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USDA urges Supreme Court to overturn FCRA 3rd Circuit ruling
On August 15, the USDA filed a brief urging the U.S. Supreme Court to overturn a U.S. Court of Appeals for the Third Circuit decision to reverse its FCRA lawsuit brought by a plaintiff who alleged that the consumer credit reporting agency reported two loans as past due even though he claimed both were closed with a $0 balance. In August 2022, the 3rd Circuit reversed a district court’s decision to grant a student loan servicer, consumer credit reporting agency, and the USDA’s (defendants) motion to dismiss a case finding that Congress unambiguously waived the government’s sovereign immunity in enacting FCRA (covered by InfoBytes here). The USDA argues that the district court was wrong in its decision, and that the FCRA does not waive the U.S.’s sovereign immunity for claims under 15 U.S.C. 1681n and 1681o because, among other things, (i) a waiver of sovereign immunity requires “unmistakably clear” statutory language; (ii) the FCRA does not create a cause of action that “‘expressly authorizes suits against sovereigns,’ and ‘recognizing immunity’ would ‘negate[]’ that express authorization”; (iii) the FCRA uses “persons” in a way that does not distinguish between sovereign and non-sovereign senses; (iv) “inexplicable incongruencies” with the term “person” within the context of §§ 1681n and 1681o includes a sovereign entity, which would not only expose the federal government but also individual states to potential lawsuits seeking monetary damages; and (v) interpreting the FCRA to permit lawsuits against the U.S. would significantly broaden the scope of liability for federal agencies, creating “overlap” already provided by the Privacy Act.
9th Circuit partially reverses FDCPA dismissal
On July 14, the U.S. Court of Appeals for the Ninth Circuit partially affirmed and partially reversed a district court’s dismissal of an FDCPA suit. The district court reviewed plaintiff’s claims under the FDCPA, which alleged that defendants violated the bankruptcy court’s order discharging his debt and knowingly filed a baseless debt collection lawsuit. The district court determined that the claims should be dismissed because (i) debtors do not have a private right of action for violations of the Bankruptcy Code; and (ii) the claim was time-barred due to the FDCPA’s one-year statute of limitations. On appeal, the 9th Circuit affirmed the dismissal of the plaintiff’s claims based on a violation of his bankruptcy discharge order but reversed the dismissal of the plaintiff’s baseless lawsuit claim, holding that it was not barred by the FDCPA’s statute of limitations.
The 9th Circuit reasoned that the plaintiff “correctly asserts that some litigation acts can constitute independent FDCPA violations and that each such violation triggers its own one-year statute of limitations under the FDCPA.” In making its decision “to determine whether a litigation act constitutes an independent violation of the FDCPA and thus has its own statute of limitations,” the appellate court derived a test, stating: “Under this test, if a debt collector decides to take a certain action during litigation, courts must assess whether that act was the debt collector’s ‘last opportunity to comply’ with the FDCPA.” Because the appellate court determined that service and filing are separate FDCPA violations and plaintiff brought suit within one year of defendants’ state law claim, the 9th Circuit held that plaintiff’s action was timely.
3rd Circuit: No ambiguity in collection dispute notice
On April 18, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a putative FDCPA class action debt collection lawsuit concerning allegedly misleading dispute language. A letter the plaintiff received from the defendant debt collector included the following statement:
Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume this debt is valid. If you notify this office in writing within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will obtain verification of the debt or obtain a copy of a judgment and mail you a copy of such judgment or verification. If you request of this office in writing within 30 days after receiving this notice[,] this office will provide you with the name and address of the original creditor, if different from the current creditor.
If you dispute the debt, or any part thereof, or request the name and address of the original creditor in writing within the thirty-day period, the law requires our firm to suspend our efforts to collect the debt until we mail the requested information to you.
