When scores of debt-collection lawyers descend on Washington this week for a trade association meeting, they’ll find one agency open that many may wish was closed: the Consumer Financial Protection Bureau.
In the past year, the bureau, which is independently funded by the Federal Reserve and still open despite the shutdown, has begun overseeing lawyers who represent banks, credit card issuers, automobile finance companies and other creditors in collecting overdue payments from consumers.
For the increasingly beleaguered bar, it’s a “huge” issue that raises still-unresolved questions of attorney-client privilege and overlap with state bar association authority, said Joann Needleman, president-elect of the National Association of Retail Collection Attorneys, which counts 700 law firms employing 2,000 lawyers as members. The agency, she said, “is the bane of our existence right now.”
Debt-collection lawyers are hoping for legislative relief, backing a bill that would exempt litigation-related collection activities from the Fair Debt Collection Practices Act. The bill, introduced July 31 by representatives Ed Perlmutter (D-Colo.) and Spencer Bachus (R-Ala.), is pending before the House Financial Services Committee.
CFPB Director Richard Cordray has called debt collection “a central issue of our times,” noting that about 30 million consumers — nearly one out of every 10 Americans — are being pursued by debt collectors, for amounts that average about $1,500 apiece.
“We are concerned about the systemwide problems in the debt-collection market that pose risks to consumers, and we want to see good practices come to dominate the market,” Cordray said during a field hearing on debt collection in Seattle last year.
According to the consumer protection bureau, about one in 20 delinquent debts are referred to a law firm that specializes in debt collection. Lawyers may sue consumers to collect the debt, or send letters or make phone calls warning of legal action if payment is not made. The work is generally low margin and handled by small firms, but collection attorneys say it’s necessary because credit markets can’t function unless people feel compelled to pay back what they owe.
In January, a CFPB rule took effect making all debt collectors — including law firms — with more than $10 million in annual receipts from collection activities subject to direct bureau supervision. This entails on-site examination of books and records by agency inspectors, an unprecedented level of scrutiny of lawyers by a federal agency.
‘THE BIG WHAT-IF’
For the CFPB, the question is whether debt-collection lawyers are behaving appropriately, and not unfairly, deceptively or abusively, when they go after consumers. Hunton & Williams partner Ronald Rubin, a former CFPB enforcement lawyer, said the “bureau will not allow anyone to escape its oversight of consumer financial laws by hiding behind once-sacred legal shields like the one afforded to attorneys.”The overriding concern with such an examination is how to protect attorney-client privilege. “Privilege is a two-way street. While the CFPB may say ‘Give us the documents,’ the approval also has to come from the client,” Needleman said. “It’s an inherent conflict.” Once the CFPB does come knocking, she said, the target firm’s first response likely will be to call its state or local bar association for assistance and ethics guidance.
R. Frank Springfield, a financial services partner at Burr & Forman in Birm­ingham, Ala., agreed that “potential conflicts may exist between CFPB supervisory authority and state bars regarding confidentiality,” he said. “Federal supervision of attorneys may be impractical at best, with 50 states already regulating the practice of law.”
In laying out the final rule, the CFPB said it has “general authority to require supervised entities to provide it with privileged information,” and that “materials produced in response to the Bureau’s demand will remain confidential.”
The agency also concluded that the legislative history of the Dodd-Frank Act doesn’t exempt lawyers from oversight. However, Representative John Conyers (D-Mich.) in a floor speech said that the Dodd-Frank conference committee was “determined to avoid any possible overlap between the bureau’s authority and the practice of law” and that giving the CFPB “authority to regulate the practice of law could materially interfere with and jeopardize sensitive aspects of the attorney-client relationship,” according to the Congressional Record.So far, Needleman of the retail-collection attorneys said she’s not aware of any law firm that has undergone a CFPB examination. “It’s been the big what-if for some time now,” she said.
Thus far, no lawyer or firm has sued to challenge the rule. “We’re not there yet,” Needleman said, adding that funding is also an obstacle to bringing a suit. The retail-collection lawyers are holding a public symposium on debt collection in Washington on October 15, followed by a conference from October 16 to 19.
OTHER FORMS OF SUPERVISION
Most lawyers will be exempt from direct agency supervision because they fall below the $10 million debt collection threshold, but that doesn’t mean they’re off the hook. Lawyers can still be hit with CFPB enforcement actions, and must also contend with increasingly nervous clients who answer to the CFPB as well.
The CFPB has made it clear that it will hold creditors responsible for anything a service provider — including outside counsel — does, said Christopher Willis, a Ballard Spahr partner who represents debt-collection lawyers. The result: Debt-collection lawyers “are being subjected to constant audits by their clients…over even the most minute details,” he said.
In part, the clients’ skittishness may stem from the robo-signing scandal, when numerous small law firms came under fire for faking foreclosure documents. Banks have paid almost $35 billion since 2012 to settle state and federal charges involving foreclosure abuses. (The CFPB, however, excluded foreclosures in defining the activities of attorneys subject to agency supervision.)
Still, Willis said that “the memory of that kind of law firm behavior may have carried over” to color the current scrutiny of debt-collection lawyers. Smaller firms are having an especially difficult time coping with the audit demands, he added.
But not all problems are directly CFPB-related. Debt-collection lawyers are hoping to get legislative relief from private suits brought under the Fair Debt Collection Practices Act, which protects consumers from abusive debt collectors. In recent years, it’s been widely used to sue lawyers and other debt collectors for technical violations of the statute, such as describing a debt in court papers as “money loaned” rather than “credit card debt.”
According to litigant data aggregator WebRecon, there were 11,495 such suits filed in 2012. The statute allows plaintiffs to recover $1,000 in damages, plus actual damages and attorney fees.
The proposed legislation is not a total exemption, the collection lawyers said, since it would only apply to litigation activities that fall under the supervision of the court. “Congress recognized that attorneys cannot be regulated, and they knew it in 1977 when the [Fair Debt Collection Practices Act] was enacted,” according to the group. “Punishment of attorneys for conduct in the courtroom will deny creditors their right to full access to the court system.”
Contact Jenna Greene at email@example.com.