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Financial Services Law Insights and Observations

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  • DFPI: Debt collection licensing applications due before January 1

    On September 1, the California Department of Financial Protection and Innovation (DFPI) announced that all debt collectors operating in California can apply to be licensed by the DFPI, which portrays the initial step in increased state oversight including an assessment of applications, formal examinations, and protections for California consumers. As previously covered by InfoBytes, as required under SB 908, all debt collectors must submit a license application prior to Jan. 1, 2022, to continue operating in California next year and authorizes the DFPI to take in borrowers’ complaints and enforce violations. Debt collectors, debt buyers, and debt collection attorneys operating in the state can submit their license applications here at the Nationwide Multistate Licensing System (NMLS), which requires financial and other information electronically, starting September 1. The announcement notes that, “[a]ny debt collector collecting debt in the state of California must submit an application on or before Friday, Dec.  31, 2021.”  When a debt collector has submitted an application, “they may continue operating as a debt collector in California while the application is pending,” according to the DFPI. However, the applicant will be required to wait for the issuance of a license prior to continuing operations in the state if an application is submitted after December 31.

    Licensing State Issues State Regulators DFPI NMLS Debt Collection

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  • DFPI issues second Debt Collection Licensing Act proposed rulemaking

    On August 19, the California Department of Financial Protection and Innovation (DFPI) issued an invitation for comments on a proposed second rulemaking (NPRM) under the Debt Collection Licensing Act (the Act). As previously covered by InfoBytes, in 2020, California enacted the Act, which requires a person engaging in the business of debt collecting in the state, as defined by the Act, to be licensed and provides for the regulation and oversight of debt collectors by DFPI. Earlier in April, DFPI issued an NPRM to adopt new debt collector licensing requirements (covered by InfoBytes here). The most recent NPRM, among other things, seeks further input from stakeholders on topics related to:

    • The scope of the Act as related to several definitions, including “debt,” “debt collection,” “person,” “consumer credit transaction,” “debt collector,” and “debt buyer,” to determine if additional clarity is necessary and whether these definitions are the same as those in California’s Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) and the Fair Debt Buying Practices Act (FDBPA).
    • Whether certain terms related to definition of a debt collector, such as “engage in the business of debt collection,” “in the ordinary course of business,” or “regularly,” require clarifying regulations.
    • Whether additional clarification is needed concerning entities or transactions exempt from the Act’s requirements.
    • Whether the term “due or owing” is clear with respect to the definition of a “debtor.”
    • Whether additional clarification is needed regarding DFPI’s authority to enforce the Rosenthal Act and the FDBPA. Under the Act, DFPI has the “authority to enforce the Rosenthal Act and the FDBPA against persons required to be licensed under the [Act] and persons expressly exempt from licensure, including certain federally regulated entities.”

    The NPRM also addresses certain provisions related to annual reports and bond amounts. Comments on the most recent proposed rulemaking are due October 5, and may be sent electronically to regulations@dfpi.ca.gov.

    Licensing State Issues DFPI State Regulators Debt Collection

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  • Maryland Court of Appeals says inspection fee ban applies to mortgage assignees and servicers

    Courts

    On August 27, the Maryland Court of Appeals held that the Maryland Usury Law applied to assignees of mortgage loans–and not just lenders as a defendant argued–and that the law’s prohibition on property inspection fees therefore applied to the mortgage servicer, as the agent of the loan’s assignee. The borrower entered into a mortgage loan secured by a deed of trust that was later assigned to Fannie Mae and contracted to the mortgage servicer. After the borrower defaulted, the servicer allegedly threatened foreclosure and assessed “fees for drive-by inspections of the property.”

