On January 31, the U.S. Court of Appeals for the Fourth Circuit held that the FDCPA does not impose a requirement that debt disputes be presented in writing and permits debtors to orally dispute the validity of a debt. Clark v. Absolute Collection Serv., Inc., No. 13-1151, 2014 WL 341943 (4th Cir. Jan. 31, 2014). A debt collector moved to dismiss a suit in which the debtor sought to invalidate a debt because the debt collection notice required the debtor’s dispute to be in writing. The debtor argued the notice violated FDCPA section 1692g(a)(3), which provides the basic right to dispute a debt. The debtor also claimed that the writing requirement was a false or deceptive means of collection in violation of section 1692e(10). Considering only the first argument on appeal, the Fourth Circuit joined the Second and Ninth Circuits, but split from the Third Circuit, and held that the “FDCPA clearly defines communications between a debt collector and consumers” and section 1692g(a)(3) “plainly does not” require a written communication to dispute a debt. The court rejected the debt collector’s argument that 1692g(a)(3) imposes an inherent writing requirement.
On March 5, the FTC released a summary of its 2013 debt collection activities, which it submitted to the CFPB on February 21, 2014. The report highlights that one of the FTC’s highest priorities is to continue targeting debt collectors that engage in deceptive, unfair, or abusive conduct. In particular, the FTC is actively pursuing debt collectors that secure payments from consumers by falsely threatening litigation or otherwise falsely implying that they are involved in law enforcement. In 2013, the FTC filed or resolved seven actions alleging deceptive, unfair, or abusive debt collection conduct. The FTC also took action against the continuing rise of so-called “phantom debt collectors.” The report also summarizes the FTC’s amicus program, and education, public outreach, research, and policy activities, including its Life of a Debt Roundtable Event, which examined data integrity in debt collection and the flow of consumer data throughout the debt collection process.
Eleventh Circuit Holds Collection Fee Based On Percentage Of Principal Owed In Violation Of Contract Terms Violated FDPCA
On January 2, the U.S. Court of Appeals for the Eleventh Circuit held that a debt collector violated the FDCPA by collecting a fee based on a percentage of the principal owed when the contract allowed a fee only for the actual cost of collection. Bradley v. Franklin Collection Serv., Inc. No. 10-1537, 2014 WL 23738 (11th Cir. Jan. 2, 2014). The debtor filed suit claiming, among other things, that the collector violated FDCPA Section 1692f, which prohibits unfair or unconscionable means of collection, including “collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” when it charged a fee that was not the actual cost of collection but rather liquidated damages. The court found that the contract only obligated the debtor to pay “all costs of collection,” i.e. the actual costs of collection and not a percentage-based fee where that fee did not correlate to the costs of collection. The court explained that the collector failed to prove that the percentage-based collection fee—which the collector assessed before attempting to collect the balance due—correlates to the actual cost of its collection effort. Addressing the issue for the first time, the Eleventh Circuit held that because the fee breached the agreement that obligated the debtor to pay only the “costs of collection”, the fee violated FDCPA Section 1692f. The court did not hold that the FDPCA prohibits the use of percentage-based collection fees, provided the contracting parties agree to such an arrangement.
On November 13, the U.S. Court of Appeals for the Second Circuit held that where a creditor hires a third party to send collection letters but does not rely on the third party for any other bona fide efforts to collect the debts, the creditor can be held liable for violating the FDCPA under the statute’s false name exception to creditor immunity. Vincent v. The Money Store, No. 11-4525, 2013 WL 5989446 (2nd Cir. Nov. 13, 2013). In this case, a group of debtors filed a putative class action against a mortgage lender who purchased mortgages initially payable to other lenders and subsequently hired a law firm to send allegedly deceptive collection letters to borrowers on the lender’s behalf. Although creditors generally are not considered debt collectors subject to the FDCPA, the court determined in this case that a statutory exception to creditor immunity applied because the creditor, in the process of collecting its own debts, used a name other than its own, which typically would indicate that a third party is collecting or attempting to collect such debts. The court explained that the appropriate inquiry to determine whether a representation to a debtor indicates that a third party is collecting or attempting to collect is whether the third party is making bona fide attempts to collect the debts of the creditor or whether it is merely operating as a “conduit” for a collection process that the creditor controls. Because that inquiry requires a factual determination and because a jury could find that the law firm was acting only as a conduit for the lender, the lender could be held liable if the letters falsely indicated that the law firm was collecting the debt. The court affirmed the district court’s dismissal of the debtors’ TILA claims, holding that because the mortgage documents did not name the lender as the person to whom the debt was initially payable, the lender is not a “creditor” under TILA. However, after a review of TILA’s legislative history, the court identified for Congress an apparent oversight in TILA that “allows an assignee to escape TILA liability when it overcharges the debtor and collects unauthorized fees, where the original creditor would otherwise be required to refund the debtor promptly.” The court remanded the action for further proceedings.
