Big banks, little banks, credit card companies, student lenders – it seems like just about every player in the financial services industry has complained about the power of the Consumer Financial Protection Bureau. Now it’s the lawyers’ turn.
On October 24, the CFPB released its final rule for overseeing debt collectors, and included attorneys among those who will be subject to direct federal supervision for the first time.
Under the rule, which goes into effect on January 2, the CFPB will have the power to send field examiners out to the law offices of attorneys who engage in debt collection to review their procedures, evaluate the quality of their compliance and identify risks to consumers.
In comments filed with the agency before the rule became final, the American Bar Association, the Commercial Law League of America and the National Association of Retail Collection Attorneys protested that the CFPB was going too far.
“The practice of law is inappropriate for federal regulation and is an area traditionally reserved for the state courts and state bar associations,” wrote Louis Freedman, president of the retail collection attorneys group, which counts more than 700 law firms representing 2,000 lawyers as members. “The Bureau’s apparent conclusion that debt collection services are not the ‘practice of law’ has significant implications for law firms’ ability to act as law firms. This concern is not limited to debt collection law firms.”
Under the rule, any firm that has more than $10 million in annual receipts from consumer debt collection activities will be subject to the CFPB’s supervisory authority – about 60 percent of the debt collection market. It’s a big business – about 30 million Americans have, on average, $1,500 of debt subject to collection, according to the CFPB. Approximately one in 20 delinquent accounts gets referred to a law firm that specializes in debt collection. The lawyers may sue to collect the debt, send letters or use other tactics.
“Millions of consumers are affected by debt collection, and we want to make sure they are treated fairly,” said CFPB Director Richard Cordray in a news release. “Today we are announcing that we will be supervising the larger debt collectors in the market for the first time at the federal level. We want all companies to realize that the better business choice is to follow the law – not break it.”
But lawyers opposed to supervision argue the CFPB did not properly consider the legislative history of the Dodd-Frank Act. In a floor speech, Representative John Conyers (D-Mich.) stated that “giving the new Bureau authority to regulate the practice of law could materially interfere with and jeopardize sensitive aspects of the attorney-client relationship,” Conyers said, according to the Congressional Record. “Any regulation from a new source would unavoidably conflict with the existing rules and lines of accountability….Our committee was determined to avoid any possible overlap between the Bureau’s authority and the practice of law.”
The CFPB in the final rule referenced Conyers’ speech, but said he was talking about lawyers who represent consumers, not those who represent commercial clients and are adverse to consumers. “The Bureau does not understand this statement to suggest that all activity conducted by attorneys is outside the Bureau’s authority,” the rule states. “Consumer debt collection is a consumer financial service…debt collection attorneys do not provide ‘legal advice or services’ to those consumers.”
The CFPB was also not persuaded by concerns that its oversight would interfere with the system of regulation by state bars. Nothing in the rule “requires attorneys to engage in or refrain from engaging in any particular conduct,” the rule states. “Of course, Federal consumer financial law does impose some conduct rules that apply to attorneys. These requirements are unlikely to be inconsistent with state professional conduct rules, as such rules presumably do not obligate attorneys to violate Federal law.”
However, the CFPB did narrow one of its definitions in response to a concern raised by the ABA’s Committee on Consumer Financial Services. Committee chair Therese Franzen in comments wrote that “it appears that the Bureau may believe that any legal action that an attorney undertakes that is adverse to a consumer in any way related to a consumer financial product or service” would subject the attorney to CFPB supervision. As an example, she said, a high-net worth individual could default on a jumbo mortgage, in which case the creditor might call its ordinary litigation counsel to handle the matter. Would that lawyer then be a debt collector and fall under CFPB oversight?
The CFPB said no. “The Bureau agrees that not every occasion on which an attorney seeks money from a consumer client constitutes debt collection,” the rule states, citing the jumbo mortgage example. In response, the bureau amended its definition to specify that it only applies to debt collection performed by people “whose principal business activity is debt collection.”
Still, debt collection lawyers stressed that they do practice law, and said that CFPB supervision will undermine attorney-client privilege. “Every debt collection law firm holds information that is protected and/or privileged that could potentially be the subject of a ‘report’ or ‘examination’ request from the Bureau,” stated comments from the Commercial Law League of America. “Compromising this privilege holds serious ramifications for licensed attorneys and the firms they operate.”
In separate comments, Keith Weiner, an attorney in Cleveland, added that CFPB oversight will “have a chilling effect on our ability to zealously represent our clients in compliance with our professional obligations.”
The CFPB didn’t buy it, writing that it has “general authority to require supervised entities to provide it with privileged information,” and that doing so does not constitute a waiver of privilege.
In an ex parte meeting earlier this year with the retail collection attorneys trade group, the CFPB was more blunt, according to a summary of the meeting filed with the agency by the group. “The CFPB explained its concern that it becomes a problem if attorneys try to cloak their activities behind the attorney-client privilege,” according to the meeting summary.
Lawyers who practice before the CFPB have widely speculated that the rule will face a legal challenge. Indeed, the ABA in its comments referenced a recent and powerful precedent, when the Federal Trade Commission tried without success to impose the privacy notification provisions of the Gramm-Leach-Bliley Act on attorneys.
In that case, the U.S. Court of Appeals for the D.C. Circuit in 2005 soundly rebuffed the FTC’s effort. “It is undisputed that the regulation of the practice of law is traditionally the province of the states,” the panel wrote. “If Congress intends to alter the ‘usual constitutional balance between the States and the Federal Government,’ it must make its intention to do so ‘unmistakably clear in the language of the statute.’” Congress, they added, does not “hide elephants in mouseholes.”
Contact Jenna Greene at firstname.lastname@example.org.