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Michigan Court of Appeals Holds Companies Hired by Automobile Lenders to Arrange for the Repossession of Collateral Need Not Be Licensed as Collection Agencies
On April 11, the Michigan Court of Appeals affirmed a trial court’s ruling that the Michigan Occupational Code did not require licensure of companies that contract with automobile lending institutions to handle collection services on delinquent accounts (“forwarding companies”) because the forwarding companies did not directly or indirectly engage in collections activities. Badeen v. Par, Inc., 2013 WL 1489372 (Mich. Ct. App. Apr. 11, 2013). Plaintiffs, licensed debt collectors, filed multiple amended complaints alleging that defendants, automobile lenders and forwarding companies, violated the Michigan Occupational Code by hiring unlicensed collections agencies and indirectly engaging in collections activities. The court of appeals held that plaintiffs were not entitled to relief for their claims that defendants engaged in licensable activity without a license. The court explained that because the forwarding companies hired by the automobile lenders contract out the activities of solicitation of claims and repossession of property to properly licensed collection agencies, and do not themselves “directly or indirectly” engage in the collection of debts, the forwarding agencies are not required to be licensed.
Massachusetts Warns Payday Loan Debt Collectors
On April 8, the Massachusetts Division of Banks sent a letter to state-licensed debt collectors advising them that it is illegal to collect on consumer loans that violate the Massachusetts small loan statute. The action follows a similar step taken by the New York Department of Financial Services last month. The Massachusetts letter reminds debt collectors that entities engaged, directly or indirectly, in the business of making loans of $6,000 or less with interest and expenses paid on the loan in excess of 12% annually must be licensed with the Division of Banks. Further, state law limits the annual interest rate that can be charged on small loans to 23%. The letter advises debt collectors that (i) loans made in violation of these rules are void, (ii) it is illegal to attempt to collect on debt that is void or unenforceable, and (iii) it is the responsibility of licensed debt collectors to ensure that they do not facilitate the creation or collection of illegal loans. The letter urges licensed debt collectors to review all client contracts and debtor accounts to ensure that all consumer, compliance, and reputational risks are appropriately evaluated and addressed on an ongoing basis.
Special Alert: Report on 2013 NMLS Annual Conference
The Nationwide Mortgage Licensing System and Registry (NMLS) held its fifth annual NMLS User Conference and Training in San Antonio, Texas from February 26 through March 1, 2013. The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, top law firms, and education providers to learn about the latest developments in mortgage supervision and to discuss pressing issues confronting the industry.
The first day of the Conference included the bi-annual NMLS Ombudsman Meeting, which provided an opportunity for NMLS users to raise issues concerning the NMLS, state and/or federal regulation. NMLS Ombudsman Timothy Siwy, Deputy Secretary of Non-Depository Institutions with the Pennsylvania Department of Banking, presided over the meeting, in which specific questions submitted by industry representatives were addressed. Several of the submitted questions focused on the new Uniform State Mortgage Loan Originator (MLO) Exam or Uniform State Test (the UST) of which 24 agencies have already adopted. Concerns were raised by the regulators as some state statutes require that a state’s specific laws be tested as a pre-requisite of MLO licensure. Others, such as regulators from California and Utah, had concerns that MLOs would not adequately learn state specific laws and regulations prior to licensure. In light of these concerns, industry representatives indicated that the UST is only the first step in licensure, and continuing education requirements, monitoring, and examinations would also serve as opportunities to ensure MLOs are well-versed in applicable state specific licensing laws and regulations.
Other areas of focus included NMLS’s expansion to include non-mortgage licenses, such as payday lender and pawn broker licenses. Some industry representatives voiced concern that approval of a license via the NMLS now carries with it an image of legitimacy with the public and expanding licensure to non-mortgage, less regulated industries could undermine that image. Regulators responded that the NMLS is a tracking mechanism—a way for regulators to track licensees state-to-state and industry-to-industry—not an independent licensing credential.
Full details regarding the specific issues submitted for comment, as well as accompanying exhibits, will be available on the NMLS Website, Ombudsman Page. A recording of the Ombudsman Meeting should be posted to the NMLS Resource Center in the near future.
The remaining days of the Conference covered various federal and state regulatory rule implementation, updates for industry, and a look ahead at new initiatives and changes to the NMLS (please refer to the NMLS Conference Agenda, which also includes copies of presentations). Specifically, various sessions covered the following topics, among others:
- The collaboration of the CFPB and state regulators to level the playing field between banks and non-banks with respect to enforcing regulations and conducting examinations. David Liken, the Deputy Director of Supervision and Enforcement with the CFPB, explained that Dodd Frank contemplated a partnership between state regulators and the CFPB, which includes information sharing and joint examinations. The CFPB plans to provide state regulators with training conducted by CFPB personnel at no cost to state regulators.
