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CFPB Supplements Consumer Reporting Guidance, Holds Consumer Advisory Board Meeting, Issues Consumer Reporting Complaints Report
On February 27, the CFPB issued supplemental guidance related to consumer reporting and held a public meeting focused on consumer reporting issues. The CFPB also released a report on consumer reporting complaints it has received.
The CFPB issued a supervision bulletin (2014-01) that restates the general obligations under the Fair Credit Reporting Act for furnishers of information to credit reporting agencies and “warn[s] companies that provide information to credit reporting agencies not to avoid investigating consumer disputes.” It follows and supplements guidance issued last year detailing the CFPB’s expectations for furnishers.
The latest guidance is predicated on the CFPB’s concern that when a furnisher responds to a consumer’s dispute, it may, without conducting an investigation, simply direct the consumer reporting agency (CRA) to delete the item it has furnished. The guidance states that a furnisher should not assume that it ceases to be a furnisher with respect to an item that a consumer disputes simply because it directs the CRA to delete that item. In addition, the guidance explains that whether an investigation is reasonable depends on the circumstances, but states that furnishers should not assume that simply deleting an item will generally constitute a reasonable investigation.
The CFPB promises to continue to monitor furnishers’ compliance with FCRA regarding consumer disputes of information they have furnished to CRAs. Furnishers should take immediate steps to ensure they are fulfilling their obligations under the law.
Consumer Advisory Board Meeting
The public session of this week’s two-day Consumer Advisory Board (CAB) Meeting featured remarks from Director Cordray, and a discussion among CAB members, industry representatives, and consumer advocates on several major topics: (i) use of credit history in employment decisions; (ii) consumer access to credit information; and (iii) the credit dispute process.
Mr. Cordray focused on steps the CFPB has taken related to the credit reporting market, including: (i) launching a complaint portal through which consumers have submitted 31,000 consumer reporting complaints, nearly 75% of which have related to the accuracy and completeness of credit reports; (ii) beginning to supervise large credit reporting companies and many large furnishers; (iii) identifying process changes, including upgrades to the e-Oscar consumer dispute system to allow consumers to file disputes online and to provide furnishers direct access to dispute materials; and (iv) issuing guidance to furnishers on resolving consumer disputes.
Mr. Cordray also expressed support for a “major initiative” in the credit card industry to make credit scoring information more easily and regularly available to card holders. Mr. Cordray stated that he sent letters to the CEOs of the major card companies “strongly encouraging them to consider making credit scores and educational content freely available to their customers on a regular basis.” He added that he sees “no reason why this approach should not be replicated with customers across other product lines as well.”
In his CAB remarks, Mr. Cordray also identified some persistent concerns that resulted in the additional furnisher guidance issued today, discussed above. He stated that “[s]ome furnishers are taking short-cuts to avoid undertaking appropriate investigations of consumer disputes. For example, a consumer may find an error on the credit report and file a dispute about an incorrect debt or a credit card that was never opened. In response, the furnisher may simply delete that account from the information it passes along to the credit reporting company.” He stated that such practices deprive consumers of important protections.
During the discussion session, consumer advocates complained that credit reports provided to consumers are not the same as the reports provided to creditors. They claimed that consumers receive “sterilized” versions and do not, for example, get to see if their file is mixed with some else’s file. They also complained that the reports do not provide credit scores.
With regard to the CFPB’s support for creditors disclosing credit scores on a regular basis, several participants, including a representative for CRAs, stated that creditors should be free to provide the credit score of their choice, and not only FICO. Mr. Cordray and the CFPB’s Corey Stone responded that the CFPB is encouraging voluntary participation in score disclosure programs, but stated the Bureau does not believe that any one score needs to be disclosed. Instead, Mr. Stone explained that creditors should provide the score that is most relevant and useful for its customers. Mr. Cordray stressed the importance of providing educational information with the score, regardless of what score is provided.
