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Supreme Court: Special Counsel Using State AG Letterhead Not in Violation of FDCPA
On May 16, the Supreme Court reversed the Sixth Circuit’s ruling that special counsel using Ohio AG letterhead to collect debts owed to the state is false or misleading in violation of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §1692. Sheriff v. Gillie, No. 15-338 (U.S. May 16, 2016). In a unanimous 8-0 opinion delivered by Justice Ginsburg, the Court opined that its “conclusion is bolstered by the character of the relationship between special counsel and the [AG].” Specifically, the Court determined that, because special counsel acts on behalf of the AG to provide legal services to state clients, a “debtor’s impression that a letter from special counsel is a letter from the [AG’s] Office is scarcely inaccurate.” The Court further opined that, being required by the AG’s office to send debt collection communications, special counsel “create no false impression in doing just what they have been instructed to do.” The Court rejects the Sixth Circuit’s argument that consumers may have concern regarding the letters’ authenticity: "[t]o the extent that consumers may be concerned that the letters are a ‘scam,’ the solution is for special counsel to say more, not less, about their role as agents of the [AG]. Special counsel’s use of the [AG’s] letterhead, furthermore, encourages consumers to use official channels to ensure the legitimacy of the letters, assuaging the very concern the Sixth Circuit identified.” The Court concludes by emphasizing the AG’s authority, as the top law enforcement official, to take punitive action against consumers who owe debts, commenting that §1692e of the FDCPA prohibits collectors from deceiving or misleading consumers, but “it does not protect consumers from fearing the actual consequences of their debts.”
The Court’s opinion does not address the question of whether or not special counsel rank as “state officers” within the meaning of the FDCPA, noting that even if it were to assume as much, arguendo, special counsel’s use of AG letterhead does not offend § 1692e. The Supreme Court remanded the issues surrounding §1692e back to the Sixth Circuit for further consideration.
Fourth Circuit: Default Status of Debt Is Not Determining Factor of "Debt Collector" Under FDCPA
Recently, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s decision that a consumer finance company collecting debts on its own behalf, which it purchased from the original creditor, is still a creditor and is not subject to the FDCPA. Henson v. Santander, No. 15-1187 (4th Cir. Mar. 23, 2016). The plaintiffs in the case each signed a retail installment sales contract with a financial services provider, and when “the plaintiffs were unable to make the payments required by the contracts and thereby defaulted, [the financial services provider] repossessed and sold their vehicles and subsequently informed each plaintiff that he or she owed a deficiency balance.” In 2011, the defendant bought the defaulted loans from the financial services provider and, thereafter, sought to collect on the debts the plaintiffs owed. In their complaint, plaintiffs argued that because the terms “debt collectors” and “creditors” as used in the FDCPA are “mutually exclusive,” any person that “receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another” (which is excluded from the definition of creditor in 15 U.S.C. § 1692a(4)) must be a debt collector. However, the court emphasized that the material distinction between a debt collector and a creditor is “whether a person’s regular collection activity is only for itself (a creditor) or whether it regularly collects for others (a debt collector).” The court opined that the plaintiffs’ argument contained “interpretational and logical flaws,” reasoning that 15 U.S.C. § 1692a(6), which defines “debt collector,” states that to assess whether a person qualifies as a “debt collector,” one must “first determine whether the person satisfies one of the statutory definitions given in the main text of § 1692a(6) before considering whether that person falls into one of the exclusions contained in subsections § 1692a(6)(A)-(F).” The court ruled that the consumer finance company’s actions did not satisfy the first, second, or third definition of “debt collector” in § 1692a(6): “Because the complaint does not satisfy any definition of debt collector, the analysis ends, and the exclusions from the definition of debt collector, on which the plaintiffs rely, have no significance.”
The plaintiffs filed a motion for rehearing en banc on April 6, 2016, which the court denied on April 19.
CFPB Takes Action Against Law Firm, its Partners, and Debt Buyer for Alleged FDCPA Violations
On April 25, the CFPB issued separate consent orders to a New Jersey-based law firm and two of the firm’s partners and a New Jersey-based debt buyer for alleged violations of the FDCPA and the Dodd-Frank Act. According to the CFPB, between 2009 and 2014, the law firm, which specializes in retail debt collection litigation, filed lawsuits on behalf of the debt buyer without having “sufficient documentation” to support “the original contracts underlying the alleged debts, documentation of the consumer’s alleged obligation, or the chain of title evidencing that the debt buyer actually owned the debt and thus had standing to sue the consumer.” The CFPB alleges that, among other things, (i) the law firm relied on an automated system and non-attorney staff to complete the initial review of data submitted by the debt buyer regarding consumers’ debt accounts; (ii) the debt buyer failed to require that the law firm complete an account-level review of the documents it submitted prior to filing suit; (iii) neither the debt buyer nor law firm obtained sufficient documentation evidencing the alleged debt and its transactional history; and (iv) the debt buyer and law firm collected debts and filed suits based on unreliable data. The CFPB further contends that the named partners had “managerial responsibility for the Firm and materially participated in the conduct of its debt-collection litigation practices.” In addition to the $1 million civil money penalty imposed on the law firm and the two partners and the $1.5 million civil money penalty imposed on the debt buyer, the consent orders prohibit the firm, the two named partners, and the debt buyer from filing suits or threatening to file suits without substantial evidence that the debt is accurate and enforceable and from using deceptive affidavits, including those that misrepresent the type of documentation reviewed and that the review was conducted by the actual person signing the affidavit.
