InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB Settles with Bank and its Two Affiliates for $18.5 Million over Alleged Faulty Student Loan Servicing Practices
On July 22, the CFPB announced that a major bank and its two affiliates agreed to pay $18.5 million to resolve allegations that the entities engaged in inadequate private student loan servicing practices. According to the consent order, the CFPB alleged that the bank and its affiliates (i) failed to provide clear information regarding the student-loan interest consumers paid; (ii) overstated the minimum amount due in student-loan billing statements; (iii) initiated collection phone calls to student loan borrowers that were non-compliant with certain provisions of the Fair Debt Collection Practices Act; and (iv) failed to provide students with defaulted student loans with information about the amount and source of the debt and the consumers' right to contest the debt's validity, as required by the Fair Debt Collection Practices Act. Under terms of the settlement, the bank agreed to provide $16 million in restitution to affected borrowers, improve its student loan servicing and collections practices, and pay a $2.5 million civil money penalty. The announcement comes as the CFPB, along with the Department of Education and Department of Treasury, concluded its comment period for public feedback on ways to improve borrower service, reduce defaults, develop best practices, implement consumer protections, and spur innovation in the student loan servicing market.
CFPB Cracks Down on Medical Debt Collector Over Alleged FCRA and FDCPA Violations
On June 18, the CFPB announced an enforcement action against a third-party medical debt collection company for allegedly failing to issue debt validation notices to customers, mishandling consumer credit reporting disputes, and preventing customers from exercising certain debt collection rights. According to the Bureau, from 2011 through 2013, the company failed to properly investigate consumers’ complaints with respect to information furnished to credit reporting agencies, and lacked internal policies and procedures on how to handle and respond to the complaints, resulting in a violation of the Fair Credit Reporting Act (FCRA). In addition, the Bureau contends that the company did not properly inform consumers of the amount of medical debt owed before commencing efforts to obtain payment on the debt, subsequently violating the Fair Debt Collection Practices Act (FDCPA). The CFPB ordered the medical debt collector to, among other things, (i) provide over $5 million in restitution to affected consumers, (ii) correct errors in consumer credit reports, (iii) pay a $500,000 civil money penalty, and (iv) improve its business practices.
2nd Circuit Reinstates Consumer Class Action Against National Debt Buyer Through Preemption Decision
On May 22, the U.S. Court of Appeals for the Second Circuit ruled against a debt collection firm, holding that “non-national bank entities are not entitled to protections under the National Bank Act (“NBA”) from state-law usury claims merely because they are assignees of a national bank.” Madden v. Midland Funding, LLC, No. 14-2131-cv, 2015 WL 2435657 (2nd Cir. May 22, 2015). The Second Circuit’s holding reversed the Southern District of New York’s decision, which held that it was permissible for the firm to charge a consumer an interest rate of 27%—a rate exceeding New York’s 25% usury limit—because the firm was an assignee of a national bank. The Second Circuit vacated the District Court’s judgment “[b]ecause neither defendant is a national bank nor a subsidiary or agent of a national bank, or is otherwise acting on behalf of a national bank, and because application of the state law on which [the plaintiff’s] claim relies would not significantly interfere with any national bank’s ability to exercise its powers under the NBA.” Id. at *1. According to the court, extending “NBA preemption to third-party debt collectors such as the defendants would be an overly broad application of the NBA” which “would create an end-run around usury laws for non-national bank entities that are not acting on behalf of a national bank.” Id. at *5. The Second Circuit also vacated the District Court’s judgment as to the plaintiff’s FDCPA claim and the denial of class certification because those rulings were predicated on the District Court’s preemption analysis. The case, which has been argued on the premise that New York state usury law applies, has been remanded back to the district court to determine choice-of-law based on a Delaware choice-of-law clause in the original debt agreement.
