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Why Regulators Should Ease Up on Debt Collectors

posted on 2015-12-03 by Nick Jarman

With complaints against debt collectors rising every year, regulators, including the Federal Trade Commission and the Consumer Financial Protection Bureau, have made debt collection a top priority. In fact, back in June, the FTC began holding “Debt Collection Dialogues” to better understand the dynamics between creditors, consumers, debt collectors and other regulators.

As president of a national debt collection company, I was invited to speak at the FTC’s November dialogue. It was focused on industry regulations on the state level and featured a lineup of speakers that included representatives from the Attorneys General and Consumer Protection offices in Georgia, South Carolina and Tennessee.

The main point I wanted to get across to everyone in attendance was that there is a difference between legitimate debt collectors and criminals. It seems every day there is a story in the news about a debt collector doing something harmful to consumers, but most of these pieces, including ones that involve federal and state enforcement actions, pertain to bad actors. And little to no efforts are made to distinguish between law-abiding companies and criminals committing theft or fraud. To be clear, when I speak of a legitimate debt collector I am referring to one that is:

  • Legally authorized to do business in the particular state they are collecting consumer debts from.
  • Licensed, bonded and insured in those states that require them to be.
  • A member of ACA International, the trade association for the credit and collection industry (of which I am a board member).

Regulators at the panel did acknowledge that because of the inconsistency in state licensing and lack of federal licensing, it is difficult for them to clearly identify legitimate debt collectors from criminals using the industry to perpetrate their crimes. One of the ideas I floated during the discussion was the possibility of creating a national registry of debt collectors that would identify legitimate debt collectors through a pre-determined process. Overall, the regulators were very receptive to the idea and felt this registry would help them make important distinctions. The FTC was also interested in what recent state regulations and enforcement actions the debt collection industry found important. It’s imperative to keep in mind three things when discussing regulations:

  • What is the intended purpose of the regulation?
  • What is the expected outcome the regulation hopes to achieve?
  • What are the potential unintended consequences?

Most people may not realize that debt collection is one of the most extensively regulated activities in the country. There are overarching federal regulations that address collection activity and more than 30 states require licensing for debt collection agencies, adding more layers of protection.

The Wild West mentality the media often portray regarding the debt collection industry appears to necessitate more stringent laws, but that image is simply untrue. A 2014 study from the Urban Institute found one in three adults in America have a debt in collection — a pervasiveness that draws attention to industry practices. However, according to stats from the CFPB’s consumer complaint database, less than 5% of the 75 million consumers with a collection account have filed a complaint with the CFPB in the past three years. Furthermore, over 65% of these complaints are related to a dispute of the debt — not poor treatment.

Any new regulation considered should aim to fix the issues consumers are complaining about: disputes about the existence or balance of debts. (It’s important to note that attempting to collect on a debt the consumer does not owe or for an amount that is not owed is already illegal.) But new laws may focus instead on the types and frequency of communication debt collectors are permitted to have with consumers. The Fair Debt Collections Practice Act already imposes these types of limitations and further restrictions would likely lead to additional adverse consequences for consumers.

Debt collectors, first and foremost, desire to resolve debts with consumers on a voluntary basis, as this resolution is the most cost effective and mutually beneficial. However, when debt collectors are unable to communicate with a debtor either due to that consumer’s unwillingness or regulation barriers, involuntary debt collection action becomes the only other option to recoup what is owed. Involuntary debt collection action refers to negative credit bureau reporting, judgments, wage garnishments, liens, bank levies, or other measures state laws allow for recovery of unpaid debts. The reality is, as regulation grows, the level of involuntary measures to collect debt will likely grow as well.

Consider, for instance, the statutes of limitations states place on how long a creditor has to enforce legal action on a debt. These statutes vary from state to state, but generally range from three to 10 years. Some states have moved to shorten their statutes of limitations on debt collection lawsuits. The prevailing thought is that doing so will help consumers and prevent creditors from suing on “zombie debts” — debts that are very old and/or no longer owed.

But as an unintended consequence of shortening these timeframes, creditors may be forced to seek involuntary legal action against consumers sooner than they would like. Creditors understand consumers face hardships and that sometimes it could take several years for them to re-establish their finances and regain the ability to repay delinquent debts. Unfortunately, reducing statutes of limitations could easily increase the likelihood that collectors won’t wait for the consumer to rebound or agree to negotiate a repayment plan. Instead, they will simply move to legal action.

It’s important that regulators take these and other issues into account as they seek to better understand the debt collection industry. The FTC’s panels are a good start; free-flowing dialogues between all parties can help root out bad actors, which would benefit consumers more than additional regulations would.