The plaintiff argued that the suspended collection language in the second paragraph violated the FDCPA because it led her to believe “that she could suspend collection by disputing all or part of the debt orally outside of the 30-day window.” Doing so, the plaintiff maintained, would conflict with her rights under Section 1692g(b) of the statute, which “guarantees that, if a consumer invokes her § 1692g(a) right to request information about a debt, and the consumer invokes this right in writing and within the thirty-day period prescribed by statute, a debt collector must ‘cease collection of the debt’ until it has provided the requested information to the debtor.” While the defendant was not required to notify the plaintiff about her rights under 1692g(b), the plaintiff claimed that including inaccurate information about those rights gave her “contrary and inconsistent” information.
The district court dismissed the action for failure to state a claim on the premise that, when “read holistically,” the letter did not suggest that the plaintiff could have collection activity suspended by orally disputing the debt outside the 30-day window. On appeal, the 3rd Circuit agreed with the district court that the language that preceded the disputed statement “eliminates any ambiguity” because “it explains that a debtor who wishes to avail herself of her statutory right to validation of a debt must request validation in writing and within 30 days of receiving a collection notice.”
3rd Circuit: Card renewal notices not subject to TILA itemization requirements
On April 11, the U.S. Court of Appeals for the Third Circuit upheld the dismissal of a putative class action suit claiming a national bank’s failure to itemize fees in its credit card renewal notices violated TILA and Regulation Z. Plaintiff alleged that his 2019 card renewal notice listed the annual membership fee as $525, but did not separate the fee into itemized amounts: $450 for the primary cardholder and $75 for an additional authorized user. Stating that the annual membership fee later appeared in his 2020 renewal notice as two separate fees, he claimed that he would have only paid the $450 fee for his own card if he had known it was an option in 2019. Plaintiff sued claiming the 2019 renewal notice violated TILA and Regulation Z, which require creditors to make disclosures before and during a creditor-borrower relationship, including the existence of any annual and periodic fees. The district court rejected the bank’s argument that the plaintiff lacked standing after finding that he suffered an economic injury by paying the full $525. However, the court granted the bank’s motion to dismiss after determining that the plaintiff failed to allege a TILA violation because neither the statute nor its implementing regulation expressly require banks to itemize fees in a renewal notice.
On appeal, the 3rd Circuit issued a precedential opinion finding that while the plaintiff had standing, he failed to plead an actual TILA violation. “While there is an itemization requirement in the statutes and regulations governing periodic disclosures,” the court clarified that “the same requirement is not included in the statutes and regulations applicable to renewal notices.” The 3rd Circuit stated that “[r]enewal notices are not subject to the same disclosure requirements as solicitations and applications, which are provided to consumers before the parties have any relationship,” explaining that because “the creditor does not yet know whether the consumer will add an authorized user to the account” during the solicitation or application period, it “must disclose ‘optional’ additional card fees.” However, during the account renewal stage, TILA and Regulation Z only require creditors to “disclose terms ‘that would apply if the account were renewed.’”
States say student loan trusts are subject to the CFPA’s prohibition on unfair debt collection practices
On November 15, a bipartisan coalition of 23 state attorneys general led by the Illinois AG announced the filing of an amicus brief supporting the CFPB’s efforts to combat allegedly illegal debt collection practices in the student loan industry. As previously covered by InfoBytes, in February, the U.S. District Court for the District of Delaware stayed the Bureau’s 2017 enforcement action against a collection of Delaware statutory trusts and their debt collector after determining there may be room for reasonable disagreement related to questions of “covered persons” and “timeliness.” The district court certified two questions for appeal to the U.S. Court of Appeals for the Third Circuit related to (i) whether the defendants qualify as “covered persons” subject to the Bureau’s enforcement authority; and (ii) whether the case can be continued after the Supreme Court’s 2020 decision in Seila Law v. CFPB (which determined that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau—covered by a Buckley Special Alert). Previously, the district court concluded that the suit was still valid and did not need ratification because—pointing to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here)—“‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the Bureau’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The district court later acknowledged, however, that Collins “is a very recent Supreme Court decision” whose scope is still being “hashed out” in lower courts, which therefore “suggests that there is room for reasonable disagreement and thus supports an interlocutory appeal here.”
