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New York Warns Payday Loan Debt Collectors
On February 22, the New York Department of Financial Services (DFS) sent letters to all debt collectors in the state to remind them that it is illegal to attempt to collect a debt on a payday loan made in New York, even if such loans were made on the Internet. Under New York law, nonbank lenders and state-charted banks are prohibited from making loans or forbearances under $250,000 at an interest rate of 16 percent or higher. Any loans made in violation of those limitations are void and cannot be collected by a debt collector. The DFS claims that “[l]enders attempt to skirt New York’s prohibition on payday lending by offering loans over the Internet, hoping to avoid prosecution.” The DS states that, regardless of the method used to make the loan, payday loans made in New York are not valid debts and cannot lawfully be collected.
CFPB Director Cordray Outlines CFPB Agenda
On February 20, in remarks during the public portion of the CFPB’s Consumer Advisory Board meeting, CFPB Director Richard Cordray identified four “classes of problems” the CFPB will seek to address in the future. Mr. Cordray stated that the CFPB will focus on (i) deceptive and misleading marketing of consumer financial products and services; (ii) financial products that trigger a cycle of debt; (iii) certain markets – such as debt collection, loan servicing, and credit reporting – where consumers are unable to choose their provider; and (iv) discrimination. While the CFPB has already taken a number of enforcement actions to address the first set of problems, Mr. Cordray noted that with respect to the second class of problems the CFPB is still assessing how to deploy its various tools to best protect consumers while preserving access to responsible credit. Mr. Cordray also noted that loan servicing practices remain a concern, and again drew parallels between the mortgage servicing market and the student loan servicing market, noting that the CFPB is looking to take steps that may address the same kinds of problems faced by student loan borrowers. With respect to discrimination, Mr. Cordray argued that African-Americans and Hispanics have unequal access to responsible credit and pay more for mortgages and auto loans, and reiterated the CFPB’s commitment to utilizing the disparate impact theory of discrimination when pursuing enforcement actions.
FTC Releases Debt Buyer Study
On January 30, the FTC released the results of a first-of-its-kind empirical study of the debt buying industry. The FTC looked at more than 5,000 portfolios of consumer debt with a face value of $143 billion, the majority of which was credit card debt, but which also included mortgage, medical, utility, telecommunications, and other debt. The report identifies a number of “key findings” related to (i) prices buyers paid for debt, (ii) information and account documentation that buyers received in the transaction, (iii) consumer disputes of debts, and (iv) debt age and statute of limitations. The FTC believes additional study of small debt buyers is required, as are reviews of debt buyers’ litigation practices and the accuracy of the information debt buyers receive and use to collect debts. While the report does not announce any specific policy or enforcement measures, the FTC notes that it continues to receive a high level of complaints about debt collectors, more than for any other industry, and that the sufficiency and accuracy of debt information remains a significant consumer protection concern
Chicago Requires Debt Collector Licensing, Sets Zoning Requirements for Small Dollar Lenders
On January 17, the City of Chicago passed ordinances related to debt collection, small dollar lending, and license enforcement. With the adoption of an ordinance requiring that debt collectors collecting debts from Chicagoans obtain from the City a Regulated Business License, Chicago becomes only the third municipality to require local debt collector licensing. By requiring a license, the ordinance requires that debt collectors follow all state and federal debt collection rules, including for example, providing debt verification. For debt collectors that have their licenses revoked, the ordinance requires a four-year wait period before a new license can be issued. A second ordinance sets new zoning rules for payday and title-secured lending stores. Finally, the City passed an ordinance that, effective June 1, 2013, will allow the Department of Business Affairs and Consumer Protection to initiate license revocation proceedings and refuse to issue or reissue the license of specific business locations convicted within the last five years of violating the Illinois Wage Payment and Collection Act (IWPCA) and the federal FDCPA. The passing of the ordinances follows a recent announcement by the City and the CFPB to enter a first-of-its-kind partnership to share information on consumer financial protection issues.
Sixth Circuit Holds That Mortgage Foreclosures are Debt Collections Under the FDCPA
On January 14, the U.S. Court of Appeals for the Sixth Circuit held that mortgage foreclosures are debt collections under the FDCPA. Glazer v. Chase Home Finance LLC, No. 10-3416, 2013 WL 141699 (6th Cir. Jan. 14, 2013). The decision rejects the view held by a majority of district courts, including the district court in this case, that mortgage foreclosures are generally outside the scope of the FDCPA because they are enforcements of a security instrument, not attempts to collect money. In this case, the borrower brought suit alleging that the law firm that attempted to foreclose on his property violated the FDCPA, and the district court dismissed the claim, ruling that foreclosures are not debt collections. In reaching its conclusion, the Sixth Circuit reasoned that “whether an obligation is a ‘debt’ depends not on whether the obligation is secured, but rather upon the purpose for which it was incurred.” The court explained that collecting such a debt can occur through personal solicitation or legal proceedings. As such, the court held that “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt,” and, therefore, every mortgage foreclosure is a debt collection. Further, the court held that lawyers who meet the general definition of “debt collector” must comply with the FDCPA when engaged in a mortgage foreclosure. The Sixth Circuit reversed the district court’s dismissal and remanded the case for further proceedings.
