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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.
FTC temporarily halts unlawful debt collection operation
On October 15, the FTC announced that the U.S. District Court for the Northern District of Georgia granted a temporary restraining order against a debt collection operation for allegedly engaging in fraudulent debt collection practices. According to the FTC’s complaint, the operation violated the FTC Act and the FDCPA by, among other things, (i) posing as law enforcement officers, prosecutors, attorneys, mediators, investigators, or process servers when calling consumers to collect debts; (ii) using profane language and threatening consumers with arrest or serious legal consequences if debts were not immediately paid; (iii) threatening to garnish wages, suspend Social Security payments, revoke drivers’ licenses, or lower credit scores; (iv) attempting to collect debts that were either never owed or were no longer owed; (v) unlawfully contacting third parties, such as family members or employers; and (vi) adding unauthorized or impermissible charges or fees to consumers’ debts. The complaint asserts that the operation also refused to provide written verification about the alleged debts as required by the FDCPA. Beyond the temporary restraining order, the FTC is seeking a permanent injunction, contract rescission or reformation, restitution, disgorgement, the appointment of a receiver, immediate access to business premises, an asset freeze, and other equitable relief.
The action is part of the FTC’s “Operation Corrupt Collector”—a nationwide enforcement and outreach effort established last month by the FTC, CFPB, and more than 50 federal and state law enforcement partners to address illegal debt collection practices. (Covered by InfoBytes here.)
Debt collector settles with CFPB for $15 million
On October 15, the CFPB announced a proposed settlement with the largest U.S. debt collector and debt buyer and its subsidiaries (collectively, “defendants”), resolving allegations that the defendants violated the terms of a 2015 consent order related to their debt collection practices. As previously covered by InfoBytes, the Bureau filed an action against the defendants in September alleging that they collected more than $300 million from consumers by violating the terms of the 2015 consent order—and again violating the FDCPA and CFPA—by, among other things, (i) filing lawsuits without possessing certain original account-level documentation (OALD) or first providing the required disclosures; (ii) failing to provide debtors with OALD within 30 days of the debtor’s request; (iii) filing lawsuits to collect on time-barred debt; and (iv) failing to disclose that debtors may incur international-transaction fees when making payments to foreign countries, which “effectively den[ied] consumers the opportunity to make informed choices of their preferred payment methods.”
The stipulated final judgment, if entered by the court, would require the defendants to pay nearly $80,000 in consumer redress and a $15 million civil money penalty. Moreover, among other things, the defendants are subject to a five-year extension of certain conduct provisions of the 2015 consent order and must disclose to consumers the potential for international-transaction fees and that the fees can be avoided by using alternative payment methods.
7th Circuit: No FDCPA liability when collection letter leaves future ambiguity
On October 8, the U.S. Court of Appeals for the Seventh Circuit affirmed dismissal of an FDCPA action, concluding that itemized breakdowns in collection letters that include zero balances for interest and other charges would not confuse or mislead the reasonable “unsophisticated consumer” to believe that future interest or other charges would be incurred if the debt is not settled. A creditor charged-off a consumer’s credit card debt and informed the consumer that it would no longer charge interest or fees on the account. The debt was reassigned to a collection agency. Consistent with the original creditor’s communication with the consumer, the collection agency sent a collection letter to the consumer that included an itemized breakdown reflecting a zero balance for “interest” and “other charges.” The “balance due at charge-off” and “current balance” were both listed as $425.86. The letter offered to resolve the debt and stated that no interest would be added to the account balance through the course of collection efforts. The consumer filed a putative class action alleging that the collection letter implied that the original creditor would begin to add interest and fees to the charged-off debt if the collection agency stopped its collection efforts in the future and, therefore, the debt collector violated the FDCPA by using false, deceptive and misleading representations to collect a debt, and failed to disclose the amount of the debt in a clear and unambiguous fashion. The district court dismissed the action, concluding that the collection letter accurately disclosed the amount of the debt.
