On July 16, the New York DFS re-proposed a rule to regulate third-party debt collection. The revised proposal: (i) describes disclosures debt collectors must provide to consumers when the debt collector initially communicates with a consumer, and additional disclosures that must be provided when the debt collector is communicating with a consumer regarding a charged-off debt; (ii) requires debt collectors to disclose to consumers when the statute of limitations on a debt has expired; (iii) outlines a process for consumers to request additional documentation proving the validity of the charged-off debt and the debt collector’s right to collect the charged-off debt; (iv) requires debt collectors to provide consumers written confirmation of debt settlement agreements and regular accounting of the debt while the consumer is paying off a debt pursuant to a settlement agreement; (v) requires debt collectors to provide consumers with disclosures of certain rights when settling a debt; and (vi) allows debt collectors to correspond with consumers by electronic mail in certain circumstances. The DFS states that although comments on its initial proposal were “generally supportive,” the revised proposal responds to comments on how the rules could better correspond to the structure of the collection industry, and seeks to clarify the meaning of certain provisions. Comments on the revised proposal are due by August 15, 2014.
On July 14, the CFPB sued a Georgia-based law firm and its three principal partners for allegedly using high-volume litigation tactics to collect millions of dollars from consumers who may not actually have owed the debts or may not have owed the debts in the amounts claimed. The suit relates to the firm’s attempts to collect, directly or indirectly, consumer credit-card debts on behalf of both credit-card issuers and debt buyers that purchase portfolios of defaulted credit-card debts. The CFPB alleges the defendants violated the FDCPA and engaged in unfair and deceptive practices by: (i) serving consumers with deceptive court filings generated by automated processes and the work of non-attorney staff, without any meaningful involvement of attorneys; and (ii) introducing faulty or unsubstantiated evidence through sworn statements even though some signers could not have known the details they were attesting to. The CFPB is seeking to permanently enjoin the firm from engaging in the alleged activity, restitution to borrowers, disgorgement, civil money penalties, and damages and other monetary relief.
On July 15, the Department of Education’s Office of Inspector General (OIG) published a report on its audit of the Department’s Federal Student Aid (FSA) office, which revealed that the FSA has failed to effectively: (i) monitor borrower complaints against private collection agencies (PCAs) and ensure that corrective action is taken; (ii) ensure PCAs are abiding by federal debt collection laws and the related terms of their contracts; and (iii) consider borrower complaints in its evaluation and compensation of PCAs. The audit covered the period October 1, 2009, through September 30, 2012. The OIG recommended that FSA, among other things, (i) enforce the contract requirement that PCAs submit all complaints to FSA and establish procedures that include ensuring PCAs take corrective action; and (ii) require relevant staff to monitor, review, and evaluate the PCA deliverables and reconcile the management/fiscal reports with recorded complaints. The FSA concurred with the findings and most of the recommendations and stated that it has taken a number of steps over the past two years to strengthen its PCA oversight efforts. The FSA further stated that it has planned additional improvements that will further enhance its ability to effectively oversee PCA’s interactions with defaulted borrowers.
This afternoon, the CFPB announced that a nonbank consumer lender will pay $10 million to resolve allegations that it engaged in certain unfair, deceptive, and abusive practices in the collection of payday loans. This action comes exactly one year after the CFPB issued guidance that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA. Read more…
Michigan Supreme Court Holds Forwarding Companies Are Collection Agencies Subject To Licensing Rules
On June 13, the Michigan Supreme Court held that forwarding companies are collection agencies under state law and are subject to state licensing requirements. Badeen v. Par, Inc., No. 147150, 2014 WL 2686068 (Mich. Jun. 13, 2014). In this case, a state-licensed debt collection agency and an individual state-licensed collection agency manager filed a putative class action against a group of forwarding companies—companies that contract with creditors to allocate a collection to a collection agent in the appropriate location but do not contact the debtors themselves—alleging the companies are actually collection agencies and were operating in the state without first obtaining a collection agency license. The court explained that under state law, a collection agency is “a person directly or indirectly engaged in soliciting a claim for collection or collecting or attempting to collect a claim owed or due another or repossessing or attempting to repossess a thing of value owed or due another arising out of an expressed or implied agreement.” The court determined that under the plain meaning of the statute, the phrase “soliciting a claim for collection” means asking a creditor for any unpaid debts that the collection agency may pursue by allocating them to local collection agents, which the forwarding companies did by contracting with creditors. The court rejected the forwarding companies’ argument that they do not satisfy the definition because soliciting a claim for collection refers only to asking the debtor to pay his or her debt, which the forwarding companies did not do. The court determined it need not reach the issue of whether the forwarding companies indirectly collect or attempt to collect debts when they contract with a local collection agency. The court remanded for trial court consideration a separate issue of whether the forwarding companies satisfy a statutory exception to the licensing requirements applicable to collection agencies whose collection activities in the state are limited to interstate communications.
