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On April 30, the New York State Department of Financial Services (DFS) again expanded the scope of its activities targeting online payday lenders by announcing that two major debit card network operators agreed to halt the processing of payday loan deductions from bank accounts owned by New York consumers who allegedly obtained illegal online payday loans. The DFS asserts that in response to increased regulatory pressure on online lenders’ use of the ACH network—known as Operation Choke Point—those lenders are using debit card transactions to collect on payday loans originated online to New York residents. The DFS believes such loans violate the state’s usury laws. The DFS also sent cease-and-desist letters to 20 companies it believes are “illegally promoting, making, or collecting on payday loans to New York consumers.” The DFS’s assault on online lenders publicly began in February 2013 when it warned third-party debt collectors about collecting on allegedly illegal payday loans, and was first expanded in August 2013 when the 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. At the same time, the DFS asked banks and NACHA to limit such lenders’ access to the payment system. DFS subsequently expanded its effort in December 2013 when it began targeting payday loan lead generation companies.
On April 30, the New York Unified Court System proposed new rules for consumer credit collection cases. If adopted, the rules would (i) require creditors to submit affidavits based on personal knowledge that meet the substantive and evidentiary standards for entry of default judgments under state law; (ii) expand to all state courts an existing requirement applicable to cases in New York City courts that an additional notice of a consumer credit action be mailed to debtors; and (iii) provide unrepresented debtors with additional resources and assistance. The proposal attaches copies of the potential affidavits, which the court system states are necessary to address so-called “robosigning.” Last October, New York State Department of Financial Services Superintendent Benjamin Lawsky urged these and other changes as part of the court’s initial public comment period. Comments on the proposal are due May 30, 2014.
On April 25, the California Court of Appeal, First District, held that California’s usury law does not prohibit a judgment creditor from accepting a forbearance fee to delay collecting on a judgment. Bisno v. Kahn, No. A133537, 2014 WL 1647660 (Cal. Ct. App. Apr. 25, 2014). In consolidated cases, the judgment creditors agreed to delay executing on their judgments in exchange for the payment of forbearance fees in addition to statutory post-judgment interest on the unpaid balance of the judgments. The judgment debtors subsequently claimed the forbearance fees are usurious and sought treble damages against the creditors. The court held that because the state’s usury law does not expressly prohibit a party from entering into an agreement to forbear collecting on a judgment, usury liability does not extend to judgment creditors who receive remuneration beyond the statutory interest rate in exchange for a delay in enforcing a judgment. The court added that a forbearance agreement is a contract between the judgment creditor and the judgment debtor that is separate from the judgment to which it applies, and therefore must be enforced in a separate contract action and is subject to standard contractual defenses such as duress and unconscionability.
FTC Settles Suit Against Tribe-Affiliated Lenders; Dispute Over CFPB Investigation Of Tribe-Affiliated Lenders Moves To Federal Court
On April 11, the FTC announced that a tribe-affiliated payday lending operation and its owner agreed to pay nearly $1 million to resolve allegations that they engaged in unfair or deceptive acts or practices and violated the Credit Practices Rule in the collection of payday loans. The FTC alleged that the lenders illegally tried to garnish borrowers’ wages and sought to force borrowers to travel to South Dakota to appear before a tribal court, and that the loan contracts issued by the lenders illegally stated that they are subject solely to the jurisdiction of the Cheyenne River Sioux Tribe. The announced settlement payment includes a $550,000 civil penalty and a court order to disgorge $417,740. The companies and their owner also are prohibited from further unfair and deceptive practices and are barred from suing any consumer in the course of collecting a debt, except for bringing a counter suit to defend against a suit brought by a consumer.
Also on April 11, in a separate matter related to federal authority over tribe-affiliated lending, a group of tribe-affiliated lenders responded in opposition to a recent CFPB petition to enforce civil investigative demands (CIDs) the Bureau issued to the lenders. In September 2013, the CFPB denied the lenders’ joint petition to set aside the CIDs, rejecting the lenders’ primary argument that the CFPB lacks authority over businesses chartered under the sovereign authority of federally recognized Indian Tribes. The lenders subsequently refused to respond to the CIDs, which the CFPB now asks the court to enforce. The CFPB argues that the lenders fall within the CFPB’s investigative authority under the terms of the Consumer Financial Protection Act, which the CFPB argues is a law of general applicability, including with regard to Indian Tribes and their property interests. The lenders continue to assert that they are sovereign entities operating beyond the CFPB’s reach.
On March 18, the Hawaii Department of Commerce and Consumer Affairs published a notice advising collection agencies that due to changes in state licensing laws in Indiana, Nevada, and North Dakota, those states no longer qualify as “reciprocal states” such that licensure in those states can be used to obtain or renew a Hawaii collection agency designation. Hawaii law allows an out-of-state collection agency to obtain a state collection agency designation by demonstrating the company is licensed under the laws of a state (i) whose requirements to be licensed, permitted, or registered as a collection agency are substantially similar to Hawaii’s requirements; and (ii) that allows similar reciprocal arrangements for Hawaii-licensed agencies. The Department advises that any agency currently using one of the three states identified as the basis for its Hawaii collection agency designation must identify a new reciprocal state on its renewal application. Colorado, Illinois, Michigan, Minnesota, Nebraska, New Mexico, and Wisconsin are identified by the Department as states that meet its definition of a reciprocal state. Because the renewal constitutes a change to the current information on file, the Department will not accept an “online” license verification in lieu of a completed original “Verification of License” form.
