Collections lawyers bracing for federal oversight

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After the new year some lawyers engaging in debt collection will now be supervised by the Consumer Financial Protection Bureau pursuant to a new rule promulgated by the agency.

“Millions of consumers are affected by debt collection, and we want to make sure they are treated fairly,” CFPB director Richard Cordray said in a statement.

“… We are announcing that we will be supervising the larger debt collectors in the market for the first time at the federal level. We want all companies to realize that the better business choice is to follow the law -– not break it.”

Cordray has characterized the CFPB as sort of a “cop on the beat,” said Tim Crisp, of the Madison office of Foley & Lardner.

Unlike the SEC and the FDIC, which act to further a wider variety of public policies, “We now have an entity created by Congress for the sole purpose of investigating and going after these alleged violations. To date, in the less than a year and a half since this agency has been operational, it’s been pretty staggering in terms of the number of investigations they’ve opened. Some of the investigations would’ve never been brought under the prior regulators.”

Lawyers have already faced scrutiny from the CFPB. The agency’s first civil enforcement action was taken against a law firm accused of bilking clients who sought help with their mortgage payment plans to avoid losing their homes.

“I have yet to find a single client or commentator who’s excited about being under the supervision of the Consumer Protection Financial Bureau – as opposed to the state bar or even the Federal Trade Commission,” said Crisp.

“There’s a very real potential here that the bureau could get very aggressive.”

He noted that the CFPB gets it money directly through the Federal Reserve and it basically gets to write its own budget every year. Looking at the results of recent elections, it’s likely that Congress will continue to be “somewhat hostile” toward the debt-collection industry.

The new rule

On Oct. 24, the CFPB released its final, 86-page rule for debt-collection oversight, including oversight for attorneys.

Not all law firms will come under the agency’s purview. A lawyer or law firm must have more than $10 million in annual receipts from consumer debt-collection activities in order to be subject to the CFPB’s direct oversight.

The state’s two largest firms, Foley & Lardner and Quarles & Brady, most likely don’t exceed that threshold-– the numbers are being crunched.

The rule might impact the smaller, boutique firms that concentrate in consumer debt collection and foreclosures.

Madison’s J. David Krekeler does some consumer-collections work, but his firm, Krekeler Strother, doesn’t come anywhere near the $10 million mark.

“Wisconsin might not have any firms who fall under this,” Krekeler said. “It might, but $10 million is a lot of money. You’ve got to have a lot of volume to collect $10 million.”

Messages and/or emails to firms that potentially fit that description — Blommer Peterman and Rausch, Sturm, Israel, Enerson & Hornik in Brookfield, as well as Gray & Associates in New Berlin and Kohn Law Firm in Milwaukee — were not immediately returned.

The rule might apply to firms below the $10 million threshold. A CFPB rule released last summer defining the covered “larger entities” as well as their “affiliate companies” is less than crystal-clear, said Madison attorney Valerie Bailey-Rihn of Quarles & Brady.

“It appears to regulate lawyers that are ‘affiliates’ of debt-collectors who are covered under the Act,” Bailey-Rihn said. “So either you collect over $10 million, or you’re an ‘affiliate.’ And looking at the definition of ‘affiliate,’ affiliated companies are those that ‘directly or indirectly exercise a controlling influence over the management or policies of the other person.’ That’s pretty vague.”

Direct supervision will likely entail teams of CFPB staffers coming onsite and auditing operations. CFPB examiners will determine whether debt collectors are in compliance with federal consumer financial law by focusing on areas such as whether covered entities are providing required disclosures, identifying themselves and the amount of debt owed, using accurate data, resolving consumer complaints and disputes adequately and in a timely fashion, and communicating civilly and honestly with consumers.

During the comment-period before the rule was finalized, attorney groups including the American Bar Association unsuccessfully argued for an attorney exclusion.

The CFPB’s response was “out there,” according to Crisp. “They’re taking the position that they have full right to regulate the bar.

“I would not be at all surprised to see law firms and lawyers, as well as bar associations, filing an action pretty quickly,” Crisp said. “The final rule was just issued on Oct. 24 and goes into effect Jan. 2 of next year. If I were a betting person, I’d bet within the next couple of months we’re going to see at least one significant lawsuit. It will take time to work its way up through the appeals’ courts, and it may ultimately be something that the U.S. Supreme Court will have to decide.”

Krekeler hopes a legal challenge is raised soon, and that it’s successful.

“I have a libertarian bent,” said Krekeler, “but I think it’s better to have a democratic laboratory, with 50 states having the ability to try different things to see what works best. When the federal government tells it to us, there’s no experimentation – there’s only one way.”

It’s additionally troubling to him that confidential and/or privileged information can be obtained by examiners, and that there’s always a potential for a data breach on the agency’s part.

For her part, Bailey-Rihn observed that, to some degree, federal control isn’t unprecedented. Specifically, attorneys doing debt-collection work are subject to the Fair Debt Collection Practices Act and required to follow its procedures. This was confirmed by the U.S. Supreme Court ruled in 1995 in Heintz v. Jenkins.

Guidance offers best practices

In the meantime, the CFPB has issued some 831 pages within manuals and procedures as guidance, including 29 pages explaining “Examination Procedures,” and 12 pages regarding Compliance Management Systems.

Looking at the guidance that’s been issued, for those who will be conducting the audits as well as the auditees, Bailey said, “Some of this is just good practices anyway.

“If you look at some of the compliance, for example, they’re looking to make sure that the debt collectors are not harassing consumers. That’s already governed by the Fair Debt Collection Practices Act and, obviously, decent debt collectors aren’t going to take those tactics anyway. Or disclosing the debt collector’s identity and the purpose of the communication, and not using threats or foul language. Some of these are practices most debt collectors already should have in place.

“So to me, this is an additional layer of time and expense. But ultimately, at the end of the day, they’re looking for best practices that I would assume most creditors already have in place.”

Correy Stephenson of Dolan Media Newswires also contributed to this report.