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DFPI takes action against five debt collectors
On January 30, the California Department of Financial Protection and Innovation (DFPI) announced enforcement actions against five separate debt collectors for unlicensed activity under the Debt Collection Licensing Act (DCLA) and unlawful and deceptive acts or practices in violation of the California Consumer Financial Protection Law (CCFPL). According to DFPI, the desist and refrain orders allege that the subjects engaged in a variety of different unlawful and deceptive practices, including, among other things: (i) engaging in debt collection in California without a license from the DFPI; (ii) attempting to collect a debt that a consumer did not owe; (iii) making unlawful threats to sue on debts; (iv) making false claims of pending lawsuits; and (v) failing to notify consumers of their right to request validation of debts. According to DFPI Commissioner Clothilde Hewlett, the agency has observed “an increase in fake debt collector scams in recent months,” and is “committed to rigorous, ongoing enforcement efforts to protect Californians from these deceitful practices.” The combined actions resulted in penalties totaling $120,000 and ordered the debt collectors to desist and refrain from violating the DCLA and CCFPL.
2nd Circuit affirms dismissal of FDCPA, FCRA, RICO action
On January 19, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a debt collection action related to alleged violations of the FCRA, FDCPA, and the Racketeer and Influenced and Corrupt Organizations (RICO) Act. Plaintiff filed a complaint against a telecommunications company and related entities concerning a disputed past-due charge and subsequent debt collection proceeding. The district court dismissed the action and denied the plaintiff’s motion for sanctions. In affirming the dismissal, the appellate court concluded that the district court correctly determined that the plaintiff failed to state a claim under the FCRA on the basis that (i) the plaintiff failed to allege cognizable damages caused by the alleged violations; and (ii) the credit reporting agencies corrected the allegedly inaccurate information within 30 days of being notified. The 2nd Circuit held that the plaintiff’s FDCPA claims also failed, pointing to the U.S. Supreme Court’s decision in Henson v. Santander Consumer USA Inc., which found that “you have to attempt to collect debts owed another before you can ever qualify as a debt collector” under the FDCPA. According to the appellate court, the plaintiff claimed that the relevant defendants are or were creditors seeking to collect on debts owed to them, and that, as such, they do not qualify as debt collectors under the statute. Finally, the 2nd Circuit concluded that the district court correctly determined that the plaintiff failed to demonstrate how the communications he received from the defendant qualified as mail or wire fraud under RICO.
District Court grants motion to set aside default judgment in FDCPA, FCRA suit
On January 19, the U.S. District Court for the District of South Dakota granted a defendant “buy now, pay later” service’s motion to set aside the default judgment in an FDCPA and FCRA suit originally entered in a small claims court. According to the order, the plaintiff filed suit in small claims court alleging violations of the FDCPA and FCRA, but the defendant did not receive notice of the suit and, as such, did not respond to the claim. A default was entered against the defendant thereafter. Upon receiving notice of the default, the defendant removed the case to federal court and moved to set aside the default. With respect to removal, the court held that removal was timely because it was made within 30 days of receiving the notice of default and held that removal was proper based on federal question jurisdiction. With respect to the motion to set aside, the court set aside the judgment, finding that there was no evidence of bad faith on the defendant’s part, that there was no prejudice to the plaintiff, and that the defendant did have “meritorious defenses” to the plaintiff’s claims.
3rd Circuit: Now-invalid default judgment still in effect when debt collection attempts were made
On January 11, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s decision to grant summary judgment in favor of defendants accused of violating the FDCPA when attempting to collect on a judgment that was later vacated. According to the opinion, the plaintiff was sued in state court for an unpaid debt. Contradictory orders were entered by the Superior Court, one which dismissed the action due to one of the defendant’s failure to attend trial, and another that entered default judgment against the plaintiff (which was confirmed two years later by the state court).