Effective October 1, 2014, third-party debt collectors seeking to collect debt in Florida will be subject to new requirements. Pursuant to HB 413, which Florida Governor Rick Scott signed on June 13, consumer collection agencies will be subject to disqualifying periods from registration based on the severity and recency of criminal convictions of certain “control persons” of those agencies. Control persons is defined as any individual, partnership, corporation, trust, or other organization that possesses the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. The bill also grants the Office of Financial Regulation authority to examine and investigate consumer collection agencies, and establishes new reporting requirements for registrants.
On May 30, the West Virginia Supreme Court of Appeals affirmed a series of trial court orders requiring a nonbank consumer finance company to pay $14 million in penalties and restitution for allegedly violating the state’s usury and debt collection laws. CashCall, Inc. v. Morrisey, No. 12-1274, 2014 WL 2404300 (W. Va. May 30, 2014). On appeal, the finance company contended, among other things, that the trial court erred in applying the “predominant economic interest” test to determine whether the finance company or the bank that funded the loans was the “true lender.” The trial court held that the finance company was the de facto lender and was therefore liable for violating the state’s usury and other laws because: (i) the agreement placed the entire monetary burden and risk of the loan program the finance company; (ii) the company paid the bank more for each loan than the amount actually financed by the bank; (iii) the finance company’s owner personally guaranteed the company’s obligations to the bank; (iv) the company had to indemnify the bank; (v) the finance company was contractually obligated to purchase the loans originated and funded by the bank only if the finance company’s underwriting guidelines were employed; and (vi) for financial reporting, the finance company treated such loans as if they were funded by the company. The court affirmed the trial court holding and rejected the finance company’s argument that the trial court should have applied the “federal law test” established by the Fourth Circuit in Discover Bank v. Vaden, 489 F3d 594 (4th Cir. 2007). In Discover Bank the Fourth Circuit held that the true lender is (i) the entity in charge of setting the terms and conditions of a loan and (ii) the entity who actually extended the credit. In support of the trial court ruling, the court explained that the “federal law test” addresses “only the superficial appearance” of the finance company’s business model. Further, the court stated that the Fourth Circuit test was established in a case where the non-bank entity was a corporate affiliate of the bank, which was not the case here, and added that if the court were to apply the federal law test, it would “always find that a rent-a-bank was the true lender of loans” like those at issue in this case.
Updated CFPB Rulemaking Agenda Adds Auto Finance Larger Participant Rule, Updates Timelines For Other Rules
The CFPB recently released its latest rulemaking agenda, which lists for the first time a larger participant rule that would define the size of nonbank auto finance companies subject to the CFPB’s supervisory authority. The CFPB anticipates proposing a rule no sooner than August 2014. Stakeholders will have an opportunity to comment, and a final rule likely would not be issued until sometime in 2015. The CFPB anticipates finalizing its rule for larger participants in the international money transfer market in September 2014. In addition, the agenda pushes back the timeline for the anticipated prepaid card proposed rule from May 2014 to June 2014. The CFPB has been testing potential prepaid card disclosures.
The agenda does not provide timelines for proposed rules related to payday lending, debt collection, or overdraft products, but the CFPB states that additional prerule activities for each of those topics will continue through September 2014, December 2014, and February 2015, respectively. The CFPB substantially extended the timeline for overdraft products; it previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could include conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.
The agenda does not include a rulemaking implementing the small business fair lending data reporting requirements in the Dodd-Frank Act, though the CFPB previously has indicated it could consider those issues in connection with its HMDA rulemaking. Prerule activities related to the HMDA rule are ongoing.