The states argued that they have a “substantial interest” in protecting state residents from unlawful debt collection practices, and that this interest is implicated by this action, which addresses whether the defendant student loan trusts are “covered persons” subject to the prohibition on unfair debt collection practices under the CFPA. Urging the 3rd Circuit to affirm the district court’s decision to deny the trusts’ motion to dismiss, the states contended among other things, that hiring third-party agencies to collect on purchased debts poses a large risk to consumers. These types of trusts, the states said, “profit only when the third parties that they have hired are able to collect on the flawed debt portfolios that they have purchased.” Moreover, “[d]ebt purchasing entities, including entities like the [t]rusts, are thus often even more likely than the original creditors to resort to unlawful tactics in undertaking collection activities,” the states stressed, explaining that in order to combat this growing problem, many states apply their prohibitions on unlawful debt collection practices “to all debt purchasers that seek to reap profits from these illegal activities, including those purchasers that outsource collection to third parties.” The Bureau’s decision to do the same is therefore appropriate under the CFPA, the states wrote, adding that “as a practical matter, these debt purchasers are as problematic as debt purchasers that collect on their own debt. The [t]rusts’ request to be treated differently because of their decision to hire third party agents to collect on the debts that they have purchased (and reap the profits on) should be rejected.”
3rd Circuit says defendants conducted reasonable investigations into FCRA claims
On November 9, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s summary judgment ruling in favor of defendants in an FCRA reasonable investigation suit. According to the opinion, the plaintiff obtained a credit card from one of the defendants, exceeded her credit limit, and was past due on payments. Another of the defendants (furnishing defendant) acquired her account and reported the outstanding debt to the consumer reporting agencies (CRAs). Plaintiff disputed the tradeline as inaccurate with two of the CRAs claiming several alleged inaccuracies, including that the date the account was opened and the original balance were inaccurate, and the payment history was incomplete, among other things. The CRAs notified the furnishing defendant of the disputes, and the furnishing defendant conducted an investigation in accordance with its FCRA dispute policies and procedures, which revealed that the account status, payment history, current balance, amount past due, and account number were accurate. Discrepancies in the spelling of the plaintiff’s name and street address were corrected however. It was not until after the plaintiff sued the defendants for violations of the FCRA that she asserted the furnishing defendant should have been aware she was enrolled in a credit protection program and that it was therefore liable for the original creditor’s failure to apply the program’s benefits to her credit card account. The opinion noted that the plaintiff also filed a “similarly vague dispute” against a student loan servicer for allegedly misreporting information about her account with the CRAs.
In agreeing with the district court, the 3rd Circuit concluded that summary judgment in favor of the defendants was properly granted as the plaintiff “failed to introduce any direct or circumstantial evidence” showing either of the defendants failed to “conduct reasonable investigations with respect to the disputed information.” Additionally, the plaintiff’s disputes were vague and failed to provide specifics as to the alleged errors or explain why the information was inaccurate or incomplete. “To the extent that [plaintiff] claims that the investigations were unreasonable because a reasonable investigation would have revealed the inaccuracies alleged, her conclusory assertion is insufficient to defeat summary judgment,” the appellate court wrote.
3rd Circuit says debt collector owes finder’s fee
On September 23, the U.S. Court of Appeals for the Third Circuit overturned a district court’s summary judgment ruling in favor of a defendant debt collector. The action concerned whether a federal contract entered between the debt collector and the Department of Education (DOE) required the payment of a finder’s fee to a plaintiff consulting company that helped the defendant secure the contract. The defendant entered into an agreement with the plaintiff to help it secure federal contracts in debt collection in exchange for a finder’s fee. The defendant signed a contract with the DOE in 2014, but did not begin performing work on the contract until 2016 after the agreement with the plaintiff had expired. The defendant refused to pay the finder’s fee, arguing that even though the contract with the DOE was signed while the agreement was still active, the contract had not been “consummated” during the agreement’s applicable period because the defendant was not eligible to receive work orders or start performing work until after the agreement expired. The plaintiff sued, but the district court ruled in favor of the defendant. The plaintiff appealed and the 3rd Circuit reversed, holding that the contract had in fact been “consummated” when it was formed in 2014, and that the defendant owed the finder’s fee. On remand, the district court again granted summary judgment for the defendant, this time on the grounds that the defendant had not “facilitated” the contract with the DOE.
