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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.
Court denies arbitration bid in tribal loan usury action
On December 10, the U.S. District Court for the Middle District of Florida denied a motion to compel arbitration filed by a collection company and its chief operations officer (collectively, “defendants”), ruling that the arbitration agreements are “unconscionable” and therefore “unenforceable” because of the conditions under which borrowers agreed to arbitrate their claims. According to the order, the plaintiffs received lines of credit from an online lending company purportedly owned by a federally recognized Louisiana tribe. After defaulting on their payments, the defendants purchased the past-due accounts and commenced collection efforts. The plaintiffs sued, alleging the defendants’ collection efforts violated the FDCPA and Florida’s Consumer Collection Practices Act (FCCPA) because the defendants knew the loans they were trying to collect were usurious and unenforceable under Florida law. The defendants moved to compel arbitration based on the arbitration agreement in the tribal lender’s line-of-credit agreement, and filed—in the alternative—motions for judgment on the pleadings.
The court ruled, among other things, that while the plaintiffs agreed to arbitrate all disputes when they took out their online payday loans, the “proposed arbitration proceeding strips Plaintiffs of the ability to vindicate any of their substantive state-law claims or rights,” and that, moreover, “the setup is a scheme to hide behind tribal immunity and commit illegal usury in violation of Florida and Louisiana law.” The court also granted in part and denied in part the defendants’ motions for judgment on the pleadings. First, in denying in part, the court ruled that because the “tribal choice-of-law provision in the [tribal lender’s] account terms is invalid,” the plaintiffs’ accounts are subject to Florida law. Therefore, because Florida law is applicable to the plaintiffs’ accounts, they present valid causes of action under the FDCPA and FCCPA. The court, however, ruled that the plaintiffs seemed to “conflate Defendants’ communications to facilitate the collection of the outstanding debts with a communication demanding payment,” pointing out that FDCPA Section 1692c(b) only punishes that latter, which “does not include communications to a third-party collection agency.”
CFPB releases fall 2020 rulemaking agenda
On December 11, the CFPB released its fall 2020 rulemaking agenda. According to a Bureau announcement, the information details the regulatory matters that the Bureau “expect[s] to focus on” between November 2020 and November 2021. The announcement notes that the Bureau will also continue to monitor the need for further actions related to the ongoing Covid-19 emergency. In addition to the rulemaking activities already completed by the Bureau this fall, the agenda highlights other regulatory activities planned, including:
- Debt Collection. The Bureau notes that it expects to issue a final rule in December 2020 addressing, among other things, disclosures related to validation notices and time-barred debt (proposal covered by a Buckley Special Alert here).
- LIBOR Transition. The Bureau notes that it anticipates publishing the final rulemaking (proposal covered by InfoBytes here) on the LIBOR transition later than the original January 2021 target identified in the Unified Agenda, due to the November 30 announcement by UK regulatory authorities that they are considering extending the availability of US$ LIBOR for legacy loan contracts until June 2023, instead of the end of 2021.
- FIRREA. The Bureau notes that, together with the Federal Reserve Board, OCC, FDIC, NCUA, and FHFA, it will continue to develop a proposed rule to implement the automated valuation model (AVM) amendments made by the Dodd-Frank Act to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) concerning appraisals.
- Mortgage Servicing. The Bureau notes that it intends to issue an NPRM in spring 2021 to consider amendments to the Bureau’s mortgage servicing rules to address actions required of servicers working with borrowers affected by natural disasters or other emergencies. The Bureau notes that comments to the interim final rule issued in June 2020, amending aspects of the mortgage servicing rules to address the exigencies of Covid-19 (covered by InfoBytes here), suggest that the rules may need additional updates to address natural disasters or other emergencies.
- HMDA. The Bureau states that two rulemakings are planned, including (i) a proposed rule that follows up on a May 2019 advanced notice of proposed rulemaking, which sought information on the costs and benefits of reporting certain data points under HMDA and coverage of certain business or commercial purpose loans (covered by InfoBytes here); and (ii) a proposed rule addressing the public disclosure of HMDA data.
CFPB sues debt collection company that used DA letterhead to threaten consumers
On December 9, the CFPB announced it filed a complaint in the U.S. District Court for the Western District of Missouri against a Missouri-based company alleging violations of the FDCPA and the CFPA. The company allegedly engaged in deceptive and otherwise unlawful debt collection acts and practices in the course of operating “bad-check pretrial-diversion programs on behalf of more than 90 district attorneys’ offices throughout the United States.” According to the Bureau, the company used district-attorney letterhead to threaten consumers with criminal prosecution unless they paid the amount of the dishonored check, enrolled and paid for a financial-education course, and paid various other administrative fees. The complaint claims that not only did the company fail to include required FDCPA disclosures in the letters it sent to consumers, it also failed to identify itself in the letters and did not inform consumers that it is a debt collector and not a district attorney. The company also allegedly failed to inform consumers that district attorneys almost never prosecute individuals who do not pay back the amount owed. Moreover, the Bureau claims that in most cases the company did not refer cases for prosecution, even if the check writer failed to respond to the collection letter, did not pay the alleged outstanding debt and fees, or failed to complete the financial-education course. The complaint seeks an injunction against the company as well as damages, redress, disgorgement of ill-gotten gains, and the imposition of civil money penalties.
