Debt Validation and Dispute Handling in Debt Collection: What You Need to Know

Approximately 40% of debt collection complaints received by the CFPB involve allegations that debt collectors are attempting to recover from the wrong consumer or in the wrong amount. The CFPB attributes this problem to two primary root causes: (1) deficiencies in the quality and quantity of information received from the creditor upon placement of the debt; and (2) a lack of clarity in initial notices leading to complaints and a lack of responsiveness.

The CFPB is proposing three interventions for the purpose of addressing these issues. First, the rulemaking would require that debt collectors “substantiate” or possess a reasonable basis for claims that a particular consumer owes a particular debt.  Second, certain information obtained by a collector in the course of collection activity must be passed on and reviewed by collectors working in subsequent placement tiers.  Lastly, the CFPB would prescribe a validation notice and Statement of Rights for the purpose of assisting consumers in determining whether they owe a particular debt and informing them of their rights during the debt collection process.

1. Substantiation: While cognizant of the many different categories of documentation that form a reasonable basis for claims of indebtedness, the CFPB intends to provide general substantiation requirements, with some specific elements, that reasonably support collection activity at different times during the collection process.

a. Prior to Commencing Collection Activity: The CFPB is considering requiring debt collectors to review information sufficient to substantiate claims of indebtedness prior to initiating collection activity. This may take the form of reviewing certain fundamental consumer information and obtaining written representations from the creditor that the information is complete and accurate. The debt collector would also be required to determine whether any “warning signs” indicating inaccuracies are present and to obtain and review additional information or documentation as needed addressing any warning signs discovered.

b. During the Course of Collection Activity: If a debt collector identifies a “warning sign” during the course of collection activity, it must cease collection activity until information is obtained and reviewed that addresses the “warning sign.”

c. Disputes: The CFPB is considering defining dispute as any communication from a consumer that takes the form of a question or challenge related to the validity of the debt (e.g. the amount of the debt or the identity of the alleged debtor) or the legal right of the collector to seek payment on the debt. Any dispute made by a consumer, orally or in writing, would require a debt collector to review documentation responsive to the type of dispute submitted by the consumer and conclude it provides a reasonable basis for further claims of indebtedness prior to continuing collection efforts. Collectors receiving a dispute must note the dispute status when transferring the debt.  If a previous collector has not addressed a dispute, subsequent collectors must review documentation as needed to address the dispute submitted by the consumer before making an initial claim of indebtedness.

i. Written disputes received within the validation period: In addition to the general dispute handling requirements, the debt collector would be required to send the consumer documentation responsive to the dispute submitted. In the event a debt is transferred to another agency prior to validation being provided, the subsequent collector must validate prior to initiating collection activity.

ii. Duplicative disputes: Similar to the requirements of the FCRA, a collector receiving a duplicative dispute has the option of following the dispute handling process or providing the consumer with an explanation as to why the dispute was considered duplicative.

iii. Oral disputes received during the validation period: A collector receiving an oral dispute will have the option of providing verification of the debt or notifying the consumer of the right to receive verification in response to a written dispute within 30 days of receipt of the validation notice.

iv. Prior to making a claim of indebtedness in litigation: The proposal would require a higher degree of proof prior to initiating litigation than it would in any other phase of debt collection. Specifically, the proposal would require a review of documentation specified for all types of disputes.

Stay tuned for Part 2 as I continue to address the last two issues addressed by the CFPB.

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