The allegations in the complaint can provide valuable insight on the CFPB’s mindset into credit reporting practices and the new administration’s view on regulation by enforcement. Editor’s note: This content is available for members only.
11/19/2019 11:00
Written by:
Porter Heath Morgan
Malone Frost Martin PLLC
On Sept. 25, 2019, the Consumer Financial Protection Bureau filed a complaint in the District Court of Maryland against Fair Collections & Outsourcing (FCO) based on their credit reporting practices, policies, and procedures. The complaint alleged violations under the Consumer Financial Protection Act (CFPA), the Fair Credit Reporting Act, Regulation V, and the Fair Debt Collection Practices Act.
Here is what agencies and credit furnishers need to know:
Regulation by Enforcement Returns
The CFPB’s lawsuit is similar to previous actions that have been labeled as “regulation by enforcement,” in that it does not provide specific evidence of prohibited practices or tangible consumer harm. The complaint is instead based on theoretical harm derived from the defendant’s internal practices, policies, and in this case, alleged training or lack of training.
The concept of regulation by enforcement was advanced by former CFPB director Richard Cordray during his tenure and was famously declared “dead” by his replacement, interim director Mick Mulvaney, in October 2018. There now have been two complaints filed by the CFPB under new director Kathy Kraninger in 2019, (CFPB v. Forster & Garbus, and CFPB v. FCO), that seem to revive this concept of regulation by enforcement.
It has been discussed amongst members of the industry whether these complaints are a form of “zombie” regulation by enforcement, or more of a “regulation by enforcement lite,” but regardless, it is important for members who credit report to pay attention to the CFPB’s allegations in the lawsuit.
Former CFPB director Cordray once stated that “it would be compliance malpractice for executives not to take careful bearings from the contents of these orders about how to comply with the law and treat consumers fairly.”
Therefore, it is imperative that members pay attention to the allegations made by the CFPB in the complaint and modify their policies, processes, and procedures if necessary.
Allegations
The CFPB’s complaint stems from the primary allegations that: 1) FCO failed to maintain reasonable policies and procedures regarding the accuracy and integrity of the information it furnishes, including the handling of consumer disputes, as required by law; 2) FCO failed to conduct reasonable investigations of certain consumer disputes and has failed to cease furnishing information that was alleged to have been the result of identity theft before it made any determination of whether the information was accurate; 3) FCO collected debt without a reasonable basis to assert it was owed. A closer look at the allegations reveal that the CFPB allegations can be broken down into four categories:
1. Disputes Measured by Volume per Employee.
The CFPB noted in its allegations that:
- FCO receives approximately 10,000 disputes a month which were handled by four employees who were managed remotely by a compliance supervisor in another location;
- That FCO did not monitor the pace at which employees respond to NCRAs concerning indirect disputes except to ensure that FCO responded within the time period prescribed by the FCRA;
- That FCO’s “fast” pace of resolving indirect disputes (averaging 17 disputes per hour per employee with some employees averaging 22 disputes or 33 disputes per hour) allowed for only a limited review; and
- FCO’s employees verified information as being accurate in response to direct disputes at a rate of 92.2%.
2. Employee Training
The CFPB’s allegations took issue with FCO’s employee training regarding indirect disputes and alleged that:
- Employees received limited to no affirmative training on how to conduct a reasonable investigation of indirect disputes although they were permitted to ask questions;
- FCO did not provide employees with any training on the requirements of the FCRA as they relate to the handling of indirect disputes; and
- For identity theft disputes, employees would only confirm that the social security number, name or unspecified identifying information matched before verifying the disputed information as accurate for identity theft disputes, and that employees would send consumers blank identity theft affidavits to be completed by the consumer, but that employees took no further action or did not follow up if the consumer did not respond.
3. Training Materials
The CFPB’s complaint also took issue with FCO’s training manual and alleged that:
- FCO provided limited written guidance to employees who responded to indirect disputes, and specifically that FCO only had one written policy and procedure on handling of indirect disputes which had “limited instructions” for responding to certain types of indirect disputes including paid or identity theft disputes;
- The training manual was drafted by the compliance manager and had only one individual with authority to change the policies and procedures;
- That the manual included “vague” language including that “each dispute is different and should be viewed in its own merit” but did not provide instructions on determining which disputes had merit and which ones did not; and
- The manual did not require employees to save or record any of the information from E-OSCAR including supporting documentation, and as a result FCO cannot reliably determine whether a dispute is identical or related to one it previously reviewed.
The CFPB further alleged that FCO did not revise or update its manual for the past seven years including:
- FCO did not seek to determine whether the instructions were effective in leading employees to conduct a reasonable investigation of indirect disputes;
- FCO did not audit the work of its employees to determine if they were following the policy or if they were complying with the FCRA; and
- FCO did not update the manual in response to two technical changes to E-OSCAR in 2013 and 2016 that significantly changed the process of responding to indirect disputes.