California District Court Holds Assignee Indirect Auto Finance Company Not Subject to FDCPA
On January 9, the U.S. District Court for the Central District of California held that an indirect auto finance company that took assignment of a retail installment sales contract from an automobile dealer is not a debt collector subject to the FDCPA. Tu v. Camino Real Chevrolet, No. 12-9456, 2013 WL 140278 (C.D. Cal. Jan. 9, 2013). As the court explained, FDCPA Section 1692a(6) defines a “debt collector” to include any person who uses any instrumentality of interstate commerce or the mails for the principle purpose of enforcing security interests. In this case, a customer purchased and financed a car with a dealer who subsequently assigned the retail installment sales contract to an auto finance company. When the borrower fell behind on his payments and the finance company tried to collect the debt, the borrower sued the finance company, alleging violations of the FDCPA. The court held that the finance company was primarily in the business of accepting installment sales contracts with its debt collection activities ancillary to its financing activities. Therefore, the finance company is not a debt collector as defined by the FDCPA. The court dismissed the borrower’s claims.
CFPB Announces First Joint Enforcement Action with State Authorities
On December 21, the CFPB announced that it obtained an order from a federal district court in Florida that requires a nationwide payday debt relief services company to refund up to $100,000 to consumers who were charged advance fees for promised debt-settlement services that the company never actually rendered. While the amount of the refund obtained through the order is relatively small, the action is notable as the first joint enforcement action by the CFPB and certain state partners. The CFPB was joined in the suit by the attorneys general of New Mexico, North Carolina, North Dakota, and Wisconsin, as well as the State of Hawaii Office of Consumer Protection. Following an investigation into the payday debt solution firm, the CFPB alleged that the company violated the FTC’s Telemarketing Sales Rule, the Dodd-Frank Act, and various state laws, by telemarketing debt-relief services and requesting or receiving fees from consumers for those services before renegotiating, settling, reducing, or otherwise altering the terms of at least one of the consumer’s debts. The CFPB announcement notes that the company cooperated with the CFPB and halted the allegedly illegal operations, and that in addition to the customer refunds the firm will pay a $5,000 civil penalty to the CFPB.
State Law Update: Massachusetts Proposes Loan Servicing and Debt Collection Rules, Announces Public Hearing
Recently, the Massachusetts Division of Banks issued proposed amendments to the state’s rules governing the conduct of debt collectors and loan servicers. The proposed rule would (i) prohibit third-party mortgage servicers from initiating a foreclosure when an application for a loan modification is in process, (ii) require that servicers ensure that a creditor has the right to foreclose and that any foreclosure-related documents are properly prepared and executed based on personal knowledge, and (iii) mandate that third-party servicers provide a single point of contact for a borrower, follow detailed loan modification procedures, and communicate with borrowers in a timely manner under the new regulations. The amendments also would, amongst other changes, (i) amend the definition of "debt collector" to include active debt buyers, (ii) clarify the definition of net worth for debt collectors, (iii) expand the limitations on contact with a consumer by a debt collector to include cellular telephone and text messaging and (iv) expand the number of significant events of a debt collector and third party loan servicer which must be reported. The Division will host a public meeting about the proposed amendments on November 29, 2012, and will accept written comments through December 6, 2012.
CFPB Finalizes Debt Collector "Larger Participant" Rule
On October 24, the CFPB issued a final rule that will allow the Bureau to supervise certain debt collectors. Under this rule, debt collectors will be required to provide certain disclosures, provide accurate information, maintain a consumer complaint and dispute-resolution process, and communicate civilly and honestly with consumers. Beginning January 2, 2013, the CFPB will be able to examine and take enforcement actions against any entity that has more than $10 million in annual receipts from consumer debt collection activities. The CFPB anticipates that the rule will cover approximately 175 third-party debt collectors, debt buyers, and collection attorneys. The final rule retains the proposed annual receipts threshold used to identify “larger participants” but excludes from the definition of annual receipts those receipts that result from collecting debts originally owed to a medical provider. The final rule also limits covered consumer debt collection activities to those conducted by “debt collectors,” which are defined as persons whose principal business activity is debt collection or that “regularly” engage in debt collection. The CFPB declined to provide a blanket exemption to attorneys, as some commenters argued was required by the Dodd-Frank Act. Concurrent with the release of the final rule, the CFPB published procedures for use in examining covered debt collectors. This rule is the second “larger participant” rule, and it follows the July 2012 consumer reporting rule. The Dodd-Frank Act requires the CFPB to promulgate a rule to define “larger participant” nonbanks in certain consumer financial services markets.
Federal District Court Holds Ohio Post-Repossession Notice Requirements Not Preempted
On October 17, the U.S. District Court for the Northern District of Ohio held that the post-repossession notice requirements in the Ohio Retail Installment Sales Act (RISA) and the Ohio Uniform Commercial Code (OUCC) were not preempted by the National Banking Act (NBA) and OCC regulations. White v. Wells Fargo Bank, N.A., Case No. 1:12 CV 943, 2012 WL 4958516 (N.D. Ohio Oct. 17, 2012). A group of borrowers allege on behalf of a putative class that the lender violated provisions of RISA and the OUCC when it repossessed and sold borrowers’ cars after the borrowers defaulted on their auto loans. The lender filed a motion to dismiss the action, claiming that, because it is a national bank, the NBA and applicable OCC regulations preempt borrowers’ RISA and OUCC claims. Following precedent from the Ninth and Fourth Circuits, the Ohio court held that the state laws regarding repossession notice requirements fell within the savings provision of the NBA and thus were not expressly preempted. The court also held that the federal government had not occupied the field of debt collection, and that the Ohio laws at issue do not relate to the bank’s lending operations and therefore do not significantly interfere with its ability to operate as a bank. Accordingly, the court denied the lender’s motion to dismiss on preemption grounds.