InfoBytes Blog

FTC Announces Settlement of First Text Message Debt Collection Action

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.

FTC FDCPA Debt Collection

Director Cordray's Statements Offer Insight Into CFPB Activities

During a September 12 House Financial Services Committee hearing and in a recent interview published in the Washington Post, CFPB Director Richard Cordray made a number of statements that shed light on a wide range of topics related to the agency’s thinking and priorities. As discussed in more detail below, Director Cordray and House committee members touched on, among other things, the status of the CFPB’s small business lending data and HMDA rules, efforts to implement the CFPB’s mortgage rules (in particular the QM rule), small-dollar lending, and the CFPB’s collection and use of consumer information.

In addition, in his interview with the Washington Post, Director Cordray confirmed that the CFPB will be writing rules that apply the Electronic Fund Transfer Act (EFTA) to prepaid cards and govern debt collection practices. He also promised additional enforcement actions against debt collectors and “activity” on payday lending.

Highlights from House Hearing:

• Mortgage Rule/QM Implementation and Impact: A number of committee members from both sides of the aisle raised concerns about the impact of the CFPB’s mortgage rules, particularly its ATR/QM rule. Members are concerned with the complexity and regulatory burden of the rules, and that the ATR/QM rule is drawn too narrowly and will limit credit availability. The concerns of community bankers were again front and center—members stated that the rules unnecessarily burden community bankers and limit their ability to make loans, which may, in turn, force them to exit the mortgage market. Mr. Cordray described the various changes to the ATR/QM rule designed to accommodate community banks, reviewed the CFPB’s implementation process and resources, and pledged to continue to work to inform bankers of those accommodations and resources. More broadly, however, he stated that most institutions have told the CFPB that they will be in substantial compliance when the rules take effect in January 2014 and he did not indicate any intention to delay the effective dates of any of the mortgage rules.

  Rep. Huizenga (R-MI) focused on the ATR/QM rules’ inclusion of affiliate charges in the 3% points and fees cap and asked if the CFPB would support changing it. Director Cordray stated that the CFPB is “happy to think further” about the issue and can provide “technical assistance,” but that the rule reflects congressional intent and any substantive change would require legislation. He also acknowledged discussions with the Representative’s staff about whether title insurance should be treated differently because it is regulated.

• Cumulative Regulatory Burden: Several members raised a broader concern about the cumulative burden of regulations on financial institutions. Rep. Capito (R-WV) asked specifically about the CFPB’s regulations streamlining initiative and for evidence that it actually is moving forward. Mr. Cordray cited the CFPB’s work to eliminate an ATM notice requirement, which was removed by legislation before the CFPB finalized its effort, and explained that the CFPB now is focused on limiting burdens related to Gramm-Leach-Bliley Act privacy notices. He did not identify any other specific efforts to eliminate regulatory burden, but stated generally that the CFPB attempts to address duplicative and unnecessarily burdensome provisions in all of its rulemakings.

• TILA/RESPA Integration Rule: Two members – Reps. Miller (R-CA) and Perlmutter (D-CO) – asked about an aspect of the CFPB’s proposed TILA-RESPA integrated disclosure that would identify title insurance as “optional.” The members expressed concern that identifying it as such would not serve consumers. Mr. Cordray was not familiar with the issue, but pledged to revisit it. He also confirmed, as expected, that the final TILA-RESPA rule will be published this fall. (The CFPB’s recent rulemaking agenda stated more specifically October 2013.) Mr. Cordray promised an adequate implementation period.

• Small Business Lending and HMDA Rules: Rep. Velasquez (D-NY), who also serves as ranking member of the Small Business Committee, asked about the status of a rule to implement Dodd-Frank Act amendments to ECOA that require financial institutions to report information concerning credit applications made by women- or minority-owned businesses and small businesses. Mr. Cordray stated that the Bureau understands the importance of this data but was proceeding carefully because the rulemaking is outside the Bureau’s “comfort zone,” which is addressing consumer issues. In particular, he noted the Bureau was seeking to work with agencies that are more knowledgeable in this area, such as the Small Business Administration. However, he added that the CFPB internally has begun developing a rulemaking to implement changes to HMDA data collection. He explained that the CFPB expects that the HMDA rulemaking will inform its small business lending rule effort, and may overlap in parts.