On November 6, the CFPB announced an advance notice of proposed rulemaking (ANPR) to solicit input on a wide array of issues related to consumer protection in the debt collection market. With the release of the ANPR, the CFPB also announced the publication of approximately 5,000 debt collection complaints in its consumer complaint database.
The ANPR marks the Bureau’s first step toward exercising its rulemaking authority under the Fair Debt Collection Practices Act (FDCPA). Notably, although the FDCPA generally applies only to third-party debt collectors, the CFPB’s regulations could extend to original creditors as well. In addition to the CFPB’s express authority to make substantive rules under the FDCPA, the Bureau made all creditors subject to debt collection guidance issued earlier this year pursuant to its general authority to regulate unfair, deceptive, and abusive practices. Read more…
On September 25, the FTC announced the settlement of its first case against a debt collector for using text messaging to attempt to collect debts in an allegedly unlawful manner. The complaint, filed on August 23, alleged that an individual and the two debt collection companies he controlled violated the FDCPA and FTC Act when the companies failed to disclose in English- and Spanish-language text messages and phone calls that the companies were debt collectors and that they falsely portrayed themselves as law firms. The FTC also alleged that the defendants illegally revealed debts to the consumers’ family members, friends, and co-workers. To resolve the FTC’s claims, the companies agreed to pay a $1 million civil penalty, agreed not to send text messages omitting the disclosures required by law and agreed to obtain a consumer’s express consent before contacting them by text message. The defendants are also barred from falsely claiming to be law firms and from falsely threatening to sue or take any action – such as seizure of property or garnishment – that they do not actually intend to take.
On July 12, the U.S. District Court for the Southern District of New York held that members of a putative class must arbitrate their claims against creditors for allegedly unlawful debt collection practices individually. Shetiwy v. Midland Credit Management, No. 12-7068, 2013 WL 3530524 (S.D.N.Y. Jul. 12, 2013). A group of creditors facing allegations that they violated the RICO Act and the FDCPA by conspiring with third party debt collectors to collect debts through fraudulently obtained default judgments, including judgments obtained through practices associated with robosigning, moved to compel arbitration based on the terms of their cardmember agreements, which require mandatory arbitration on an individual basis of any claims arising from a cardmember’s account. The court held that even if the plaintiffs could show that costs associated with individual arbitration would preclude vindicating their statutory rights under RICO and the FDCPA, the U.S. Supreme Court’s recent holding in American Express Co. v. Italian Colors Restaurant, “made clear that a generalized congressional intent to vindicate statutory rights cannot override the FAA’s mandate that courts enforce arbitration clauses” like the one at issue here. The court explained that “[n]othing in the text of RICO or the FDCPA indicate [sic] a more explicit ‘contrary congressional command’ than that contained in the federal antitrust laws at issue in Italian Colors” and that “[i]n fact, the FDCPA explicitly limits recovery obtained by unnamed class members in a class action, without regard to how that will affect total recover for each individual.” The court enforced the arbitration agreements and stayed the case as to the creditors pending arbitration.
On July 9, the FTC announced that a third-party debt collector and its subsidiaries agreed to pay a $3.2 million civil penalty to resolve allegations that the companies violated the FDCPA and FTC Act by (i) calling individuals multiple times per day, including early in the morning or late at night, (ii) calling even after being asked to stop, (iii) calling individuals’ workplaces despite knowing that the employers prohibited such calls, (iv) leaving phone messages for third parties, which disclosed the debtor’s name and the existence of the debt, and (v) continuing collection efforts without verifying a debt, even after individuals said they did not owe the debt. In addition to the monetary penalty, which the FTC described as the largest it has ever obtained against a third-party collector, the stipulated order requires, with regard to consumers who dispute the validity or the amount of a debt, that the companies close the account and end collection efforts, or suspend collection until they have conducted a reasonable investigation and verified that their information about the debt is accurate and complete. The order also restricts situations in which the defendants can leave voicemails that disclose the alleged debtor’s name and the fact that he or she may owe a debt, and requires the companies to halt or limit other alleged practices. The companies also must record at least 75% of all their debt collection calls beginning one year after the date of the order, and retain the recordings for 90 days after they are made.