On appeal, the 7th Circuit agreed with the district court. Specifically, according to the opinion, the appellate court concluded that the breakdown of charges in the letter “cannot be construed as forward looking,” rejecting the consumer’s argument that including zero balances implies that future interest or charges could be incurred if he did not accept the collector’s offer. Moreover, the appellate court noted that when a collection letter “only makes explicit representations about the present that are true, a plaintiff may not establish liability on the basis that it leaves ambiguity about the future.” The statement in the letter that no interest would accrue while the collector pursued the debt is not misleading because it “makes no suggestion regarding the possibility that interest will or will not be assessed in the future if [the debt collector] ends its collection efforts.”
District court: Debt collector must disclose partial payment or promise to pay will restart statute of limitations
On September 28, the U.S. District Court for the Northern District of Illinois granted a plaintiff’s motion for summary judgment in an FDCPA action, ruling that a debt collector (defendant) was required to disclose that a partial payment or new promise to pay would restart the statute of limitations under state law. The plaintiff received a dunning letter from the defendant seeking to collect time-barred credit card debt. A disclaimer included in the letter, which presented several options to resolve the debt, stated: “The law limits how long you can be sued on a debt and how long a debt can appear on your credit report. Due to the age of this debt, we will not sue you for it or report payment or non-payment of it to a credit bureau. In addition, we will not restart the statute of limitations on the debt if you make a payment.” The plaintiff filed a lawsuit alleging violations of Sections 1692e and 1692f of the FDCPA, claiming that the disclosure language was misleading and deceptive because it failed to disclose (i) “the effect of partial payment on the statute of limitations”; (ii) “that the statute of limitations on the debt had run”; and (iii) “that no information about the debt could be reported to credit bureaus.” The defendant countered that the first two sentences of the disclosure were included pursuant to a consent order with the CFPB and “that its policy is to continue treating a time-barred debt as expired even if a consumer makes a partial payment.” The defendant further argued that there was “no potential ‘pitfall’ to partial payment” because of its policy not to restart the statute of limitations when a partial payment was made, and that its “explicit promise that it will not sue even if Plaintiff makes a payment dispels any potential confusion.”
The court disagreed, finding that the defendant’s promise not to restart the statute of limitations without disclosing that a partial payment or a promise to pay would restart the statute was “misleading and deceptive” under Illinois law. The court also ruled that the plaintiff “is not expected to know [the defendant’s] internal policies regarding suing on debts where the statute of limitations has run or rely on its promises to not pursue a debt collectible in court after the statute of limitations protection has been forfeited.” The defendant’s policy, the court stated, does not obviate the “need to explain the mechanics of reviving the statute of limitations under Illinois law.”
New York AG takes action against debt collection operation
On September 25, the New York attorney general announced a temporary restraining order was granted against a debt collection operation (consisting of a leader and at least six other individuals and entities) for allegedly contacting consumers using deceptive and abusive collection tactics. According to the press release, the operation allegedly contacted consumers by spoofing phone numbers to appear associated with the local court house or sheriff’s office in order to impersonate government officials and threaten the consumers with false legal action in order to collect debts, in violation of the state laws, the FDCPA, and the Truth in Caller ID Act of 2009. The temporary restraining order prohibits the operation from engaging in debt collection practices and freezes the corporate defendants’ assets. The operations’ leader is also allegedly in breach of a 2014 Assurance of Discontinuance with the AG for previous violations of the FDCPA.
The AG is seeking a permanent injunction, disgorgement, restitution, and civil penalties.
