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National Bank, Debt Collection Agency Reach $4.3 Million Class Action Settlement for Alleged FDCPA Violations
On August 21, a national bank and a debt collection agency (Defendants) together entered a $4.3 million settlement in a Fair Debt Collection Practices Act (FDCPA) class action lawsuit brought by borrowers who alleged the Defendants unlawfully attempted to collect certain mortgage payments. The July 2015 complaint, filed in the U.S. District Court for the Southern District of California, accused Defendants of violating the FDCPA, California’s Rosenthal Fair Debt Collection Practices Act, and California’s Unfair Competition Law, Business and Professions Code when they sent more than 20,000 allegedly misleading, unenforceable payment notices to borrowers after the bank had released the liens on the properties securing the mortgage loans.
According to a memorandum in support of the motion seeking preliminary approval of the settlement, approximately three percent of the 23,376 members of the settlement class members made payments on unenforceable loans. The rest of the class did not make any payments. After three mediation sessions and a series of negotiations, Defendants agreed to award class members amounts based on their placement into one of three tranches: (i) tranche 1: borrowers who made at least one “challenged payment” on a purchase money mortgage; (ii) tranche 2: borrowers who made at least one challenged payment on a non-purchase money mortgage; and (iii) tranche 3: borrowers who received an “allegedly deceptive payment communication” but did not make any challenged payments. The settlement terms stipulate that class members in tranche 1 will receive an initial payment worth 76 percent of the total challenged payments they made, and members in tranche 2 will receive an initial distribution of 38 percent of what they paid. Class members from Tranche 1 and Tranche 2 will be eligible for a second distribution if sufficient funds remain available. An approximately $22 payment will be sent to the majority of the class members (who fall into tranche 3), which will be paid from the $500,000 maximum statutory civil penalty available under the Rosenthal Act. Class members are not required to do anything to receive their award.
CFPB Issues Bulletin Warning Service Providers About Pay-By-Phone Fees
On July 31, the CFPB issued a bulletin to warn service providers that misleading consumers about pay-by-phone fees may potentially be a violation of Dodd-Frank’s prohibition on unfair, deceptive, or abusive acts or practices. The Bureau also provided guidance regarding its expectations for UDAAP and FDCPA compliance when assessing pay-by-phone fees. According to the bulletin, the CFPB noted several instances where consumers were either not informed up front of the fees that came with paying expenses over the phone or were not offered lower-cost alternatives. The Bureau cited several public enforcement actions, in which it alleged, among other things, that entities (i) misrepresented available payment options or gave the impression that a fee was required to make a payment by phone, when the only purpose of the fee was to expedite the phone payment; (ii) failed to disclose phone pay fees, thus creating the impression that there was no service fee; or (iii) lacked monitoring and oversight programs to deter this type of misleading behavior. The Bureau further encouraged service providers to consult a 2016 bulletin issued to discuss “detecting and preventing consumer harm from production incentives” to examine whether existing or future provider production incentive programs might “steer borrowers to certain payment types or to avoid disclosures,” which it says increases the potential risk for UDAAP.
District Judge Denies Summary Judgement in FTC, New York AG FDCPA Suit
On July 18, the U.S. District Court for the Western District of New York denied summary judgment in a suit filed by the FTC and the New York Attorney General against four corporate defendants (Corporate Defendants) and four individual defendants (Individual Defendants) alleging that the Defendants engaged in abusive and deceptive debt collection practices. See Federal Trade Commission and People of the State of New York v. Vantage Point Services, LLC, Case 1:15-cv-00006-WMS-HKS (W.D.N.Y., Jul. 18, 2017). Plaintiffs argued that the Corporate Defendants, together with several non-defendant debt-collecting businesses, engaged in a single debt-collection enterprise. The Corporate Defendants maintained, however, that while they “did business with the various entities, either by placing debt with them or by processing payments on debt they were collecting,” the businesses remained separate, distinct entities, and they operated independently.
The court found that there were “numerous disputed issues of fact” concerning the plaintiffs’ common enterprise theory, including a failure by the plaintiffs to specify which entities allegedly made threats or used illegal tactics to collect debt. Indeed, the court noted that while there was “overwhelming evidence of wrongdoing,” the plaintiffs had “failed to link that wrongdoing to any specific Defendant.” In fact, the court observed that the “majority of the wrongdoing appears to have been committed by the non-defendant call initiators.” The court also found material disputes of fact as to whether the Corporate Defendants shared office space and commingled funds and as to whether the Individual Defendants were liable at all.
