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CFPB Sues Online Lenders Following Investigation into Debt Collection Practices
On April 27, the CFPB announced that it filed a suit against four online installment lenders for allegedly deceiving customers by collecting debts that were not legally owed. In a complaint filed in the United States District Court for the Northern District of Illinois, the Bureau claims, among other things, that the lenders engaged in unfair, abusive, and deceptive acts—a violation of Dodd-Frank—by collecting on installment loans that are partially or wholly void under state law. The Bureau further claims that lenders violated the TILA for failing to disclose the annual percentage rate for their loans when they were required to do so. The complaint alleges that the lenders originated, serviced, and collected high-cost, small-dollar installment loans. Since at least 2012, consumers could borrow between $300 and $1,200 with annual percentage rates from 440 percent up to 950 percent. These high-cost loans allegedly violate licensing requirements or usury limits in a least 17 states—thus rendering the loans void in whole or in part. The CFPB asserts that the lenders not only misrepresented that consumers were obligated to pay debts that were void, but also reinforced the misrepresentations through actions such as sending letters, making phone calls demanding payment, and originating ACH debit entries from consumers’ bank accounts.The complaint seeks a permanent injunction prohibiting the lenders from committing future violations of federal consumer financial law, as well as other legal and equitable relief including restitution to affected consumers, disgorgement of ill-gotten revenue, and civil money penalties.
CFPB Fines Servicemember Auto Lender for Violating Consent Order
On April 26, the CFPB issued a second consent order against an Ohio-based auto lender, specializing in extending credit to servicemembers, for violating an earlier 2015 consent order issued by the Bureau (see previous InfoBytes summary). The 2015 order required, among other things, that the lender to pay restitution of over $2 million to affected consumers in addition to a $1 million civil money penalty for allegedly engaging in unfair, abusive, and deceptive debt collection practices. The 2017 consent order claims the lender violated the earlier order by failing to provide the required consumer redress or the redress plan consistent with the 2015 consent order. The Bureau contends that the lender issued worthless account “credits” to settled-in full accounts and to consumers whose debts were discharged in bankruptcy, and failed to provide the appropriate redress to consumers making payments under settlement agreements. The consent order requires that the lender: (i) pay an additional $1.25 million civil money penalty; (ii) pay $718,900 to the Bureau, which will be sent as refunds to consumers; (iii) issue $372,157 in account credits to consumers who have account balances, in addition to properly crediting consumers making payments under settlement agreements; and (iv) pay $75,000 in redress-administration costs to the Bureau.
FTC Announces Civil Penalty Judgment Against Debt Collector Fined $2 Million for FDCPA Violations
On April 24, the FTC announced a civil penalty judgment against the president of a Texas-based debt collection company, ordering him to pay $2 million for violating the Fair Debt Collection Practices Act by falsely threatening debtors (see previous InfoBytes post). The judgment was filed in the Eastern District of Texas and resolves a case filed on the FTC’s behalf by the Department of Justice in January 2015, alleging that the company’s collectors were impersonating attorneys and judicial employees; falsely threatening litigation, wage garnishments and asset seizures; and misrepresenting the character or legal status of debts under collection. Both the president and the debt collection company have been banned from the debt collection business under a permanent injunction issued in April 2016.
Supreme Court Hears Arguments on Whether a Debt Collector Who Purchases the Debt is Liable Under the FDCPA
On April 18, the United States Supreme Court heard oral argument in Henson v. Santander Consumer USA, Inc., Dkt. No. 16-349, on the question of “[w]hether a company that regularly attempts to collect debts it purchased after the debts had fallen into default is a ‘debt collector’ subject to the Fair Debt Collection Practices Act [FDCPA].” The case arose out of a class action filed by four consumers who had defaulted on automobile loans made by an auto lending affiliate of a major bank. The originator hired Respondent to collect the loans on behalf of the lender and Respondent later purchased the delinquent loans as part of a pool. Though Petitioners did not allege that debt collection was the principal purpose of the Respondent’s business, the consumer-plaintiffs had claimed that the Respondent regularly buys and attempts to collect defaulted debts, and that, in this instance, the Respondent engaged in conduct that violated the FDCPA after it bought the loans. The Petitioner needed to establish, among other things, that the Respondent was a debt collector under the FDCPA and that the loans were in default when they were acquired.