4. Controls, Monitoring, and Regulation V
The CFPB also alleged that FCO did not comply with Regulation V because when it created its manual it did not consider the appropriate guidelines from Appendix E, 12 CFR Part 1022 including:
- Not establishing and implementing policies and procedures reasonably designed to promote the objective of conducting reasonable investigations of consumer disputes and taking appropriate actions based on the outcome of such investigations;
- Not establishing and implementing appropriate internal controls regarding the accuracy and integrity of information including standard procedures and verifying random samples of information;
- Training staff to implement the policies and procedures; and
- Conducting periodic evaluations of its own practices, consumer reporting agencies practices of which the furnisher is aware, investigations of disputed information, means of communication, and other factors that may affect the accuracy and integrity of information furnished to consumer reporting agencies and identify practices that can compromise the accuracy and integrity of information such reviewing historical records relating to accuracy or integrity, considering types of errors, omissions, or other problems, consider feedback from consumer reporting agencies, consumers or employees.
The CFPB also alleged that FCO had knowledge that indirect disputes were not appropriately being investigated by one or more employees based on multiple consumer complaints and threats of lawsuits, and that they failed to consider feedback from consumers who threatened to sue FCO because their disputes were not being investigated.
Finally, the CFPB alleged that certain portfolios of debt have a high dispute rate compared to the average dispute rate and that those high rates of disputes along with inability to obtain additional information are warning signs that put FCO on notice that there may be problems with the accuracy and or reliability of the information about the debts in those portfolios.
Takeaways
It is important to note that FCO denies the allegations in the CFPB’s complaint and has filed a motion to dismiss with the court. It is also important to understand that there is no determination of any violation or any court order ruling on the merits of the CFPB’s allegations. However, the allegations in the complaint can provide valuable insight on the CFPB’s mindset on credit reporting practices as well as provide insight into the new administration’s view on regulation by enforcement.
1. Monitor the Dispute Handling Process.
ACA members who credit report should capture, track, and monitor their dispute response staff including measuring the number of disputes each employee handles per hour, and the results of those investigations if they are not already doing so. It is clear from the FCO complaint that the CFPB expects agencies to have this information available for internal purposes, but also available for the CFPB and/or regulators when an inquiry is made with adequate jurisdiction and scope.
2. Review Training Programs.
ACA members should also be active in their review of their training program for credit reporting and responding to disputes. At a minimum, the CFPB expects that agencies that credit report: 1) train their employees on the details and specifics of responding to direct disputes, 2) have specific training on the FCRA, and 3) have specialized procedures for identity theft disputes that accept the dispute as valid and suspend collection activity including credit reporting until resolution of the dispute.
3. Review Training Materials.
ACA members should also review and update training materials on credit reporting and responding to consumer disputes. The FCO complaint suggests that the CFPB expects that agencies: 1) provide extensive written guidance and training to employees with detailed instructions on responding to different types of disputes, 2) include specific language to define disputes that have merit and disputes that do not have merit, 3) require employees to save and record E-OSCAR information and supporting documentation.
4. Review Credit Reporting Process and Controls.
Finally, members should review their processes and controls for responding to consumer disputes. The industry has seen an increased focus on compliance controls in the past several years, and the FCO complaint confirms that the CFPB also expects agencies to have controls in place to measure and monitor policies and procedures.
The FCO complaint gives insight and examples into several things the CFPB is looking for in conducting periodic evaluations of its own practices including: 1) consumer reporting agencies’ practices, 2) reviewing historical records relating to accuracy or integrity, 3) considering types of errors, omissions, or other problems, and 4) consider feedback from consumer reporting agencies, consumers (including consumer complaints and threats of lawsuits), or employees. The CFPB also indicates that agencies should review these controls by client and client portfolio.
For now, the allegations in the CFPB’s complaint is all the industry will have to rely on for insight until the U.S. Supreme Court rules on Seila Law v. Consumer Financial Protection Bureau next spring. Its case against FCO will likely receive a judicial stay like its case against Forster & Garbus or will be voluntarily dismissed like the CFPB chose to do in its case against Ocwen Financial Services in September, so no further arguments will be made from them.
However, the FCO complaint provides enough insight for the industry and for members who credit report on the minimum expectations the CFPB has when responding to consumer disputes. And while there is still uncertainty about the extent of the CFPB’s resurrection of the concept of regulation by enforcement with the new administration,ACA members should review the details of the FCO complaint and ensure they are compliant with these minimum expectations.
The following article was contributed by a member of ACA International’s Member Attorney Program (MAP) committee. ACA Daily will publish future legal analyses and thought pieces written by members of this important committee.
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