- The future of the NMLS which includes a goal to initiate three system releases/ enhancements per year. 2013-2014 will include launching an advance change notice function, electronic surety bond management, and a requirement for annual volume reports for non-mortgage entities.
- The state of financial supervision, in particular, concerns about industry diversity and cooperation between state and federal agencies to leverage their resources to address emerging issues and trends in the financial market.
- Regulation of debt collectors as the “larger participant” rule giving the CFPB supervisory authority over debt collectors was issued in October 2012 and took effect on January 2, 2013. The CFPB has started looking at collection practices of creditors when the creditor collects in its own name and through third party collectors.
In addition, the Conference covered major changes to the NMLS and also included a presentation from the CFPB summarizing the CFPB’s final rules:
- Advance Change Notification—The NMLS will launch its Advance Change Notice functionality that will allow licensees to provide notice electronically to NMLS participating states of proposed changes to the company and its branches, including, but not limited to: name changes, address changes, and change of control. The initial roll out of this functionality is slated for June 2013.
- Money Services Regulator Panel—A Money Services Regulator Panel, which included Stephanie Newberg, Deputy Commissioner of the Texas Department of Banking, and Deb Bortner of the Washington Department of Financial Institutions, discussed the benefits and challenges associated with the addition of money services licenses to the NMLS. The NMLS has provided money services business with a streamlined system to apply for licenses and keep regulators updated on license changes; however, licensees continue to struggle with certain aspects of the system (e.g., transmission of materials via the NMLS and confusion with completing certain control person and direct and indirect owner forms, given varying state interpretations).
- The New System of Dual Regulatory Supervision—A panel, which included Charlie Fields, Director, Non-Depository Entities Division, North Carolina Office of the Commissioner of Banks, Calvin Hagins, Program Manager, Supervision, Fair Lending & Enforcement with the CFPB, and various industry representatives, discussed the coordinated efforts of state regulators and the CFPB to conduct licensee examinations. The panel focused on (1) examination selection criteria—i.e., how the Multi-State Examination Committee or CFPB may decide to examine an entity, (2) factors weighed by the Multi-State Examination Committee when deciding whether to join CFPB in an examination, (3) CFPB examination process—i.e., CFPB’s preference to collect date on-site while processing and analyzing data off-site, and (4) encouraging entities to engage in “self-regulation” and “self-review.”
- 2013 Mortgage Final Rules Overview—Kelly Thompson Chochran, Assistant Director for Regulations of the CFPB summarized several recently issued CFPB rules, which are expected to be implemented in the next year, including: the Ability-to-Repay / Qualified Mortgages Final Rule, the Mortgage Servicing Final Rule, and the Loan Originator Compensation, HOEPA, Escrows, and Appraisal Final Rule.
BuckleySandler recently issued detailed summaries of the CFPB rules.
For more information about NMLS, visit the NMLS Resource Center, About NMLS.
New York Warns Payday Loan Debt Collectors
On February 22, the New York Department of Financial Services (DFS) sent letters to all debt collectors in the state to remind them that it is illegal to attempt to collect a debt on a payday loan made in New York, even if such loans were made on the Internet. Under New York law, nonbank lenders and state-charted banks are prohibited from making loans or forbearances under $250,000 at an interest rate of 16 percent or higher. Any loans made in violation of those limitations are void and cannot be collected by a debt collector. The DFS claims that “[l]enders attempt to skirt New York’s prohibition on payday lending by offering loans over the Internet, hoping to avoid prosecution.” The DS states that, regardless of the method used to make the loan, payday loans made in New York are not valid debts and cannot lawfully be collected.
FTC Releases Debt Buyer Study
On January 30, the FTC released the results of a first-of-its-kind empirical study of the debt buying industry. The FTC looked at more than 5,000 portfolios of consumer debt with a face value of $143 billion, the majority of which was credit card debt, but which also included mortgage, medical, utility, telecommunications, and other debt. The report identifies a number of “key findings” related to (i) prices buyers paid for debt, (ii) information and account documentation that buyers received in the transaction, (iii) consumer disputes of debts, and (iv) debt age and statute of limitations. The FTC believes additional study of small debt buyers is required, as are reviews of debt buyers’ litigation practices and the accuracy of the information debt buyers receive and use to collect debts. While the report does not announce any specific policy or enforcement measures, the FTC notes that it continues to receive a high level of complaints about debt collectors, more than for any other industry, and that the sufficiency and accuracy of debt information remains a significant consumer protection concern
New TCPA Action against Card Issuer Highlights Growing Area of Litigation Risk
On January 29, a credit card holder filed a putative class action against a card issuer that funds consumer retail credit accounts for customers of a major retail chain, alleging that the issuer violated the Telephone Consumer Protection Act in attempting to collect on the card holder’s credit card debt. Complaint, French v. Target Nat’l Bank, No. 13-233 (S.D. Cal. filed Jan. 29, 2013). The named plaintiff claims that after she fell behind on her payments, the issuer began making numerous calls daily to her personal cell phone, a number she claims not to have provided to the issuer. The issuer allegedly used an “automatic telephone dialing system” to make the calls, which the card holder claims continued even after she notified the issuer that it was not authorized to contact her on her cellular phone, and asked that the calls cease. The card holder alleges that in doing so, the issuer violated the TCPA, which requires express written consent from a consumer prior to receiving calls from an automated dialing system or an artificial or prerecorded voice. On behalf of the proposed class, the card holder is seeking $500 in statutory damages for each and every alleged negligent violation, and treble damages for each alleged knowing or willful violation. The suit is the latest in a growing number of cases to be filed in recent years, particularly in California, and highlights a significant litigation risk for card issuers and debt collectors.
