Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On September 23, the Federal Trade Commission released a statement announcing the settlement of claims and a default judgment against a debt collection operation based out of Atlanta and Cleveland and its principals, barring them from debt collection activities and subjecting the defendants to a judgment of over $9.3 million. According to the release, the defendants violated FDCPA by threatening consumers with legal action unless they rendered payment on debts that the consumer, in many cases, did not actually owe. The defendants were alleged to use fictitious business names that implied affiliation with a law firm to harass consumers, through robocalls and voicemails, to make payments on these non-existent debts.
On September 16, the CFPB filed a civil action against a for-profit college for allegedly engaging in an “illegal predatory lending scheme.” Specifically, the CFPB alleges that the school engaged in unfair and deceptive practices by: (i) inducing enrollment through false and misleading representations about job placement and career opportunities; (ii) inflating tuition to require students to obtain private loans in addition to Title IV aid; (iii) persuading students to incur significant debt through private loans that had substantially high interest rates (as compared to federal loans) and required repayment while students attended school; (iv) misleading students to believe that the school did not have an interest in the private loans offered; and (v) knowing its students were likely to default on the private loans made. In addition, the CFPB alleges that the school violated the FDCPA by taking aggressive and unfair action, including pulling students out of class, blocking computer access, preventing class registration, and withholding participation in graduation, to collect payments on the private loans as soon as they became past due. The CFPB is seeking to permanently enjoin the school from engaging in the alleged activity, restitution and damages to consumers, disgorgement, rescission of all private loans originated since July 21, 2011, civil money penalties, and costs and other monetary relief.
The CFPB’s lawsuit was filed after a similar action was filed against the school by the Massachusetts Attorney General (AG) alleging that the school engaged in unfair or deceptive acts or practices by: (i) aggressively enrolling students by misrepresenting, among other things, employment and career opportunities, the nature and quality of the education provided, credit transferability, the utility of its career services, and its financial aid; (ii) recruiting students that would not benefit from the programs and/or were legally unable to obtain employment in the field studied; (iii) offering private loans that were guaranteed and/or funded by the school and steering students to such loans; and (iv) engaging in harassing debt collection practices. The Massachusetts AG is seeking to permanently enjoin the school from engaging in the alleged conduct, restitution to students, civil penalties, and attorneys’ fees and other monetary relief.
Fourth Circuit Holds That Debtors Are Not Required To Dispute Debt In Writing To State A Claim Under FDCPA
On August 15, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s denial of a debt collector’s motion for judgment as a matter of law because, under the FDCPA, debtors are not required to dispute debts in writing pursuant to Section 1692g in order to seek relief under Section 1692e. Russell v. Absolute Collection Services, No. 12-2357, 2014 WL 3973729 (4th Cir. Aug. 15, 2014). Within thirty days of receiving the initial debt collection letter, the debtor paid the entire amount due directly to her husband’s medical provider. However, the debt collector continued to make calls and send collection letters thereafter. During the calls, the debtor told the collector that the debt had been paid, but she never advised the collector in writing that she was disputing the debt, nor did she send proof of payment. The debt collector argued that Section 1692g debt validation procedures required the debtor to dispute the debt in writing. The court disagreed, stating that such an interpretation “would thwart the statute’s objective of curtailing abusive and deceptive collection practices and would contravene the FDCPA’s express command that debt collectors be liable for violations of ‘any provision’ of the statute.”
On July 14, the CFPB sued a Georgia-based law firm and its three principal partners for allegedly using high-volume litigation tactics to collect millions of dollars from consumers who may not actually have owed the debts or may not have owed the debts in the amounts claimed. The suit relates to the firm’s attempts to collect, directly or indirectly, consumer credit-card debts on behalf of both credit-card issuers and debt buyers that purchase portfolios of defaulted credit-card debts. The CFPB alleges the defendants violated the FDCPA and engaged in unfair and deceptive practices by: (i) serving consumers with deceptive court filings generated by automated processes and the work of non-attorney staff, without any meaningful involvement of attorneys; and (ii) introducing faulty or unsubstantiated evidence through sworn statements even though some signers could not have known the details they were attesting to. The CFPB is seeking to permanently enjoin the firm from engaging in the alleged activity, restitution to borrowers, disgorgement, civil money penalties, and damages and other monetary relief.
On July 8, the CFPB released guidance designed to ensure equal treatment for legally married same-sex couples in response to the Supreme Court’s decision in United States v. Windsor, 133 S. Ct. 2675 (2013). Windsor held unconstitutional section 3 of the Defense of Marriage Act, which defined the word “marriage” as “a legal union between one man and one woman as husband and wife” and the word “spouse” as referring “only to a person of the opposite sex who is a husband or a wife.”