On May 22, the CFPB published its Spring 2014 Supervisory Highlights report, its fourth such report to date. In addition to reviewing recent guidance, rulemakings, and public enforcement actions, the report states that the CFPB’s nonpublic supervisory actions related to deposit products, consumer reporting, credit cards, and mortgage origination and servicing have yielded more than $70 million in remediation to over 775,000 consumers. The report also reiterates CFPB supervisory guidance with regard to oversight of third-party service providers and implementation of compliance management systems (CMS) to mitigate risk.
The report specifically highlights fair lending aspects of CMS, based on CFPB examiners’ observations that “financial institutions lack adequate policies and procedures for managing the fair lending risk that may arise when a lender makes exceptions to its established credit standards.” The CFPB acknowledges that credit exceptions are appropriate when based on a legitimate justification. In addition to reviewing fair lending aspects of CMS, the CFPB states lenders should also maintain adequate documentation and oversight to avoid increasing fair lending risk.
Nonbank Supervisory Findings
The majority of the report summarizes supervisory findings at nonbanks, particularly with regard to consumer reporting, debt collection, and short-term, small-dollar lending: Read more…
On May 8, New York Attorney General (AG) Eric Schneiderman announced that two debt buyers agreed to resolve allegations that they engaged in improper collection of untimely debt against New York consumers. The AG claims that the companies purchased unpaid consumer debt—largely credit card debt—from original creditors and then sought to collect on that debt by suing debtors and obtaining uncontested default judgments against those who failed to respond to lawsuits, even though the underlying claims were outside of the applicable statute of limitations. The applicable statute of limitations is determined based on the state of the original creditor’s residence and may be shorter than New York’s six-year statute of limitations. According to the AG, obtaining or collecting on a judgment based on such untimely claims is unlawful under New York law. Together, the companies allegedly obtained nearly three thousand improper judgments, totaling approximately $16 million. The companies will pay civil penalties and costs of $300,000 and $175,000 and agreed to vacate the allegedly improper judgments and cease any further collection activities on the judgments. The companies also agreed to adjust their debt collection practices by (i) disclosing in any written or oral communication with a consumer about a time-barred debt that the company will not sue to collect on the debt; (ii) disclosing in any written or oral communication with a consumer about a debt that is outside the date for reporting the debt provided for by FCRA that, because of the age of the debt, the company will not report the debt to any credit reporting agency; (iii) alleging certain information relevant to the statute of limitations in any debt collection complaint, “including the name of the original creditor of the debt, the complete chain of title of the debt, and the date of the consumer’s last payment on the debt”; and (iv) submitting an affidavit with any application for a default judgment that “attests that after reasonable inquiry, the company or its counsel has reason to believe that the applicable statute of limitations has not expired.”
On April 30, the New York State Department of Financial Services (DFS) again expanded the scope of its activities targeting online payday lenders by announcing that two major debit card network operators agreed to halt the processing of payday loan deductions from bank accounts owned by New York consumers who allegedly obtained illegal online payday loans. The DFS asserts that in response to increased regulatory pressure on online lenders’ use of the ACH network—known as Operation Choke Point—those lenders are using debit card transactions to collect on payday loans originated online to New York residents. The DFS believes such loans violate the state’s usury laws. The DFS also sent cease-and-desist letters to 20 companies it believes are “illegally promoting, making, or collecting on payday loans to New York consumers.” The DFS’s assault on online lenders publicly began in February 2013 when it warned third-party debt collectors about collecting on allegedly illegal payday loans, and was first expanded in August 2013 when the DFS sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. At the same time, the DFS asked banks and NACHA to limit such lenders’ access to the payment system. DFS subsequently expanded its effort in December 2013 when it began targeting payday loan lead generation companies.
