InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Debt collector seeks to invalidate CFPB medical debt advisory opinion
Recently, a debt collector filed a complaint against the CFPB and Director Rohit Chopra, in the U.S. District Court for the District of Columbia, challenging the Bureau’s new debt collection advisory opinion. The plaintiff took issue with the CFPB’s advisory opinion, issued on October 1 (covered by InfoBytes here), which the complaint described as creating new substantive obligation and requirements for debt collectors to substantiate medical debts prior to collection (“New Substantiation Rule”). The plaintiff contended this rulemaking was issued without adhering to the procedural requirements mandated by the APA — specifically the notice-and-comment period.
The complaint asserted the New Substantiation Rule was a legislative rule rather than an interpretive one, as it imposed “significant and substantive new requirements on medical debt collectors.” The plaintiff argued the CFPB’s failure to follow the APA’s notice-and-comment process renders the rule invalid. The plaintiff further alleged that the rule contradicts existing law under the FDCPA, which would not require debt collectors to independently investigate and substantiate debts before attempting to collect them.
The plaintiff seeks a declaration that the New Substantiation Rule is invalid due to the CFPB’s non-compliance with the APA’s procedural requirements. Additionally, the plaintiff requests an injunction to set aside the rule, along with the recovery of attorneys’ fees and costs incurred in relation to the case.
Maryland appellate court reinstates consumer claims against debt collectors for alleged deception
On November 6, the Appellate Court of Maryland reversed a lower court’s dismissal of a class action lawsuit alleging violations of the Maryland Consumer Debt Collection Act (MCDCA) and the Maryland Consumer Protection Act (MCPA). The plaintiffs, a class of two individuals, claimed debt collectors filed lawsuits to collect money they knew was not owed, constituting unfair and deceptive practices under Maryland law. The lower court had ruled that the common law litigation privilege barred these claims, providing immunity to the debt collectors for statements made during proceedings.
The appellate court held that the litigation privilege does not bar claims under the MCDCA and MCPA against debt collectors. The court indicated that it discerned “nothing in the MCDCA or MCPA to indicate that the General Assembly contemplated that debt collectors could gain litigation immunity inside the courthouse for unfair debt collection practices that are expressly prohibited outside the courthouse.”
The court emphasized that the litigation privilege is typically limited to defamation-like claims involving reputational harm and is not intended to shield debt collectors from liability for unfair debt collection practices. The court also rejected the argument that the professional services exemption in the MCPA protected the attorney involved, ruling that the exemption does not apply to the commercial aspects of law practice. Accordingly, the court concluded that the lower court erred in dismissing the complaint, reinstated the plaintiffs’ claims, and remanded the case.
CFPB urges the U.S. Supreme Court to not review a trust debt collection case
Recently, in a case between the CFPB and a student loan trust, the CFPB submitted a brief challenging the appellant’s efforts to reverse a U.S. Court of Appeals for the Third Circuit decision, which found that trusts are covered persons under the CFPA, and allowed a CFPB enforcement action against trusts to resume. As previously covered by InfoBytes, the 3rd Circuit remanded the case to a district court after evaluating two issues: (i) whether the trusts are covered persons subject to the CFPA; and (ii) whether the CFPB was required to ratify the underlying action that questioned a constitutional deficiency within the Bureau.
The Bureau’s brief begins by examining a constitutional defect: If the statutory provision that restricted the President’s power to remove the CFPB Director requires the dismissal of a civil enforcement action that was initially filed while the removal provision was in effect. The appellants argued the enforcement action should be dismissed due to this defect. The CFPB’s brief, however, argued that a dismissal is unwarranted because the petitioners have not demonstrated any causal link between the removal provision and the enforcement action. The brief noted that the CFPB has continued the action under multiple directors who are fully removable by the President.
The brief then discussed whether the trusts, which contract with third parties to service student loans and arrange for third parties to file debt-collection suits in the trusts’ name, qualify as “covered persons” under Dodd-Frank Act. The petitioners contended they do not engage in offering or providing a consumer financial product or service because they contracted with third parties to litigate debt collection suits. The CFPB’s brief argued that the trusts are “covered persons” because they are involved in the business of collecting debt and servicing loans through third-party contracts — a necessary part of their operations.
Additionally, the brief addressed the ordinary meaning of “engage in” as interpreted by the Supreme Court in another relevant case, asserting that the trusts’ activities fall within this definition. The CFPB emphasized the trusts’ governing documents explicitly state their purpose to engage in acquiring, servicing and collecting student loans. The brief urged the Supreme Court to deny the petition for a writ of certiorari.
