Get to Know the New Rules

On July 28, 2016 the CFPB (Consumer Financial Protection Bureau) announced its new debt collection rules which focus on additional requirements for debt collectors to prove their debt, especially in the context of requesting a default judgment.

The CFPB is a supervisory regulatory enforcement authority over various consumer financial services and laws including:

debt collection
credit reporting
mortgage services
private student loan lender and servicers
pay-day lenders and others

One of the problems that is meant to be addressed by the new rules is the large volume of default judgments issued against consumers. It is thought many consumers may not understand their rights and fail to file a responsive pleading to a lawsuit. The new CFPB rules force debt-collectors to provide consumers with better information about the debt in question, substantiate their claim before filing suit, disclose the possibility of litigation, and the implication of the default judgment.

Many of these rules are directed at so called ‘debt buyers’ who file large volume of lawsuits often based on incomplete information regarding the debt in question, and then obtain a default judgment against the consumer. Over the past decade, the court system and government regulators have seen a huge increase in so-called “junk debt”, meaning unsubstantiated debt claims that are sold and resold by multiple players in the collection industry.

The concern is that many of these default judgments are being obtained for unsubstantiated or unproven amounts, and some of them are even obtained against the incorrect person or on debts for which the enforcement period has already expired. The goal is to require the debt-collector to provide more information to the consumer, and provide higher evidentiary standards for proof of the amount and validity of the debt.

Although the specifics have not yet been promulgated, the following are the fundamental changes that are being addressed:

Debt collectors would be forced to substantiate debts prior to any communication with consumers;
Collectors would be required to provide a “litigation” disclosure explaining that a court could enter a default judgment against the consumer if he/she fails to respond in court;
Collectors would be prohibited from filing suit or threating litigation involving time barred debts;
Limitations would be placed on state “revival statutes” which allow the collect or to reset and extend the statute of limitations where borrowers make a payment or acknowledge their debt in writing;
These changes only apply at this time the consumer debt and not commercial debt.

Similar to the Fair Debt Collection Practice Act, a debt collector is defined as a Third-Party that is collecting the debt of another creditor. Currently, the new CFPB rules do not apply to creditors who are collecting their own debts. The new rules will apply to attorneys collecting their client’s debts.

It is expected that these rules may eventually apply to the requirements for creditors collecting their own debts. This would include higher standards for demand letters, bankruptcy proofs of claims, and claims filed in descendant’s estates. It should also add requirements for the seller of the debt, not just the debt buyer, to take affirmative steps to check their records for accuracy.

Tips for creditors:

Maintain detailed consumer billing records and full pay histories;
Be prepared to furnish your attorney or often debt collector with additional documents to prove your balance due;
If you sell a consumer claim to a debt buyer, be able to provide adequate documentation;
There may be additional collection delays while the consumer has more options to dispute the debt.