The Consumer Financial Protection Bureau is at its heart and in theory intended to protect consumers from unfair financial services practices. Sounds great, right? Well, in 2012, the watchdog set its sights on debt collection, which should give pause to property management firms.
That occasionally a resident will fail to pay rent in a timely manner is a fact of life in residential property management, and in some cases, those residents' failures to pay will lead to the eviction/collections process.
Unlike most business disputes, however, owner-resident cases often involve a number of remedies; to wit: Regaining possession of the apartment, recovering unpaid rent and recouping the expense incurred from property damage. Regardless of circumstances and geography, the immediate concern in such situations is to regain possession of the apartment and return it to an income-producing asset with new residents.
Lawsuits are filed. Property managers accumulate eviction orders as well as money judgments, because, generally, the rent is paid or it is not. The judgments may be awards for unpaid rent, attorney's fees, costs related to the adjudication of the case (filing fees and service costs), as well as damage to the apartment.
Even with judgments in hand, there are certainly instances where attempts to collect consumer debt are initially unsuccessful. Whether the attempts are made in-house, or are referred to a debt-collection agency, one fact remains the same: Consumer debt collection is a regulated business where missteps can expose the creditor (Read: The property management firm) to lawsuits and significant financial exposure.
But First, An Example
For those not well versed in the evictions and collections process, consider the following scenario:
A resident in your community falls behind on his rent. The property manager refers the matter to a local attorney who asks, "Do you want a money judgment as well as an eviction?" The property manager says, "Yes," so he can maximize the recovery and minimize lost revenue.
Prior to court, the property manager enters the apartment and determines that a window requires replacing, the carpet needs to be cleaned and several walls need repair and repainting. The sum of the repairs is $400.
The attorney appears in court on the designated day. The resident does not. The attorney obtains an eviction order allowing the property manager to lease the apartment and a money judgment for rent past due ($1,000), as well as court costs ($50) and repair costs ($400). The judge reduces the claim for $500 in attorney fees to $100.
The property manager offsets the resident's security deposit ($750) against the cost of repairs, leaving $350 to be applied to the outstanding debt. The property manager applies the $350 to the judgment amount, forgetting that the $400 had already been applied for the repairs.
The property manager then submits that information to the administrative office of the property management company. The internal collections division contacts the attorney for a copy of the judgment and is provided a copy of the original filing, but not the judgment order. The company concludes that the resident owes $1,950, unaware that the judge reduced the amount of the awarded fee (including reducing attorney fees from $500 to $100), or that the security deposit had been applied to a portion of the judgment.
The internal collection effort is unsuccessful so, 90 days later, the company refers the resident's account to a collection agency and provides information about him to a credit bureau. The property manager neglects to communicate this development to the attorney, to whom he continues to refer eviction/collection cases.
Months pass, and the collection agency locates the resident at his new address and obtains the phone number. The agents begin calling the resident demanding he pay $1,950 plus accrued post-judgment interest. The resident then calls a relative (a know-it-all sister who is in law school), who informs him that the collections agency has violated the Fair Debt Collections Act and he might be in a position to recover a judgment against the collections agency as opposed to having to pay one.
"The Fair Debt Collection Practices Act generically prohibits deceptive collection practices," says Anita Tolani, Esq., Managing Partner at the firm Weinberg, Jacobs & Tolani in Bethesda, Md. "When collection notices do not provide proper breakdown of judgment and post-judgment charges, an argument may be made that we have a FDCPA violation, and may also be a state violation and Fair Credit Reporting Act violation."
Imagine for a moment a manila folder containing every piece of evidence proving each of the claims in the above scenario. In an ideal world, an effective document management system would allow you to retrieve each element of proof in each case (Spoiler alert: More on this later). In the real world, case files are often incomplete and may consist of a one-page photocopy of the court order awarding the judgment.
Taking Up A Collection
One-and-a-half billion dollars. That's "billion" with a "B." It's the total amount of settlements recently reached with just three major financial services corporations by the Consumer Financial Protection Bureau (CFPB): $540 million against SunTrust Mortgage Inc. for mortgage servicing misdeeds; $727 million against Bank of America for deceptive marketing of credit card services; and $309 million against JP Morgan Chase Bank to settle similar charges.
On its surface, the CFPB, a government agency created in the wake of the financial meltdown of 2007-2008 through the Dodd-Frank Wall Street Reform and Consumer Protection Act, likely doesn't immediately strike many in the multifamily housing industry as a cause for concern. That, however, could prove a costly misperception.
The CFPB is now the second government agency to focus on the enforcement of violations of the Fair Credit Reporting Act and Fair Debt Collection Practices Act, both formerly under the purview of the Federal Trade Commission (FTC). Now, both agencies have oversight and interest in the regulation of debt collection.