    The parties entered into a loan modification agreement to resolve the default, but the borrower objected to the inclusion of the property inspection fees. The borrower later filed a complaint claiming the servicer collected property inspection fees prohibited by the Maryland Usury Law (CL §12-121). The borrower also alleged violations of the Maryland Consumer Debt Collection Act (MCDCA). The trial court dismissed the claims concluding, among other things, that neither Fannie Mae nor the servicer were subject to state usury prohibitions because neither entity “fit the definition of ‘lender’ in the law.” An intermediate appellate court later reversed the trial court’s dismissal.

    In a 6-1 holding, the Court of Appeals concluded that “the Maryland Commissioner of Financial Regulation has taken the position that mortgage servicers. . .are subject to the prohibition on inspection fees in CL §12-121 during the life of a mortgage loan,” and that, moreover, CL §12-121 “limits the authority of a person who makes a mortgage loan to charge property inspection fees in connection with that loan.” As such, the Court of Appeals held that the addition of the definition of “lender” to the Maryland Usury Law that made the Usury Law part of the Commercial Law Article, “did not change that rule.” The Court of Appeals also stated that the borrower adequately alleged the elements of an MCDCA claim when she asserted the servicer “attempted to collect an alleged debt by asserting a right to collect inspection fees with knowledge that the right did not exist.”

    Courts State Issues Usury Mortgages Mortgage Origination Debt Collection

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  • Massachusetts announces consent judgment against debt-collection company

    State Issues

    On August 31, the Massachusetts attorney general announced a “first-of-its-kind” consent judgment against a Massachusetts-based debt-settlement company and its chief operating officer for allegedly violating the Massachusetts Consumer Protection Act, among other things. The consent judgment settled a lawsuit in which the AG alleged that the company charged inflated and premature fees, knowingly and regularly enrolled consumers who were not able to benefit from its program, and failed to communicate the harms that consumers could encounter after enrolling in its program. According to the AG, the company “directed consumers to stop paying their debts and to stop communicating with creditors, and to instead make payments into a dedicated ‘savings’ account administered by [a] payment processor.” The AG also alleged the company “engaged in the unauthorized practice of law by continuing to represent consumers after they were sued in relation to an enrolled debt.” Under the terms of the AG’s consent order, the company is required to pay $1 million to the Commonwealth.

    As previously covered by InfoBytes, in May, the CFPB announced a settlement with the same company for allegedly violating the Telemarketing Sales Rule and the Consumer Financial Protection Act.

    State Issues State Attorney General Enforcement Massachusetts Debt Collection

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  • Maryland Court of Appeals rejects distinction between “methods” of debt collection and “amounts” of debt to be collected

    Courts

    On August 27, the Maryland Court of Appeals reversed a circuit court’s dismissal of petitioners’ Maryland Consumer Debt Collection Act (MCDCA) and Consumer Protection Act (MCPA) claims, rejecting a distinction drawn by some courts “between ‘methods’ of debt collection and ‘amounts’ of debts sought to be collected, when assessing a claim under CL § 14-202(8).” At issue is the amount of post-judgment interest charged above the maximum legal rate to individuals who defaulted on their residential leases.

    In reversing, the Court of Appeals disagreed with the circuit court that MCDCA claims were restricted to “methods,” holding that § 14-202(8) should be interpreted “broadly to reach any claim, attempt, or threat to enforce a right that a debt collector knows does not exist,” and in this case, petitioners were not “precluded from invoking § 14-202(8) when the amount claimed by the debt collector includes sums that the debt collector, to its knowledge, did not have the right to collect.” However, the Court of Appeals held that, in contrast to the FDCPA, the MCDCA is not a “strict liability statute,” and although “where the law is settled at the time a collector takes a contrary position in claiming a right, the collector’s recklessness in failing to discover the contrary authority is equivalent to ‘aware[ness]’ (i.e., actual knowledge) of the authority,” such knowledge is a question of fact that could, in some cases, require a jury determination. As a result, the case was remanded to the circuit court to allow the petitioners an opportunity to file a new motion for class certification.