CFPB Releases Supervisory Highlights, Winter 2016 Issue
On March 8, the CFPB released its tenth edition of Supervisory Highlights, summarizing supervisory observations in the areas of consumer reporting, debt collection, mortgage origination, remittances, student loan servicing, and fair lending. The report covers the CFPB’s supervision work in the last quarter of 2015, generally between September 2015 and December 2015. Noteworthy findings in the report include: (i) violations of the Dodd-Frank Act’s unfair practice provisions by student loan servicers who would automatically default borrowers and co-signers on a private loan if either declared bankruptcy; (ii) violations of the October 2013 Remittance Rule, including providers failing to give complete and accurate disclosures to consumers, failing to cancel transactions within the required timeframe, failing to promptly credit a consumer’s account when an error occurred, and either not communicating the results of error investigations within the required timeframe or at all, or communicating them to an unauthorized party; (iii) inaccuracies in checking account information reported to NSCRAs by banks and credit unions; and (iv) violations of the FDCPA, with debt collectors failing to honor consumers’ requests to stop making contact with them and threatening garnishment against student loan borrowers who were not eligible for garnishment under the Department of Education guidelines. In addition to summarizing supervisory observations, the report provides an overview of the public enforcement actions taken between September and December 2015. Regarding non-public supervisory actions in the areas of deposits, debt collection, and mortgage origination, the report states that the CFPB collected more than $14 million in restitution to approximately 228,000 consumers in the fourth quarter of 2015.
FTC Reports to CFPB on 2015 Activities to Combat Illegal Debt Collection Practices
On February 17, the FTC sent the CFPB a letter summarizing its 2015 efforts to stop allegedly illegal debt collection practices. According to the letter, in 2015, the FTC’s FDCPA activities included “aggressive law enforcement activities and public outreach to address new and troubling issues in debt collection,” such as (i) coordinating the first federal-state-local enforcement initiative, Operation Collection Protection, that targets deceptive and abusive debt collection practices; (ii) prosecuting various cases involving the use of purportedly unlawful text messages to collect debts; (iii) publishing a list of every company and individual that has been banned from engaging in debt collection activities because of the FTC’s work; and (iv) hosting three Debt Collection Dialogues “to promote a more robust exchange of information between the debt collection industry and the state and federal governmental agencies that regulate their conduct.” The letter highlights various actions against debt collectors taken jointly by the FTC and the CFPB, and the offices of the New York and Illinois Attorneys General. Under the FDCPA, the FTC shares enforcement responsibilities with the CFPB. The FTC’s recent letter is intended to assist the CFPB in preparing its annual report to Congress about its administration of the FDCPA, as required by Dodd-Frank.
CFPB Announces Proposed Consent Order with Debt Collection Law Firm
On December 28, the CFPB filed a proposed consent order to resolve allegations that a Georgia-based law firm operated a debt-collection lawsuit mill by collecting millions of dollars from consumers who may not have owed the debts in the amounts claimed, or may not have owed debts at all. According to the July 2014 complaint, the firm violated the FDCPA and engaged in unfair and deceptive practices by (i) intimidating consumers through the use of automatically-filed lawsuits that did not involve attorneys; and (ii) using sworn statements from its clients to support its lawsuits, even though the signers could not have known the details to which they were attesting. The CFPB’s proposed consent order would prohibit the firm and its partners from (i) filing lawsuits or threatening to sue to enforce debts unless they are able to prove, through specific documentation, that the debt is enforceable; (ii) filing or threatening lawsuits unless specific documentation regarding a consumer’s debt was reviewed by an attorney; and (iii) using affidavits as evidence to collect debts unless the signer’s knowledge of the facts and the documents are specifically and accurately described in the statements. The proposed order also seeks a $3.1 million civil money penalty.
CFPB Orders Small-Dollar Lender to Pay $10 Million for Debt Collection Practices; Releases Compliance Bulletin
On December 16, the CFPB announced a consent order against a Texas-based small-dollar lender for alleged violations of the Consumer Financial Protection Act, the Electronic Fund Transfer Act (EFTA), and the EFTA’s implementing regulation, Regulation E. According to the CFPB, beginning in July 2011, the company engaged in unfair or deceptive acts or practices and violated Regulation E by (i) visiting consumers’ homes and places of employment to collect debts; (ii) contacting third parties for reasons other than to acquire consumers’ location information, which put consumers at risk of their information being disclosed to third parties, and ignoring requests to stop calling consumers’ workplaces; (iv) making false threats of litigation if consumers did not pay the past due amount; (v) misrepresenting the company’s ability to, and routine practice to, run credit checks on loan applicants; (vi) requiring consumers to pay using pre-authorized electronic fund transfers; (vii) causing consumers to incur fees from their banks due to electronic withdrawal practices; and (viii) misrepresenting a consumer’s ability to repay loans early and to revoke authorization for electronic withdrawal authorization. The CFPB’s administratively-filed consent order requires the company to pay $7,500,000 towards refunding consumers affected by its practices, and pay a civil money penalty of $3,000,000. In addition, the order prohibits the company from collecting on defaulted loans owed by approximately 130,000 consumers, and from engaging in unfair and deceptive debt collection practices in the future.