Significantly, both the Fair Credit Reporting Act and the Fair Debt Collections Reporting Act provide for civil remedies against the debt collectors by the debtors who have been injured by collection practices. This opportunity has not been lost by segments of the plaintiffs' bar, which have filed numerous lawsuits against debt collectors in federal courts. There were 3,215 lawsuits filed for violations of the Fair Debt Collections Practices Act in 2005; in 2011, there were 11,811, and that number continues to rise.
"The FDCPA and FCRA have a statutory violation of $1,000 per violation," Tolani says. "Many states have mirroring laws that are also $1,000 per violation (Texas, California and Florida, being examples). Also, under federal law, the collection agency would be responsible for the consumer's attorneys fees. Depending on the case, those may add up.
"If we have a collection practice by a collection agency that violates the FDCPA and/or FCRA we could also be looking at a class-action claim. Those are fairly common in our industry," she says.
In November 2013, the CFPB issue its advance notice of a Proposed Rulemaking seeking comment, data and information about debt collection practices. The 114-page document reflects CFPB's interests in how additional regulation might "help both consumers and the industry."
In this effort, CFPB is collecting extensive data from a variety of sources that will be used to support whatever rules it deems necessary to support it mission, both for "original creditors" (first-party debt collectors) and the collection firms or law firms that specialize in the collection of defaulted debt (third-party debt collectors). CFPB has the authority to "prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service are fully, accurately and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits and risk associated with the product or service in light of the facts and circumstances. "(Section 1032 (a) of the Dodd-Frank Act).
This is the door through which the CFPB will walk through to seek to regulate debt collection against rental housing management firms. (Note how "debtors" have become "consumers."). Incomplete case files are no longer going to cut it (not that they ever did) in the regulatory climate in which the rental housing industry finds itself. It also is why it is of the utmost importance to have an unassailable system in place that keeps the property manager, his or her company and any third-party agencies in the loop and on the same page.
It bears repeating: Not only are property management firms at risk of losing collections' cases to delinquent residents, they and their third-party debt collection service providers are also in jeopardy of running afoul of government bodies intent on aggressively pursuing these types of perceived consumer injustices.
"The CFPB has broad, sweeping authority over our industry, and we have only seen the beginning of their supervisory authority against the debt collection industry," says Tolani. "The first step is for collectors and creditors to work together to ensure data integrity, particularly in the housing space. This includes accurate information related to the account breakdown, including judgment amounts allowed and disallowed during the eviction process."
Strategic Response
Denise Beihoffer, First Vice President-Legal at Equity Residential, is well aware of the dilemma confronting community managers who ask lawyers to represent the company in eviction proceedings, as well as obtaining money judgments, and the disconnect that can occur when the results of a money judgment are not accurately communicated to the collection agency. While admitting that restricting the lawyers to possessory actions only may seem a bit short-sighted, Equity Residential (the first apartment company to join the S&P 500 and one of the largest multifamily housing owners and managers in the country) often instructs its community managers to not have eviction counsel pursue money judgments, but, rather, to allow collection specialists to pursue the former residents for outstanding balances.
Equity's community managers make the initial collection effort, as they have the existing relationship with the residents. According to Beihoffer, the accounts are typically turned over to the collection agency within 45 days.
AvalonBay, an equity REIT that also is one of the largest owner/operators in the U.S., adopted a different approach several years ago. Its Customer Care Center in Virginia Beach oversees a centralized process for its more than 200 communities. According to Allen Soles, Senior Director of Customer Support Operations, their specialists manage every step of the process electronically. Everything from working out individual payment plans with debtors to the supervision of attorneys and debt collection agencies is recorded and documented.
The net result has been an effective loss-mitigation program. Soles stressed that AvalonBay sets performance goals and is vigilant about monitoring their process noting that you should "inspect what you expect" as a means of hitting those goals.
"Creditors are responsible for providing accurate, substantiated charges to their third-party collection agencies," says Carol Bloom, Executive Vice President of Fair Collections & Outsourcing, Inc., in Beltsville, Md. "The regulatory environment under the Consumer Financial Protection Bureau demands that the 'least-sophisticated consumer' is provided clear, accurate documentation of the assigned amounts.
"When a consumer disputes a collection account, during and after the 'validation period,' the inability of a creditor to clearly substantiate the charges may lead to an expensive, time-consuming lawsuit or threat of suit. When it comes to obtaining money judgments prior to eviction, clients should rely on their eviction attorneys to provide accurate information back to their multifamily clients. It's then up to the creditor to ensure that only the allowable charges and correct responsible parties are forwarded to their collection providers. Simply put, accurate data up-front is the best defense to help avoid and reduce risk," she says.
Grand Centralization
It's said that baseball is America's national pastime. Based on the following evidence, one might convincingly argue it's actually complaining.