A few years later, an attempt was made to collect on the debt. The plaintiff disputed the debt and later sued, claiming the defendants “knew or should have known” that the debt was unenforceable. The plaintiff later filed a motion in state court to vacate the default judgment and declare it “void ab initio,” which was eventually granted by the state court after it determined that the judgment was erroneously entered by the clerk after the court had already dismissed the case due to the debt collector’s failure to appear for trial. The plaintiff filed a cross-motion for summary judgment in the district court.
The district court, however, found that the defendants’ alleged efforts to collect the debt were not false or misleading because the now-invalid default judgment at issue was technically still valid and existed when the collection attempts were made. The plaintiff appealed, arguing that the summary judgment violated the Rooker-Feldman doctrine because the district court “‘could not have reached the decision that it did without necessarily supplanting’ the Superior Court’s order vacating the judgment against her.” The plaintiff also argued that the district court erred when it found the Superior Court judgment against the plaintiff to be “in effect . . . until such time as it was vacated, . . . rather than ‘per se not valid’” when the defendants engaged in their efforts to collect the debt.
On appeal, the 3rd Circuit disagreed with the plaintiff’s assertions. According to the appellate court, the plaintiff satisfied none of the four requirements to trigger the Rooker-Feldman doctrine, adding that regardless of whether the state court declared the judgment “void ab initio,” it was in effect when the defendant attempted to collect on the debt. Moreover, the appellate court noted that the plaintiff “failed to present a triable issue that any communication from Defendants to [the plaintiff] regarding the collection of the default judgment was made unlawful retroactively upon the Superior Court vacating its default judgment order.”
District Court issues judgment against debt-collection law firm
On January 11, the U.S. District Court for the Southern District of New York entered a proposed stipulated final judgment and order against a defendant New York debt-collection law firm. As previously covered by InfoBytes, the Bureau’s complaint alleged that between 2014 and 2016 the defendant initiated over 99,000 collection lawsuits in an attempt to collect debts by relying on “non-attorney support staff, automation, and both a cursory and deficient review of account files,” in violation of both the FDCPA and the Consumer Financial Protection Act. The Bureau alleged the lawsuits contained names and signatures of attorneys despite those attorneys “not being meaningfully involved in reviewing the merits of the lawsuits,” including not reviewing pertinent documentation related to the debts, such as account applications, billing statements, payment histories, and the terms and conditions governing an account. Moreover, the defendant allegedly did not perform reviews of the contracts related to debt sales, despite filing lawsuits on behalf of debt buyers that have been accused of unlawful debt collection practices.
In order to continue with debt-collection litigation, for each collection suit, the settlement requires the defendant to possess documents with specific information about the debt, including the name of the original creditor, evidence that the consumer authorized the debt, the chain of assignment supporting any sale of the debt, and a break-down of how the debt amount was calculated. The defendant must also certify that the attorney whose name appears on the complaint reviewed the supporting documentation and ensure the complaint is consistent with that documentation. Any pending lawsuit in which the defendant does not certify its compliance with the specific information and meaningful attorney review requirements must be voluntarily dismissed. The also order requires the defendant to pay a $100,000 penalty to the Bureau.
CFPB says ruling on funding structure doesn’t affect debt collector’s CID
In December, the CFPB denied a petition by a debt collection agency to set aside a civil investigative demand (CID) issued last October. The company challenged the Bureau’s authority to issue the CID on the grounds that the agency’s funding mechanism is unconstitutional. The company’s argument relied on a decision issued by the U.S. Court of Appeals for the Fifth Circuit on October 19 (covered by a Buckley Special Alert), which found that the Bureau is unconstitutionally funded and vacated the CFPB’s Payday Lending Rule. The Bureau submitted a petition for a writ of certiorari in November asking the U.S. Supreme Court to review the 5th Circuit decision (covered by InfoBytes here).
