CFPB Consent Orders Against Two Largest Debt Buyers Pose Broad Implications

Summary of the key findings of the Consent Orders that the CFPB issued against the two largest U.S. debt buyers, Encore and Portfolio Recovery Associates, on September 9^th. The paper focuses specifically on practices addressed in the Orders that are likely to be commonplace across the consumer lending industry.

Overview

On September 9, 2015, the CFPB issued substantially similar Consent Orders against Encore Capital Group (Encore) and Portfolio Recovery Associates (PRA), the two largest buyers of consumer debt in the US, for a wide array of allegedly unlawful debt collection practices.^[1] Many of the practices cited in the Orders are common in the consumer lending industry. Hence, certain aspects of the Orders, which are reviewed below, are likely to have a significant impact on debt sales and collections practices.

Contract Disclaimer Language as Red Flag

Both Orders allege violations of Sections 1031 and 1036(a)(1)(B) of the Consumer Financial Protection Act (aka UDAAP) based on “false or unsubstantiated representations about owing a debt.”^[2] To this end, both Orders cited disclaimer language in contracts with debt sellers as among the factors that should have caused the buyer (i.e. Encore or PRA) to question the validity of an acquired debt portfolio and conduct a detailed review of account-level documentation (e.g. loan histories, billing statements, and loan agreements) for all debts acquired under the given contract.^[3] Among the disclaimers cited in the Orders is language providing that loans are being purchased based on the buyer’s independent review and evaluation.^[4] Other examples of contract disclaimers noted in the Orders include language indicating that:

• supporting documents may only be available for a percentage of accounts, and not identifying the specific accounts missing documentation;^[5]
• the statute of limitations may have run out on some unspecified accounts;
• account balances are “approximate” and may not reflect payments made prior to the cut-off date for transfer;^[6]
• some accounts may be subject to actual or potential claims or disputes;^[7] and
• supporting documents are only available for a fee (or other language limiting the availability of documents).^[8]

Account-Level Documentation is Critical

The Orders mandate the review of account-level documentation under a number of circumstances. First, past experience with unreliable data from a seller should cause the buyer to doubt the reliability, and recognize the need to evaluate, of all data received from that seller.^[9] Second, if at any time during the preceding twelve months any consumer disputed the accuracy or validity of an acquired debt and the buyer was unable to obtain sufficient documentation to confirm the debt, account-level documentation must be reviewed. This review covers all debts in the portfolio unless the buyer is able to “establish, based on a documented and thorough review” a sample of other accounts showing that the inability to confirm was: (i) an anomaly, or (ii) the result of “a documented balance adjustment” made by a creditor after the buyer acquired the portfolio. Third, account-level documentation must be reviewed for all debts in the portfolio if the identity of any borrower is disputed and cannot be determined based on available documents, unless the buyer is able to demonstrate that the situation was anomaly through a “documented and thorough review” sample of other accounts.

Imprudent Litigation Practices

The respective Orders additionally cite substantially similar litigation practices as imprudent and/or unlawful. For example, both Orders highlight the use of law firms with very few attorneys to support hundreds of thousands of lawsuits; e.g. “Encore placed over 100,000 accounts with a firm that employed 16 attorneys, and threatened to sue approximately half a million consumers through a firm that employed 24 attorneys,^[10] while PRA placed “tens of thousands” of debts with law firms staffed by fewer than five attorneys.^[11] Although neither Encore nor PRA provided these small firms access to account-level documentation, the clear implication is that meaningful reviews of such documentation would have been impossible. In this regard, the respective Compliance Plan section of each Order sets forth a multiple-page, detailed list of due diligence factors that must be considered prior to employing any law firm for debt collection purposes, including, but not limited to the ability of the law firm to perform its obligations in compliance with all applicable federal consumer financial laws and the buyer’s related policies and procedures.^[12]

Both Orders cite as violations of UDAAP and the FDCPA, unsupported threats to file collection lawsuits, including the threatening or filing of a lawsuit without an intent to prove the lawsuit if contested. Specifically, the Orders cite as unlawful any representation made to a consumer that: (i) an attorney has reviewed the debt, where no attorney has done so; (ii) a debt collection lawsuit has been filed, where no suit has in fact been filed; or (iii) a lawsuit may be filed, unless an attorney has actually reviewed and approved the debt for suit.^[13] With respect to the foregoing, the PRA Order specifically cites the practice of non-attorney collectors identifying themselves as calling from the “Litigation Department,” threatening litigation, and not disclosing whether an attorney had reviewed the debt.^[14]

Before any lawsuit may be filed, the Orders include a detailed list of the account-level documents and other information that must be obtained, including the information listed below, which must be provided to the consumer:

1. the name of the Creditor at the time of Charge-off, including the name under which that Creditor did business with the Consumer;
2. the last four digits of the account number associated with the Debt at the time of Consumer's last monthly account statement, or if not available, at the time of Charge-off;
3. the Charge-off Balance;
4. Respondent's method of calculating any amount claimed in excess of the Charge-off Balance; and
5. a statement that the Consumer may request, in writing, copies of [certain documentation described elsewhere in the Order]. . . and Respondent or Respondent's agent will, within 30 days of such request, provide the documentation at no cost.^[15]

Time-Barred Debt

For any attempts to collect time-barred debt, the Orders require certain minimum disclosures to be provided. Specifically, any communication with a consumer concerning time-barred debt that cannot be included in a consumer report under the Fair Credit Reporting Act (FCRA) must include the disclosure that: "The law limits how long you can be sued on a debt and how long a debt can appear on your credit report. Due to the age of this debt, we will not sue you for it or report payment or non-payment of it to a credit bureau.” In addition, for time-barred debt that may be collected under applicable state law and may be included in a credit report, communications must include the statement: “The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it.”^[16]

Finally, both Orders cited violations of UDAAP and the FDCPA based on the failure to investigate disputes.^[17] Encore had a standing policy not to investigate any dispute received from a consumer more than 45 days after the required notice of validation of debt had been sent to that consumer, and this policy was applied to the collections law firms that Encore retained. Moreover, in sworn affidavits filed in support of default judgments Encore falsely stated that the debt was “assumed valid” under FDCPA where the consumer had failed to timely respond to the notice of validation.^[18] PRA, in turn, erroneously assumed that it was under no obligation to investigate disputes received more than 30 days after the notice of validation was sent, and did not investigate oral disputes unless the dispute was put in writing within 14 days.^[19]

Contact Us for More Information

Bridgeforce Law can assist you in the assessing the current state of your firm’s compliance with the supervisory expectations described in the Encore and PRA Consent Orders, including, but not limited to, the due diligence that should be performed prior to engaging any debt collection law firm, collection agency, or debt buyer. We would be happy to discuss where our services can help meet your needs.