First Party Collectors - Don’t Forget About UDAAP!

Editor’s Note:

First party collection activity is becoming a larger segment of ARM industry business every year. Virtually every type of business does some amount of first party collections, whether handled internally or outsourced.  This is the second of two excellent articles featured this week at insideARM about first party collections written by Linda Straub Jones from Lexis Nexis Risk Solutions.

Reminder: The insideARM 3^rd Annual First Party Summit is being held June 5-7 in Frisco, TX. This is the ARM industry’s only conference dedicated to first party activity – from customer care, customer service, to collections. If you want to learn more on this topic register here now.

I frequently speak with the collection departments of many banks and credit unions.  Since my job revolves around compliance, that’s where the conversation generally leads to – compliance within the credit and collections industry.  One surprising trend in these conversations is the number of first party collections personnel who say they aren’t concerned about the CFPB’s upcoming collections rulemaking, or the FDCPA.  While most collection departments in banks and credit unions do follow many aspects of the FDCPA, especially those relating to fairness when dealing with consumers, they also state that since the FDCPA doesn’t apply to creditors collecting their own debt, they don’t necessarily have to follow those rules. 

While all of this is true, one thing that many people forget is that the FDCPA and the CFPB’s upcoming collections rules aren’t the only regulations that first party’s need to be aware of when doing collections – let’s not forget about UDAAP!  Under the Dodd-Frank Act, all covered persons or service providers are legally required to refrain from committing Unfair Deceptive Abusive Acts and Practices (UDAAPs).   In fact, CFPB Bulletin 2013-07 revolves around UDAAP in the collection of consumer debts.  If you haven’t read this recently, I’d suggest a quick review of this bulletin.

The CFPB is actively pursuing first parties for UDAAPs related to their collection activities.  Additionally, the CFPB can determine exactly what it considers a UDAAP – while there are general guidelines as to what a UDAAP is in the Bulletin, the CFPB leaves much of the interpretation to its own discretion. 

But first, let’s review what UDAAP means:

UNFAIRNESS: An act or practice is unfair when:

1. it causes or is likely to cause substantial injury to consumers; 
2. the injury is not reasonably avoidable by consumers; and 
3. the injury is not outweighed by countervailing benefits to consumers or to competition. (A “substantial injury” typically takes the form of monetary harm)

DECEPTIVE ACTS OR PRACTICES:  An act or practice is deceptive when:

1. it misleads or is likely to mislead the consumer;
2. the consumer’s interpretation of the behavior reasonable; and
3. behavior is material (the misleading representation, omission, act, or practice etc. ) (Representation, omission, implication etc.  May disclose to avoid deception.) 

ABUSIVE ACTS OR PRACTICES: An act or practice is abusive when:

1. it materially interferes with the ability of a consumer to understand a term or condition product or service; or 
2. takes unreasonable advantage of – a lack of understanding about the cost, risks, or conditions of the product or service; the inability of the consumer to protect themselves when selecting or using a consumer financial product or service; or takes advantage of consumer’s trust that entity is acting in their best interest. 

In order to understand better what the CFPB considers a UDAAP in first party collections, look no further than two suits that took place in 2016.

• August 2016: Wells Fargo. Student Loan servicing practices. $410K in relief and $3.6 M in civil money penalty. The Bureau identified breakdowns throughout Wells Fargo’s servicing process including failing to provide important payment information to consumers, charging consumers illegal fees, and failing to update inaccurate credit report information.
• September 2016: Navy Federal Credit Union. $23 M in redress and $5.5 M civil money penalty for threatening to file suit, garnish wages, contact commanding officers, and change the credit scores of members who fell behind on payments.  The CFPB further found that in most cases Navy Federal did not intend to act on any of its threats to its members.

It’s important to note that even if you are a smaller bank or credit union, this doesn’t exclude you from the CFPB’s supervision.  The CFPB has said time and time again that it looks to its consumer complaint portal for leads as to which companies are being unfair, deceptive or abusive to consumers.  No matter your size, if you are participating in UDAAP’s against consumers, the CFPB will pay attention to you!

All information provided in this article is general in nature and is provided for educational purposes only.  It should not be construed as legal advice.  For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice in your state.