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Financial Services Law Insights and Observations


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  • 5th Circuit reverses decision that a portion of a contract was indefinite and unenforceable


    On May 18, the U.S. Court of Appeals for the 5th Circuit reversed a district court’s decision to dismiss a suit against a creditor that sold portfolios of delinquent and defaulted debt, ruling that the disputed portion of the contract between the two parties was enforceable.

    According to the opinion, the defendant sold portfolios of delinquent accounts to the plaintiff. The plaintiff and the defendant entered a “forward flow” agreement, where the defendant agreed to continue to send the plaintiff accounts during a specific timeline. Under the agreement, the defendant agreed to deliver “additional accounts,” which would be the same quality as the other accounts that had been sold. The parties could not settle on an agreement regarding the pricing for accounts that were submitted under the forward flow agreement, and the defendant sued the plaintiff for breach of contract. A district court granted the defendant’s motion to dismiss, which the plaintiff appealed.

    The appellate court found that the district court erred on its decision that the term “additional accounts” was indefinite and therefore unenforceable. The court stated that “[t]aken together, the plain meaning of the word ‘additional,’ the contract’s clear architecture, and various settled principles of interpretation reveal that ‘additional accounts’ refers to all qualifying accounts that accrue quarterly.” The appellate court also noted that it “cannot ignore that this argument was not presented to the district court,” and that it will not speculate on why [the defendant-appellee did not] reached for this low-hanging factual fruit.”

    Courts Appellate Fifth Circuit Debt Buyer Debt Collection

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  • District Court grants class certification in FDCPA suit


    On April 27, the U.S. District Court for the Western District of Pennsylvania granted a plaintiff’s motion for class certification in an action against a consumer debt buyer (defendant) for allegedly violating the FDCPA by stating that a judgment may be awarded prior to the expiration of a settlement offer, even though a collection lawsuit was not filed. According to the opinion, the plaintiff received a collection letter from the defendant that offered a “discount program” for his “Legal Collections account without any further legal action,” which had to be accepted within a month. The letter also stated that “[a] judgment could be awarded by the court before the expiration of the discount offer listed in this letter,” despite the fact that at the time the letter was received, there were no pending court cases in which a judgment could be entered against the plaintiff. After receiving the letter, the plaintiff filed suit, alleging that the defendant violated the FDCPA by making false, misleading, and deceptive misrepresentations about the debt. Among other things, the defendant argued that the size of the class would be impossible to ascertain because identifying class members would require individualized inquiries into who received a letter and when. By holding that the FDCPA violation occurred when a letter was sent rather than when it was received, the court rejected the defendant’s argument and ruled instead that individualized inquiry is not necessary. According to the district court, “[r]eviewing this information will, of course, require some level of individualized inquiry. But the need for file-by-file review to identify class members is not fatal to class certification.” The district court further noted that “[c]ourts and parties must be able to determine accrual dates with some degree of certainty,” and “[t[he date of receipt may often be impossible to determine, particularly where the recipient is an individual as opposed to a commercial entity.”

    Courts Class Action Debt Collection FDCPA Debt Buyer

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  • North Carolina appellate court affirms district court’s decision in debt collection case


    On March 15, the Court of Appeals of North Carolina affirmed a district court’s grant of summary judgment in favor of a debt buyer plaintiff and rejected the debtor defendant’s argument that the plaintiff failed to comply with a provision of North Carolina’s Consumer Economic Protection Act (CEPA). According to the order, the defendant appealed the district court’s grant of summary judgment to the plaintiff in its 2019 suit to renew a default judgment that was entered in 2010 against the defendant. The defendant argued that the default judgment “is void because it was procured by fraud and the clerk lacked jurisdiction to enter the default judgment for various reasons,” and “that Plaintiff’s interest rates on Defendant’s debt violate North Carolina law.” The appellate court noted that the CEPA “did not apply” because the statute requires that, “[p]rior to entry of a default judgment or summary judgment against a debtor in a complaint initiated by a debt buyer, the plaintiff shall file evidence with the court to establish the amount and nature of the debt.” The appellate court noted that although the plaintiff filed its original complaint against the defendant in August 2009, this CEPA provision did not take effect until October 1, 2009, and therefore only applies to “foreclosures initiated, debt collection activities undertaken, and actions filed on or after that date.” The defendant argued that the plaintiff was still required to comply with the CEPA provision because the plaintiff filed its motion for a default judgment in February 2010—after the effective date of the CEPA provision. But the appellate court determined that the plaintiff’s motion for a default judgment “was part of prosecuting its ‘action filed’ and was not a ‘debt collection activity’ within the meaning of the Act.”

