The Impact of the CFPB's Supplemental Proposed Rulemaking for Time-Barred Debt Disclosures is Greater Than What Appears

This article, authored by Joann Needleman and Ann Lemmo, originally appeared as an Alert on ClarkHill.com, and is republished here with permission.

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Last Friday, the Consumer Financial Protection Bureau (CFPB or Bureau) released its Supplemental Notice of Proposed Rulemaking (SNPR) for time-barred debt disclosures. The CFPB seeks to amend Regulation F, specifically §§ 1006.26 and 1006.34, which implements the Fair Debt Collection Practices Act (FDCPA) and requires debt collectors to make certain disclosures when collecting on time-barred debts. The CFPB published its Notice of Proposed Rulemaking (NPR) for Debt Collection on May 21, 2019, and that comment period has closed. The comment period for the SNPR is sixty days from publication in the federal registrar. As of the date of this alert, the SNPR has not been published.

The optics of time-barred debt have never been overly positive. Unfortunately, instances of consumers being harassed about debts that are sometimes decades old are frequently reported. Older debt can sometimes lack substantiation and proof that it is owed by the correct person for the right amount and for this reason it poses risk to consumers. However, as the CFPB admits in its analysis in support of the SNPR, while the size of the market for the collection of time-barred debts is unknown, it certainly is not the majority of collected delinquent debt. While the CFPB seeks to put forth proposals that are well-intended to address the problem of older debt and potential consumer harm, the proposals ultimately accomplish this goal by doing an end-around many state laws and rules of civil procedure.

What the CFPB is Proposing 

The proposals would require that a debt collector who “knows or should know” that a debt is time barred to clearly and conspicuously disclose in an initial communication, or in a validation notice under §1692g, “(i) [t]hat the law limits how long the consumer can be sued for a debt and that, because of the age of the debt, the debt collector will not sue the consumer to collect it; and (ii) [i]f, under applicable law, the debt collector’s right to bring a legal action against the consumer can be revived, the fact that revival can occur and the circumstances in which it can occur.” (§ 1006.26(c)(1)). This disclosure can be made orally or in writing and if required, must be placed on the front of the validation notice. 

The Bureau also addresses the timing of the disclosure to account for instances when the debt may become time barred during the collection process or in instances when the debt collector discovers that the debt is time barred.

The SNPR revises the model validation notice proposed last year by adding model language to reflect additional scenarios of a time-barred debt and differing state laws regarding consumer conduct that could revive a time-barred debt. The Model Forms cover the following scenarios:

1. Model Form B-4: Used when a debt is time barred and either the state has no law regarding revival of the debt or the debt collector will not choose to revive the debt even if a payment is made
2. Model Form B-5: Used if state law allows revival of a debt when the consumer acknowledges in writing that he/she owes the debt or makes a payment on the debt
3. Model Form B-6: Used if state law allows revival of the debt when the consumer makes only a payment on the debt
4. Model Form B-7: Used if state law allows revival of the debt when the consumer acknowledges in writing that he/she owes the debt.

Use of the Model Forms in a validation notice or use of its relevant content in any other required communication acts as a safe harbor for the debt collector.

Issues to look out for: 

1. Proving “know or should know”

Although the FDCPA is a strict liability statute, the CFPB recognizes that determining whether a debt is time barred is not an exact science. For this reason, the Bureau in both the NPR and in the SNPR lowered the standard upon a debt collector to “know or should know” that a debt is time barred when sending appropriate disclosures. The problem arises when it is learned at a subsequent time that the debt is in fact time barred and previous communications did not include a disclosure. This is when a debt collector’s knowledge will ultimately become a question of fact. Therefore, debt collectors may need to do a deeper dive into due diligence and develop new methods of documenting their knowledge (or lack thereof) about the status of the debt. Will it be enough to rely on the creditor for this information? Debt collectors will need to not only keep track of the age of the debt and any prior placements but also whether the creditor or a prior debt collector was ever aware of the debt’s status as this may be relevant in determining the debt collector’s “should have known” status. 

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2. Timing

The SNPR provides that if the debt collector subsequently learns that the debt became time barred either after an initial communication is made or after a validation notice is sent, then the debt collector “must provide disclosures… in the debt collector’s first communication, if any, with the consumer on or after the date on which the debt collector knows or should know that the debt became time barred.” (§ 1006.26(c)(i-ii)). Yet the SNPR is silent regarding when this next communication should occur. What if the consumer sends in the payment before that communication? What if the debt collector does not plan to contact the consumer for several days or weeks? A collector’s policies and procedures may certainly come into question if a consumer learns that the debt became time barred and yet they heard nothing further from the debt collector.

3. Oral disclosures

Although time-barred debt disclosures can be provided orally, doing so will only invite a conversation about a consumer’s legal rights. Inevitably, that discussion will result in a consumer having more questions that could lead to seeking legal advice from the debt collector. While a collector will do their best to field these follow-up questions and provide agents with the appropriate training, any response, even a proper response, could lead to the consumer’s further confusion. Debt collectors will inevitably be the ones tasked with explaining the ramifications of time-barred debt beyond the disclosure language provided in the SNPR.

4. Reconciling State Law Requirements

Several states already require the exact SNPR proposed language. However, there are some instances where the language may be slightly different. A consumer will, therefore, be faced with somewhat repetitive disclosures in the same validation notice or communication.

Furthermore, the CFPB requires that its disclosures be placed on the front of a communication or validation notice. However, some states also require these same disclosures to be placed on the front of communication as well. In the instance of a validation notice, the real estate on the page is limited. What is a debt collector to do and which requirement will take precedence?

Can the right to file a lawsuit be taken away outside a courtroom?

In many states, the statute of limitations is a procedural rule and a defense to a claim that a debt is time barred. The statute of limitations must be raised as an affirmative defense, otherwise, the defense is waived. Thus, the CFPB’s disclosures state that “the law limits how long a consumer can be sued for a debt” is technically, and more importantly, not legally accurate. Undeniably, some cases hold that maintaining a lawsuit that was time-barred is an unfair and deceptive act within the meaning of the FDCPA. However, denying the right to proceed with a claim and file the suit is not within the province of the CFPB. The text of the FDCPA states nothing of the kind. It will be up to the industry to decide whether to fight this battle. However, given that these rules will impede a creditor's ability to enforce their legal rights, expect those rights to be enforced at a much faster rate and certainly before the expiration of the applicable statute of limitations.

Clark Hill's Consumer Financial Services Regulatory and Compliance Practice Group can help you navigate this rapidly evolving regulatory environment by providing technical guidance, policy advice and strategic outreach to relevant stakeholders as well as governmental agencies who oversee the financial services industry. Our exceptional team of lawyers and government and regulatory advisors has extensive experience in - and an in-depth understanding of - the laws and regulations governing financial products and services.

Please contact Joann Needleman for further information.