The CFPB's guidance, which took the form of a memorandum to CFPB staff, states that regardless of a person’s state of residency, the CFPB will consider a person who is married under the laws of any jurisdiction to be married nationwide for purposes of enforcing, administering, or interpreting the statutes, regulations, and policies under the Bureau’s jurisdiction. The Bureau adds that it “will not regard a person to be married by virtue of being in a domestic partnership, civil union, or other relationship not denominated by law as a marriage.”
The guidance adds that the Bureau will use and interpret the terms “spouse,” “marriage,” “married,” “husband,” “wife,” and any other similar terms related to family or marital status in all statutes, regulations, and policies administered, enforced or interpreted by the Bureau (including ECOA and Regulation B, FDCPA, TILA, RESPA) to include same-sex marriages and married same-sex spouses. The Bureau’s stated policy on same-sex marriage follows HUD’s Equal Access Rule, which became effective March 5, 2012, which ensures access to HUD-assisted or HUD-insured housing for LGBT persons.
This afternoon, the CFPB announced that a nonbank consumer lender will pay $10 million to resolve allegations that it engaged in certain unfair, deceptive, and abusive practices in the collection of payday loans. This action comes exactly one year after the CFPB issued guidance that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.
Based on its findings during an examination of the lender, which was coordinated with the Texas Office of Consumer Credit, the CFPB alleged that the lender and its third-party vendors used false claims and threats to coerce delinquent payday loan borrowers into taking out an additional payday loan to cover their debt. The CFPB claimed that the lender trained its staff to “create a sense of urgency” for consumers in default, and that in-house and third-party vendor staff did so by (i) making an excessive number of calls to borrowers; (ii) disclosing the existence of the debt to non-liable third parties; and (iii) continuing to call borrowers at their workplaces after being told such calls were prohibited, or calling borrowers directly after they had obtained counsel.
The CFPB further alleged that some in-house staff also misrepresented the actions that third-party collectors would take after a loan was transferred for additional collection efforts, even though those actions were prohibited or limited by the lender’s own corporate policies and contracts with outside collectors. The in-house staff also allegedly falsely advised borrowers that they could not prevent the transfer of the delinquent debt to a third-party collector. In-house and third-party staff also allegedly falsely threatened delinquent borrowers with litigation or criminal prosecution, when the lender did not, as a matter of policy, pursue litigation or criminal prosecution for non-payment or permit its third-party collectors to do so.
The CFPB characterized certain of the acts as either unfair or deceptive, and stated that the lender’s efforts to create and leverage an artificial sense of urgency to induce delinquent borrowers with demonstrated inability to repay their existing loans to take out new loans with accompanying fees “took unreasonable advantage of the inability of consumers to protect their own interests in selecting or using a consumer financial product or service” and thereby qualify as abusive acts or practices.
The lender, in its own press release, pointed out that the CFPB’s allegations related only to collection practices prior to March 2012, and that a third-party review revealed that more than 96 percent of the lender’s calls during the review period met relevant collections standards. The lender added that it has policies that prevent delinquent borrowers from taking out new loans, and that an analysis of those policies revealed that 99.5 percent of customers with a loan in collections for more than 90 days did not take out a new loan with the lender within two days of paying off their existing loan, and 99.1 percent of customers did not take out a new loan within 14 days of paying off their existing loan. This data suggests that the CFPB’s exception tolerance for in-house collection operations is exceedingly thin.
The order requires the lender to pay $5 million in redress to eligible borrowers and a $5 million civil money penalty. The lender stressed that it cooperated fully with the CFPB, implementing recommended compliance changes and enhancements and responding to requests for documents and information. It committed to completing those corrective actions and agreed to certain reporting and recordkeeping requirements.
The action is at least the second public action taken by the CFPB against a payday lender. In November 2013 the CFPB entered a consent order to resolve so-called “robosigning” allegations against another lender. That action, which was resolved with a $5 million penalty and $14 million in restitution, also included allegations that the lender violated the Military Lending Act and engaged in certain unlawful examination conduct.
On March 20, the CFPB released its third annual report summarizing its activities in 2013 to implement and enforce the FDCPA. The report describes the CFPB’s and the FTC’s shared FDCPA enforcement authority, incorporates the FTC’s annual FDCPA update, and reiterates the intention of both the FTC and the CFPB to exercise their authority to take action—both independently and in concert—against those in violation of the FDCPA.