    Courts Appellate Debt Buyer State Issues North Carolina Debt Collection

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  • New Jersey Superior Court grants summary judgment in favor of debt buyer


    On January 21, the Superior Court of New Jersey granted a defendant debt buyer’s cross-motion for summary judgment following the Appellate Division’s partial remand. The plaintiff filed a proposed class action lawsuit in 2017, claiming that the defendant violated the New Jersey Consumer Fraud Act (CFA) by unlawfully acquiring defaulted credit card accounts without obtaining a license to engage as a sales finance company or a consumer lender. The case was dismissed, but later partially remanded on appeal. The Superior Court struck the portion of the complaint alleging class claims and focused on the remaining individual claim concerning the plaintiff’s account. The Superior Court ultimately determined that the plaintiff’s CFA claim failed because the alleged conduct did not rise “to the level of deception, fraud, or misrepresentation in connection with the sale of merchandise or services” required for a claim under CFA. According to the Superior Court, the CFA requires that claimants show an ascertainable loss. The plaintiff’s claim that she suffered a loss by paying the defendant rather than the bank that originally extended the credit was not convincing, the Superior Court stated. The plaintiff admitted “that after the [account] was sold to Defendant, [the bank] did not seek payment of the credit card account. Thus, the record establishes that Plaintiff has not suffered any harm. Without an ascertainable loss, Plaintiff’s CFA claim fails,” the decision said. The Superior Court also disagreed with the plaintiff’s assertion that the defendant was required to obtain a consumer lending license under the New Jersey Consumer Finance Licensing Act. Noting that the defendant is a debt buyer and not a consumer lender, the Superior Court held that the defendant was not required to be licensed.

    Courts Debt Buyer State Issues New Jersey Debt Collection Licensing

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  • DFPI reminds debt collectors and buyers of December 31 application deadline

    Recently, the California Department of Financial Protection and Innovation (DFPI) reminded debt buyers and debt collectors operating in the state of California that applications must be submitted on or before December 31, 2021 through the Nationwide Multistate Licensing System & Registry (NMLS). The Debt Collection Licensing Act, which takes effect January 1, 2022, requires all persons engaging in the business of debt collection to be licensed by DFPI. Debt collectors that have submitted applications may continue operating in the state while the applications are pending. However, debt collectors that miss the December 31 deadline will be required to wait for the issuance of a license before operating in the state. Application materials and a checklist of requirements are available on NMLS. DFPI noted it will review applications and issue licenses in 2022 and 2023, and stated that once a debt collector is licensed it will not need to register under the California Consumer Financial Protection Law.

    Licensing State Issues State Regulators DFPI Debt Collection California NMLS Debt Buyer

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  • DFPI fines debt collector $375k in first action under the CCFPL

    State Issues

    On September 22, the California Department of Financial Protection and Innovation (DFPI) announced its first enforcement action against a California-based debt collector and debt buyer for allegedly violating the California Consumer Financial Protection Law (CCFPL) by threatening to sue consumers and furnishing negative information to a credit bureau without first notifying consumers about the alleged debt—a practice commonly known as “debt parking.” According to DFPI, consumers complained that their credit scores dropped significantly as a result. The respondent also, among other things, allegedly left voicemails that did not disclose the caller’s identity, threatened illegal lawsuits and wage garnishment (even though it never actually commenced any legal proceedings), and failed to notify consumers in writing within 30 days of transmitting negative information to the credit bureau. Under the order, the respondent is required to pay a $375,000 fine and must desist and refrain from unlawful acts or practices associated with the FDCPA, the Rosenthal Fair Debt Collection Practices Act, and the Consumer Credit Reporting Agencies Act.