On July 3, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit held that a mortgage servicer’s alleged repeated delivery of notices of default and acceleration to borrowers who were current on their obligation could be “adverse action,” triggering the ECOA notification requirements. Schlegel v. Wells Fargo Bank, No. 11-6816, 2013 WL 3336727 (9th Cir. July 3, 2013). According to the borrowers, although they received a discharge in bankruptcy, they reaffirmed their mortgage loan, subject to a modification that apparently reduced their monthly payment obligation. The borrowers claimed that the servicer did not correct its records to reflect the loan modification and sent several notices of default and acceleration. The Ninth Circuit held that, while sending a mistaken default notice would not necessarily constitute an adverse action, the conduct alleged in the complaint, in which the creditor repeatedly stated that the obligation was immediately due and payable, fell within the definition of an “adverse action” as, among other things, a “revocation of credit.” Therefore, the court reversed the district court’s dismissal of the borrowers’ claim that the mortgage servicer had failed to provide a notification within 30 days after taking adverse action, as required under ECOA. The appellate court, however, upheld the district court’s dismissal of the borrowers’ claim under the FDCPA, holding that the complaint failed to adequately allege that the servicer was a “debt collector” under the FDCPA — i.e., either that its principal business was the collection of debts or that it was collecting the subject debt “for another.”
CFPB Puts Creditors, Third-Party Collectors on Notice Regarding Unfair, Deceptive, and Abusive Debt Collection Practices
This morning, the CFPB issued new debt collection guidance that, among other things, seeks to hold CFPB-supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive (UDAAP) when collecting their own debts, in much the same way debt collectors are held accountable for violations of the FDCPA. Bulletin 2013-07 reviews the Dodd-Frank Act UDAAP standards, provides a non-exhaustive list of debt collection acts or practices that could constitute UDAAPs, and states that even though creditors generally are not considered debt collectors under the FDCPA, the CFPB intends to supervise their debt collection activities under its UDAAP authority.
Separately, in Bulletin 2013-08, the CFPB provided guidance to creditors, debt buyers, and third-party collectors about compliance with the FDCPA and sections 1031 and 1036 of Dodd-Frank when making representations about the impact that payments on debts in collection may have on credit reports and credit scores. The Bulletin states that potentially deceptive debt collection claims are a matter of “significant concern” to the CFPB and describes the CFPB’s planned supervisory activities and other actions the CFPB may take to ensure that the debt collection market “functions in a fair, transparent, and competitive manner.”
In addition, the CFPB announced that it will begin accepting consumer complaints related to debt collection, and published five “action letters” that consumers can use to correspond with debt collectors. The letters address the situations when the consumer: (i) needs more information on the debt; (ii) wants to dispute the debt and for the debt collector to prove responsibility or stop communication; (iii) wants to restrict how and when a debt collector can contact them; (iv) has hired a lawyer; (v) wants the debt collector to stop any and all contact.
On May 29, in a case of first impression for that circuit, the U.S. Court of Appeals for the Second Circuit held that a debt collector’s collection notice requiring a debtor to dispute a debt in writing violated the FDCPA’s debt notice provisions, provided for in Section 1692g. Hooks v. Forman, Holt, Eliades & Ravin, LLC, No. 12-3639, 2013 WL 2321409 (2nd Cir. May 29, 2012). In so holding, the Second Circuit joined the Ninth Circuit but split from the Third Circuit, which has held that a notice imposing a written requirement does not violate the FDCPA. Here, a district court dismissed a case brought by two debtors in a putative class action against a debt collector for allegedly violating the FDCPA by including in debt notices a requirement that debt disputes be submitted in writing. On appeal, the Second Circuit held that language of Section 1692g(a)(3), which provides the basic right to dispute the debt, does not incorporate the writing requirement included specifically in other sections of 1692g. The court held that the FDCPA intentionally established a bifurcated system that allows a debtor to protect that basic right through an oral dispute, while triggering a broader set of rights by disputing a debt in writing. The court vacated a judgment of the district court and remanded for further proceedings.