In March 2016, the U.S. Court of Appeals for the Fourth Circuit rejected the consumers’ arguments, concluding that the FDCPA “generally does not regulate creditors when they collect debt on their own account and that, on the facts alleged by the plaintiffs, [the defendant] became a creditor when it purchased the loans before engaging in the challenged practices.” Accordingly, the Fourth Circuit noted that the originator of the loans was irrelevant. In September 2016, the consumer-plaintiffs filed a cert petition with the Supreme Court, which was subsequently granted on January 13. Attorneys general from 28 states and the District of Columbia also joined in an amicus brief supporting the consumers’ argument.
At oral argument before the Supreme Court, the Petitioners cited 15 U.S.C. §1692a(6)(F) and argued that the debts are "owed" to the original lender, but are "due" to the debt buyer. As such, argued Petitioner, a debt buyer should be considered to be collecting debts “owed or due another,” and thus fall within the FDCPA definition of a “debt collector”. Respondent countered that “owed or due another” could only mean that the debt is currently owed to another person. However, Respondent argued, as a debt buyer, it was collecting debts owed to itself, and thus would not be a “debt collector” under the FDCPA. Both sides also presented policy-based arguments. Petitioner suggested that because Respondent was considered a “debt collector” before purchasing the loan, it could not remove itself from the scope of the FDCPA by purchasing the debts. Conversely, Respondent noted that, by purchasing essentially all of the original lender’s loans it had “stepped into [the lender]’s shoes.” Counsel emphasized that Respondent therefore fit the FDCPA definition of “creditor,” and, as a creditor, it had an incentive to maintain a positive relationship with consumers.
CFPB Takes Action Against Law Firm for Alleged FDCPA Violations Concerning Claims of Attorney Involvement in Debt Collection
On April 17, the CFPB announced that it was seeking a permanent injunction and fines against a law firm for allegedly engaging in illegal debt collection practices by making false representations regarding attorney involvement in debt collection calls and in “millions of collection letters sent to consumers.” In a complaint filed in the United States District Court for the Northern District of Ohio, the Bureau claims, among other things, that the firm violated the Fair Debt Collection Practices Act and Dodd-Frank by sending “demand letters” and making collection calls to consumers falsely implying that the consumer’s account files had been reviewed by an attorney. The complaint alleges that a majority of the demand letters were created through an automated process and, in most cases, no attorney had reviewed the account file to determine whether sending such a letter was accurate and appropriate. These letters included payment coupons through which consumers made millions of dollars in debt payments to the law firm. The complaint also alleges that a majority of the collection calls made to consumers were handled by non-attorney collectors who conveyed the impression that the matters had been reviewed by attorneys even though no attorney had in fact reviewed the account files. The complaint seeks a permanent injunction prohibiting the firm from committing future violations as well as other legal and equitable relief including restitution to affected consumers, disgorgement of ill-gotten revenue, and civil money penalties.
FTC Returning More Than $2.7 Million to Consumers Scammed in Debt Collection Scheme
On March 30, the FTC announced that it is mailing checks to 5,232 consumers who lost money as part of a debt collection scheme that cheated consumers out of more than $2.7 million. The compensation follows a 2011 complaint filed by the Commission that was settled in 2014, in which the two principal owners (Defendants) of the debt collection company were ordered to surrender more than $3.3 million worth of assets to be paid to the victims. Defendants were also permanently banned from the debt collection business and prohibited from falsely representing any financial products or services. The charges in the complaint allege Defendants (and others) violated the FTC Act and FDCPA by: (i) calling consumers and posing as process servers attempting to “deliver legal papers . . . purportedly related to a lawsuit”; (ii) threatening consumers with arrest if they did not respond to the calls; and (iii) masquerading as attorneys or law office employees demanding consumers pay legal fees where, in many instances, “consumers did not even owe the debt the defendants were trying to collect.” According to the Commission’s March 30 announcement, consumers who lost money will receive the full amount of fraudulent fees Defendants added to their debt.