On April 30, the New York Unified Court System proposed new rules for consumer credit collection cases. If adopted, the rules would (i) require creditors to submit affidavits based on personal knowledge that meet the substantive and evidentiary standards for entry of default judgments under state law; (ii) expand to all state courts an existing requirement applicable to cases in New York City courts that an additional notice of a consumer credit action be mailed to debtors; and (iii) provide unrepresented debtors with additional resources and assistance. The proposal attaches copies of the potential affidavits, which the court system states are necessary to address so-called “robosigning.” Last October, New York State Department of Financial Services Superintendent Benjamin Lawsky urged these and other changes as part of the court’s initial public comment period. Comments on the proposal are due May 30, 2014.
On April 25, the California Court of Appeal, First District, held that California’s usury law does not prohibit a judgment creditor from accepting a forbearance fee to delay collecting on a judgment. Bisno v. Kahn, No. A133537, 2014 WL 1647660 (Cal. Ct. App. Apr. 25, 2014). In consolidated cases, the judgment creditors agreed to delay executing on their judgments in exchange for the payment of forbearance fees in addition to statutory post-judgment interest on the unpaid balance of the judgments. The judgment debtors subsequently claimed the forbearance fees are usurious and sought treble damages against the creditors. The court held that because the state’s usury law does not expressly prohibit a party from entering into an agreement to forbear collecting on a judgment, usury liability does not extend to judgment creditors who receive remuneration beyond the statutory interest rate in exchange for a delay in enforcing a judgment. The court added that a forbearance agreement is a contract between the judgment creditor and the judgment debtor that is separate from the judgment to which it applies, and therefore must be enforced in a separate contract action and is subject to standard contractual defenses such as duress and unconscionability.
FTC Settles Suit Against Tribe-Affiliated Lenders; Dispute Over CFPB Investigation Of Tribe-Affiliated Lenders Moves To Federal Court
On April 11, the FTC announced that a tribe-affiliated payday lending operation and its owner agreed to pay nearly $1 million to resolve allegations that they engaged in unfair and deceptive acts or practices and violated the Credit Practices Rule in the collection of payday loans. The FTC alleged that the lenders illegally tried to garnish borrowers’ wages and sought to force borrowers to travel to South Dakota to appear before a tribal court, and that the loan contracts issued by the lenders illegally stated that they are subject solely to the jurisdiction of the Cheyenne River Sioux Tribe. The announced settlement payment includes a $550,000 civil penalty and a court order to disgorge $417,740. The companies and their owner also are prohibited from further unfair and deceptive practices and are barred from suing any consumer in the course of collecting a debt, except for bringing a counter suit to defend against a suit brought by a consumer.
Also on April 11, in a separate matter related to federal authority over tribe-affiliated lending, a group of tribe-affiliated lenders responded in opposition to a recent CFPB petition to enforce civil investigative demands (CIDs) the Bureau issued to the lenders. In September 2013, the CFPB denied the lenders’ joint petition to set aside the CIDs, rejecting the lenders’ primary argument that the CFPB lacks authority over businesses chartered under the sovereign authority of federally recognized Indian Tribes. The lenders subsequently refused to respond to the CIDs, which the CFPB now asks the court to enforce. The CFPB argues that the lenders fall within the CFPB’s investigative authority under the terms of the Consumer Financial Protection Act, which the CFPB argues is a law of general applicability, including with regard to Indian Tribes and their property interests. The lenders continue to assert that they are sovereign entities operating beyond the CFPB’s reach.
On March 18, the Hawaii Department of Commerce and Consumer Affairs published a notice advising collection agencies that due to changes in state licensing laws in Indiana, Nevada, and North Dakota, those states no longer qualify as “reciprocal states” such that licensure in those states can be used to obtain or renew a Hawaii collection agency designation. Hawaii law allows an out-of-state collection agency to obtain a state collection agency designation by demonstrating the company is licensed under the laws of a state (i) whose requirements to be licensed, permitted, or registered as a collection agency are substantially similar to Hawaii’s requirements; and (ii) that allows similar reciprocal arrangements for Hawaii-licensed agencies. The Department advises that any agency currently using one of the three states identified as the basis for its Hawaii collection agency designation must identify a new reciprocal state on its renewal application. Colorado, Illinois, Michigan, Minnesota, Nebraska, New Mexico, and Wisconsin are identified by the Department as states that meet its definition of a reciprocal state. Because the renewal constitutes a change to the current information on file, the Department will not accept an “online” license verification in lieu of a completed original “Verification of License” form.