The CFPB Issues Warning and Guidance on Obtaining Consumer Authorization for Preauthorized Electronic Funds Transfers that Confirms a Recording of a Consumer’s Oral Authorization Can Satisfy Regulation E’s Requirements

posted on 2015-12-02 by David.Anthony, Ashley Taylor

On November 24, 2015, the Consumer Financial Protection Bureau (CFPB) issued a Compliance Bulletin (2015-06), warning companies that they must ensure that consumer authorization is obtained before automatically debiting a consumer’s account and that required notifications to consumers must clearly describe the terms of the preauthorized electronic funds transfers (EFTs).

Importantly, for the first time a federal regulator has publicly confirmed that companies can comply with the requirements of the Electronic Funds Transfer Act (EFTA) and Regulation E (Reg. E) by obtaining a consumer’s authorization for preauthorized EFTs through the recording of a telephone conversation, which can qualify as an electronic signature under the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001, et seq. (E Sign Act). This issue of oral authorization of EFTs has caused much debate, perplexed members of the financial services industry, and given rise to numerous national class actions. The CFPB explicitly states in the Bulletin that Reg. E “does not specify that entities must provide a writing to consumers when obtaining the authorization,” and the restriction in the E-Sign Act on the use of oral recordings as electronic records “does not apply when obtaining a consumer’s authorization for preauthorized EFTs.” Companies can now find a safe harbor in this Bulletin, but should take steps to ensure their compliance management system satisfies all the requirements for preauthorized EFTs contained in the EFTA, Reg. E, and E-Sign Act, in particular recording and retaining telephone recordings in compliance with federal and state laws and making certain a copy of the terms of the authorization is provided to the consumer.

The CFPB’s Compliance Bulletin Regarding the Requirements for Consumer Authorizations for Preauthorized EFTs

The CFPB issued the Compliance Bulletin “to remind entities of their obligations under” the EFTA and Reg. E when obtaining consumer authorizations for preauthorized EFTs from a consumer’s account. The Bulletin notes the CFPB “has observed that some entities may not fully comply with the requirements imposed by” EFTA and Reg. E, or “may be uncertain of their obligations” and “the intersections between” Reg. E and the E-Sign Act.

The Bulletin appears to be the CFPB’s summary of the current law, and includes references to relevant findings in examinations conducted by Supervision.

Background on the EFTA, Regulation E, and the E-Sign Act

In 1996, the Board of Governors of the Federal Reserve System issued Reg E. pursuant to the EFTA. Rulemaking authority under the EFTA transferred to the CFPB effective July 21, 2011, pursuant to the Consumer Financial Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.

EFTs are defined broadly and generally include any transfer of funds initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer’s account.

In accordance with §1693e of the EFTA, § 205.10(b) of Reg. E provides that “[p]reauthorized electronic fund transfers from a consumer’s account may be authorized only by a writing signed or similarly authenticated by the consumer.” Supplement I to Part 205 contains the Official Staff Interpretations of Reg. E, and in its commentary to Paragraph 10(b) of Reg. E, the Staff stated:

The similarly authenticated standard permits signed, written authorizations to be provided electronically. The writing and signature requirements of this section are satisfied by complying with the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq., which defines electronic records and electronic signatures. Examples of electronic signatures include, but are not limited to, digital signatures and security codes. … The authorization process should evidence the consumer's identity and assent to the authorization. The person that obtains the authorization must provide a copy of the terms of the authorization to the consumer either electronically or in paper form. ....

12 C.F.R. Part 205, Supp. 1, ¶10(b)5.

The E-Sign Act provides that electronic records and electronic signatures have the same validity as paper documents and handwritten signatures. If the EFTA calls for a writing to be made in connection with a transaction, the writing can be satisfied by an electronic record. If the EFTA requires a writing to be “signed or similarly authenticated,” the requirement can be satisfied through an electronic signature.

The E-Sign Act defines an “electronic signature” as “an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” An electronic record is defined as “a contract or other record created, generated, sent, communicated, received, or stored by electronic means.” While the E-Sign Act provides that an audiotape recording of an oral communication does not qualify as an “electronic record,” it has no such caveat with respect to whether an audiotape recording qualifies as an “electronic signature.” Thus, the E-Sign Act has been interpreted to mean that nothing prevents the creation of an electronic signature through a recording of an oral communication.

Section 1693e(a) of the EFTA provides that “a copy of such authorization shall be provided to the consumer when made.” Section 1005.10(b) of Reg. E. provides that “[t]he person that obtains the authorization shall provide a copy to the consumer.” However, the Official Staff Interpretations of Reg. E in Supplement I to Part 205 contain the following Staff commentary to Paragraph 10(b): “The person that obtains the authorization must provide a copy of the terms of the authorization to the consumer either electronically or in paper form.”