The debt collection agency and the CFPB held a “meet and confer” at the end of October, and the company argued that during the meet and confer the parties did not agree on two of the company’s objections: (i) the inadequate Notification of Purpose Pursuant to 12 C.F.R. §1080.5 contained in the CID; and (ii) the Bureau’s unconstitutional funding mechanism. The company filed a petition to set aside the CID, arguing that because the Bureau’s funding mechanism is unconstitutional, the Bureau lacks enforcement authority and the CID should be set aside in its entirety. The company claimed a similar nexus exists between the Bureau’s unconstitutional funding mechanism and the concrete harm suffered by the company. Just as the Payday Lending Rule was vacated by the 5th Circuit and set aside as unenforceable, “but for the Bureau’s unconstitutional spending, the CID would not have been issued,” the company said.
In rejecting the company’s arguments, the Bureau commented that it “has consistently taken the position that the administrative process … for petitioning to modify or set aside a CID is not the proper forum for raising and adjudicating challenges to the constitutionality of the Bureau’s statute.” In declining to set aside the CID on constitutional grounds, the Bureau wrote that should it later determine that it is necessary to obtain a court order compelling compliance with the CID, the company will have an opportunity to raise any constitutional arguments as a defense in district court.
NYDFS revises proposed amendments to third-party debt collection rules
In December, NYDFS released revised proposed amendments to 23 NYCRR 1, which regulates third-party debt collectors and debt buyers. NYDFS first issued a proposed amendment to 23 NYCRR 1 in December 2021 (covered by InfoBytes here), which factored in findings from NYDFS investigations that revealed instances of abusive and deceptive debt collection practices, as well as consumer debt collection complaint data. The first proposed amendment, among other things, is intended to enhance consumer protections by increasing transparency, requiring heightened disclosures, reducing misleading statements about consumer debt obligations, and placing stricter limits on debt collection phone calls than those currently imposed under federal regulations. The revised proposal, among other things, also include the following requirements:
- A debt collector must send written notification within five days after the initial communication with a consumer that clearly and conspicuously contains validation information as required under Regulation F. Debt collectors are prohibited from using the charge-off date as the itemization date for the alleged debt unless it is a revolving or open-end credit account. Instead, debt collectors should use the last payment date as the itemization date if available.
- Written notifications must be clear and conspicuous and also include the following, in addition to validation information: (i) the reference date relied upon to determine the itemization date; (ii) for revolving or open-end credit accounts, an account number (or a truncated version of the account number) associated with the debt on the last payment date or the last statement date if no payment has been made; (iii) the merchant brand, affinity brand, or facility name, if any, associated with the debt; (iv) the date and amount of the last payment or a statement noting that no payment was made, if available; (v) the applicable statute of limitations expressed in years for debt that has not been reduced to judgment; (vi) information on a debt that has been reduced to a judgment, if applicable; and (vii) notice that a consumer has the right to dispute the validity of a debt and instructions on how to submit a dispute.
- Debt collectors must inform consumers of available language access services and are required to record the consumer’s language preference, if other than English, in the written notification.
- Unless affirmatively requested by the consumer, required disclosures may not be made exclusively by electronic communication. Additionally, a debt collector may communicate with a consumer exclusively through electronic communication only if: (i) the consumer has voluntarily provided contact information for electronic communication; (ii) the consumer has given revocable consent in writing to receive electronic communication from the debt collector in reference to a specific debt (electronic signatures constitute written consent); (iii) the debt collector retains the written consent for six years or until the debt is discharged, sold, or transferred (whichever is longer); and (iv) all electronic communications include clear and conspicuous disclosures regarding revoking consent.
- Communications sent in the form of a pleading in a civil action will not be considered an initial communication for the purposes of these amendments.
- Debt collectors must provide substantiation of debt within 45 days.
- Debt collectors may not communicate or attempt to communicate excessively with a consumer. Specifically, debt collectors are limited to one completed phone call and three attempted phone calls per seven-day period per alleged debt. Telephone calls more than these limits may be permitted when required by federal or state law, or when made in response to the consumer’s request to be contacted and in the manner indicated by the consumer, if any.