FTC Announces Charges Against Debt Collection Operation for FDCPA and FTC Act Violations
On July 17, the FTC issued a press release announcing charges against a Florida-based debt collection operation for allegedly posing as lawyers and threating individuals with lawsuits or prison time if they failed to pay debt they did not actually owe. According to the complaint filed by the FTC, the defendants violated the FTC Act by making false, unsubstantiated, or misleading representations regarding debt owed and threatened legal action. Additionally, the defendants allegedly violated the Fair Debt Collection Practices Act by (i) engaging in “unlawful third-party communications” without obtaining prior consumer consent; (ii) failing to disclose they were debt collectors; (iii) making false, deceptive, or misleading representations by withholding the true status of the debt, impersonating attorneys, and threatening legal action, among others; and (iv) failing to provide consumers written verification of their debt within the required time frame. As a result, the FTC announced a federal court has temporarily halted the operation and frozen its assets.
Fifth Circuit Affirms Debt Collector Violation of FDCPA
On July 6, the U.S. Court of Appeals for the Fifth Circuit held that a debt collector violated the Fair Debt Collection Practices Act (FDCPA) when it failed to notify credit reporting agencies that a consumer had disputed a debt. The Fifth Circuit further determined that this failure was sufficient to comprise a concrete injury conferring standing for the consumer to sue.
In its opinion, the appellate court focused on FDCPA § 807(8) and § 809(b), since the debt collector argued that the requirements in § 809 apply to § 807(8), relieving it of its notification duty under § 807(8). Although the appellate court found that the consumer had not disputed his debt under § 809, it agreed with the district court that this failure did not obviate the debt collector’s responsibility under § 807(8). The appellate court found that the debt collector was in violation of the FDCPA for passing on “credit information which is known or which should be known to be false, including the failure” to notify credit agencies of consumer’s disputed debt. Additionally, the appellate court determined that the debt collector’s violation of § 807(8) “exposed [the consumer] to a real risk of financial harm caused by an inaccurate credit rating.”
Debt Collector Liable for Violating FDCPA and TCPA
On July 3, the Court of Appeals for the Third Circuit affirmed that a debt collector violated the Telephone Consumer Practices Act (TCPA) when it called a consumer’s cell phone without the consumer’s consent, resulting in a damages award of $34,500. Additionally, the appellate court reversed the district court’s decision regarding a Fair Debt Collection Practices Act (FDCPA) claim for sending a collection letter to the consumer without taking proper precautions to ensure the consumer’s account number would remain private. The debt collector put forth the defense of bona fide error regarding its alleged violations of the FDCPA. The appellate court, citing Supreme Court precedent, rejected the defense, holding that bona fide error could be claimed only in the case of a clerical or factual error, but a “mistaken interpretation of the law is inexcusable under the FDCPA’s bona fide error defense.” The Third Circuit remanded the FDCPA claim to the district court to enter judgment for the consumer and calculate the damages the debt collector must pay.
Maine Amends Fair Debt Collection Practices Act to Enact Debt Collection Requirements for Debt Buyers
On June 16, Maine Governor Paul LePage signed into law amendments (H.P. 836) to the state’s Fair Debt Collection Practices Act (Maine FDCPA) to promote the fiscally responsible collection of purchased debts. Changes affect the definitions of charge-off, debt buyer and resolved debt, as well as licensing and documentation requirements, transferring debt ownership, collection actions, and civil penalties.
The law now considers a “debt buyer” to be a debt collector, and defines a debt buyer as a person “regularly engaged in the business of purchasing charged-off consumer debt for collection purposes, whether the person collects the debt or hires a [third] party, which many include an attorney-at-law, in order to collect the debt.” Notably, the definition excludes supervised financial organizations or a person that “acquires charged-off consumer debt incidental to the purchase of a portfolio predominantly consisting of consumer debt that has not been charged off.” Debt buyers must comply with existing licensing requirements and criminal background checks under the provisions of Maine FDCPA Section 11031.
The law will apply to a debt buyer with respect to debt sold to the debt buyer on or after January 1, 2018. Furthermore, it will not “affect the validity of any collection actions taken, civil actions or arbitration actions commenced or judgments entered into prior to January 1, 2018.”
Special Alert: Supreme Court Holds that a Person May Collect Defaulted Debts Purchased for Its Own Account Without Triggering the FDCPA
On June 12, the United States Supreme Court issued a ruling in Henson v. Santander Consumer USA Inc., affirming the Fourth Circuit’s holding that the Fair Debt Collection Practices Act’s (“FDCPA” or the “Act”) definition of the term “debt collector” does not necessarily apply to a company collecting debts in default that it purchased for its own account.