CFPB reaches settlement with unlicensed debt collector
On December 8, the CFPB announced a settlement with a New Jersey-based debt collector resolving allegations that the defendant violated the FDCPA and the CFPA’s prohibition against deceptive acts or practices by obtaining judgments and demanding payments from consumers in states where it was not legally licensed to do so. According to the Bureau, the defendant purchased consumer debts from debt brokers, used law firms to obtain judgments against the consumers, and “continued to collect on those judgments . . . as well as on a handful of payment agreements it obtained from debtors.” The Bureau found that the defendant falsely implied that it had a legally enforceable right to recover payments from consumers in Connecticut, New Jersey, and Rhode Island, and demanded payments and threatened legal action even though it did not hold the debt collection licenses required under the laws of those states. The consent order requires the defendant to pay a $204,000 civil money penalty, and prohibits the defendant from collecting on the judgments against, or payment agreements entered into with, consumers in Connecticut, New Jersey, and Rhode Island when it was not legally allowed to do so. The defendant is also required to “take all necessary steps to vacate all judgments not discharged in bankruptcy or [that were] previously satisfied,” and must suspend collection of those judgments and provide notice to consumers with payment agreements that have been satisfied.
District court denies dismissal and stay of CFPB action
On November 30, the U.S. District Court of the District of Maryland denied a motion to dismiss an action brought by the CFPB against a debt collection entity, its subsidiaries, and their owner (collectively, “defendants”), rejecting the defendants’ argument that the Bureau lacked standing to bring the action. As previously covered by InfoBytes, in September 2019, the Bureau alleged the defendants violated the FCRA, FDCPA, and the CFPA by, among other things, failing to (i) establish or implement reasonable written policies and procedures to ensure accurate reporting to consumer-reporting agencies; (ii) incorporate appropriate guidelines for the handling of indirect disputes in its policies and procedures; (iii) conduct reasonable investigations and review relevant information when handling indirect disputes; and (iv) furnish information about accounts after receiving identity theft reports about such accounts without conducting an investigation into the accuracy of the information. The defendants moved to dismiss the action arguing, among other things, that (i) the Bureau lacks standing to bring the action; and (ii) Director Kraninger’s ratification of the litigation was invalid. In the alternative, the defendants moved to stay the lawsuit until the U.S. Supreme Court issued a ruling in Collins v. Mnuchin (covered by InfoBytes here).
The court denied the motion to stay, concluding that the issues pending before the Supreme Court in Mnuchin may not necessarily apply to the Bureau, as they are different agencies and further, there is no issue of ratification in Mnuchin. Thus, given the “uncertainty surrounding the effect a decision in Collins v. Mnuchin will have on the present case,” the court denied the motion to stay. The court also denied the motion to dismiss, concluding, among other things, that the Supreme Court’s finding in Seila Law LLC v. CFPB (covered by a Buckley Special Alert) that the Bureau had a constitutional defect in its leadership structure under Article II does not diminish the agency’s Article III standing. Moreover, the court concluded that the decision in Seila Law does not mean that the Bureau “lacked authority during the time in which it was led by an improperly removable Director,” and therefore the Bureau had the authority to initiate the September 2019 lawsuit against the defendants. Further, the court held that the July 2020 ratification of the enforcement action was proper.
9th Circuit vacates summary judgment in bankruptcy, FDCPA action
On November 25, the U.S. Court of Appeals vacated summary judgment in favor of defendants in an action alleging the defendants violated the FDCPA by attempting to collect a debt that was discharged in a bankruptcy proceeding and no longer owed. According to the opinion, after the plaintiff fell behind on dues that were owed to his homeownership association (HOA), a law firm acting as a debt collector on behalf of the HOA obtained a lien for the unpaid debt and initiated nonjudicial foreclosure proceedings. The plaintiff filed and received approval for Chapter 13 bankruptcy protection. A separate collection agency that received the plaintiff’s HOA arrearage payments eventually informed the bankruptcy trustee that the HOA debt was “paid in full,” with a notice issued to that effect. An order of discharge was entered in the case by the bankruptcy court after the completion of payment was verified. Following the bankruptcy discharge order, the law firm—whose records still showed an unpaid balance—undertook collection efforts again. The plaintiff informed the law firm that the debt had been paid, and—after further review—the law firm acknowledged a communication from the collection agency that stated the debt had been paid in full. The plaintiff filed suit, but the defendants argued that the claims were precluded under Walls v. Wells Fargo Bank, N.A. because the debt was discharged in bankruptcy. The district court granted the defendant’s motion for summary judgment, ruling that the plaintiff’s “FDCPA claims were precluded ‘because they are premised upon violations of the bankruptcy post-discharge injunction.’”