The consumer advocates also were sharply critical of the CRAs and certain creditors’ dispute resolution processes. One participant raised specific concerns about the lack of human interaction in online dispute processes and the sale of certain add-on products offered during the dispute process.
The industry’s representative defended recent enhancements to the dispute process and highlighted the efficiency benefits of online disputes, including quicker resolution. He added that many furnishers prefer to hear directly from their customers, and that the real issue is how creditors respond.
Report on Consumer Reporting Complaints
The “credit reporting complaint snapshot” states that of the nearly 300,000 complaints the CFPB has received on a range of consumer financial products and services, approximately 31,000 or 11 percent have been about credit reporting. The CFPB accepts consumer credit reporting complaints in five categories: (i) incorrect credit report information; (ii) credit reporting company’s investigation; (iii) improper use of a credit report; (iv) inability to obtain credit report or score; and (v) credit monitoring or identity protection services. The CFPB reports that the most common complaints related to incorrect information on a credit report, while very few complaints related to identity protection or credit monitoring services. The report reviews the complaint handling process, and indicates that companies have resolved approximately 91 percent of the complaints submitted to them.
On January 31, the U.S. Court of Appeals for the Fourth Circuit held that the FDCPA does not impose a requirement that debt disputes be presented in writing and permits debtors to orally dispute the validity of a debt. Clark v. Absolute Collection Serv., Inc., No. 13-1151, 2014 WL 341943 (4th Cir. Jan. 31, 2014). A debt collector moved to dismiss a suit in which the debtor sought to invalidate a debt because the debt collection notice required the debtor’s dispute to be in writing. The debtor argued the notice violated FDCPA section 1692g(a)(3), which provides the basic right to dispute a debt. The debtor also claimed that the writing requirement was a false or deceptive means of collection in violation of section 1692e(10). Considering only the first argument on appeal, the Fourth Circuit joined the Second and Ninth Circuits, but split from the Third Circuit, and held that the “FDCPA clearly defines communications between a debt collector and consumers” and section 1692g(a)(3) “plainly does not” require a written communication to dispute a debt. The court rejected the debt collector’s argument that 1692g(a)(3) imposes an inherent writing requirement.
Eleventh Circuit Holds Collection Fee Based On Percentage Of Principal Owed In Violation Of Contract Terms Violated FDPCA
On January 2, the U.S. Court of Appeals for the Eleventh Circuit held that a debt collector violated the FDCPA by collecting a fee based on a percentage of the principal owed when the contract allowed a fee only for the actual cost of collection. Bradley v. Franklin Collection Serv., Inc. No. 10-1537, 2014 WL 23738 (11th Cir. Jan. 2, 2014). The debtor filed suit claiming, among other things, that the collector violated FDCPA Section 1692f, which prohibits unfair or unconscionable means of collection, including “collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” when it charged a fee that was not the actual cost of collection but rather liquidated damages. The court found that the contract only obligated the debtor to pay “all costs of collection,” i.e. the actual costs of collection and not a percentage-based fee where that fee did not correlate to the costs of collection. The court explained that the collector failed to prove that the percentage-based collection fee—which the collector assessed before attempting to collect the balance due—correlates to the actual cost of its collection effort. Addressing the issue for the first time, the Eleventh Circuit held that because the fee breached the agreement that obligated the debtor to pay only the “costs of collection”, the fee violated FDCPA Section 1692f. The court did not hold that the FDPCA prohibits the use of percentage-based collection fees, provided the contracting parties agree to such an arrangement.
On January 13, the CFPB issued a notice extending the comment period for its advance notice of proposed rulemaking related to debt collection practices. The notice states that the comment period, which was set to end on February 10, 2014, has been extended through February 28, 2014 in response to numerous formal and informal requests for additional time.
On December 18, the Massachusetts Division of Banks published a short set of frequently-asked-questions related to new regulations intended to parallel and supplement mortgage servicing requirements promulgated by the CFPB and included in National Mortgage Servicing Settlement.