On March 20, the CFPB presented to Congress its annual report on implementation and enforcement of the FDCPA. The report (i) summarizes the Bureau’s Consumer Response function, which does not currently cover debt collection complaints, and the number and types of consumer complaints regarding debt collection received by the FTC in 2012, (ii) describes the CFPB’s debt collection supervision program, (iii) presents recent enforcement and advocacy program developments, (iv) discusses recent education and outreach, as well as research and policy initiatives, and (v) discusses coordination and cooperation between the CFPB and the FTC. Because the FTC and the CFPB share FDCPA implementation and enforcement responsibilities, the report incorporates a letter from the FTC regarding its FDCPA-related activities. The CFPB reported that the FTC continues to receive more complaints for the debt collection industry than for any other. The report also highlights (i) the debt collection aspects of a CFPB enforcement action against a credit card company, (ii) the Supreme Court’s recent decision upholding court discretion to award costs to prevailing FDCPA defendant creditors, and (iii) FTC enforcement activities.
On February 26, the U.S. Supreme Court held that the FDCPA does not limit a court’s discretion under federal rules to award costs to a prevailing defendant creditor alleged to have violated the Act. Marx v. Gen. Revenue Corp., No. 11-1175, 2013 WL 673254 (Feb. 26, 2013). The Tenth Circuit had earlier held that the defendant creditor did not violate the FDCPA, and that the creditor could be awarded costs under Federal Rule of Civil Procedure 54(d)(1). On appeal, the debtor, supported by the United States as amicus, argued that any statute specifically providing for costs displaces Rule 54(d)(1), regardless of whether it is contrary to the Rule. The relevant FDCPA provision, §1692k(a)(3), provides that “[o]n a finding by the court that an action under this section was brought in bad faith and for the purpose of harassment, the court may award to the defendant attorney’s fees reasonable in relation to the work expended and costs.” The Court affirmed the Tenth Circuit and held that the language and context of §1692k(a)(3) indicate that Congress did not intend it to prohibit courts from awarding costs. The Court explained that (i) the statute is best read as codifying a court’s pre-existing authority to award both attorney’s fees and costs, (ii) by including “and costs” in the second sentence of the statute, Congress foreclosed the argument that defendants can only recover attorney’s fees when plaintiffs bring an action in bad faith and removed any doubt that defendants may also recover costs in such cases, and (iii) the statutory language sharply contrasts with that of other statutes in which Congress has placed conditions on awarding costs to prevailing defendants.
On February 1, the FTC sent a letter to the CFPB describing the FTC’s debt collection-related activities over the past year. The responsibility to report to Congress each year on implementation and enforcement of the FDCPA shifted from the FTC to the CFPB last year, but given their shared authority with regard to the FDCPA, the CFPB relies on the FTC to provide information for inclusion in its annual report. The FTC letter recaps the agency’s law enforcement efforts, including the filing or resolution of four actions against collectors alleged to have engaged in deceptive, unfair, or abusive conduct and the filing or resolution of three actions related to phantom debt collection. The letter also highlights outreach and policy activities, including the FTC’s recent debt buyer study.
On January 14, the U.S. Court of Appeals for the Sixth Circuit held that mortgage foreclosures are debt collections under the FDCPA. Glazer v. Chase Home Finance LLC, No. 10-3416, 2013 WL 141699 (6th Cir. Jan. 14, 2013). The decision rejects the view held by a majority of district courts, including the district court in this case, that mortgage foreclosures are generally outside the scope of the FDCPA because they are enforcements of a security instrument, not attempts to collect money. In this case, the borrower brought suit alleging that the law firm that attempted to foreclose on his property violated the FDCPA, and the district court dismissed the claim, ruling that foreclosures are not debt collections. In reaching its conclusion, the Sixth Circuit reasoned that “whether an obligation is a ‘debt’ depends not on whether the obligation is secured, but rather upon the purpose for which it was incurred.” The court explained that collecting such a debt can occur through personal solicitation or legal proceedings. As such, the court held that “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt,” and, therefore, every mortgage foreclosure is a debt collection. Further, the court held that lawyers who meet the general definition of “debt collector” must comply with the FDCPA when engaged in a mortgage foreclosure. The Sixth Circuit reversed the district court’s dismissal and remanded the case for further proceedings.