In October, the Consumer Financial Protection Bureau issued its much-anticipated final Payday Rule. The Payday Rule, designed by the CFPB to end socalled “payday debt traps,” can be broadly divided into two sets of requirements:

1. Lenders must make an ability to repay determination and comply with related credit reporting obligations before making certain covered loans; and

2. Lenders must comply with limitations and disclosure requirements in connection with processing payments on covered loans.

The final Payday Rule regulates three different types of “Covered Loans”:

1. Short-Term Loans: closed or openend loans where the consumer is required to pay within 45 days;

2. Longer-Term Balloon Loans: closed- or open-end loans where the consumer has longer than 45 days to pay, and either the loan must be repaid in a single payment, or has a “balloon payment” (e.g. at least one payment owed is more than twice as large as any other payment); and

3. Covered Longer-Term Loans: closed or open-end loans longer than 45 days, where the APR during any term of the loan exceeds 36% (as defined by Regulation Z) and the creditor obtains a “leveraged payment mechanism.” “Leveraged payment mechanism” is defined as the right to initiate a payment transfer, through any means, from a consumer’s account, either on a single occasion or on a recurring basis. This could include checks that are not deposited immediately by the lender or an electronic fund transfer authorization for a future date.

The ability to repay requirements and related credit reporting obligations apply only to the first two types of Covered Loans – short-term loans and longer-term balloon loans. The payment requirements apply to all three types of Covered Loans – short-term loans, longer-term balloon loans, and covered longer-term loans.

The Rule requires any lender making a short-term loan or a longer-term balloon loan to first determine that the consumer has the ability to repay the loan, while still meeting their basic living expenses during the term of the loan. A lender making these types of loans must also comply with a number of special credit reporting requirements. As compared to the proposal, the final Rule provides more flexibility regarding the income and debt verification requirements by allowing the lender to rely on written statements from the borrower.

The limitations on processing payments apply to all three types of covered loans: short-term loans, longer-term balloon loans, and longer-term covered loans. In connection with these loans, a lender is prohibited from attempting to withdraw a payment from consumer’s account after two consecutive failed payments, unless the consumer provides a new payment authorization. The lender may, however, initiate a payment transfer to collect a late fee or returned check fee without obtaining a new authorization. The rule also prescribes model disclosures for lenders prior to making payment transfer attempts.

Lenders making covered loans must comply with the rule’s 36-month record retention requirement, and develop robust compliance policies and procedures related to their covered lending activity.

There are a number of exemptions from the rule, including purchase money loans, real-estate secured loans, credit cards, student loans, pawn loans, overdraft, wage advance programs and no cost advances. The rule also exempts (1) “alternative loans,” which are closed-end loans of $200 – $1,000, paid off in one to six months in two or more fully amortizing, equal payments, are exempt if the lender follows the rates and fees permitted under the National Credit Union Administration Payday Alternative Loan Program (e.g. 28% interest and a $20 application fee); (2) “principal payoff loans,” which are short-term fully amortizing loans of $500 or less, with the option of up to two loan renewals, so long as the borrower does not have a recent short-term or balloonpayment loan; and (3) “accommodation loans” where a lender makes fewer than 2,500 covered loans per year, where the income from the loans does not exceed 10% of its gross profits.

The Final Rule was published in the Federal Register on November 17. Accordingly, the compliance deadline for the provisions of the final rule concerning the ability to repay analysis and limitations on payment attempts is August 19, 2019. In case it may be helpful, the final publication in the Federal Register can be found at www.federalregister. gov/d/2017-21808/page-54472.

Catherine M. Brennan and Meghan Musselman are partners in the Hanover, Maryland office of Hudson Cook, and Kavitha Subramanian is an associate in the firm’s Washington, D.C. office.

Ms. Subramanian advises financial services clients on federal and state regulatory compliance matters. She can be reached ksubramanian@ hudco.com.

Ms. Brennan assists banks, investment banks and other licensed lenders in the development and maintenance of nationwide consumer and commercial lending programs. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Ms. Musselman advises banks and other similar creditors in the development and maintenance of consumer credit programs, compliance management systems, and vendor management programs. She can be reached at mmusselman@ hudco.com.

