Last month, the Massachusetts Division of Banks (DOB) issued an advisory opinion addressing whether an oral request by a debtor for certain records to validate a debt (pursuant to 209 CMR 18.18(3)) triggers a debt collector’s obligation to provide such documents within five business days. The DOB advised that a debt collector’s receipt of an oral request for such records from a consumer (or a consumer’s attorney) is sufficient to trigger the debt collector’s obligation and may serve to commence the five business day period in which the required response must be returned to the consumer.
Fourth Circuit Holds That Debtors Are Not Required To Dispute Debt In Writing To State A Claim Under FDCPA
On August 15, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s denial of a debt collector’s motion for judgment as a matter of law because, under the FDCPA, debtors are not required to dispute debts in writing pursuant to Section 1692g in order to seek relief under Section 1692e. Russell v. Absolute Collection Services, No. 12-2357, 2014 WL 3973729 (4th Cir. Aug. 15, 2014). Within thirty days of receiving the initial debt collection letter, the debtor paid the entire amount due directly to her husband’s medical provider. However, the debt collector continued to make calls and send collection letters thereafter. During the calls, the debtor told the collector that the debt had been paid, but she never advised the collector in writing that she was disputing the debt, nor did she send proof of payment. The debt collector argued that Section 1692g debt validation procedures required the debtor to dispute the debt in writing. The court disagreed, stating that such an interpretation “would thwart the statute’s objective of curtailing abusive and deceptive collection practices and would contravene the FDCPA’s express command that debt collectors be liable for violations of ‘any provision’ of the statute.”
On August 4, the OCC issued Bulletin 2014-37, which provides new guidance on the application of consumer protection requirements and safe and sound banking practices to consumer debt-sale arrangements with third parties—e.g. debt buyers—that intend to pursue collection of the underlying obligations. The guidance goes well beyond the set of “best practices” the OCC provided last summer as an attachment to written testimony submitted to a U.S. Senate committee. For example, the new guidance establishes requirements to: (i) notify the consumer that a debt has been sold, the dollar amount of the debt transferred, and the name and address of the debt buyer; (ii) perform due diligence on the debt buyer down to the consumer complaint level; and (iii) provide the debt buyer with the signed debt contract and a detailed payment history. The bulletin also requires sale contracts to include limitations on the debt buyer’s ability to litigate on an account and “minimum-service-level agreements” that apply whether or not debt buyers conduct the collection activities or employ other collection agents. The Bulletin specifies that certain types of debt are “not appropriate for sale,” such as: (i) debt of borrowers who have sought or are seeking bankruptcy protection; (ii) accounts eligible for Servicemembers Civil Relief Act protections; (iii) accounts in disaster areas; and (iv) accounts close to the statute of limitations.
Bankruptcy Court Refuses To Dismiss Class Suit Claiming Bank’s Credit Reporting Practices Violated Bankruptcy Code
On July 22, the U.S. Bankruptcy Court for the Southern District of New York rejected a bank’s motion to dismiss a putative class action adversary proceeding alleging that certain of the bank’s credit reporting practices violated U.S. bankruptcy law. In re Haynes, No. 11-23212, 2014 WL 3608891 (S.D.N.Y. Jul. 22, 2014). The named plaintiff-debtor alleged that the bank charged off and sold his debt, which was subsequently discharged in bankruptcy, but failed to correct his credit report that listed the debt, post-discharge, as being only “charged off,” rather than being “discharged in bankruptcy.” The bank moved to dismiss for failure to state a claim, arguing that because it sold the debt pre-bankruptcy, it did not have an obligation under the FCRA or Sections 727 and 524(a) of the Bankruptcy Code to correct the debtor’s credit report. The court denied the bank’s motion on the grounds that (i) the bank continues to have an economic interest in the debt—notwithstanding its sale—because the bank continues to receive a percentage payment of the proceeds of each debt repaid to it and forwarded to the debt’s purchaser; and (ii) by failing to correct the credit reports, the bank is enhancing its purchasers’ ability to collect on the debt.
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 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 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.