Comments are due February 13. The amendments are scheduled to take effect 180 days after the notice of adoption is published in the State Register.
National bank to pay $2 million in mortgage fee violation class action
On December 19, the U.S. District Court for the Central District of California granted final approval of a settlement in a $2 million class action resolving allegations that a national bank violated California’s Rosenthal Fair Debt Collection Practices Act (RFDCPA) and Unfair Competition Law (UCL). According to the order for preliminary approval, the plaintiff class alleged that the bank improperly charged and collected transaction fees when processing mortgage payments. The district court certified the class, which included “all persons who have or had a California address, and at any time between June 1, 2016 and the date of the Court’s order preliminarily approving the settlement, paid at least one transaction fee to [the defendant] for making a payment on a residential mortgage loan serviced by [the defendant] by telephone, IVR, or the internet.” The district court determined that the settlement agreement was “reasonable and adequate.” The two class representatives who filed the suit were awarded $1,500 each, and their attorneys were awarded $499,000 in fees.
District Court approves $2.8 million settlement in FDCPA convenience fee class action
On December 22, the U.S. District Court for the Southern District of Florida granted preliminary approval of a $2.8 million settlement in an FDCPA class-action suit resolving allegations that convenience fees were charged when consumers made payments on their mortgages over the phone or online. According to the suit, the plaintiffs claimed the defendant did not charge processing fees if borrowers made payments by check or signed up for automatic monthly debits from their bank accounts. The plaintiffs further argued that the processing fees were “illegal and improper because neither the mortgages themselves nor applicable statutes authorize such fees.” The parties agreed to mediation in April 2022, and a motion for preliminary approval of a settlement was filed in August. A coalition of state attorneys general from 32 states and the District of Columbia, led by the New York AG filed an amicus brief in the district court opposing the original proposed $13 million settlement in the suit (covered previously by InfoBytes here). The AGs outlined concerns with the proposed settlement, including that (i) the relief provided to class members violates various state laws, and that the defendant seeks to ratify fees in an “unwritten, mass amendment” that violates state laws and regulations; (ii) class members only receive an “inadequate” one-time payment, while the defendant may continue to charge excessive fees for the life of the loan; and (iii) low- and moderate-income borrowers are not treated equitably under the proposed settlement. Under the terms of the new settlement, members of the class who do not opt out of the settlement will receive a share of the $2.8 million. The settlement also reduces the fees class members will have to pay when making payments online or via the telephone for the next two years. The defendant also agreed to add additional disclosures to its website to increase borrower awareness of alternative payment methods that could have lower fees or no fees. Defendant’s representatives will also receive additional training to ensure they provide additional information and disclosures about convenience fees when speaking with customers.
On June 16, the court granted final approval of the settlement.
Massachusetts reaches settlement in unfair debt collection and mortgage servicing matter
On December 22, the Massachusetts attorney general announced a settlement with a South Carolina mortgage servicer to resolve claims that it allegedly failed to assist homeowners avoid foreclosure and engaged in unfair debt collection and mortgage servicing practices. According to an assurance of discontinuance filed in Suffolk Superior Court, the servicer allegedly violated the Massachusetts’ Act to Prevent Unlawful and Unnecessary Foreclosures, which requires servicers to make a good faith effort to help borrowers with certain unfair loan terms avoid foreclosure. Among other things, the servicer allegedly failed to (i) properly review borrowers’ income, debts, and obligations when assessing affordable loan modifications; (ii) provide borrowers with the results of these assessments; or (iii) provide borrowers with notice of their right to present a counteroffer after being offered a loan modification. The servicer also allegedly violated the state’s debt collection regulations by failing to timely issue compliant debt validation notices, and calling borrowers more than twice in a seven-day period. While denying the allegations, the servicer agreed to pay $975,000 to the state and will undertake significant business practice changes and provide ongoing reporting to the AG to ensure compliance.