• Small Dollar or “Payday” Lending: Small-dollar lending, particularly through the Internet, remains an active topic for both Congress and the CFPB. Several members raised a general concern with the growth of online lending and potential consumer protection challenges, while others accused the CFPB and other federal authorities of attempting to eliminate the practice altogether. Director Cordray recited the supervision and enforcement challenges associated with online lending and stated that it is a “subject of some considerable scrutiny right now, by [the CFPB] and by others.” He declined to comment more specifically on the CFPB’s involvement in reported efforts by the DOJ, the FDIC, and state authorities with regard to online lenders and the banks that process payments for them. Mr. Cordray later added that the CFPB considers the challenges of “offshore” lending to differ from those presented by Native American lenders. While both are difficult for state authorities to address, the CFPB does not consider tribal lenders to be “offshore” and believes that it is well established in federal law that the federal government can regulate tribal businesses and activities affiliated with tribes.

  Rep. Luetkemeyer (R-MO) mentioned a bill he first introduced last year to address some of these issues by creating a national charter for qualified non-depository creditors. Mr. Cordray responded that he did not have a position on the proposal at this time. Last year, the proposal met opposition from the OCC, state attorneys general, and state bank regulators.

  In response to Rep. Meeks (D-NY), who expressed concern about borrowers who need access to small dollar loans, Mr. Cordray stated that he believes financial institutions could make small dollar loans cheaply.

• Supervision and Enforcement: Rep. Neugebauer (R-TX) and others inquired about the CFPB’s examination and enforcement programs. Mr. Neugebauer asked about the CFPB’s application of the “abusive” prong in the Dodd-Frank Act “UDAAP” standard and about the scope of the CFPB’s information requests. With regard to “abusive practices,” Director Cordray stated that examiners are looking only at practices that meet the statutory definition. He explained that he has difficulty with the abusive standard, and that, in his view, something that is abusive is likely also unfair and deceptive. He promised that the CFPB will “tread carefully” and will not be “wild and overly aggressive” in its application of the abusive standard. With regard to information requests, Mr. Cordray agreed that the CFPB’s practice should be to only sample data and information in connection with exams, but added that in enforcement situations the CFPB may need much more data. Some members also criticized the salaries paid to CFPB staff, while others complained about the lack of experience of some examiners.

• CFPB Data Collection: Numerous members assailed Mr. Cordray with regard to the CFPB’s collection and use of consumer information, and the CFPB’s alleged failure to respond to information requests submitted by Republican members. Mr. Cordray asserted that the CFPB’s data collection and use is legal and necessary. He objected to the characterization that the CFPB has delayed its response to the committee, and indicated that he will be back to testify on this topic in the coming weeks.

Excerpts from Washington Post Interview:

(For the original Washington Post interview, please click here.)

• Debt Collection:  “We will be undertaking rulemaking in the debt-collection area. The work on that will get started later this fall. Debt collection is an area that is in need of revision and updating. It’s a very problematic area, one of the most complained-about areas by the public. It’s only gotten worse in the wake of the financial meltdown because so many people owe debt. An estimated 30 million Americans have a debt collector chasing after them now, so it’s a very salient issue now for the public. The Fair Debt Collection Act was passed in 1977, and there were never any provisions for rules to be written under it, so it hasn’t kept pace with the times. It’s now 35 years old, and there is room for us to update the act to take account of various court decisions, changes in the industry, changes among the consumer public to improve coverage so people are protected and treated fairly. That’s an important area for us and an area where we’ve already had some activity moving toward rulemaking. We’re also examining debt collectors. We’ve done some enforcement actions involving debt collection, and there will be more. We’ve put out a bulletin on first-party debt collectors, making clear that they’re also covered under existing law. And we’re starting to provide some tools for consumers to use, such as the template letters they can use to try and avoid undue harassment and abuse from debt collectors.”

