wants clarity. Since a state law requirement has to be substantially similar to or provide greater protections than the FDCPA and the proposed rule to qualify for an exemption, the exemption under section 1692o does not necessarily create compliance concerns, but could impact the potential federal and state penalties for a particular violation and the regulator pursuing an alleged violation. In the near future, states may find it challenging to obtain an exemption from the FDCPA for certain debt collection practices insofar as the proposed rule requires a state law to be substantially similar to or provide greater protections than the FDCPA and the proposed rule. For certain requirements, the proposed rule sets forth more detailed provisions than currently appear in the FDCPA and state law. As a result, states may rarely apply for an exemption under section 1692o. Maine is the only state to have obtained an exemption under section 1692o.

In sum, prior to the effective date of the proposed rule, any person engaging in debt collection should consider how the proposed rule impacts its multi-state debt collection compliance.

1. Ojogwu v. Rodenburg Law Firm, No. 19-CV-0563 (PJS/TNL), 2019 WL 6130450, at *5 (D. Minn. Nov. 19, 2019).

Susan M. Seaman

Dreher Tomkies LLP

Susan M. Seaman is an associate in the Columbus, Ohio, office of Dreher Tomkies LLP. She practices in a variety of areas relating to banking, consumer financial services, and small business funding, including multistate compliance, online lending, and emerging payments. Susan serves as a ABA Business Law Fellow and a young lawyer liaison to the Electronic Financial Services and Digital Currency Subcommittee of the Consumer Financial Services Committee.