CFPB Debt Collection and Payday Loan Supervisory Highlights Update

Bureau of Consumer Financial Protection Releases Latest Supervisory Highlights

The Bureau of Consumer Financial Protection (Bureau) today released its 17th edition of Supervisory Highlights. The report covers Bureau supervision activities generally completed between December 2017 and May 2018, and shares observations in the areas of auto loan servicing, credit card account management, debt collection, mortgage servicing, payday lending, and small business lending.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Bureau is authorized to supervise banks and credit unions with more than $10 billion in assets, as well as certain nonbanks. Institutions are subject only to the requirements of relevant laws and regulations.

The report shares information regarding general supervisory and examination findings, communicates operational changes to the Bureau’s supervisory program, and provides information on recent Bureau final rules. The information is disseminated to help institutions better understand how the Bureau examines institutions for compliance. The Bureau expects that the publication of Supervisory Highlights will continue to aid Bureau-supervised entities in their efforts to comply with federal consumer financial law. The document does not impose any new legal requirements.

Bureau examinations may result in supervisory recommendations to address problems that they find. These recommendations may include paying refunds or restitution, or taking actions to stop unlawful practices and promote future compliance such as implementing new policies, or improving training or monitoring. When appropriate, the Bureau opens investigations for potential enforcement actions based on information obtained during the supervisory process.

Debt collection

The Bureau’s Supervision program has authority to examine certain entities that engage in consumer debt collection activities, including nonbanks that are larger participants in the consumer debt collection market. Recent examinations of larger participants identified one or more violations of the Fair Debt Collection Practices Act (FDCPA).

Failure to obtain and mail debt verification before engaging in further collection activities

Section 809(b) of the FDCPA requires a debt collector, upon receipt of a written debt validation request from a consumer, to cease collection of the debt until it obtains verification of the debt and mails it to the consumer. Examinations found that one or more debt collectors routinely failed to mail debt verifications before engaging in further collections activities. Instead, one or more debt collectors forwarded consumer debt validation requests to originating creditors;the creditors then reviewed the debts and mailed responses directly to consumers. One or more debt collectors accepted creditor determinations that the debt was owed by the relevant consumer for the amount claimed without receiving information verifying the debt and without mailing the required verification to consumers. One or more debt collectors then continued collection activities on accounts in violation of section 809(b) of the FDCPA. In response to these examination findings, one or more debt collectors are revising their debt validation policies, procedures, and practices to ensure both that they obtain appropriate verification of the debt when requested and that they mail the verification to consumers prior to engaging in further collection activities.

Payday lending

The Bureau’s Supervision program covers entities that offer or provide payday loans. Examinations of payday lenders identified unfair and deceptive acts or practices as well as violations of Regulation E.

Misleading collection letters

Examinations observed one or more entities engaging in a deceptive act or practice in their collection letters. These entities represented in their letters that they will, or may have no choice but to, repossess consumers’ vehicles if the consumers fail to make payments or contact the entities. This was despite the fact that these entities did not have business relationships with any party to repossess vehicles and, as a general matter, did not repossess vehicles. Given these facts, the examination concluded that the net impression of these representations in the context of each letter was to mislead consumers to believe that these entities would repossess or were likely to repossess consumers’ vehicles. The representations were material because they were likely to affect the behavior of consumers who were misled. The representations were likely to induce consumers to make payments to these entities, as opposed to allocating their funds toward other expenses. In response to the examination findings, the entity or entities are ensuring that their collection letters do not contain deceptive content.

Debiting consumers’ accounts without valid authorization by using account information previously provided for other purposes

Examinations observed one or more entities using debit card numbers or Automated Clearing House (ACH) credentials that consumers had not validly authorized the entities to use to debit funds in connection with a single-payment or installment loan in default. Upon a consumer’s failure to repay the loan obligation as agreed, one or more entities attempted to initiate electronic fund transfers (EFTs) using debit card numbers or ACH credentials that borrowers had identified on authorization forms executed in connection with the defaulted loan at issue. If those attempts were unsuccessful, the entities would then seek to collect balances due and owing via EFT susing debit card numbers or ACH credentials that the borrowers had supplied to the entities for other purposes, such as when obtaining other loans or making one-time payments on other loans or the loan at issue. Through these invalidly authorized EFTs, the entities sought payment of up to the entire amount due on the loan. The examinations identified these as unfair acts or practices and also, in some cases, as violations of Regulation E. With respect to unfairness, the invalidly authorized debits caused substantial injury in the form of debits that consumers could not anticipate, leading to potential fees. Because the credentials were provided to the entities for other purposes, such as account information consumers provided in previous credit applications, consumers could not anticipate that the entities would use them for the defaulted loan at issue and thus could not reasonably avoid such injury.

Finally, the injury was not outweighed by any countervailing benefits to consumers, such as satisfying their debts, or to competition, such as passing on lower costs to consumers derived from easier debt collection.By giving an unfair advantage over other entities that obtain authorization to initiate debits from consumers pursuant to clear and readily understandable terms, the unfair acts or practices likely harmed competition. With respect to loans for which the consumer entered into preauthorized EFTs that recurred at substantially regular intervals, the examinations identified this practice as a violation of Regulation E, which requires that preauthorized EFTs from a consumer’s account be authorized only by a writing signed or similarly authenticated by the consumer. Here, the loan agreements and EFT authorization forms failed to provide clear and readily understandable terms regarding the entities’ use of debit card numbers or ACH credentials that consumers provided for other purposes. Accordingly, the entities did not obtain valid preauthorized EFT authorizations for the debits they initiated using debit card numbers or ACH credentials consumers provided for other purposes. In response to examination findings, the entity or entities are ceasing the violations, remediatingborrowers impacted by the invalid EFTs, and revising loan agreement templates and ACH authorization forms.


The complete report maybe found at the CFPB website here.

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