On December 10, the Colorado Attorney General (AG) announced a lawsuit against a debt buyer and its principal for allegedly engaging in fraudulent conduct in attempting to collect charged-off debt purchased from two national banks. The complaint also names two debt collection companies to whom the debt buyer resold some of the debt acquired from the banks. The AG asserts that all three companies routinely used false affidavits to collect on the debt.
The complaint scrutinizes the agreements pursuant to which the banks transferred the charged-off debt to the debt buyer. The AG states that the agreements limited the information the banks were obligated to provide to the buyer, requiring it to purchase evidence of the debt from the banks as needed. If the buyer requested documents that the banks could not locate, the banks agreed to provide affidavits attesting to the validity of such debts.
According to the complaint, the debt buyer sought to maximize its profits by using such affidavits and other materials provided by the banks to fabricate similar documents. It then allegedly used those false materials to collect debts from Colorado consumers, or provided the fabricated materials to the debt collectors to whom it had resold some of the debt. The complaint notes that neither of the two debt collectors “had policies or procedures for the evaluation of the validity or accuracy of account documentation that they received regarding debt that they purchased or sought to collect on.”
The AG claims that the creation, use, and distribution of the false bank documents violated the Colorado Fair Debt Collection Practices Act and the Colorado Consumer Protection Act. The AG also claims the debt buyer conducted collection activities in the state without obtaining a license, in violation of the state licensing law. The complaint seeks, among other things, civil penalties, actual damages, restitution, and disgorgement of all profits from the allegedly unlawful activities.
On November 20, the CFPB announced the resolution of an enforcement action against one of the largest payday lenders in the country. The consent order alleges that the lender and an online lending subsidiary made hundreds of payday loans to active duty military members or dependents in violation of the Military Lending Act, and that call center training deficiencies have allowed additional loans to be originated to spouses of active-duty members. The order also alleges unfair and deceptive debt collection practices, including so-called “robosigning” that allegedly yielded inaccurate affidavits and pleadings likely to cause substantial injury. In July, the CFPB issued a notice that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.
Notably, this is the first public action in which the CFPB alleges that the supervised entities engaged in unlawful examination conduct. The Bureau asserts that the lender and subsidiary failed to comply with examination requirements, including by not preserving and producing certain materials and information required by the CFPB. Both the lender and its subsidiary are nonbanks and have not previously been subject to regular federal consumer compliance examinations; the CFPB does not allege that the exam failures were intentional violations potentially subject to criminal charges.
Pursuant to the consent order, the lender must pay $8 million in consumer redress, in addition to the more than $6 million the lender has already distributed to consumers for alleged debt collection and MLA violations. The lender also must pay a $5 million civil money penalty. The CFPB did not reveal how it determined the penalty amount or what portion of the fine is attributable to the alleged consumer-facing violations versus the alleged unlawful exam conduct. Finally, the order requires comprehensive compliance enhancement and imposes ongoing reporting and recordkeeping obligations for a period of three years.
In written remarks released by the CFPB, Director Cordray stated: “This action should send several clear messages to everyone under the jurisdiction of the Consumer Bureau. First, robo-signing practices are illegal wherever they occur, and they need to stop – period. Second, violations of the Military Lending Act harm our servicemembers and will be vigorously policed. Third, the Bureau will detect and punish entities that withhold, destroy, or hide information relevant to our exams.”