On March 20, the CFPB released its third annual report summarizing its activities in 2013 to implement and enforce the FDCPA. The report describes the CFPB’s and the FTC’s shared FDCPA enforcement authority, incorporates the FTC’s annual FDCPA update, and reiterates the intention of both the FTC and the CFPB to exercise their authority to take action—both independently and in concert—against those in violation of the FDCPA.
The report highlights the debt collection-related complaints the Bureau has received—over 30,000 since the CFPB began accepting and compiling consumer complaints in July 2013, making the third-party debt collection market the largest source of consumer complaints submitted to the CFPB. The report states that the majority of the complaints the CFPB has received involve attempts to collect debts not owed and allegedly illegal communication tactics. The report also identifies several changes within the debt collection industry over the past year that will remain points of emphasis for the CFPB, including the expansion of the debt buying market, the growth of medical debt and student loan debt in collection, and the use of expanded technologies to communicate with debtors.
On March 6, the CFPB issued a notice that it intends to conduct a mail survey of consumers “to learn about their experiences interacting with the debt collection industry.” The notice states that the Bureau, as part of its information gathering related to its debt collection rulemaking, will ask consumers about (i) whether they have been contacted by debt collectors in the past; (ii) whether they recognized the debt that was being collected; (iii) interactions with the debt collectors; (iv) preferences for how they would like to be contacted by debt collectors; (v) opinions about potential regulatory interventions in debt collection markets; and (vi) knowledge of legal rights regarding debt collections. Comments on the proposed survey are due by May 6, 2014.
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.
On March 5, the Superior Court of New Jersey, Appellate Division issued an opinion clarifying the proof necessary for debt buyers to prevail on efforts to collect an assigned debt on a closed and charged-off credit card account. New Century Fin. Servs. Inc. v. Oughla, Nos. A-6078-11T4, A-6370-11T1, 2014 WL 839180 (N.J. Sup. Ct. App. Div. Mar. 5, 2014). In a consolidated appeal of two trial court decisions, debtors sought to reverse the trial court’s orders granting summary judgment to two debt buyers seeking to collect on charged-off credit card debt they had purchased from sellers who derived their ownership from credit card issuers. The appeals court explained that to collect such debt, debtors must prove (i) ownership of the charged-off debt, which it can do through business records documenting its ownership, and (ii) the amount due at the time the card issuer charged off the debt. The court also determined that (i) an electronic copy of the last billing statement is sufficient to demonstrate the amount due at charge-off; (ii) the validity of a debt assignment is not undermined by a failure to provide notice of the assignment to the debtor, and (iii) that a debt can be assigned without specifically referencing the debtor’s name or account number. The court held in these companion cases that one of the debt buyers established ownership through proper authentication and certification of business records, while the other debt buyer failed to provide sufficient proof of the full chain of ownership of its claim to meet its burden. The court affirmed summary judgment for one buyer and reversed and remanded the other buyer’s case accordingly.
On February 28, the UK Financial Conduct Authority (FCA) announced final rules for consumer credit providers, including new protections for consumers in credit transactions. The FCA states that the most drastic changes relate to payday lending and debt management. For example, with regard to “high-cost short-term credit,” the new rules will (i) limit to two the number of loan roll-overs; (ii) restrict to two the number of times a firm can seek repayment using a continuous payment authority; and (iii) require creditors to provide a risk warning. Among other things, the new rules also establish prudential standards and conduct protocols for debt management companies, peer-to-peer lending platforms, and debt advice companies. The policy statement also describes the FCA’s risk-based and proactive supervisory approach, which the FCA states will subject firms engaged in “higher risk business” that “pose a potentially greater risk to consumers” to an “intense and hands on supervisory experience” and will allow the FCA to levy "swift penalties” on violators. The new rules take effect April 1, 2014. The FCA plans next to propose a cap on the cost of high-cost, short-term credit.
- Jonice Gray Tucker to discuss “Getting your company ready: Managing fair lending for IMBs” at the Mortgage Bankers Association Independent Mortgage Bankers Conference
- Jonice Gray Tucker to discuss “Be Your Compliance Best in 2022” at the California Mortgage Bankers Association webinar
- Lauren R. Randell to discuss “Significant legal developments in the Northeast” at the 37th Annual National Institute on White Collar Crime
- Jonice Gray Tucker to discuss “Small business & regulation: How fair lending has evolved & where it is heading?” at the Consumer Bankers Association Live program
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek
- Jonice Gray Tucker and Kari Hall to discuss “Equity, equality, regulation and enforcement – The evolving regulatory landscape of fair lending, redlining, and UDAAP” at the ABA Business Law Committee Hybrid Spring Meeting