On January 10, 2022, the Consumer Financial Protection Bureau (CFPB) filed a complaint in federal district court against three affiliated debt-buying businesses and the individuals who founded and operated them for "knowingly and recklessly [placing debts with and selling them to] debt collection agencies that used threats and misrepresentations to coerce payments from consumers."
The corporate defendants are in the business of purchasing portfolios of defaulted consumer debt and then placing those portfolios with (or selling them to) third-party debt collectors. The CFPB alleges that the third-party debt collectors engaged in illegal debt collection practices, such as falsely threatening consumers with lawsuits and arrest, and that the defendants who placed the debt with (or in some cases sold it to) the debt collectors are directly liable for violating the Consumer Financial Protection Act and Fair Debt Collection Practices Act.
Of note is the CFPB's use of its substantial assistance authority here to attempt to hold the defendants liable for the actions of downstream third parties. The CFPB points to the fact that the three companies received hundreds of complaints about the deceptive collection practices either directly from the consumers or through the consumers' creditors and failed to take meaningful action to correct them. According to the CFPB, the companies claimed to have separated themselves from some of the debt collectors, but internal documents reviewed by the CFPB showed that the companies continued to place debt portfolios with and sell them to debt collectors that they claimed were terminated.
"Companies cannot profit and evade liability simply by creating a maze of shape-shifting entities and enabling third parties to take advantage of consumers," said CFPB Director Rohit Chopra.
The CFPB's actions signal a willingness by the Bureau to target creditors for the abusive or deceptive debt collection practices of third parties. A strong third-party vendor management program can help to minimize this risk. Such a program must include:
- Due diligence of each collection agency and debt buyer
- Complaint data analysis to identify potentially problematic conduct
- Ongoing monitoring of collection agencies
The bottom line is that companies in the business of placing or selling consumer debt may be held responsible for what happens to the debt downstream.
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Alexandra Megaris, a partner in the New York and Washington offices of Venable LLP, focuses on complex regulatory investigations and government enforcement matters involving state attorneys general, the Federal Trade Commission (FTC), the Consumer Financial Protection Bureau (CFPB), state regulatory agencies, and the U.S. Congress. Alex also works closely with Venable's government affairs team in advocating for clients before these agencies. She has extensive experience with consumer protection laws, such as state unfair, deceptive and abusive practices (UDAAP) laws, the FTC Act, the Consumer Financial Protection Act, the FTC's Telemarketing Sales Rule, and product-specific regulations, including those regulating credit reporting, loan servicing, and debt collection.
Jonathan L. Pompan, a partner in the Washington, DC office of Venable LLP, chairs the firm's Consumer Financial Services Practice Group. His practice focuses on providing comprehensive legal advice and regulatory advocacy to a broad spectrum of clients, such as nonbank financial products and services providers, including fintechs, lenders, debt buyers and collectors, advertisers and marketers, and trade and professional associations, before the Consumer Financial Protection Bureau, the Federal Trade Commission, state attorneys general, and regulatory agencies.
For more information about this and related industry topics, see www.Venable.com/cfs/publications.