On November 13, the U.S. Court of Appeals for the Second Circuit held that where a creditor hires a third party to send collection letters but does not rely on the third party for any other bona fide efforts to collect the debts, the creditor can be held liable for violating the FDCPA under the statute’s false name exception to creditor immunity. Vincent v. The Money Store, No. 11-4525, 2013 WL 5989446 (2nd Cir. Nov. 13, 2013). In this case, a group of debtors filed a putative class action against a mortgage lender who purchased mortgages initially payable to other lenders and subsequently hired a law firm to send allegedly deceptive collection letters to borrowers on the lender’s behalf. Although creditors generally are not considered debt collectors subject to the FDCPA, the court determined in this case that a statutory exception to creditor immunity applied because the creditor, in the process of collecting its own debts, used a name other than its own, which typically would indicate that a third party is collecting or attempting to collect such debts. The court explained that the appropriate inquiry to determine whether a representation to a debtor indicates that a third party is collecting or attempting to collect is whether the third party is making bona fide attempts to collect the debts of the creditor or whether it is merely operating as a “conduit” for a collection process that the creditor controls. Because that inquiry requires a factual determination and because a jury could find that the law firm was acting only as a conduit for the lender, the lender could be held liable if the letters falsely indicated that the law firm was collecting the debt. The court affirmed the district court’s dismissal of the debtors’ TILA claims, holding that because the mortgage documents did not name the lender as the person to whom the debt was initially payable, the lender is not a “creditor” under TILA. However, after a review of TILA’s legislative history, the court identified for Congress an apparent oversight in TILA that “allows an assignee to escape TILA liability when it overcharges the debtor and collects unauthorized fees, where the original creditor would otherwise be required to refund the debtor promptly.” The court remanded the action for further proceedings.
On November 6, the CFPB announced an advance notice of proposed rulemaking (ANPR) to solicit input on a wide array of issues related to consumer protection in the debt collection market. With the release of the ANPR, the CFPB also announced the publication of approximately 5,000 debt collection complaints in its consumer complaint database.
The ANPR marks the Bureau’s first step toward exercising its rulemaking authority under the Fair Debt Collection Practices Act (FDCPA). Notably, although the FDCPA generally applies only to third-party debt collectors, the CFPB’s regulations could extend to original creditors as well. In addition to the CFPB’s express authority to make substantive rules under the FDCPA, the Bureau made all creditors subject to debt collection guidance issued earlier this year pursuant to its general authority to regulate unfair, deceptive, and abusive practices.
The 162 questions contained in the ANPR focus primarily on the accuracy of information used by debt collectors, how to ensure consumers know their rights, and the communication tactics collectors employ to recover debts.
- Information Accuracy—Due to concern over how information is transferred, the CFPB seeks input on current processes for transferring records and ensuring the integrity of information transmitted. Specifically, the CFPB inquires about how account holders are identified and verified, how claims of improper identification are handled, how amounts of indebtedness are confirmed, and how claims of indebtedness are supported.
- Informed Consumers—Based on its belief that consumers may not sufficiently understand debt collection processes, the CFPB seeks input on the quality of information and disclosures provided to debtors. Specifically, the CFPB inquires about the information and disclosures provided with respect to the specific debt being collected and the debtors’ legal rights, including the rights to dispute debt and limit certain communications.
- Communication Tactics—Based on its concern that harmful communication tactics continue in the debt collection market, the CFPB seeks input on tactics not addressed by the FDCPA. Specifically, the CFPB inquires about frequency of contact with debtors, the means of communication employed, and the use and prevalence of threats by collectors.
The deadline for comments is 90 days from publication of the ANPR in the Federal Register.
On October 18, New York DFS Superintendent Benjamin Lawsky commented on the New York Unified Court System’s proposal to require debt collectors to use standardized affidavits as evidence of ownership of debt when seeking default judgments in consumer credit actions following an assignment of the original creditor’s interest. Superintendent Lawsky urged the Court System to pursue “bolder reform,” including requiring debt collectors to (i) present “stronger affidavits” to prevent “robo-signing” and ensure debt collectors review a consumer’s file, (ii) include information about the reviewed debts in the affidavit, (iii) include documentation evidencing the debt with the complaint, (iv) send consumers a pre-complaint notice before commencing a collection lawsuit, and (v) demonstrate proof of service when moving for a default judgment. The Superintendent also recommended that consumers be provided an opportunity to vacate a default judgment if a debt collector violates court rules. The Court System is accepting comments on its proposal through December 4, 2013.
- 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