The first recorded complaints to the CFPB related to debt collection practices appeared in July 2013. From then until April 1, CFPB received 59,403 complaints-9,454 so far in 2015 alone (The CFPB publishes complaint data at www.consumerfinance.gov/complaintdatabase). The issues range from communication tactics to taking/threatening an illegal action, but two things remain consistent: Consumers have no qualms about informing their government they've been victimized (whether the transgression is real or perceived), and the CFPB is ultra vigilant in its pursuit of curbing what it considers to be unlawful and unethical debt collection practices.
To further reinforce the underlying issue wrapped up in the above data, in the article, "Keep An Eye on the Consumer Financial Protection Bureau," Mark Di Vincenzo of the National Association for Multifamily Law describes the incredible increase in human resources at the agency: "The CFPB is only four years old, but it's growing rapidly-from 663 employees in fiscal year 2011 to 1,443 in fiscal year 2014." To further underscore the growth, he states that the FTC, which has been in operation since 1914 and does "pretty much the same thing as the CFPB," has approximately 400 fewer employees.
"The CFPB, the FTC, states attorneys general and consumer advocacy groups are playing a game of one-upmanship to see who can execute the most enforcement actions against companies who deal with consumers," says Angi Pusateri, NALP, CAS, Vice President of Sales for RentDebt Automated Collections, LLC. "The vehicles enforcement bodies use are the FDCPA, FCRA, TCPA, GLBA, state and local laws, rules and regulations and, more alarmingly, UDAAP. Often, third-party collection vendors and I fear in the near future, property management companies are at the center of those enforcement actions.
"The enforcement and rule-making bodies-the CFPB in particular-are increasing their involvement on how consumer debt is recovered, not only by third-party collection agencies but by original creditors as well, holding not only the agencies responsible for their actions, but also those who hire them as well. Agencies should be more compelled to ask for current and accurate documentation from their clients concerning critical resident data in order to comply with the requirements to pursue a debt," she says.
The bottom line: More complaints, increased resources and a stated goal by a government watchdog to aggressively pursue offenders of the laws it exists to protect leaves multifamily housing management firms exposed to the kind of unwanted attention that stems from maintaining incomplete case files and leaving key stakeholders without critical information pertaining to the collection of debt.
"As the programmer of Jenark Business systems and CTO of Sawyer Realty Holdings, I saw first-hand how important it is to centralize all of the information regarding the delinquent accounts to ensure that payoff orders, applicable laws and collection practices are followed," says Mike Flynn, Chief Information Officer at the National Apartment Association. "Otherwise, the entire debt could be in jeopardy of being subverted or dismissed."
Whether through personal experience or conventional wisdom, it's widely understood that your relatives are typically wrong about everything. Not so in the hypothetical case outlined above-the relative of the delinquent resident is spot on when it comes to offending the sensibilities of the CFPB. You might even say that resident owes a debt of gratitude.
"There are many facets to how federal, state and local governments regulate the debt recovery process by collection agencies," says Pusateri. "The understanding of debt regulation should not be overlooked by our industry but should in fact be incorporated into the legal training of your management team."
So consider this a warning, although shots have already been fired across the bow. Evaluate your policies and procedures today, and shield yourself from running afoul of the CFPB, a regulator that is clearly intent on taking aim at our industry.
Frank Mauck is Senior Manager of Communications for NAA. He can be reached at 703-797-0647 or [email protected].
Eviction-Collections: Unfortunate Scenario
Following is a common scenario for a community that evicts a resident and then attempts to collect money owed from that resident. By maintaining clear and consistent communication with all parties involved, an apartment community can avoid a resident's lawsuit claiming violation of the Fair Debt Collections Act.
Property Manager requests a lawyer to file for eviction and a money judgment on a resident.
Property Manager enters apartment and determines $400 is needed in repairs.
The lawyer files for the case, seeking eviction, past rent due ($1,000), repair costs ($400), attorney's fees ($500) and court costs ($50). At the hearing, court grants eviction, allowing the property manager to lease the apartment. Court also awards a money judgment for rent and apartment repairs ($1,400); court costs ($50) and attorney fees in reduced amount of $100.
The attorney reports this result to the Property Manager.
The Property Manager had paid the $400 repair bill, using the resident's $750 security deposit.
Property Manager applies the remainder of the security deposit ($350) to the judgment amount, leaving a net amount owed of $1,200, forgetting that $400 had already been applied for repairs. Property manager submits that information to the property management company.
The company's internal collections division contacts the attorney for a copy of the judgment and is provided a copy of the original filing, but not the judgment order. The company concludes that the resident owes $1,950, unaware that the judge reduced the amount of the attorney's fees or that the security deposit had been applied to a portion of the judgment.
The internal collection effort is unsuccessful so, 90 days later, the company refers the resident's account to a collection agency and provides information about him to a credit bureau.
The property manager neglects to inform this update to the attorney, to whom he continues to refer eviction/collection cases.
Months later, the collection agency locates the resident at his new address and obtains the phone number. The agents call the resident demanding he pay $1,950 plus accrued post-judgment interest. The resident then sues the collections company and the apartment company for violation of the Fair Debt Collections Act.