Ninth Circuit: California Law Allows Prejudgment Interest Demand Without Judgment on Debt
On May 12, the Ninth Circuit held that a debt collection letter did not violate the FDCPA or California’s Rosenthal Act where the amount of the debt was certain, even though the debt collector had not yet obtained a judgment. Diaz v. Kubler Corp., 2015 WL 2214634 (9th Cir. May 12, 2015). The debt collector sent a collection letter demanding that the debtor pay an amount reflecting the principal owed plus interest at an annual rate of 10%, which was the rate set forth in California law for contracts that do not stipulate a legal rate of interest. The district court granted summary judgment, holding that the debt collector could not seek to collect prejudgment interest at the statutory rate without first obtaining a judgment for breach of contract. Therefore, the court held, the debt collector had violated the FDCPA and the Rosenthal Act by attempting to collect an amount not authorized by the contract creating the debt or permitted by law. The Ninth Circuit reversed, holding that California Civil Code §3287(a) allows recovery of prejudgment interest from the time that the creditor’s right to recover is “vested,” which occurs at the time “the amount of damages become certain or capable of being made certain, not the time liability to pay those amounts is determined.” Damages “become certain or capable of being made certain” when “there is essentially no dispute between the parties concerning the basis of computation of damages if any are recoverable but where their dispute centers on the issue of liability giving rise to damage.” At that time, prejudgment interest becomes available as a matter of right. Accordingly, the debt collector’s demand for prejudgment interest did not violate the FDCPA or the Rosenthal Act.
CFPB Files Suit and Obtains Injunction Against Participants of Alleged Illegal Debt Collection Scheme
On April 8, the CFPB announced that it filed a lawsuit in the United States District Court for the Northern District of Georgia on March 26 against participants in an allegedly illegal debt collection operation, involving certain payment processors and a telephone broadcast service provider. The complaint alleges that several individuals and the companies they formed, based in New York and Georgia, attempted to collect debt that consumers did not owe or that the collectors were not authorized to collect. The complaint further alleges uses of harassing and deceptive techniques in violation of the CFPA and FDCPA. Specifically, the collectors allegedly placed robo-calls through a telephone broadcast service provider, also named in the complaint, to millions of consumers stating that the consumers had engaged in check fraud and threatening them with legal action if they did not provide payment information. The CFPB asserts that as a result, the debt collectors received millions of dollars in profits from the targeted consumers. The complaint also names certain payment processors used by the collectors to process payments from consumers. The CFPB obtained a preliminary injunction to halt the debt collection activities and freeze the assets of all defendants named in the lawsuit. Consistent with prior enforcement actions and guidance, the CFPB’s complaint in this matter underscores the importance of exercising thorough due diligence and ongoing oversight of third parties engaged to provide material services in connection with the offering or provision of a consumer financial product or service. For an in-depth analysis of the CFPB’s expanding scrutiny in this area, please see the recently published article Regulatory Blue Pencil: CFPB Guidance, Enforcement Actions Signal Expanding Focus on Vendor Management, authored by BuckleySandler Partner Elizabeth McGinn and Counsel Moorari Shah.
CFPB Announces Action Against National Debt Collection Company
On March 30, the CFPB announced an enforcement action against a nationwide debt collection operation and its CEO for allegedly violating the FDCPA. The Bureau’s complaint alleges that the debt collection operation (i) posed as state or district attorneys by sending communication letters on prosecutors’ letterheads; (ii) threatened consumers with criminal prosecution for bounced checks before a state or district attorney had determined if a violation had occurred; and (iii) deceived consumers into believing that they must enroll in and pay for a financial education class to avoid potential criminal prosecution for bad checks. In addition to the $50,000 civil money penalty the company will pay, the proposed consent order requires that the debt collection operation: (i) end its deceptive communication practices; (ii) stop threatening customers with imprisonment; (iii) no longer use district attorney letterhead; and (iv) increase its supervision – to include state and district attorneys – of communicating with consumers about diversion programs.
