On January 24, 2013, the Massachusetts Office of the Attorney General (“AG”) issued guidance to the industry interpreting its debt collection regulations (“Regulations”) that became effective March 2, 2012. The AG took this unusual step as it recognized that the Regulations raise unique compliance issues for servicers of consumer debt. The AG promulgated the Regulations pursuant to the rulemaking authority conferred by the Massachusetts Consumer Protection Act (“Chapter 93A”), “to establish standards, by defining unfair or deceptive acts or practices, for the collection of debts from persons within the Commonwealth of Massachusetts.” 940 C.M.R. 7.01. Although there is no private right of action, a violation may, nevertheless, constitute “an unfair or deceptive act or practice under Chapter 93A.”
One unique issue is the scope of the Regulations. The Regulations apply to a “creditor” defined to include “any person engaged in collecting a debt owed or alleged to be owed to him by a debtor,” as well as a buyer of delinquent debt. In contrast, the federal Fair Debt Collection Practices Act (“FDCPA”) applies only to consumer debts asserted to be owed to another person or institution. Thus, loans excluded from the scope of the FDCPA may be covered by the Regulations as the FDCPA applies to the purchaser of debt that is in default whereas the Regulations apply to a creditor. The guidance attempts to clarify several issues, including those addressed below, but, as we discuss, servicers of consumer debt will still have to contemplate many unanswered questions.
Do unsuccessful attempts to reach a debtor by telephone count toward the limitation of two calls in any seven day period?
The Regulations prohibit creditors from “initiating a communication with any debtor via telephone, either in person or via text messaging or recorded audio message, in excess of two such communications in each seven day period.” 940 C.M.R. 704(1)(f). While it seems like a simple limitation, this provision has raised many questions. Do unsuccessful attempts to reach a debtor by telephone count toward the limitation of two calls in any seven day period? What if a creditor uses an auto dialer that is programmed to disconnect if a call reaches an answering machine? The guidance indicates that attempts to reach a debtor are not counted towards this limit if the creditor is “truly unable” to leave a text or voice message. The guidance does not indicate whether a communication that causes a phone to ring but disconnects before leaving a message would be counted, although the guidance adds that the AG “may still consider enforcement action against any conduct, including initiation of communication via telephone, the natural consequence of which is to harass, oppress, or abuse a debtor.”
When is a communication in “collection of a debt?”
The Regulations require creditors to provide certain disclosures within five business days after the creditor initially communicates with a debtor about the “collection of a debt.” The guidance addresses when a communication is an “initial communication” made in connection with the collection of a debt that triggers disclosure requirements under the Regulations. Unfortunately, there is no bright line test to determine when a communication is made in connection with the collection of a debt. The guidance provides three factors to consider when making a determination: (1) whether there is any demand for payment or attempt to collect a debt; (2) whether the communication is an inducement to settle or discuss a debt; and (3) the relationship of the parties. On the third prong, the guidance provides that if a creditor has regular communication with a debtor (e.g., monthly statements), the communication is less likely to be in connection with the collection of a debt than if such communication is nonexistent.
In connection with a disputed debt, when is a creditor excused from sending a debt validation letter or information on loss mitigation?
Some clarity on the disputed debt provisions of the Regulations comes with the release of the guidance. The Regulations provide that a creditor shall cease all collection activities if the debtor “notifies the creditor in writing … that the debt, or any portion thereof, is disputed.” 940 C.M.R. 708(2). The Regulations do not specify whether a creditor is excused (or, for that matter, prohibited) from sending a debt validation letter in cases in which it receives a written dispute of the debt. The guidance does not address this question either. The guidance does indicate, however, that the Regulations do not prohibit a creditor from providing a debtor information about home preservation options or other loss mitigation programs during this “automatic stay” period. The AG reasons that “such contacts with a debtor are for servicing purposes in an effort to assist the consumer, and are not considered to be made in connection with collection of the debt.” While the Regulations indicate that documentary evidence verifying a debt includes all documents that bear the signature of a debtor, the guidance indicates that a creditor need not produce every signature-bearing document pertaining to individual transactions that are itemized on a statement. Thus, for example, a creditor on a loan or account accessed by a card need not produce signatures on each transaction and can comply with the verification requirement in the Regulations by producing an itemized statement.
Does the guidance extend to the Division of Banks regulations concerning the conduct of the business of debt collectors and loan servicers?
The guidance only applies to the Regulations and it remains to be seen whether the Massachusetts Division of Banks will follow this guidance in interpreting its regulations, 209 C.M.R. 18.00, which include provisions to the Regulations that apply to licensed third party debt collectors and loan servicers. For the sake of consistency, we hope the Division of Banks will follow the AG’s lead.