The Henson Case
The FDCPA defines the term “debt collector” as those who regularly seek to collect debts “owed…another.” Like the Fourth Circuit, the Supreme Court reasoned that the FDCPA’s definition focuses attention on “third party collection agents working for a debt owner — not on a debt owner seeking to collect debts for itself” and thus, in the context of the facts presented, the purchaser of the debts at issue did not qualify as a debt collector under the FDCPA.***
Click here to read full special alert.If you have questions about the ruling or other related issues, visit our Debt Collection & Buying practice page for more information, or contact a Buckley Sandler attorney with whom you have worked in the past.
Colorado Extends Fair Debt Collection Practices Act Through 2028
On June 1, Colorado Governor John Hickenlooper enacted legislation (SB 17-216) executing recommendations from the Department of Regulatory Agencies’ 2016 Sunset Report, and extending the Colorado Fair Debt Collection Practices Act (Act) an additional 11 years through September 1, 2028. The Act was originally set to be repealed on July 1, 2017. Specifically, the legislation will implement the following points:
- defines a “debt buyer” as an individual who “engages in the business of purchasing delinquent or defaulted debt for collection purposes,” regardless of whether the debt is collected by the debt buyer, a third-party, or through litigation. The Act applies to debt buyers who purchase consumer debts sold or resold on or after January 1, 2018;
- states that debt collectors or collection agencies that bring legal actions on debts must follow outlined requirements;
- defines collection agency expectations for the purchase, sale or attempted collection of a purchased debt;
- sets the statute of limitations for public actions brought by the administrator of the Act to two years and sets the limit to one year for private actions;
- requires the administrator to prepare a biannual report to address enforcement actions, complaint processing statistics, and significant legal filings, among other things, in addition to hosting biannual meetings to disseminate the findings.
SB 17-216 went into effect June 1, 2017 with the exception of certain provisions governing debt buyers, documentation for legal actions, and Uniform Consumer Credit Code Administrator reporting requirements that take effect January 1, 2018.
Supreme Court Rules that FDCPA Law Not Applied to Time-Barred Debt Bankruptcy Claim
In a ruling handed down on May 15, the United States Supreme Court held that a debt collector’s filing of a proof of claim on time-barred debt in a consumer bankruptcy proceeding is not a “false, deceptive, misleading, unfair, or unconscionable” debt collection practice within the meaning of the Fair Debt Collection Practices Act (FDCPA). See Midland Funding, LLC v. Johnson, Case No. 16-348, 581 U.S. ___ (2017). Chief Justice Roberts and Justices Kennedy, Thomas, and Alito joined in Justice Breyer’s decision. Justice Gorsuch took no part in the consideration or decision of the case.
The Midland case arises out of a 2014 Chapter 13 petition, in response to which the defendant debt-collector filed a proof of claim for the payment of decades-old unpaid credit card debt the company had acquired. After the bankruptcy court dismissed the time-barred claim, the debtor filed a separate civil action in District Court alleging that the debt collector had violated the FDCPA. Finding that application of the FDCPA was precluded by the Bankruptcy Code, the District Court dismissed the suit. However, the Court of Appeals for the Eleventh Circuit reversed, finding “no irreconcilable conflict between the FDCPA and the [Bankruptcy] Code.” See Johnson v. Midland Funding, LLC, 823 F.3d 1334, 1336 (11th Cir. 2016).
The Supreme Court reversed. Writing for a 5-3 majority, Justice Breyer explained why the Court disagreed with the Eleventh Circuit panel’s conclusion that Midland was potentially liable for damages under the FDCPA for attempting to collect in bankruptcy on decade-old credit card debt. The Court held that the filing of a time-barred claim in a bankruptcy proceeding is not “false, deceptive, or misleading” because, among other reasons, “[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense” and therefore “we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code’s similar system.” The ruling also noted several differences between bankruptcy proceedings and a civil action to collect a debt—including that the “audience in [consumer] bankruptcy cases includes a trustee . . . likely to understand” the nature of a proof of claim and the necessity of objecting where appropriate.
Justice Sotomayor filed a dissenting opinion—joined by Justice Ginsburg and Justice Kagan—arguing that attempting to collect time-barred debt is both “unfair” and “unconscionable” because, among other reasons, the business model adopted by “professional debt collectors” depends on the hope “that no one notices that the debt is too old to be enforced by the courts.” Justice Sotomayor’s dissent also took issue with the majority’s claim that “structural features of the bankruptcy process reduce the risk that state debt will go unnoticed and thus be allowed,” agreeing with the Government’s amicus brief that trustees “cannot realistically be expected to identify every time-barred . . . claim filed in every bankruptcy.”