On the second appeal, the 3rd Circuit determined that the agreement specifies that a finder’s fee is owed whenever a “fee transaction is consummated” and defined a fee transaction as “the subsequent consummation of any contract with any Federal government agency for which [defendant] has been invited to compete, and is later awarded a contract to perform, which both parties herein expressly agree shall have arisen due to any ‘teaming’ or ‘subcontracting’ engagement Finder may have facilitated in advance of any such award of a contract by a Federal government agency.” According to the appellate court, it did not matter when the work orders from the DOE began, because the fee transaction was consummated during the agreement period.
3rd Circuit: Debt buyer not required to be licensed under Pennsylvania law
On September 19, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s ruling in an FDCPA suit, finding that a defendant debt buyer was not required to be licensed under Pennsylvania law when it attempted to collect interest that had accrued at a rate of more than 6 percent under the original credit card agreement. According to the opinion, the plaintiff opened a credit card with a bank, which had an interest rate of 22.9 percent. The plaintiff defaulted on a debt he accrued on the card, and the debt was subsequently charged-off and sold by the bank to the defendant. The plaintiff argued that the defendant violated the FDCPA since the interest rate was limited by the Pennsylvania Consumer Discount Company Act (CDCA), which states that an unlicensed firm “in the business of negotiating or making loans or advances of money on credit [less than $25,000]” may not collect interest at an annual interest rate over 6 percent. The district court granted the defendant’s motion to dismiss, ruling that the defendant was entitled to collect interest above 6 percent because it held a license under a different state law.
On the appeal, the 3rd Circuit found that the CDCA applies to companies that arrange for or negotiate loans with certain parameters, and that there is nothing in the plaintiff’s amended complaint to suggest that the defendant is in the business of negotiating loans. The appellate court noted that the plaintiff’s allegations “indicate that [the defendant] purchases debt, such as [plaintiff’s] credit card account that [the bank had] charged off. But even with that allegation as a starting point, it is not reasonable to infer that an entity that purchases charged-off debt would also be in the business of negotiating or bargaining for the initial terms of loans or advances.” The appellate court further noted that “the amended complaint cuts against such an inference: it alleges that [the bank], not [the defendant], set the annual interest rate for [plaintiff’s] use of the credit card for loans and advances at 22.90%. Thus, with the understanding that negotiate means ‘to bargain’ and not ‘to transfer,’ [the plaintiff’s] allegations do not support an inference that [defendant] is in the business of negotiating loans or advances.”
FTC, CFPB say furnishers must investigate indirect disputes
On September 13, the FTC and CFPB (agencies) filed a joint amicus brief with the U.S. Court of Appeals for the Third Circuit, seeking the reversal of a district court decision that held furnishers of credit information are only obligated to investigate “bona fide” indirect disputes and may choose to decline to investigate other indirect disputes raised by consumers that are deemed frivolous. The agencies argued that this “atextual, judge-made exception” could undermine a key FCRA protection that allows consumers to dispute and correct inaccurate information in their credit reports, leading to a likely increase in consumer complaints related to credit reporting inaccuracies. Under the FCRA, consumers may file a direct dispute with a furnisher or file an indirect dispute with a consumer reporting agency (CRA), which may refer the dispute to the furnisher.
The case involves a direct dispute submitted by a plaintiff to a cable company, requesting an investigation into an allegedly fraudulent delinquent account listed on his credit report. The plaintiff informed the cable company that he was a victim of identity theft and that the account was opened in his name without his authorization. The cable company eventually referred the account to a debt collector (defendant) for collection after the plaintiff failed to provide requested information showing his account was opened due to fraud. An indirect dispute was later filed by the plaintiff with the CRA, which in turn sent the dispute to the defendant as the furnisher of the allegedly inaccurate information. After a second indirect dispute was filed noting the allegedly fraudulent account was the subject of litigation, the defendant removed the account from the plaintiff’s credit report and ceased collections. The plaintiff sued, asserting claims under the FCRA, FDCPA, and Pennsylvania law. The district court granted summary judgment in favor of the defendant, ruling that the plaintiff failed to provide evidence substantiating the basis of his dispute, and that “a furnisher is obligated to investigate only ‘bona fide’ indirect disputes and may therefore decline to investigate any indirect dispute it deems frivolous.”
