FTC’s Recent Enforcement Action Sets New Debt Collection Standards

Auto lenders are in the cross-hairs of federal regulators. The Consumer Financial Protection Bureau recently announced it is drafting a larger nonbank participant rule for auto lenders. In the meantime, the Federal Trade Commission announced yesterday the filing of a stipulated order imposing a civil monetary penalty and injunctive relief against a subprime auto lender.

Big Penalty, Restitution, Restrictions

FTC LogoThe Federal Trade Commission announced yesterday that Consumer Portfolio Services, Inc. will pay a civil monetary penalty of $5.5 million arising from its servicing and collection of consumer motor vehicle loans. In addition to the monetary penalty, the lender agreed to make certain changes to its business practices, make refunds or adjustments of $3.5 million to 128,000 accounts and forbear from collecting on an additional 35,000 accounts as part of a stipulated order entered earlier this week.

Consumer Portfolio Services describes itself as a “specialty finance company that provides indirect automobile financing to individuals with past credit problems, low incomes or limited credit histories.” The FTC’s complaint also alleges that some loans were delinquent at the time the lender acquired them, making it a “debt collector” under the Fair Debt Collection Practices Act. The complaint alleged the lender had violated Section 5(a) of the FTC Act (prohibiting unfair or deceptive acts or practices), as well as the FDCPA and the Fair Credit Reporting Act in the servicing of its loans.

While the complaint and stipulated order offer guidance on what auto lenders will likely expect to see in the supervision process, there’s plenty more going on here. The directives addressing FCRA and debt collection compliance suggest the regulators are toughening certain standards and, in some cases, creating entirely new standards for certain debt collection activities, regardless of whether they are carried out by original lenders or third-party debt collectors.

Data Integrity Program Required

The complaint alleged that the lender did not have policies and procedures in place regarding the accuracy and integrity of information it furnished to credited reporting agencies, required by the Furnisher Rule (12 C.F.R. § 1022.40, et seq.). Among the various mandates of the stipulated order is for the lender to implement a “comprehensive data integrity program.” Among the program’s requirements, it must:

  • designate an employee or employees accountable for the program;
  • identify material internal and external risks to the accuracy and integrity of the lender’s loan servicing data that could cause errors in consumer accounts; and
  • provide an assessment of the sufficiency of the safeguards deployed to control then identified risks.

In assessing risks to customer data, the stipulated order requires the lender, at a minimum, to consider risks in “each area of relevant operation.” These areas would include, but are not limited to:

  • employee training and management
  • information systems, including network and software design, information processing, storage, disposal and transmission
  • prevention, detection and response to systems failure

Third-Party Contact Limited

Section 1692b of the FDCPA permits debt collectors to communicate with third parties for the purpose of obtaining a consumer’s “location information.” The stipulated order limits the lenders ability to make such communications by requiring it to document that it has a “reasonable belief that it cannot locate the consumer.” A “reasonable belief” is presumed, under the stipulated order when:

  • mail directed to the consumer’s last known address is returned as undeliverable;
  • the consumer’s “known telephone number(s)” are disconnected;
  • “at each number known to belong to the consumer the voice mailbox is full or does not acccept messages;” or
  • a third party at the consumer’s last telephone number claims the consumer is no longer using it.

The lender is also required to document the basis for its “reasonable belief” and maintain these records for three years from the date of its last contact with the third party.

Oral Cease & Desist Made Effective for Calls

Under the stipulated order, an oral cease and desist can be construed to place a permanent stop to all telephone communications (after one last phone call), unless the lender sends a certain notice to the consumer within seven days of the oral demand and the consumer fails to confirm the cease and desist in writing. The oral cease and desist becomes ineffective after 30 days, only if:

  • the lender, within seven days of the consumer’s oral demand, sends a written notice to the consumer’s last known address advising the consumer that the oral cease and desist must be confirmed in writing by sending a notice to the lender (or by electronic submission through the lender’s website); and
  • the consumer fails to make the confirmation.

By requiring the lender to send the written notice to trigger the 30-day sunset of the oral cease and desist, the procedure makes it difficult and risky for the lender to continue to make telephone calls to a consumer in the face of an oral cease and desist. There is no limit on the consumer’s ability to make further oral cease and desists as well. If at the end of the 30-day period the consumer does not make the written confirmation and the call-stop expires, the procedures do not prevent the consumer from making further verbal demands to cease telephone communications and restarting the 30-day clock.

The procedures outlined in the stipulated order also depart from the text of the FDCPA. Section 1692c(c) of the FDCPA makes a consumer’s request to cease communications effective only if it is made in writing by the consumer (as defined in § 1692c(d)) to the debt collector. The statute does not require a debt collector to notify a consumer of the writing requirement. The stipulated order gets around this by creating a rebuttable presumption that, absent the following of the procedures outlined above and the sunset of the 30-day period, placing more than one telephone call to a consumer after she has verbally, or in writing, notified it to stop telephone communications is conduct, “the natural consequence of which is to harass, oppress or abuse any person.” That language is lifted from § 1692d of the FDCPA and (for the lender’s own loans or performing loans it acquired ) is likely construed as conduct violating Section 5 of the FTC Act.

June 5 Webinar to Examine Latest Regulatory Actions

I’ve only touched on a few of the issues presented by the stipulated order. During our June 5 webinar Understanding the Guidance from the CFPB’s Supervisory Highlights Report, Joann Needleman and I will take a closer look at the stipulated order too — it is that important. Two years ago the FTC got the ball rolling on the concept of disclosing time-barred debt, and the CFPB has been actively pursuing the issue ever since. Perhaps this stipulated order is opening another avenue of restrictions that the regulators will expect to be implemented throughout the consumer financial services industry.  Register for the webinar below and receive 1.5 hours of DBA International continuing education credit. Application is pending for 1.5 hours of attorney CLE for California, Delaware, New Jersey, Pennsylvania and Virginia. New York attorneys have reciprocity with Virginia CLE.

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Donald Maurice provides counsel to the financial services industry, successfully litigating matters in the state and federal courts in individual and class actions. He has successfully argued before the Third, Fourth and Eighth Circuit U.S. Courts of Appeals, and has represented the financial services industry before several courts including as counsel for amicus curiae before the United States Supreme Court. He counsels clients in regulatory actions before the CFPB, and other federal and state regulators and in the development and testing of debt collection compliance systems. Don is peer-rated AV by Martindale-Hubbell, the worldwide guide to lawyers. In addition to being a frequent speaker and author on consumer financial services law, he serves as legal counsel to DBA International and as chair of the ABA's Bankruptcy and Debt Collection Subcommittee. He serves on the governing Board of Regents of the American College of Consumer Financial Services Lawyers and on the Governing Committee of the Conference on Consumer Finance Law .