Consumer Debt Collections: New Legislation and the New CFPB Promise a New Era of Consumer Protections

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I predict that 2013 will be viewed by consumer advocates as a game-change year for consumers with large, unpaid personal debts and facing oppressive debt collection lawsuits and calls from debt collectors.  That’s because on July 10, 2013, the Consumer Finance Protection Bureau (“CFPB”) issued a bulletin that it would start a closer watch of debt collection agencies and on July 16, 2013, the U.S. Senate confirmed Richard Cordray as Director of the CFPB. Also, over the past few years, several state legislatures have quietly passed laws that protect consumers from debt collection lawsuits that have not been properly documented. The latest state law concerning debt collection lawsuits was signed in July 2013, by California Governor Jerry Brown, known as the California Fair Debt Buying Practices Act (“CFDBPA”).

Since the federal Fair Debt Collection Practices Act (“FDCPA”) was passed by Congress in 1977, over 35 years ago, the United States has experienced a consumer-credit explosion, which has resulted in many billions of dollars in unpaid debt on the books of financial institutions.  In response, the U.S. has developed a new industry of debt buyers, companies which purchase large pools of unpaid debts from banks and other financial institutions, then try to collect from the debtors or sell smaller pools of the debt to other debt buyers. Some of these companies are so large and well capitalized that they are listed on a national stock exchange, such as Encore Capital Group, Inc., which is listed on NASDAQ (symbol “ECPG”). Encore subsidiaries include Midland Funding and Asset Acceptance, which are among the largest debt buyers in the U.S. today.

Until recently, debt buyers have taken advantage of weaknesses in state court systems. After signing an agreement to purchase the pool of unpaid debts and receiving an “affidavit of sale” and a computer data file containing the names and personal information of the debtors and the account information, the debt buyer sues the individual debtor in state court, though they have no other documentation to support their claims.  This swamps the state courts with debt collection cases, though court budgets have been severely reduced by severe government budget cuts.

The combination of too many cases with too few lawyers accessible to consumers, appears to have created the perfect storm of debt collection lawsuits becoming judgments, many by default. A default judgment means that the consumer debtor failed to settle or file in court a formal response to the lawsuit. Often the consumer was not properly served and had no knowledge that they had been sued.   After years of reviewing consumer files, many debt collection lawsuits are not properly delivered to the debtor, leaving them vulnerable to an invalid default judgment being enforced (without warning) on the debtor’s bank accounts, wages, and residence.  Debt buyers often target consumers even though they can’t prove that the debts are legitimate.  In January of this year, the Federal Trade Commission (“FTC”) issued a report that found debt buyers didn’t verify alleged debts in half of the cases studied by the agency.  The FTC found that consumers disputed an estimated one million debts each year but that debt buyers only verified 500,000 of those disputed debts.

Recent laws, such as CFDBPA are the response by state legislatures to help consumers and the courts deal with this deluge of debt-buyer lawsuits.  New rules in the CFDBPA include prohibiting a debt buyer from collecting a debt, unless the debt buyer has access to the signed contract or other written proof of the debt with the consumer. Also, the debt buyer must explain to the consumer in writing the debt’s balance, including the original balance and how the charges were incurred.

Affecting all consumers in the United States are the changes being overseen by the CFPB, a new agency that was created in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  In July of 2013, the CFPB issued CFPB Bulletin 2013-07, stating that CFPB would begin reviewing unfair acts and practices by debt collectors, which include debt buyers. Among a long list of illegal acts and practices, the bulletin stated that it would watch closely the “taking possession of property without the legal right to do so” and “false threats of lawsuits, arrest, prosecution, or imprisonment for non-payment of a debt.”  Now that the Senate has confirmed the CFPB’s first Director, Richard Cordray, consumers are looking forward to further restrictions by CFPB on debt buyers and other debt collectors.

Written by Robert Stempler, California Consumer Attorney and President of Consumer Law Office of Robert Stempler, APC. The firm has published several short videos, articles, and a blog on debt collection lawsuits at www.stopcollectionlawsuits.com .