Chicago Requires Debt Collector Licensing, Sets Zoning Requirements for Small Dollar Lenders
On January 17, the City of Chicago passed ordinances related to debt collection, small dollar lending, and license enforcement. With the adoption of an ordinance requiring that debt collectors collecting debts from Chicagoans obtain from the City a Regulated Business License, Chicago becomes only the third municipality to require local debt collector licensing. By requiring a license, the ordinance requires that debt collectors follow all state and federal debt collection rules, including for example, providing debt verification. For debt collectors that have their licenses revoked, the ordinance requires a four-year wait period before a new license can be issued. A second ordinance sets new zoning rules for payday and title-secured lending stores. Finally, the City passed an ordinance that, effective June 1, 2013, will allow the Department of Business Affairs and Consumer Protection to initiate license revocation proceedings and refuse to issue or reissue the license of specific business locations convicted within the last five years of violating the Illinois Wage Payment and Collection Act (IWPCA) and the federal FDCPA. The passing of the ordinances follows a recent announcement by the City and the CFPB to enter a first-of-its-kind partnership to share information on consumer financial protection issues.
Sixth Circuit Holds That Mortgage Foreclosures are Debt Collections Under the FDCPA
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.
California District Court Holds Assignee Indirect Auto Finance Company Not Subject to FDCPA
On January 9, the U.S. District Court for the Central District of California held that an indirect auto finance company that took assignment of a retail installment sales contract from an automobile dealer is not a debt collector subject to the FDCPA. Tu v. Camino Real Chevrolet, No. 12-9456, 2013 WL 140278 (C.D. Cal. Jan. 9, 2013). As the court explained, FDCPA Section 1692a(6) defines a “debt collector” to include any person who uses any instrumentality of interstate commerce or the mails for the principle purpose of enforcing security interests. In this case, a customer purchased and financed a car with a dealer who subsequently assigned the retail installment sales contract to an auto finance company. When the borrower fell behind on his payments and the finance company tried to collect the debt, the borrower sued the finance company, alleging violations of the FDCPA. The court held that the finance company was primarily in the business of accepting installment sales contracts with its debt collection activities ancillary to its financing activities. Therefore, the finance company is not a debt collector as defined by the FDCPA. The court dismissed the borrower’s claims.
Eleventh Circuit Holds Management Company Collecting HOA Fees Exempt from FDCPA
Recently, the U.S. Court of Appeals for the Eleventh Circuit held that a management company collecting debts for a homeowners association was exempt from the FDCPA because collecting the unpaid assessments was incidental to the company’s bona fide fiduciary obligations. Harris v. Liberty Cmty. Mgmt., Inc., No. 11-14362, 2012 WL 6604518 (11th Cir. Dec. 19, 2012). In Harris, a homeowners association contracted with a management company to perform various tasks, including collecting past due assessments from homeowners. After warning the plaintiffs that their water service would be disconnected if they did not pay their outstanding association dues, the management company had their water service suspended. The plaintiffs asserted that the company was a debt collector under the FDCPA and violated the Act by terminating their water service. Under Section 1692a(6)(F)(i) of the FDCPA, an individual or entity is exempt from the Act when “collecting or attempting to collect any debt owed…another to the extent such activity is incidental to a bona fide fiduciary obligation.” The Eleventh Circuit held that the management company fell within this exemption. Because the company was the homeowners association’s agent, it owed a fiduciary duty to the association. The court also found that collecting the debts was “incidental” to the company’s fiduciary obligation, noting that the company did many other tasks for the association other than collect assessments, such as obtaining utilities, purchasing insurance, and assisting the association with its tax filings. In addition, the Eleventh Circuit affirmed the district court’s dismissal of the plaintiffs’ claims under the Georgia Fair Business Practices Act. The court explained that the management company’s decision to stop the water service after providing the plaintiff notice was not unfair or deceptive.