On October 17, 2018, the Consumer Financial Protection Bureau (CFPB) released its Fall 2018 rulemaking agenda. Among the items on the agenda was the CFPB’s planned issuance – by March 2019 – of a Notice of Proposed Rulemaking (NPRM) for the Fair Debt Collection Practices Act (FDCPA). The goal of the NPRM is to address industry and consumer group concerns over “how to apply the 40-year old [FDCPA] to modern collection processes,” including communication practices and consumer disclosures. The CFPB has not yet issued an NPRM regarding the FDCPA, leaving it up to courts and creditors to continue to interpret and navigate statutory ambiguities.
If recent United States Supreme Court activity is any indication, there is plenty of ambiguity in the FDCPA to go around. The Court’s decisions in Obduskey v. McCarthy & Holthus LLP(March 20, 2019) and Henson v. Santander Consumer USA Inc. (June 12, 2017) have helped to flesh out who is a “debt collector” under the FDCPA. On February 25, 2019, the Court granted certiorari in Rotkiske v. Klemm on the issue of whether the “discovery rule” applies to toll the FDCPA’s one-year statute of limitations. In the bankruptcy context, the Court held in Midland Funding, LLC v. Johnson (May 15, 2017) that “filing a proof of claim that is obviously time barred is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the FDCPA.” However, there remain a number of unresolved conflicts between the Bankruptcy Code and the FDCPA that present risk to creditors, and this risk can be mitigated by bankruptcy-specific revisions to the FDCPA.
One area of seemingly irreconcilable conflict relates to the “Mini-Miranda” disclosure required by the FDCPA. The FDCPA requires that in an initial communication with a consumer, a debt collector must inform the consumer that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose. Later communications must disclose that they are coming from a debt collector. The FDCPA does not explicitly reference the Bankruptcy Code, which can lead to scenarios where a “debt collector” under the FDCPA must include the Mini-Miranda disclosure on a communication to a consumer that is protected by the automatic stay or discharge injunction under applicable bankruptcy law or bankruptcy court orders.
Unfortunately for creditors, guidance from the courts regarding the interplay of the FDCPA and the Bankruptcy Code is not uniform. The federal circuit courts of appeals are split as to whether the Bankruptcy Code displaces the FDCPA in the bankruptcy context with respect to the Mini-Miranda disclosure, with no direct guidance from the Supreme Court. This lack of guidance puts creditors in a precarious position, as they must attempt to comply simultaneously with provisions of both the FDCPA and the Bankruptcy Code, all without direct statutory or regulatory direction.
Because circuit courts are split on this matter and because of the potential risk in not complying with both federal legal requirements, many creditors have tailored correspondence in an attempt to simultaneously comply with both requirements by including the Mini-Miranda disclosure, followed immediately by an explanation that – to the extent the consumer is protected by the automatic stay or a discharge order – the letter is being sent for informational purposes only and is not an attempt to collect a debt. An example might be as follows:
“This is an attempt to collect a debt. Any information obtained will be used for that purpose. However, to the extent your original obligation has been discharged or is subject to an automatic stay under the United States Bankruptcy Code, this notice is for compliance and/or informational purposes only and does not constitute a demand for payment or an attempt to impose personal liability for such obligation.”
This improvised attempt to balance competing statutes underscores the need for a bankruptcy exemption from including the Mini-Miranda disclosure on communications to the consumer.
Consumers Represented by Bankruptcy Counsel
Similar conflicts arise regarding the question of who should receive communications when a consumer in bankruptcy is represented by counsel. In many bankruptcy cases, the consumer’s contact with his or her bankruptcy attorney decreases drastically once the bankruptcy case is filed. The bankruptcy attorney is unlikely to regularly communicate with the consumer regarding ongoing monthly payments to creditors and the specific status of particular loans or accounts. This lack of communication leads to tension among the FDCPA, the Bankruptcy Code and certain CFPB communication requirements set forth in Regulation Z.
The FDCPA provides that “without the prior consent of the consumer given directly to the debt collector or the express permission of a court of competent jurisdiction, a debt collector may not communicate with a consumer in connection with the collection of any debt … if the debt collector knows the consumer is represented by an attorney with respect to such debt and has knowledge of, or can readily ascertain, such attorney’s name and address, unless the attorney fails to respond within a reasonable period of time to a communication from the debt collector or unless the attorney consents to direct communication with the consumer.”
Regulation Z provides that, absent a specific exemption, servicers must send periodic statements to consumers that are in an active bankruptcy case or that have received a discharge in bankruptcy. These statements are modified to reflect the impact of bankruptcy on the loan and the consumer, including bankruptcy-specific disclaimers and certain financial information specific to the status of the consumer’s payments pursuant to bankruptcy court orders.
Regulation Z does not directly address the fact that consumers may be represented by counsel, which leaves servicers in a quandary: Should they follow Regulation Z’s mandate to send periodic statements to the consumer, or should they follow the FDCPA’s requirement that communications should be directed to the consumer’s bankruptcy counsel? When given the opportunity to provide some much-needed clarity through informal guidance, the CFPB demurred:
If a borrower in bankruptcy is represented by counsel, to whom should the periodic statement be sent? In general, the periodic statement should be sent to the borrower. However, if bankruptcy law or other law prevents the servicer from communicating directly with the borrower, the periodic statement may be sent to borrower’s counsel.
-CFPB March 20, 2018, Answers to Frequently Asked Questions
At least one consumer bankruptcy attorney has brought this issue to the bankruptcy court’s attention. In the Ferguson case in the United States Bankruptcy Court for the Northern District of New York (case number 17-12324), the attorney noted that the mailing of statements to him instead of the consumer violated the court’s confirmation order and placed his firm “in the position of being the post office for monthly mortgage statements,” which increased both the “clerical time spent on the re-mailing function” as well as liability to his firm in ensuring that the statements are re-mailed. The parties entered into an agreement that statements would be mailed directly to the consumer going forward, but a one-off approach to the issue is not practical for creditors.
The Need for Revisions to the FDCPA to Reflect Bankruptcy
The foregoing examples highlight the need for revisions to the FDCPA to ensure that it reflects the realities of bankruptcy practice. Without limitation, the Mini-Miranda disclosure requirement exposes creditors to significant risk in connection with consumers affected by bankruptcy. Likewise, bankruptcy counsel has little use for bankruptcy-tailored monthly financial information designed to keep the consumer apprised of the account status, yet the lack of specific guidance from the CFPB leaves creditors with no easy choice – absent obtaining a court order – on where the creditor should send statements. When the CFPB releases its NPRM on the FDCPA, we encourage creditors to raise these issues.