The struggle to stay on top of the mound of compliant collection will never cease. It is constantly shifting, often revealing formations that seem to defy reason and frequently impossible to determine its summit. A law firm must meet this challenge with courage and poise to be successful. It is for this reason that this issue’s law firm spotlight is shining on Blitt and Gaines, P.C. Collection Advisor spoke with Blitt and Gaines’ partner, Fred N. Blitt to learn about their start and what they are doing to achieve success.

How did you decide on pursuing the legal profession and the collection area of law?

I received my undergraduate degree in Accounting from the University of Illinois and wanted to pursue an advanced degree. I thought that a law degree was the best option for me as I was initially pursuing a career as a tax and corporate attorney. As for collections, I don’t think anyone really pursues debt collections going into law school. I had a great deal of experience in the area of debt collections as my family had a furniture store that extended credit on the south side of Chicago. I grew up working for that business through law school. I sold furniture; delivered furniture; made collection calls for late payments and actually picked up payments from our customers. Now my dad is retired and opens the mail at my office every day.

When and how did Blitt & Gaines open its doors?

I first worked in public accounting after law school then spent another year as corporate counsel for a large international advertising agency. I always wanted to own my own business, so I simply quit a good situation and asked a friend if I could share office space with him almost 23 years ago. This office was located on the north side of Chicago near Wrigley Field; and believe it or not was above a funeral home! I was doing general practice work like wills, real estate closings and tax returns. I was also doing debt collection work for my family’s furniture store. I began doing more and more collection work for local banks and finance companies. My sister Jan Gaines joined my little firm above the funeral home after a few years. At that point, the vast majority of the work we handled was debt collections. We moved to nicer office space in downtown Chicago and continued to expand. Now we are located in suburban Chicago and have over 100 employees.

How does technology assist you in processing legal cases for collections?

Technology is a huge component of our legal debt collection law practice. In its simplest form, it allows us to accurately monitor our cases. In today’s environment, technology is a huge part of our dedication to compliance. For example, technology is used to monitor collector phone calls for adherence to policies and procedures and training. It is also used to ensure steps are taken to properly review files. A big example of that would be using technology to determine if a consumer/defendant was in the military.

What is the most significant legal mistake agencies new to collections make?

I am confident law firms new to this area of law would underestimate the resources needed for proper compliance.

What are some things your leadership team does to keep your collectors driven and happy?

We are a big believer in the saying that “attitude reflects leadership”! Our management team has a great attitude and we work diligently to infect our collectors with that attitude. For our firm, good collectors are not only those collectors who collect the most money. Compliance is equally important. We regularly evaluate our collectors on their performance and provide them with feedback. The goal is not to “beat up” the collectors for what they did wrong; rather; to “coach up” the collectors in a way to improve performance.

What are the most dangerous pitfalls in legal collections and skip tracing and how do you avoid them?

The most dangerous pitfall today in legal debt collections is making sure your staff is well trained and understands the importance of compliance. Bottom line, if you cannot follow policies and procedures, you cannot work here!

Have you been required to adapt your legal practice due to the growing prominence of the CFPB? How?

Absolutely. Our practice has changed significantly over the past few years due to the regulatory environment. We have staff that is devoted to areas of compliance such as call monitoring, complaint monitoring, and policies and procedures.

What should agencies be doing to prepare for the 2014 collection year in terms of litigation to collect debt?

Debt collection law firms need to continue to work diligently to be able to adhere to enhanced compliance standards. This commitment can be quite costly. In my opinion, the leaders of debt collection law firms need to be aware that their law firm is still a small business. It is imperative that they allocate the resources necessary to comply with client and regulatory policies while finding ways to maintain profitability. That means law firm leadership needs to embrace changes to staff and technology to help the firm in the future.

What do you do with your free time?

The majority of my office is comprised of Chicago Bears fans. We have tailgated at Bears games for years. The tailgates have gotten larger and larger over the years (think 75 people) and so has our tailgate truck. I own a 10-seat tailgate truck that seats 10 people plus all the tailgate supplies. It has a huge sound system with indoor and outdoor TVs. The tailgates are a meeting place for many employees, friends, business associates, clients and local politicians. The menu is also very diverse as we serve items like lamb chops cooked on our trash can grill, jambalaya, and jalapeno cheddar brats.

