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Legal, Regulatory, and Privacy Issues

Will CFPB proposal on zombie debt disclosures mislead consumers?

Consumer advocates say the disclosures are more friendly to debt collectors, and that collecting on time-barred debt should be banned


The Consumer Financial Protection Bureau is proposing a rule to define how debt collectors should follow up on time-barred debts with consumers, but consumer advocates want to ban such collection efforts instead.    

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The Consumer Financial Protection Bureau is proposing a rule to define how debt collectors should follow up on time-barred debts with consumers, but consumer advocates want to ban such collection efforts instead.

This rulemaking proposal is a supplement to the CFPB efforts from 2019 to update the Fair Debt Collection Practices Act to better reflect the use of modern technology. Consumer advocates say that the proposal is more geared to the interests of debt collectors than consumers.

The CFPB is inviting public comment on this supplementary rule through August 4, 2020.

See related: CFPB’s fair debt collection update proposal elicits negative feedback

Time-barred debt disclosures

According to the CFPB, its new proposal is based on the FDCPA’s outlawing of the use of “any false, deceptive, or misleading representation or means in connection with the collection of any debt.”

Accordingly, the consumer protection agency has come up with requirements for debt collectors to make disclosures to consumers relating to time-barred debt, and also disclosures related to the revival of the debt, if necessary.

A time-barred debt is considered an inactive zombie debt since it is past the statute of limitations for legal action by debt collectors. Once a debt is revived, the debt collector is allowed to legally sue for collection of the debt.

The new proposal requires debt collectors engaged in collection efforts on debts that they know or “should know” are time-barred to notify consumers that there are legal limits on the period of time a consumer can be sued for a debt. They should also inform consumers that because of the age of the debt being collected on, the collector will not sue them to collect it.

In addition, debt collectors should disclose, in case this applies, if their right to bring legal action can be revived under the laws that govern the debt, and the circumstances under which this revival could occur. State laws vary on how a debt could be revived. Generally, a debt can be revived when a debtor makes a partial payment on the debt, or when a debtor acknowledges the debt in writing.

The CFPB has also come up with model statements and forms that debt collectors could use to comply with these requirements.

See related: If I pay off an old debt, will it damage my rejuvenated credit score?

Consumer advocates: Ban collection efforts on time-barred debt

Although the CFPB touts the protections that these disclosures will afford consumers, advocates do not see it that way. They allege that the CFPB should have outright banned collectors from following up on time-barred debt.

April Kuehnhoff, a National Consumer Law Center attorney, noted, in a media release, “Unfortunately, disclosures cannot adequately protect vulnerable consumers from abusive practices related to the collection of time-barred debt.” She added, “The CFPB took what should have been a simple prohibition and watered it down.”

Voicing similar concerns, Linda Jun, senior policy counsel at Americans for Financial Reform Education Fund, said, “To truly protect consumers the CFPB should ban collection of time-barred debt in and out of court because these debts are so old that records are lost, the collector may have the wrong person or wrong amount, and the debt cannot be collected without mistakes or deception.”

The Center for Responsible Lending has also weighed in. Kiran Sidhu, policy counsel with the organization, said, in a media release, “Nearly one-third of adults among the nation’s 71 million consumers with active credit files are aggressively pursued by debt collectors based on information that is often in error, incomplete or so old that the statute of limitations has passed.

“As courts have held, collection and threat of collection of time-barred debt violates the Fair Debt Collection Practices Act’s prohibition on false or misleading representations, prohibition on unfair practices or both.”

See related: Card debt past the statute of limitations? Yes, you still owe it

CFPB defends proposal

The CFPB, however, states in its notice about the proposed rule, “courts generally have agreed that a debt collector can use disclosures to correct misleading impressions relating to a debt’s enforceability and the possibility of revival that arise from the debt collector’s attempt to collect a time-barred debt.”

The agency conducted consumer research, completed in September 2019, on different disclosures to determine which ones would work best. It has also sought feedback from some small business representatives through a panel.

Based on this research, the CFPB rebuts consumer groups’ assertion that collectors should be barred from following up on time-barred debts altogether.

The CFPB notes that its quantitative test results “suggest that disclosures can be effective in preventing the deception associated with the collection of time-barred debts and that, therefore, prohibiting the collection of time-barred debt and banning revival are not necessary to prevent deception.”

One negative consequence of altogether banning collection on time-barred debts the CFPB cites include a negative fallout for consumers in the form of rising litigation before the statute of limitations expires on the debt.

In a media release, ACA International, a trade association for the debt management industry, including outsourced debt collectors, noted that it supports a “safe-harbor disclosure” for debt collectors since “it would ensure that the collector adequately warns the consumer about the consequences of nonpayment and it allows the collector and consumer to engage in legitimate communications about resolving the account.”

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