The report highlights the debt collection-related complaints the Bureau has received—over 30,000 since the CFPB began accepting and compiling consumer complaints in July 2013, making the third-party debt collection market the largest source of consumer complaints submitted to the CFPB. The report states that the majority of the complaints the CFPB has received involve attempts to collect debts not owed and allegedly illegal communication tactics. The report also identifies several changes within the debt collection industry over the past year that will remain points of emphasis for the CFPB, including the expansion of the debt buying market, the growth of medical debt and student loan debt in collection, and the use of expanded technologies to communicate with debtors.
On March 5, the FTC released a summary of its 2013 debt collection activities, which it submitted to the CFPB on February 21, 2014. The report highlights that one of the FTC’s highest priorities is to continue targeting debt collectors that engage in deceptive, unfair, or abusive conduct. In particular, the FTC is actively pursuing debt collectors that secure payments from consumers by falsely threatening litigation or otherwise falsely implying that they are involved in law enforcement. In 2013, the FTC filed or resolved seven actions alleging deceptive, unfair, or abusive debt collection conduct. The FTC also took action against the continuing rise of so-called “phantom debt collectors.” The report also summarizes the FTC’s amicus program, and education, public outreach, research, and policy activities, including its Life of a Debt Roundtable Event, which examined data integrity in debt collection and the flow of consumer data throughout the debt collection process.
On January 31, the U.S. Court of Appeals for the Fourth Circuit held that the FDCPA does not impose a requirement that debt disputes be presented in writing and permits debtors to orally dispute the validity of a debt. Clark v. Absolute Collection Serv., Inc., No. 13-1151, 2014 WL 341943 (4th Cir. Jan. 31, 2014). A debt collector moved to dismiss a suit in which the debtor sought to invalidate a debt because the debt collection notice required the debtor’s dispute to be in writing. The debtor argued the notice violated FDCPA section 1692g(a)(3), which provides the basic right to dispute a debt. The debtor also claimed that the writing requirement was a false or deceptive means of collection in violation of section 1692e(10). Considering only the first argument on appeal, the Fourth Circuit joined the Second and Ninth Circuits, but split from the Third Circuit, and held that the “FDCPA clearly defines communications between a debt collector and consumers” and section 1692g(a)(3) “plainly does not” require a written communication to dispute a debt. The court rejected the debt collector’s argument that 1692g(a)(3) imposes an inherent writing requirement.
Eleventh Circuit Holds Collection Fee Based On Percentage Of Principal Owed In Violation Of Contract Terms Violated FDPCA
On January 2, the U.S. Court of Appeals for the Eleventh Circuit held that a debt collector violated the FDCPA by collecting a fee based on a percentage of the principal owed when the contract allowed a fee only for the actual cost of collection. Bradley v. Franklin Collection Serv., Inc. No. 10-1537, 2014 WL 23738 (11th Cir. Jan. 2, 2014). The debtor filed suit claiming, among other things, that the collector violated FDCPA Section 1692f, which prohibits unfair or unconscionable means of collection, including “collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” when it charged a fee that was not the actual cost of collection but rather liquidated damages. The court found that the contract only obligated the debtor to pay “all costs of collection,” i.e. the actual costs of collection and not a percentage-based fee where that fee did not correlate to the costs of collection. The court explained that the collector failed to prove that the percentage-based collection fee—which the collector assessed before attempting to collect the balance due—correlates to the actual cost of its collection effort. Addressing the issue for the first time, the Eleventh Circuit held that because the fee breached the agreement that obligated the debtor to pay only the “costs of collection”, the fee violated FDCPA Section 1692f. The court did not hold that the FDPCA prohibits the use of percentage-based collection fees, provided the contracting parties agree to such an arrangement.
- Jonice Gray Tucker to discuss “Getting your company ready: Managing fair lending for IMBs” at the Mortgage Bankers Association Independent Mortgage Bankers Conference
- Jonice Gray Tucker to discuss “Be Your Compliance Best in 2022” at the California Mortgage Bankers Association webinar
- Lauren R. Randell to discuss “Significant legal developments in the Northeast” at the 37th Annual National Institute on White Collar Crime
- Jonice Gray Tucker to discuss “Small business & regulation: How fair lending has evolved & where it is heading?” at the Consumer Bankers Association Live program
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek
- Jonice Gray Tucker and Kari Hall to discuss “Equity, equality, regulation and enforcement – The evolving regulatory landscape of fair lending, redlining, and UDAAP” at the ABA Business Law Committee Hybrid Spring Meeting