    State Issues State Regulators DFPI Enforcement CCFPL Consumer Finance Debt Collection Debt Buyer FDCPA California

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  • Minnesota enacts student loan servicer, debt buyer provisions

    On June 26, the Minnesota governor signed omnibus bill HF 6, which, among other things, creates a Student Loan Bill of Rights and outlines new provisions for student loan servicers. The act provides new definitions and, subject to exemptions, requires entities servicing student loans in the state to be licensed. The act outlines servicer duties and responsibilities, including those related to responding to borrower communications, applying overpayments and partial payments, handling student loan transfers, providing income-driven repayment program options, and maintaining records. Additionally, servicers are prohibited from (i) misleading borrowers; (ii) engaging in any unfair or deceptive practices or misrepresenting or omitting information related to a borrower’s student loan obligations; (iii) misapplying payments; (iv) knowingly or negligently providing inaccurate information; (v) failing to provide both favorable and unfavorable payment history to consumer reporting agencies; (vi) refusing to communicate with a borrower’s authorized representative; (vii) making false statements or omitting material facts connected “with any application, information, or reports filed with the commissioner or any other federal, state, or local government agency”; (viii) violating any federal, state, or local law; (ix) providing incorrect information regarding the availability of student loan forgiveness; and (x) failing to comply with outlined duties and obligations. Furthermore, the state commissioner has authority to conduct examinations; deny, suspend, or revoke licenses; censure servicers; and impose civil penalties.

    Additionally, as part of the omnibus bill, the definition of “collection agency” now includes a “debt buyer,” which is defined as a “business engaged in the purchase of any charged-off account, bill, or other indebtedness for collection purposes, whether the business collects the account, bill, or other indebtedness, hires a third party for collection, or hires an attorney for litigation related to the collection.” The act also defines an “affiliated company” as “a company that: (1) directly or indirectly controls, is controlled by, or is under common control with another company or companies; (2) has the same executive management team or owner that exerts control over the business operations of the company; (3) maintains a uniform network of corporate and compliance policies and procedures; and (4) does not engage in active collection of debts.” The commissioner is also required to allow affiliated companies to operate under a single license and be subject to a single examination provided all of the affiliated company names are listed on the license. Under the act, debt buyers are required to submit license applications no later than January 1, 2022; however, a debt buyer who has filed an application with the commissioner for a collection agency license before January 1, 2022, and has a pending application thereafter, “may continue to operate without a license until the commissioner approves or denies the application.”

    The provisions take effect August 1.

    Licensing State Issues State Legislation Student Loan Servicer Debt Buyer Student Lending

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  • District Court: Debt buyer vicariously liable for debt collector's actions


    On June 7, the U.S. District Court for the District of Oregon partially granted a plaintiff’s motion for summary judgment, finding that a debt buyer who puts accounts with a debt collector can be held vicariously liable for the actions of the debt collector, since the debt buyer “bear[s] the responsibility of monitoring the activities of those it hires to collect debts on its behalf.” The case is on remand from the U.S. Court of Appeals for the Ninth Circuit, which reversed the district court’s dismissal of the lawsuit and found that a company that purchases consumer debt is defined as a “debt collector” under the FDCPA, even if there is no direct interaction with consumers and the debt collection is outsourced to a third party (covered by InfoBytes here).

    The plaintiff sued the debt buyer (defendant) claiming it was “vicariously and jointly liable” for alleged FDCPA violations by the third-party collector. The district court granted the defendant’s motion to dismiss, ruling that the plaintiff failed to state a claim because debt purchasing companies like the defendant “who have no interactions with debtors and merely contract with third parties to collect on the debts they have purchased simply do not have the principal purpose of collecting debts.” The district court reasoned that Congress intended the FDCPA to apply only to those who directly interact with customers, based on the court’s interpretation of the language used in the substantive provisions of the law.

    On appeal, the 9th Circuit reversed the dismissal, determining that the FDCPA does not solely regulate entities that directly interact with consumers. The appellate court concluded that an entity that otherwise meets the “principal purpose” definition of debt collector—“any business the principal purpose of which is the collection of any debts”—cannot avoid liability under the FDCPA merely by hiring a third party to perform debt collection activities on its behalf.