CFPB taken to court over its advisory opinion on medical debt collections
On November 1, several debt collection trade organizations sued the CFPB in the U.S. District Court for the District of Columbia. In the complaint, the plaintiffs alleged that the CFPB violated the APA when it issued an advisory opinion on October 1 on collecting medical debts (covered by InfoBytes here). The plaintiffs claimed the advisory opinion interpreted the FDCPA to establish new rules without public input, as allegedly required by the APA.
The plaintiffs claimed the CFPB implemented new rules under the FDCPA, such as: (i) a requirement for debt collectors to review account-level documents before sending a validation notice; (ii) a requirement for debt collectors to apply a “reasonableness” standard for determining the amount to be collected, rather than relying on collection amounts stated by the original creditor; (iii) a new definition of debt in “default”; and (iv) a mandate for medical procedure audits to ensure billed procedures were actually performed. The plaintiffs argued these rules imposed new obligations on debt collectors and the healthcare billing industry.
In addition to claiming that the CFPB failed to follow the APA’s rulemaking procedures in adopting the advisory opinion, the plaintiffs further contended that the advisory opinion exceeded the CFPB’s statutory authority, as Congress did not delegate regulatory power over healthcare to the CFPB. The plaintiffs asserted the CFPB’s jurisdiction was limited to financial products and services, and the advisory opinion extended the agency’s reach illegally into the healthcare sector. The plaintiffs also argued that the advisory opinion “should be set aside” because the CFPB was funded unconstitutionally due to the Fed’s lack of profits since September 2022. This was not the first time litigants have argued that the CFPB was unconstitutional following the decision in CFPB v. CFSA (here). To date, courts have continued to agree that the CFPB’s funding structure is legal (here).
Overall, the plaintiffs asserted five counts against the CFPB in violation of the APA: failure to engage in notice-and-comment rulemaking; arbitrary and capricious action; failure to observe certain procedures required by law; exceeding statutory jurisdiction, authority, or limitations; and an unconstitutional funding structure. The complaint sought an order vacating and setting aside the advisory opinion nationwide, along with other relief.
California appellate court rules that a name mix-up violates the FDCPA
On October 23, a California Court of Appeal reversed a lower court’s decision granting an anti-SLAPP motion in a case involving a debt collection agency and a consumer. The lower court had granted the debt collection agency’s anti-SLAPP motion after the debt collection agency mistakenly sued and served a consumer with the same name — but a different birth date and Social Security number. After learning of the mistake, the debt collection agency dismissed the case, however, the consumer maintained their cross-complaint, claiming the agency violated the FDCPA and the state’s Rosenthal Act by suing the consumer for a debt owed by another person with that same name. In response, the debt collection agency filed an anti-SLAPP motion, which the lower court granted.
In reversing the lower court’s decision, the appellate court noted the FDCPA is a strict liability statute aimed at preventing abusive debt collection practices, including cases of mistaken identity. Suing the wrong person over a debt constituted a false representation of the debt’s character. The consumer’s claims had enough merit to proceed, and the case was remanded for further proceedings consistent with this opinion.
New York City dept. announces enforcement delay of debt collection rules after litigation
Recently, the New York City Department of Consumer and Worker Protection (DCWP) announced a delay enforcing Title 6 of the Rules of the City of New York which impact debt collectors. Although the new rules will still take effect on December 1, as planned, the DCWP announced it will not enforce the new rules until April 1, 2025.
On its website, the DCWP posted the following notice: “In response to industry requests, DCWP will not be enforcing the new Debt Collector Rules until April 1, 2025. We will address this grace period for compliance during our DCWP 101: Free Webinar on New Rules for Debt Collectors on Thursday, November 7, 2024[,] at 2:00 p.m.”
As previously covered by InfoBytes, the new debt collection rules require debt collectors to provide specific disclosures when collecting on time-barred debt, maintain comprehensive records of communications, consumer complaints, and other relevant documents, and obtain consumer consent for electronic communications with clear opt-out options.
The DCWP’s announcement came one day after the agency received a lawsuit from two stakeholders (an industry association and a debt-collection agency). The stakeholders filed a complaint for declaratory and injunctive relief against the DCWP, arguing that the debt collection rules violate the First, Fifth and Fourteenth Amendments and are preempted by federal and state law. The stakeholders seek a declaratory judgment invalidating several sections of the rule and a permanent injunction preventing its enactment or enforcement.
Minnesota Attorney General shuts down debt settlement companies
On October 18, the Minnesota Attorney General (AG) secured an Assurance of Discontinuance (AOD) between the State of Minnesota and two debt settlement companies (the respondents) regarding allegations that the companies engaged in unlawful debt settlement practices in Minnesota, including operating without the required registration, failing to execute compliant written agreements, and misrepresenting their services to consumers.