    Courts State Issues Debt Collection Consumer Finance Class Action

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  • District Court notes distinction between definition of “accounts” and “receivables”

    Courts

    On August 25, the U.S. District Court for the District of New Jersey denied a defendant debt collector’s motion to compel arbitration in an FDCPA action, ruling that the defendant never purchased the rights to enforce arbitration. In so holding, the Court stated that the words “accounts” and “receivables” mean different things and that purchasing a receivable does not guarantee all the rights assigned to the account. The court originally denied the defendant’s motion to compel arbitration to allow for limited discovery to determine whether a valid arbitration agreement existed between the parties. The defendant argued that the agreements governing the accounts require that all claims be subject to arbitration on an individual basis and that it is entitled to arbitration since it is an agent of the purchasing creditor and the purchasing creditor purchased the rights to enforce arbitration from the original creditor. The plaintiffs countered that the right to compel arbitration was not transferred because the purchase agreements only transferred the rights under the “receivables” and not the “accounts.” The court agreed, noting that under the plain meaning of the purchase agreements, the purchasing creditor did not purchase, and was not assigned, the right to compel arbitration.

    Courts FDCPA Debt Collection Class Action

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  • District Court rules in defendants’ favor regarding third-party disclosure

    Courts

    On August 25, the U.S. District Court for the Eastern District of Missouri granted a motion for judgment on the pleadings in favor of a defendant debt collector over a plaintiff alleging FDCPA violations. The plaintiff, a bankruptcy attorney who represents consumers in connection with discharging their debts, received a letter from defendant that disclosed a debt for a consumer he did not represent and has never represented. The plaintiff sued under the FDCPA, claiming that the defendant, among other things, engaged in abusive, deceptive, and unfair debt collection practices when defendant disclosed the existence of this third-party debt to the plaintiff by contacting him via letter. The plaintiff alleged that he was injured and suffered damages “due to the time Plaintiff had to spend trying to learn why he was being contacted and whether he had ever represented Plaintiff.” However, the court held that because the plaintiff was not a “consumer” under the FDCPA, he did not have standing to bring the FDCPA case. In so ruling, the court noted that the U.S. Court of Appeals for the Eighth Circuit has not yet ruled on whether the FDCPA “applies to persons other than a consumer[‘]” but agreed “with the greater weight of authority that concludes” only consumers have standing to bring such actions.

    Courts Third-Party Debt Collection FDCPA

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  • CFPB officially withdraws extension of compliance date for debt collection rules

    Federal Issues

    On September 1, the CFPB published a proposal in the Federal Register to withdraw its proposed rule that would have extended the effective date of its final rules amending Regulation F, which implements the FDCPA. As previously covered by InfoBytes, in April, the Bureau proposed delaying the effective date by 60 days to provide affected parties additional time to comply due to the ongoing Covid-19 pandemic. However, the Bureau determined that an extension is unnecessary and will publish a formal notice in the Federal Register, withdrawing the April notice of proposed rulemaking (covered by InfoBytes here). According to the Bureau, industry comments generally did not support an extension, and “[m]ost industry commenters stated that, despite the pandemic, they would be prepared to comply with the Debt Collection Final Rules by November 30, 2021.”

    Federal Issues CFPB Debt Collection Agency Rule-Making & Guidance FDCPA Covid-19

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  • 5th Circuit orders plaintiff to pay outstanding loan