2nd Circuit: No bona fide error defense without written policies to avoid the error
On September 4, the U.S. Court of Appeals for the Second Circuit affirmed in part and vacated in part a summary judgment ruling in favor of a debt collector, concluding that the debt collector was not entitled to the FDCPA’s bona fide error defense as a matter of law when it erroneously sent communications to a consumer with the same name as the actual debtor. According to the opinion, a debt collector sent collection notices to a consumer with the same first name, middle initial, and last name as the actual debtor. The consumer informed the debt collector that he was not the debtor and provided the last two digits of his social security number, which were different than the debtor’s social security number on file with the debt collector. The debt collector continued to send communications, including a subpoena duces tecum, to the consumer and the consumer filed suit, alleging various violations of the FDCPA. The district court granted summary judgment in favor of the debt collector, concluding that the debt collector did not violate certain provisions of the FDCPA and noting that while it violated others, the FDCPA’s bona fide error defense applied making the debt collector not liable for the violations.
On appeal, the 2nd Circuit agreed with the district court that the debt collector did not violate Section 1692e(5) or Section 1692f of the FDCPA because it did not intend to send the communications to a non-debtor, nor did the debt collector’s actions constitute “unfair or unconscionable means” of collection because the consumer was not forced to respond to the information subpoena or attend a debtor’s examination. However, the appellate court determined that the district court erred in granting summary judgment on the bona fide error defense because a reasonable jury could conclude that the debt collector “did not maintain procedures reasonably adapted to avoid its error.” The appellate court also noted that the debt collector was “in possession of more than enough evidence” that the consumer was not the debtor, including different social security numbers and birth years, and a reasonable jury could conclude the mistake “was not made in good faith.” Additionally, the appellate court emphasized that the debt collector had “no written policies” to address situations in which employees are uncertain about whether a debtor may live at a particular address. Thus, the debt collector was not entitled to summary judgment on the outstanding FDCPA claims, and the appellate court remanded the case to the district court.
CFPB alleges debt collection, debt buying companies violated 2015 consent order
On September 8, the CFPB filed a complaint against the largest U.S. debt collector and debt buyer and its subsidiaries (collectively, “defendants”) for allegedly violating the terms of a 2015 consent order related to their debt collection practices. As previously covered by InfoBytes, the defendants allegedly engaged in robo-signing, sued (or threatened to sue) on stale debt, made inaccurate statements to consumers, and engaged in other illegal collection practices in violation of the Consumer Financial Protection Act (CFPA), FDCPA, and FCRA. According to the complaint, filed in the U.S. District Court for the Southern District of California, the defendants have collected more than $300 million from consumers using practices that did not comply with the 2015 consent order. Among other things, the complaint alleges that the defendants violated the terms of the consent order—and again violated the FDCPA and CFPA—by (i) filing lawsuits without possessing certain original account-level documentation (OALD) or first providing required disclosures; (ii) failing to provide consumers with OALD within 30 days of the consumer’s request; (iii) filing lawsuits to collect on time-barred debt; and (iv) failing to disclose that consumers may incur international-transaction fees when making payments to foreign countries, which “effectively den[ied] consumers the opportunity to make informed choices of their preferred payment methods.” The Bureau seeks injunctive relief, damages, consumer redress, disgorgement, and civil money penalties. In addition, the Bureau asks the court to permanently enjoin the defendants from committing future violations of the CFPA or FDCPA.
CFPB and New York AG take action against debt collection operation
On September 8, the CFPB and the New York attorney general jointly filed a lawsuit against a debt collection operation based near Buffalo, New York. The defendants include five companies, two of their owners, and two of their managers (collectively, “defendants”). According to the complaint, filed in the U.S. District Court for the Western District of New York, the defendants violated the Consumer Financial Protection Act, FDCPA, and various New York laws by using illegal tactics to induce consumer payments, such as (i) threatening arrest and imprisonment; (ii) claiming consumers owed more debt than they actually did; (iii) threatening to contact employers about the existence of the debt; (iv) harassing consumers and third parties by using “intimidating, menacing, or belittling language”; and (v) failing to provide debt verification notices.
The lawsuit seeks consumer redress, disgorgement, civil money penalties, and injunctive relief against the defendants.