The AG alleged respondents marketed, sold and provided debt settlement services to Minnesota consumers without first registering with the Minnesota Department of Commerce. Furthermore, the companies allegedly imposed charges or received payments without executing written agreements and without performing all agreed-upon services. Additionally, the companies are accused of misrepresenting their services leading to “consumer confusion or misunderstanding.”
To resolve these allegations, the AOD stipulated respondents must cease all business operations in Minnesota unless they become properly registered. They are also required to pay over $1 million to the Attorney General, representing the total amount of payments received from consumers minus refunds and chargebacks. Respondents must also provide a complete and accurate list of all Minnesota consumers they contracted, including payment, chargeback, and refund amounts. Additionally, the companies face a stayed civil money penalty of over $500,000, which will be enforced if they violate the terms of the AOD.
Massachusetts AG settles with loan servicer over debt collection violations
Recently, the Massachusetts AG settled with a loan servicer (respondent) to resolve allegations that respondent violated Massachusetts foreclosure-prevention law, debt collection regulations, and federal mortgage servicing rules. The AG alleged that respondent, which primarily engages in the servicing and resolution of nonperforming residential mortgage loans, failed to provide timely notices to borrowers, delayed communication allowing large unpaid balances to accrue, and unlawfully charged up-front payments for mortgage modifications. Additionally, respondent was accused of engaging in collection activities on time-barred debts without required disclosures, violating state regulations by excessively calling borrowers and failing to provide required notices. The company also allegedly failed to send required periodic statements to borrowers, violating federal regulations.
According to the settlement, in addition to paying $300,000 to Massachusetts, which may be used for consumer restitution, the respondent must release all liens associated with the underlying portfolio at issue at no expense to the consumer, must request the deletion of related tradelines from credit reports, and is prohibited from undertaking any collection activity on such accounts or assigning or transferring any right to collect payment on such accounts, among other things. Respondent agreed that for future accounts, it will not engage in collection activities on time-barred debts and will comply with applicable laws and regulations. Respondent will also assign a Single Point of Contact to all delinquent borrowers to answer borrowers’ questions and communicate deadlines.
CFPB issues advisory opinion on medical debt collection practices
On October 1, the CFPB issued an advisory opinion regarding medical debt collection practices and debt collectors’ obligations under the FDCPA and Regulation F. The advisory opinion identified practices for which debt collectors will be considered strictly liable for, such as (i) collecting amounts not owed because they were already paid, either fully or partially, including when paid by insurance or a government payor; (ii) collecting amounts not owed due to federal or state law, such as where employers or insurers are liable for the debt under state workers’ compensation programs; and (iii) collecting amounts above what can be charged under federal or state law, including limits set by the No Surprises Act or state common law remedies if there is not an express contract.
The CFPB also noted specifically that debt collectors will be liable for attempting to collect amounts for services not received, such as where a medical provider uses a code that entitles the provider to greater compensation than the level of care than what was provided, known as “upcoding.” The advisory opinion also stated that debt collectors must have a “reasonable basis” for asserting the validity and correctness of the debts they collect, which may require obtaining underlying patient agreements, billing history or other contracts.
The advisory opinion provided guidance on how the CFPB interprets “default” under the FDCPA for medical debt, stating that whether a debt will be considered “in default” will be determined by the terms of the agreement between the consumer and the medical provider under applicable law governing the agreement.
CFPB discusses impact of debt collection practices on surviving spouses
On September 20, the CFPB published a blog post that addressed debt collectors targeting surviving spouses for the unpaid medical bills of their deceased partners.
The blog post highlighted the vulnerabilities of surviving spouses and reports higher rates of depression, loneliness, increased household debts and decreased incomes compared to four years earlier. As described by the CFPB, surviving spouses were more likely to have unpaid medical bills, with an average amount of $28,749, compared to $15,785 for the rest of the population, and many surviving spouses reported significant drops in their credit scores and difficulties in refinancing or qualifying for financial programs.
The blog post also discussed the CFPB’s concerns that debt collectors may provide misleading information about a surviving spouse’s responsibility for the deceased’s debts and use aggressive tactics (i.e., frequent and harassing phone calls) to pressure surviving spouses into paying debts they may not be legally obligated to pay. Further, the CFPB expressed concerns that potentially illegal collection attempts were still prevalent despite some states having laws to protect surviving spouses from being held responsible for their deceased partner’s medical debts and the FDCPA’s prohibition against abusive, unfair or deceptive practices by debt collectors. As part of its efforts to address such concerns, the CFPB has committed to working with state regulators and law enforcement to pursue debt collectors who engage in illegal debt collection efforts. The blog post also included a checklist and a list of CFPB tips and resources to help surviving spouses take control of their finances following the death of a spouse.