• Small Dollar or “Payday” Lending:  “We put out the white paper on payday lending and the deposit advance products in late spring. That is leading us toward policy work in the area. There is some follow-up research work we’re doing that has been underway since the first paper came out. But there will be activity in this area in the near future. The issue coming out recently of online payday lenders who are relying on financial banks to be the mechanism for financing and collecting the money really has been interesting. Frankly, the work in that area involves coordination with both federal regulators and state officials, and it can even be international, with some online lenders originating from outside of the United States now. It’s an area where we’ve been building partnerships as well as thinking about the policy work that we need to do, and we’re making progress.” (See our prior post on the CFPB payday lending white paper.)

• Prepaid Cards:  “The fact that prepaid cards are not covered by ­consumer-protection laws at the moment is a compelling need for us to write regulations to get them covered. We’re moving forward to write rules to make sure they are protected under [the Electronic Fund Transfer Act (EFTA)]. It’s a real front-burner issue for us.” (Note that on September 12, the CFPB also issued a bulletin on the application of EFTA to payroll cards.)

• Ability-to-Pay Requirements for Non-Mortgage Products:  “It’s something that we are thinking about. Some of the most interesting issues for me have been the ones where we start to see some of the same philosophical issues extending across different markets, but potentially in different ways. So ability to pay in the mortgage market is arguable at its zenith because it’s a huge dollar transaction. You can justify more demands on the lenders and the borrower to make sure that transaction works. In the credit card context, under the [Credit Card Accountability Responsibility and Disclosure Act of 2009], there is an ability-to-repay provision in there. But it operates in a somewhat different way for credit cards than it should for mortgages. They’re different kinds of transactions, different size, different scope. You can get in and out of credit cards in a hurry. Not so easy to get in and out of mortgages. How it applies to smaller-dollar lending is a further differentiation. It’s something that we’re having to think about. The general principle, though, of ability to repay as the basis for making loans is just common sense. The lender should care about whether the borrower can repay because they’re the ones lending the money. They’re the ones at risk. The market is no longer so straightforward. With mortgages, for example, the ability to repay was arguably lost if you could sell into the secondary market. There are a number of consumer groups that have been pushing [the ability-to-repay model] as a broad principle across markets. There is quite a bit to what they’re saying. How it would apply from one market to another is worth further analysis, and that’s something we’re engaged in analyzing.”

• Supervision:  “We have to institute our supervision program for financial institutions that are used to being regulated, but not necessarily used to being regulated with a focus on consumer protection. It’s an adjustment for them. But in the non-bank sphere, they’re often not used to being regulated at all, or only on the state level. In that area, there has been a real shift toward more of a compliance mentality. And our being on the scene and doing this work has caused that shift.”

• Safety and Soundness:  “It’s the right perspective that an institution needs to merge the short-term and long-term thinking about its business model. It’s not a long-term business model to take advantage of your consumers in ways that are not sustainable. That’s what brings safety and soundness regulation and consumer protection regulation back together and really makes them harmonious."

CFPB Payday Lending Mortgage Origination Internet Lending

August Beach Read Series: CFPB's Supervision of Student Lending and Servicing Takes Shape

Over the past year, the CFPB has started to publicly outline its supervisory approach to student lending and servicing. In doing so, it repeatedly has identified similarities between the lending practices that led to the subprime mortgage crisis and the escalating default rate in the burgeoning level of student loan debt. Rather than wait for a student loan crisis, the CFPB is attempting to put in place a program it hopes can help prevent one.

As part of that program, at the end of 2012, the CFPB released its student loan examination procedures. Also in 2012 the CFPB released two reports (July 2012 and October 2012) aimed at curbing purported violations of law, and it has continued to highlight student loan issues this year, including in a recent update on student loan complaints. In addition, in March of 2013, partly to address the complaints of student loan debtors, the CFPB announced its intention to supervise and examine the larger non-bank education loan servicers. That rule should be finalized next month.