On appeal, the 9th Circuit concluded that the plaintiff’s claims were not precluded by the Bankruptcy Code. The appellate court observed that while its 2002 decision in Walls generally indicates that the Bankruptcy Code precludes FDCPA claims premised on a violation of a bankruptcy discharge order, it did not apply in this case. Among other things, the panel determined that the plaintiff’s FDCPA claims were not premised on an issuance or violation of the discharge order in the bankruptcy proceeding. Rather, the plaintiff’s FDCPA claims were based on a debt that was fully satisfied through arrearage payments as part of a Chapter 13 plan before a discharge order was entered. As such, the appellate court determined that “just because [the plaintiff] made his arrearage payments through operation of a bankruptcy plan” it “does not render his FDCPA claims inextricably intertwined with bankruptcy issues.”
1st Circuit: Original creditor’s arbitration agreement applies to debt buyer
On November 25, the U.S. Court of Appeals for the First Circuit affirmed a grant of a motion to compel arbitration in a debt collection action, concluding that a debt buyer holds the same arbitration rights as the original creditor under a cardmember agreement entered into with the plaintiff. The debt buyer purchased a pool of defaulted credit card debts from the original creditor, including the plaintiff’s charged-off account. After a municipal judge ruled that the debt buyer could not prove it owned the unpaid debt, the plaintiff filed a class action lawsuit alleging, among other things, that the debt buyer and its law firm (collectively, “defendants”) violated the FDCPA by attempting to collect the debt after the statute of limitations had expired. The defendants filed a motion to compel arbitration, and the district court approved the magistrate judge’s recommendation that an enforcement clause in the cardholder agreement between the plaintiff and the original creditor be enforced. The plaintiff appealed, arguing that the defendants should not be able to compel arbitration because they were not the signatories of the original cardholder agreement.
On appeal, the 1st Circuit concluded that the plaintiff offered no support for deviating from the “long-standing given in contract law. . .that ‘an assignee stands in the shoes of the assignor,’” holding that the original creditor’s rights were assigned to the debt buyer and its agents, including the right to invoke the cardmember agreement’s arbitration provision.
2nd Circuit: Payment demand in debt collection letter overshadows validation notice
On November 5, the U.S. Court of Appeals for the Second Circuit reversed a district court’s dismissal of an FDCPA action, concluding that warnings in a defendant’s debt collection letter “could have created the misimpression that immediate payment is the consumer’s only means of avoiding a parade of collateral consequences, thereby overshadowing the consumer’s validation rights.” The defendant sent a debt collection letter to the consumer warning that it was instructed to commence litigation in order to collect a debt. The plaintiff was told he could avoid consequences such as paying attorneys’ fees if he made a payment or made suitable payment arrangements. The letter also contained a validation notice, which apprised the plaintiff of his right to dispute the debt within 30 days. The plaintiff filed a complaint alleging the letter violated the FDCPA because it included language that overshadowed the required disclosure of his right to demand that the debt be validated. The district court granted the defendant’s motion to dismiss, ruling that the plaintiff failed to adequately allege an FDCPA violation based on either (i) “the interaction between the letter’s payment demands and its validation notice,” or (ii) the letter’s statement that the plaintiff may be liable for attorneys’ fees in the event of litigation.
On appeal, the 2nd Circuit disagreed with the district court’s conclusions, holding that the complaint stated an FDCPA violation because, among other things, the letter’s payment demand overshadowed its validation notice. The appellate court found that the complaint also adequately stated an FDCPA violation based on the letter’s statements that the plaintiff “may be liable for attorneys’ fees where no such fees could be recovered.” Furthermore, the appellate court determined that the defendant’s introduction of an unsigned form contract supporting its claim to attorneys’ fees “at most raises a factual dispute about whether [the plaintiff] ever signed a contract providing for attorneys’ fees,” and concluded that this factual dispute should not have been resolved at the motion to dismiss stage.
CFPB finalizes certain debt collection rules
On October 30, the CFPB issued (along with blog post from Director Kraninger) its final rule amending Regulation F, which implements the Fair Debt Collection Practices Act (FDCPA), addressing debt collection communications and prohibitions on harassment or abuse, false or misleading representations, and unfair practices. The final rule does not include several significant provisions from the proposed rule, including those related to consumer disclosures. The Bureau states a second “disclosure-focused” final rule will be released in December 2020. This final rule is expected to address the model debt validation notice and time-barred debt disclosures previously proposed by the Bureau. As previously covered by InfoBytes (here and here) the Bureau issued the proposed rule in May 2019 and a supplemental proposed rule in February 2020, addressing time-barred debt disclosures. The final rule is effective November 30, 2021.
Among other things, the final rule: (i) prohibits a debt collector from calling a consumer about a particular debt more than seven times within seven consecutive days or within seven consecutive days of having had a telephone conversation; (ii) allows consumers to set preferences with debt collectors on certain communications, including communications with third parties and allowing consumers a reasonable way to opt-out of electronic communications; and (iii) clarifies that the FDCPA’s prohibition on harassing, oppressive, or abusive conduct applies to email and text messages. Additionally, the final rule also contains the procedures for state application for exemption from the provisions of the FDCPA.