    On remand, the district court judge found that the debt buyer and debt collector were in a principal-agent relationship “because the undisputed facts demonstrate that [the debt buyer] had a right to control [the debt collector’s] debt collection activities to a significant degree.” According to the opinion, the agreement between the debt buyer and collector allowed the debt buyer to audit the accounts it placed with the debt collector. During an audit, the debt buyer pointed out that the debt collector’s “collection efforts needed much improvement with regard to consumer compliance” and that “simple guidelines were not being followed.” In addition, the audit found that the debt buyer had prior knowledge of phone scripts the debt collector used when contacting debtors on its behalf. The judge concluded that “[b]y its acquiescence, [the debt buyer] ‘impliedly authorized’ [the debt collector’s] use of the script ‘and thus is liable for any violations of law caused by the firm’s use of those practices.”


    Courts Ninth Circuit Appellate FDCPA Debt Buyer

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  • 8th Circuit vacates FDCPA judgment against debt buyer


    On December 14, the U.S. Court of Appeals for the Eighth Circuit vacated a $4,000 judgment in favor of a consumer in an FDCPA action against a debt buyer (defendant), concluding that while the defendant qualifies as a debt collector, the actions of the subsequent debt collector cannot be imputed to the defendant. According to the opinion, the defendant brought a collection action against a consumer, which was dismissed by the district court after the consumer retained an attorney and the defendant failed to respond to the consumer’s dismissal motion. The defendant subsequently hired a collection agency to collect on the debt but failed to inform the collection agency that the consumer had previous retained an attorney. After the collection agency sent a settlement offer to the consumer, the consumer filed an action against the defendant alleging violations of the FDCPA and the Arkansas Fair Debt Collection Practices Act (AFDCPA) for contacting her directly when she was represented by an attorney. The district court granted partial summary judgment in favor of the consumer, concluding, among other things, that the defendant (i) qualified as a debt collector under federal and state law; (ii) the defendant was acting as an agent of the collection agency; and (ii) the defendant is liable for the violations arising out of the collection agency’s contact with the consumer. The consumer accepted a $4,000 offer of judgment, and the district court entered final judgment.

    On appeal, the 8th Circuit agreed that the defendant qualified as a debt collector under the FDCPA and the AFDCPA, but determined that the consumer “did not present sufficient evidence to establish that [the collection agency]’s actions may be imputed to [the defendant] as a matter of law.” Specifically, the appellate court concluded that in order to establish the defendant’s liability under the FDCPA, the consumer needed to show that the defendant was responsible for the collection agency’s action. Because it was established that the collection agency did not know that the consumer was represented by an attorney, the appellate court noted that the consumer “cannot prevail against [the defendant] on a theory of vicarious liability,” and instead, must prove that an agency relationship existed for direct liability. Because the consumer failed to put into evidence an agreement between the defendant and the collection agency and the district court failed to address the agency relationship, the appellate court concluded the district court erred in granting partial summary judgment and vacated the $4,000 judgment and remanded the case.

    Courts FDCPA Eighth Circuit Debt Collection Debt Buyer

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  • Maryland AG obtains $2.6 million in student debt relief

    State Issues

    On November 16, the Maryland attorney general announced that it obtained over $2.6 million in debt relief from a third-party debt buyer for approximately 1,200 former students of a defunct Maryland-based for-profit college. In its press release, the AG alleged that the for-profit college offered “low-quality programs at a price significantly higher than comparable programs at Maryland’s public institutions.” According to the AG, due to the college’s high tuition, students had little choice but to take out loans issued by the college itself. After the college permanently closed, a court-appointed receiver sold the rights to collect the loans to a third-party debt buyer. The AG took the position that, because the college abruptly closed and failed to provide its students with the services promised, the loans should have been canceled rather than sold. To resolve the dispute, the AG and the third-party debt buyer entered into a settlement. Under the terms of the settlement, the third-party debt buyer agreed to cease collection on any of the outstanding loans and to refund approximately 75 percent of the payments collected from the students after it bought the loan portfolio. Furthermore, the debt buyer agreed to remove trade lines relating to the loans from the student’s credit reports.

    State Issues State Attorney General Debt Relief Student Lending Debt Buyer

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