Student lenders and servicers also should take note of the CFPB’s recently issued debt collection guidance, which, among other things, holds 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.  Many of the guideposts set forth in the guidance reflect the standards to which third-party debt collectors are held accountable under the FDCPA.

For more information about the CFPB’s debt collection guidance, please see a recent article by BuckleySandler Partner Valerie Hletko. Over the coming months, look for additional articles from BuckleySandler attorneys about the CFPB’s activities in the area of student loans and other non-mortgage consumer financial products and services.

CFPB Examination Nonbank Supervision Student Lending Debt Collection Bank Supervision

New York Seeks to Halt Online Payday Loans, Collections; Federal Agencies Issue Subpoenas

On August 6, the New York Department of Financial Services (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. The letters demand that within 14 days the companies confirm that they are no longer soliciting or making payday loans in excess of the state usury caps. Under New York law, it is civil usury for a company to make a loan or forbearance under $250,000 with an interest rate exceeding 16% per year, and a criminal violation to make a loan with an interest rate exceeding 25% per year. The letters also remind recipients that it is illegal to collect on loans that exceed the usury cap; a separate letter to third-party debt collectors included the same notice. The DFS previously warned third-party debt collectors about collecting on illegal payday loans in March. In addition, the Department of Financial Services sent letters to 117 banks and NACHA requesting that they work with the DFS to create a set of model safeguard procedures to deny ACH access to the targeted lenders and provide the DFS with information about steps the institutions are taking to halt the allegedly illegal activity.

The role of banks in processing payday loan payments was identified as an enforcement priority earlier this year by the DOJ’s Financial Fraud Enforcement Task Force. The DOJ, the CFPB, and other federal agencies reportedly have issued subpoenas to banks and other entities as part of a broad investigation of online payday lending.

Payment Systems Payday Lending Debt Collection DOJ Enforcement Internet Lending

Federal District Court Compels Arbitration of Debt Collection Robosigning Suit

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.

Credit Cards FDCPA Arbitration Debt Collection

FTC Announces Largest Civil Penalty Ever Against Third-Party Debt Collector

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.

FTC FDCPA Debt Collection

Ninth Circuit Holds Repeated Erroneous Default Notices Can Be ECOA Adverse Action

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.”

FDCPA Mortgage Servicing ECOA

CFPB Puts Creditors, Third-Party Collectors on Notice Regarding Unfair, Deceptive, and Abusive Debt Collection Practices

On July 10, 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.

CFPB FDCPA UDAAP Debt Collection

Second Circuit Holds Writing Requirement for Debt Challenge Violates FDCPA

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.

FDCPA

Tenth Circuit Holds Affidavit Sufficient to Avoid Summary Judgment on FCRA Emotional Damage Claim

Recently, the U.S. Court of Appeals for the Tenth Circuit affirmed in part and reversed in part a district court’s award of summary judgment to a mortgage servicer who provided a negative credit report after the borrower refinanced his home without notifying the closing agent that his servicing rights had been transferred. Llewellyn v. Allstate Home Loans, Inc., 711 F.3d 1173 (10th Cir.  2013). The district court granted summary judgment  to the servicer and its foreclosure law firm after concluding that the borrower had failed to provide sufficient evidence of actual economic or emotional damages, or willfulness to support his FCRA claim. The Tenth Circuit affirmed the district court’s determination that the borrower had not provided evidence of economic damages or willfulness, but concluded that the evidence presented was sufficient to create a genuine issue of material fact about whether the borrower suffered emotional damages and reversed and remanded for further proceedings on that claim. In so doing, the court explained that borrowers can rely solely on their own testimony to establish emotional harm if they explain their injury in reasonable detail and do not rely on conclusory statements. The appellate court also affirmed the district court’s award of summary judgment in favor of the servicer on the borrower’s FDCPA claim, concluding that the servicer acquired the debt before it was in default, and thus did not qualify as a “debt collector” under the statute.

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