Consumer Authorizations in Compliance with EFTA and Regulation E

There is good news in this Bulletin as it explains the CFPB’s expectations for how entities obtaining consumer authorizations for preauthorized EFTs can comply with relevant law, and it clarifies the obligations of entities obtaining customer authorization for preauthorized EFTs.

To comply with EFTA and Reg. E requirements, all EFTs must be authorized by the customer in writing or similarly authenticated — in either paper or electronic form, as specified by the E-Sign Act — and the customer must be provided with a copy of the authorization terms that includes the amount and timing of the recurring EFTs from her account. The Bulletin also states that consumer authorization can be given over the phone if the customer provides authentication by using a code or PIN entered on the phone’s keypad, or if an oral authorization is recorded in compliance with relevant State laws, retained by the requesting company (Reg. E imposes a two-year retention requirement), and follows the requirements of the E-Sign Act to ensure the consumer intends to sign the record.

Providing a Copy of the Terms of the Authorization to the Consumer

EFTA and Reg. E require persons obtaining an authorization for a preauthorized EFTs must provide a copy of the terms of the authorization to the consumer when it is made, in paper form or electronically.

The Bulletin notes that “two of the most significant terms of an authorization are the timing and amount of the recurring transfers from the consumer’s account.” The Bulletin explains: “In at least one examination, CFPB examiners observed that one or more companies provided consumers a notice of terms for preauthorized EFTs from a consumer’s account. Supervision determined that these notices of terms did not satisfy Reg. E, because the notices did not disclose important authorization terms such as the recurring nature of the preauthorized EFTs, or the amount and timing of all the payments to which the consumer agreed.”

Thus, it is vital that the recurring nature of the preauthorized EFTs, as well as the amount and timing of all the payments to which the consumer agreed, be clearly disclosed in any notice to a consumer containing the terms of the authorization.

The Bulletin also recognizes that there is “an alternative to providing a copy of the authorization after its execution,” another indication that a consumer’s authorization can be obtained through a voice recording. Instead, a company can comply with its obligations “to provide the consumer a copy of the authorization by using a confirmation form. For instance, a company may provide a consumer with two copies of a preauthorization form, and ask the consumer to sign and return one and to retain the second copy. However, a company does not satisfy Regulation E by only making a copy of the authorization available upon request in lieu of providing the copy.”

CFPB’s Action Letters for Consumers to Manage and Stop Preauthorized EFTs 

In addition to the Bulletin, the CFPB posted a new entry on its blog entitled “You have protections when it comes to automatic debit payments from your account.” This blog post includes suggestions for consumers when dealing with automatic debit payments and includes four sample letters a consumer can use in connection with managing and stopping preauthorized EFTs:

·         A sample letter to send to a company or merchant to revoke the consumer’s permission to auto debit the account

·         A sample letter to send to a bank or credit union to provide notice that the consumer revoked a company’s authorization to automatically debit the account

·         A sample stop payment order to instruct a bank or credit union to stop allowing the company to take payments from the consumer’s account

·         A sample letter to a bank or credit union providing notice of an unauthorized debit from a consumer’s account

Key Takeaways

Companies accepting payments through preauthorized EFTs can glean a number of takeaways from this Bulletin. First, all entities obtaining preauthorized EFTs from consumers should take immediate steps to ensure their policies, procedures and training is in full compliance with this Bulletin. Entities already accepting oral authorizations for preauthorized EFTs, as well as those contemplating it, can use the issuance of this Bulletin as an opportunity to assess the risks associated with this method of accepting consumer payments. Second, first party and debt collectors can find comfort in their attempts to secure agreements from consumers during a telephone call to make recurring payments, but they should be aware that the CFPB’s noted its expectation that “when practical, the CFPB encourages entities obtaining consumer authorizations for preauthorized EFTs to provide the copy of the authorization to the consumer before the first preauthorized EFT is initiated.” Finally, the CFPB and other regulators continues their focus on consumer payments, including the CFPB tightening regulations around payday lending and other installment loans, as well as the interactions of vendors (like payment processors) with consumers that involve a consumer granting direct access to her bank account so that funds can be debited directly.




David N. Anthony
Partner • 804.697.5410

John C. Lynch
Partner • 757.687.7765

Keith J. Barnett
Partner • 404.885.3423



Ashley L. Taylor Jr.
Partner • 804.697.1286

Alan D. Wingfield
Partner • 804.697.1350

Ethan G. Ostroff
Associate • 757.687.7541