Eleventh Circuit Throws Out FDCPA Complaint On Grounds of Judicial Estoppel
On March 31, U.S. Court of Appeals in the 11th Circuit concluded that the district court properly dismissed plaintiff’s FDCPA complaint, using the concept of judicial estoppel. Ward v. AMS Servicing, LLC, 2015 WL 1432982 (11th Cir. Mar.31, 2015). In this case, the court addressed whether the Defendant was incorrect in charging the Plaintiff a monthly mortgage amount agreed to in a consent order, rather than the amount stipulated in the Note. In November 2013, the Plaintiff filed suit in the district court, alleging that Defendant violated the FDCPA by falsely representing the amount of her monthly mortgage payments. In June 2009, the Plaintiff and the original servicer of her loan entered into a loan modification for her home where she agreed that her monthly payment would be $1,182.89. Thereafter, the loan was sold with the Defendant acting as the new servicer. Subsequently, the Plaintiff fell behind on her loan and sought Chapter 13 bankruptcy protection. As a result, the mortgage holder sought to modify the automatic stay to allow it to foreclose on the property. In order to resolve the matter, the parties entered into a consent order, signed by the bankruptcy court, which provided that, in order to cure the arrearage, the Plaintiff’s monthly payment would rise to $1,319.50 from September 1, 2012 through May 1, 2013, but regular payments would resume once the arrearage had been paid. Despite the consent order, Plaintiff argued in district court and on appeal that Defendant violated FDCPA by charging the higher amount. The court concluded that Plaintiff’s challenge to the amount of the monthly mortgage payment was barred by judicial estoppel (e.g., “meant to prevent litigants from deliberately changing positions after the fact to gain an unfair advantage”), as Plaintiff would have gained an unfair advantage if allowed to proceed with the FDCPA suit since Defendant was convinced not to proceed with foreclosure in return for Defendant’s express agreement to pay $1,319.50 until her mortgage was current. For these reasons, the court affirmed a lower court’s dismissal of the Plaintiff’s civil suit against the Defendant.
Eighth Circuit Rules Disputed Debt Claim Does Not Violate FDCPA
On December 4, the U.S. Court of Appeals for the Eighth Circuit held that a debt collector did not violate the FDCPA by informing a consumer reporting agency (CRA) that a consumer owed a debt without also expressly indicating that the consumer had disputed it. McIvor v. Credit Control Services, Inc., No. 14-1164 (8th Cir. Dec. 4, 2014). According to the opinion, the plaintiff brought a claim under § 1692e(8) of the FDCPA, which prohibits debt collectors from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt,” and deems as a violation the conduct of “[c]ommunicating . . . to any person credit information which is known . . . to be false, including the failure to communicate that a disputed debt is disputed.” The court reasoned that no violation occurred here because (i) the CRA already knew that the debt was disputed, and (ii) the debt collector communicated with the CRA “with the purpose of complying with the FCRA, not as an elective report of credit information.”
District Court Denies Motion to Dismiss Class Action Against Debt Collection Firm Over "Misleading" Collection Letters
On December 15, the U.S. District Court for the District of New Jersey denied a motion to dismiss a class action suit against a fund and law firm specializing in debt collection. Marucci et al v. Cawley & Bergmann, LLP et al, No. 13-cv-4884 (D.N.J. Dec. 15, 2014). The suit claims that the firm violated the FDCPA by not informing consumers that interest was accruing on the amount specified in their collection letters. According to the complaint, the debt collection letters used by the firm “would lead the least sophisticated consumer to believe that payment of the amount stated in the letter would satisfy the Debt, when in fact interest is accruing and the consumer may still owe additional accrued interest.” The court found that the plaintiff’s interpretation of the letter was sufficiently reasonable to state a claim.
CFPB Proposes Amendments to Mortgage Servicing Rules
On November 20, the CFPB announced the issuance of a proposed rule to amend RESPA (Reg. X) and TILA (Reg.Z). The proposed rule changes primarily focus on clarifying, revising or amending (i) Regulation X’s servicing provisions regarding force-placed insurance, early intervention, and loss mitigation requirements; and (ii) periodic statement requirements under Regulation Z’s servicing provisions. In addition, the proposed amendments also revise certain servicing requirements that apply when a consumer is a potential or confirmed successor in interest, is in bankruptcy, or sends a cease communication request under the Fair Debt Collection Practices Act. Further, the proposed rule makes technical corrections to several provisions of Regulations X and Z. The public comment period will be open for 90 days upon publication in the Federal Register.