Debt Collection Company President Fined $2 Million for FDCPA Violations
On March 21, a U.S. district judge in the Eastern District of Texas ordered the president of a Texas-based third-party debt collector company (Defendant) to pay a $2 million civil penalty for FDCPA violations by company employees. U.S. v. Commercial Recovery Systems, Inc., No. 4:15-CV-00036, 2017 WL 1065137 (E.D. Tex. Mar. 21, 2017). The complaint, filed in 2015, alleges that Defendant had the authority to direct and control the employees’ actions and had personal knowledge that employees were “impersonating attorneys, attorneys’ staff and judicial employees; falsely threatening litigation; falsely threatening wage garnishments and asset seizures; and misrepresenting the character or legal status of debts under collection.” In his order, the judge notes that Defendant “admitted to hiring abusive collection managers and refused to fire them if they were effective,” acknowledged that the company had no formal FDCPA training program, and testified that the company had been driven into bankruptcy largely by FDCPA suits brought by private litigants. Such conduct, the judge reasoned, evidences a “lack of good faith.” The Court noted that theoretically the Defendant could have faced a civil penalty exceeding $4 billion if the estimated 109,643 violations were penalized at $40,000 each—the maximum penalty amount authorized by the FTC Act for “each instance of conduct that violates the FDCPA with actual or implied knowledge of the FDCPA.” In additional to the penalty, the Defendant must cease all debt collection activity.
FTC Settles with Debt Collection Company for Violations of FTC Act and FDCPA
On March 24, the FTC entered into an agreement with a debt collection company and its owners (Defendants) to resolve allegations that Defendants had engaged in deceptive acts or practices in violation of the FTC Act and the FDCPA. Earlier in the month, the FTC filed a complaint against Defendants, claiming that Defendants collected “court fines, parking tickets, and debts for utility bills and other services on behalf of more than 500 municipalities in various states, including Alabama, Arkansas, Illinois, Kansas, Louisiana, Mississippi, Oklahoma and Texas.” The complaint alleges that Defendants used government letterhead to mislead consumers into thinking the letter was coming from a government agency. The complaint further asserts that Defendants sent consumers an initial warning letter, followed by a “FINAL NOTICE PRIOR TO ARREST” document, which falsely claimed that due to nonpayment, the consumer was subject to arrest, suspension of his or her driver’s license, and reporting to consumer reporting agencies. The agreement enters a civil penalty of $350,000 that must be paid within seven days and prohibits Defendants from misrepresenting debt collection practices and making unsubstantiated claims.
House Bill Focuses on Collection of Debts Owed to Federal Agencies
In February, Rep. Mia Love (R-Utah) introduced the Stop Debt Collection Abuse Act of 2017 (H.R. 864)—legislation seeking to extend the scope of the Fair Debt Collection Practices Act (“FDCPA”) to cover the activities of private debt collectors working on behalf of federal government agencies. Specifically, the proposed bill expands the definition of debt subject to the FDCPA to cover obligations—including loans, overpayments, fines, past-due penalties, and late fees—owed to a federal agency. Under the proposed new law, a debt collector includes any person who regularly collects debts currently or originally owed or allegedly owed to a federal agency. Moreover, the bill also requires that any fees charged by private debt collectors seeking to collect debt owed to a federal agency are limited to: (i) reasonable amounts in relation to the actual costs of the collection; (ii) fees authorized by a contract between the debt collector and the federal agency; and (iii) amounts not greater than 10 percent of the amount collected by the debt collector. H.R. 864, which is currently pending before the House committee on Financial Services, is co-sponsored by Keith Ellison (D-Minn.), French Hill (R-Ark.), and Emanuel Cleaver II (D-Mo.).
Special Alert: Madden Class Action Moves Forward
On February 27, the U.S. District Court for the Southern District of New York issued a ruling in Madden v. Midland Funding, LLC,[1] holding that New York’s fundamental public policy against usury overrides a Delaware choice-of-law clause in the plaintiff’s credit card agreement. The court allowed the plaintiff to proceed with Fair Debt Collection Practices Act (“FDCPA”) claims (and related state unfair or deceptive acts or practices claims) against the defendants, a debt buyer that had purchased the plaintiff’s charged-off credit card debt and its affiliated debt collector. The court did not allow plaintiff’s claims for violations of New York’s usury law to proceed, as it held that New York’s civil usury statute does not apply to defaulted debts and that the plaintiff cannot directly enforce the criminal usury statute. The court also granted the plaintiff’s motion for class certification.
[1] No. 11-CV-8149, 2017 WL 758518 (S.D.N.Y. Feb. 27, 2017).
Click here to read full special alert* * *
If you have questions about the ruling or other related issues, visit our Class Actions practice for more information, or contact a Buckley Sandler attorney with whom you have worked in the past.