The CFPB simultaneously released Compliance Bulletin 2015-07, warning creditors, debt buyers, and third-party collectors of potentially unlawful in-person debt collection practices. Specifically, the bulletin reminds the financial services industry of debt collection practices prohibited by the Dodd-Frank Act and the Fair Debt Collection Practices Act, including (i) engaging in unfair, deceptive, or abusive acts or practices; (ii) communicating with a consumer at any place or time that the debt collector knows, or should know, to be inconvenient to the consumer; (iii) communicating with persons other than the consumer (and other identified parties, except in certain circumstances) for purposes other than acquiring location information; (iv) “‘us[ing] unfair or unconscionable means to collect, or attempt to collect, debt’”; and (v) “‘engag[ing] in any conduct the consequences of which is to harass, oppress, or abuse a person in connection with collecting a debt.’”
CFPB Announces Complaint and Proposed Consent Order Against Massachusetts Debt Collection Firm
On December 7, the CFPB announced the filing of a complaint and a proposed consent order against a Massachusetts-based debt collection firm for alleged violations of the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), and the Dodd-Frank Act. In 2012, the firm’s subsidiary purchased a debt portfolio from a telephone service provider containing over three million defaulted, and predominantly outdated, cellphone accounts. The firm and its subsidiary entered into a collection services agreement, with the firm agreeing to remit money collected from consumers, less fees and expenses, to its subsidiary. According to the CFPB, the firm, having prior experience in the collection of telecommunications debt, knew that the portfolio likely contained defects, including inaccurate and incomplete dispute histories and unverified documentation. Still, even after customers disputed certain debt, the firm continued to report the debt to credit reporting companies and to collect on time-barred, disputed, fraudulent, and settled or paid debts. The CFPB further alleges that the firm reported faulty information to the credit reporting companies by initially reporting that the entire debt portfolio was disputed, and then removing and subsequently reinserting the dispute flags on the entire portfolio. The firm’s purportedly deceptive practices resulted in the collection of about $743,000 on more than 2,000 disputed accounts, where the debt was not verified.
Under the proposed consent order, the firm would be required to: (i) refund to customers the payments that it received for disputed debt that was not verified; (ii) cease collecting and reporting on unverified, disputed debt, and request the removal by the credit reporting companies of such reported information from customer files; (iii) for five years, review original account-level documents to verify a debt before collecting on it; (iv) for five years, refrain from reselling its purchased debt to other debt collectors; and (v) pay a penalty of $1.85 million.
Illinois District Court Enters Final Judgment Against For-Profit College to Resolve CFPB Litigation
On October 28, the U.S. District Court for the Northern District of Illinois filed a default judgment and order against a for-profit college company to resolve litigation with the CFPB. In a September 2014 lawsuit, the CFPB alleged that the company engaged in unfair and deceptive practices by making false and misleading representations to students to encourage them to take out private student loans. The CFPB also alleged that the company violated the FDCPA by taking aggressive and unfair action to collect on the loan payments when they became past due. The court order requires the company to pay approximately $531 million in redress to student borrowers, which the company is unable to pay because it has dissolved and its assets have been distributed in its bankruptcy case. The CFPB indicated that it will continue to seek additional relief for students affected by the company’s practices despite the company’s inability to pay the judgment.
CFPB Issues Consent Orders Regarding Debt Collection Practices
On September 9, the CFPB ordered the two largest U.S. debt buyers and collectors to pay a combined total of nearly $80 million in civil penalties and consumer restitution related to their debt collection practices. The CFPB alleged that both companies, among other things, 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 particular, the CFPB criticized the practice of purchasing debts without obtaining important documentation or information about the debt, or verifying to ensure the debts were accurate and enforceable before commencing collection activities. Under the consent orders, one company agreed to provide up to $42 million in consumer refunds, pay a $10 million civil money penalty, and cease collecting on a portfolio of consumer debt with a face value of over $125 million. The other company agreed to provide $19 million in restitution, pay an $8 million civil money penalty, and cease collecting on a consumer debt portfolio with a face value of over $3 million. In addition, both companies are also generally prohibited from reselling consumer debt. In prepared remarks announcing the enforcement action, CFPB Director Richard Cordray noted, “the terms of the orders will help reform and improve the tactics and approaches” within the debt collection market. The CFPB’s action comes as the industry anticipates the CFPB’s issuance of new debt collection rules.