    Courts

    On August 16, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court decision to require the plaintiff CEO of several petrochemical companies, who defaulted on a revolving line of credit that he guaranteed, to repay national lenders (defendants) an outstanding amount, rejecting the CEO’s argument that the agreements were fraudulently induced. The plaintiff allegedly withdrew a $90 million revolving line of credit from the defendants. His personal liability arose after his companies began breaching some of the loans’ financial covenants. To avoid acceleration, the CEO himself guaranteed the companies’ outstanding debt. Because his companies continued breaching their loan obligations and the defendants were “concerned about the borrowers’ cash burn, ‘collateral deterioration,’ and ‘poor accounting controls,’” the parties modified the total debt to $72 million. In addition, the defendants and the companies amended their credit agreement and the plaintiff “executed a personal guaranty of the debt his companies assumed.” At the defendants’ recommendation—or, as the CEO maintains—“the borrowers also brought on a chief restructuring officer (CRO) to help turn the companies around.” When the companies continued to default on the loan obligations, the CEO and the borrowers entered into two forbearance agreements with the defendants that imposed financial, operational, and reporting obligations on the borrowers. After the second agreement expired and the borrowers' defaults remained, the company sued the defendants for over $1.5 billion in damages for negligence, fraud, conversion, among other things, in which the defendants “counterclaimed and impleaded [the CEO] and the remaining borrowers and guarantors, alleging breach of contract and breach of guaranty.” According to the opinion, “[t]hose third-party defendants then counterclaimed against the lenders, asserting the same tort claims initially lodged by the company.” Furthermore, the CEO asserted the following four defenses: fraudulent inducement, duress, unclean hands, and equitable estoppel. The district court rejected each of the plaintiff’s arguments, ordering him to pay the defendants, plus interest and attorney fees, noting “that the underlying breach of guaranty was ‘not contested.’” The district court held that the waivers and releases the plaintiff signed as part of the two forbearance agreements “foreclosed any claim that he was fraudulently induced into signing the earlier Guaranty,” and determined that his allegations of intense business pressure fell short of establishing duress.

    On appeal, the 5th Circuit agreed with the district court, affirming that the plaintiff failed to prove that he signed onto the agreements under duress. According to the 5th Circuit, “[t]he district court detected a glaring problem with this theory: the timeline of events refutes it,” and the plaintiff “learned of the purported fraud—the supposed scheme to replace him with the CRO—before he ratified the Guaranty.”

    Courts Appellate Debt Collection Fifth Circuit

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  • District Court: "Least sophisticated consumer" would not be misled by collection letter disclosures

    Courts

    On August 23, a magistrate judge of the U.S. District Court for the District of Colorado granted a defendant’s motion for summary judgment, ruling pursuant to the “least sophisticated consumer standard” that the debt collection letter accurately conveyed the subject FDCPA rights. The plaintiff alleged the defendant debt collector’s letter violated several sections of the FDCPA by, among other things, making false and misleading representations in violation of Section 1682e by informing the plaintiff that “calling for further information or making a payment is not a substitute for disputing the debt” because it implied that disputing the debt was mandatory instead of optional. Additionally, the plaintiff contended that this language overshadowed and contradicted the required disclosure on the second page of the letter by “suggest[ing] that disputing the debt was mutually exclusive to making a payment”—an alleged violation of Section 1692g. The defendant moved for summary judgment, arguing that the plaintiff lacked standing to sue, or in the alternative, that he lacked sufficient evidence to prove his FDCPA claims.

    The court disagreed, ruling that the plaintiff’s alleged injuries (that the FDCPA violation caused him to not pay his debt and that he lost out on the ability to make payments or to, among other things, negotiate a separate payment plan) did not rise to the level of tangible harm necessary to satisfy Article III standing. The court then reviewed the letter’s disclosures under the least sophisticated consumer standard and determined that “it is one thing to say that making a payment and disputing a debt are different, and another entirely to suggest that they are mutually exclusive. The phrase, ‘IS NOT A SUBSTITUTE FOR,’ does not carry any reasonable implication of exclusivity, and in fact demonstrates, when read in full context, that Defendant is informing Plaintiff that making a payment does not take the place of disputing the debt. In other words, both can be pursued without exclusivity.” Moreover, because the language is not misleading or contradictory, the court ruled that it did not overshadow the second-page disclosure, which informed him of his right (but not obligation) to dispute the debt.

    Courts Debt Collection FDCPA Disclosures

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