The CFPB announced seven new appointees to their Consumer Advisory Board. One of those appointed to this three-year position is Joann Needleman, Vice President of Maurice & Needleman, P.C. and past president of NARCA. Needleman has extensive litigation experience in state and federal courts and has successfully defended creditors against claims brought under the Fair Debt Collection Practices Act and Fair Credit Reporting Act.

Needleman is a third generation attorney. Her grandfather was a criminal attorney and her Father was a civil attorney.

“I started practice with my father,” Needleman said. “One of my first cases was a commercial collection case; then moved over to the consumer side. The commercial side was not as busy at the time. I got involved in NARCA in 1995. I met my partner there. FDCPA and defense litigation is now most of the practice. I developed advocacy initiative at NARCA and have been on the board since 2006.”

Needleman voiced her concern over the controversial case of CFPB v. Frederick J. Hanna & Associates, P.C. She stated that NARCA is not representing Hanna but is concerned about the action against Hanna. She further commented saying NARCA would be concerned if any agency under the executive branch of the government began determining how attorneys can practice law because attorneys are governed by their State Bar.

“The States determine how we practice law. Our clients also dictate how we discharge our duties in the best interest of our clients,” Needleman said.

“There is a general concern when a federal level agency says, ‘we don’t like the way you practice law.’ From the attorney’s perspective we occupy a unique space; we have always felt that the FDCPA does not especially apply because the States determine how litigation takes place. In 1977 attorneys were exempt from FDCPA. In 1986 they were put back in. Consumers did not insist but different collection groups felt that it was an unfair advantage. Anything pre-collection, the FDCPA does apply. But at litigation the FDCPA must stop at the courthouse door.”

As of December 2014, two bills in Congress will exempt lawyers from FDCPA. One being H.R. 2892, which most recently was referred to the House Committee on Financial Services in July 2013. The other is S.2328, which was read twice and referred to the Committee on Banking, Housing and Urban Affairs.

“We have had bi-partisan support in both houses,” said Needleman. “They should be re-introduced next session. Many Congressmen are lawyers so they understand the situation.”

Another item that has collection professionals concerned is being examined by the CFPB. Needleman had some comments about how to prepare for an exam should one arise.

“The problem in preparing for a CFPB exam is there are no rules,” Needleman said. “The CFPB said they were going to look at unfair deceptive practices (UDAPs), which is very subjective. The best way to prepare is to look at the exam modules to find out what they will be looking for; that would be a good template. The question is what are the laws in your jurisdiction? If you are nationwide you have wider exposure. You should also look at the CFPB quarterly supervisory highlights to determine what is of great concern to them. Make sure your Complaint Management System (CMS) has board oversight, training and vendor control, and complaint documentation and resolution. Outside audits would be helpful. Make sure your staff and vendors are trained and are complying with consumer protection law.”

“Several companies provide documentation services and the CFPB wants to ensure compliance with consumer protection laws. At the end of the day, the CFPB has found some employees did not understand the FDCPA and consumer financial protection. The FDCPA had limited enforcement powers; the CFPB can now supervise non-bank entities. The FTC did not work directly with financial services. The CFPB does have this mandate.” FDCPA had no regulations and was left to States to interpret. It never addressed voice mail. The CFPB has the power to issue a civil investigation demand (CID), which is a subpoena. However, Needleman commends the CFPB for putting together 30 people to provide input on the Consumer Advisory Board. One member is a payday lender, for example. Needleman said that after one meeting it has been helpful.

“My goal is to remind them, we all work in a credit based eco-system,” Needleman said. “Collections is not an outlier. You can’t have one without the other. Mortgages and student loans exist. I keep reminding them collections is a key part; and you have to keep it moving or the system breaks down.

“For example mortgages became very difficult. Your debt to income ratio has to be higher, so certain people will have a hard time buying a home especially first time buyers. If you create huge barriers to collecting debt you affect consumer credit in the American economy.”