In urging the appellate court to overturn the decision, the agencies countered in their amicus brief that the text of the FCRA is unambiguous—“furnishers must investigate all indirect disputes.” Nothing in the text suggests that a furnisher can choose not to investigate an indirect dispute if it determines it to be frivolous, the agencies stressed, further noting that if Congress intended to “create an exception for frivolous disputes, it knew how to do so,” and that in other parts of the statute Congress expressly provided that certain frivolous disputes do not need to be investigated.
The amicus brief also pointed out that under the FCRA, consumers are entitled to be notified about the outcome of their disputes, as well as given an opportunity to cure any deficiencies. The district court holding, the agencies said, would circumvent these requirements, thereby undercutting a central remedy under the FCRA that ensures consumers are able to dispute and correct inaccurate information in their credit reports. If furnishers were able to ignore disputes referred to them by CRAs, it could open an unintended loophole that would allow disputes to disappear “into a proverbial black hole,” the agencies asserted, emphasizing that if the district court’s interpretation is affirmed, consumers who submit an indirect dispute that is deemed frivolous by a furnisher may never receive any notice of that determination, and therefore, may never be able to cure any deficiencies or correct erroneous information in their credit reports.
The agencies also challenged whether the exception created by the district court’s ruling is necessary, as the FCRA already provides protections to furnishers from investigating frivolous disputes. Specifically, the statute allows CRAs to determine if a dispute a frivolous before forwarding a dispute to the furnisher. Moreover, furnishers “are not required to conduct an unreasonably onerous investigation into a conclusory or unsubstantiated dispute,” the agencies explained, stating that whether a furnisher has satisfied its obligation to conduct a reasonable investigation is normally a fact-intensive question for trial.
The Bureau noted in an accompanying blog post that it has also filed several other amicus briefs in other pending FCRA cases (previously covered by InfoBytes here) related to consumer reporting obligations.
3rd Circuit: Arbitration valid despite questions about loan assignment
On September 1, the U.S. Court of Appeals for the Third Circuit concluded that a district court erred in finding that it had the authority to adjudicate the question of arbitrability based on questions concerning the underlying legality of an assignment of a consumer’s loan. The plaintiff took out a personal loan, which included an arbitration clause in the underlying agreement that delegated questions of arbitrability to an arbitrator. The plaintiff’s charged-off debt was assigned to the defendant who filed a lawsuit to recover the unpaid balance but later dismissed the suit rather than litigating. The plaintiff later contended that the defendant reported his loan delinquency to credit agencies in “an unlawful attempt to collect the [l]oan,” and sued, claiming that because the defendant was not licensed in Pennsylvania during the time period at issue it was not lawfully permitted to purchase the debt. The defendant filed a motion to compel arbitration under the purchase agreement with the loan originator. Focusing on the validity of the assignment, the district court denied the defendant’s motion to compel arbitration.
On appeal, the 3rd Circuit concluded that the district court’s only responsibility was to determine whether the parties to the underlying loan “clearly and unmistakably” expressed an agreement to arbitrate the issue of arbitrability, and, if so, the district court was required to send questions about arbitrability to the arbitrator. The appellate court reasoned that even if the underlying assignment is invalidated later, it would not affect whether the initial agreement to arbitrate was valid. The appellate court vacated the district court’s order denying arbitration and remanded with instructions to grant the motion to stay and refer the matter to arbitration. A dissenting judge countered that the plaintiff never signed an arbitration agreement with the defendant, and that because the underlying assignment was invalid, the plaintiff never consented to arbitration with the assignee of the contract.