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On May 7, the U.S. District Court for the Central District of California entered two default judgments totaling more than $34.1 million in an action by the CFPB against a mortgage lender and several related individuals and companies (collectively, “defendants”) for alleged violations of the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), and Fair Credit Reporting Act (FCRA). Settlements have already been reached with the chief operating officer/part-owner of one of the defendant companies, as well as certain other defendants (covered by InfoBytes here, here, and here).
As previously covered by InfoBytes, the Bureau filed a complaint in 2020 claiming the defendants violated the FCRA by, among other things, illegally obtaining consumer reports from a credit reporting agency for millions of consumers with student loans by representing that the reports would be used to “make firm offers of credit for mortgage loans” and to market mortgage products, but instead, the defendants allegedly resold or provided the reports to companies engaged in marketing student loan debt-relief services. The defendants also allegedly violated the TSR by charging and collecting advance fees for their debt-relief services. The CFPB further claimed that the defendants violated the TSR and CFPA when they used telemarketing sales calls and direct mail to encourage consumers to consolidate their loans, and falsely represented that consolidation could lower student-loan interest rates, improve borrowers’ credit scores, and change their servicer to the Department of Education.
The May 7 default judgment entered against the student loan debt-relief companies requires the collective payment of more than $19.6 million in consumer redress and more than $11.3 million in civil money penalties to the Bureau. The companies are also permanently enjoined from offering or providing debt-relief services or from using or obtaining consumer reports for any purpose. Moreover, the companies and any associated individuals may not disclose, use, or benefit from consumer information contained in or derived from prescreened consumer reports for use in marketing debt-relief services.
A second default judgment was entered the same day against one of the individual defendants. The judgment requires the individual defendant to pay a more than $3.2 million civil money penalty and permanently enjoins him from providing debt relief services or from using or obtaining prescreened consumer reports for any purpose.
On April 26, the U.S. District Court for the Northern District of Alabama partially granted a defendant debt collector’s motion for summary judgment concerning alleged FCRA and FDCPA violations. According to the opinion, the defendant sent a dunning letter to the plaintiff’s son seeking to recover unpaid debt. The plaintiff disputed the amount of debt owed and asked that the debt not be reported to the CRAs. However, two years later the son noticed the debt was included on his credit report and wrote to a CRA to dispute the debt. The defendant conducted an investigation to verify the debt and asserted that it told the CRAs that the son continued to dispute the debt. The credit reports the son obtained after the investigation, however, did not include a notation on his credit report showing the debt as disputed. The plaintiff brought suit on behalf of his son alleging the defendant violated the FCRA by failing to investigate the disputed debt, and the FDCPA by failing to communicate with the CRAs and misrepresenting the amount of the debt. The court granted summary judgment on the FCRA claim, finding that the dispute as to the debt owed was based on a legal defense not a factual inaccuracy, and that “the FCRA makes a furnisher liable for failing to report a dispute only if the dispute is meritorious.” The court, however, permitted the FDCPA claim predicated on the alleged failure to communicate with the CRA to proceed to trial because there is no analogous requirement that the dispute be meritorious to state a claim. The court dismissed the FDCPA claim predicated on the dunning letter for lack of standing.
On May 4, two additional settlements were reached with defendants in an action by the CFPB against a lender and several related individuals and companies (collectively, “defendants”) for alleged violations of the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), and Fair Credit Reporting Act (FCRA). As previously covered by InfoBytes, the CFPB filed a complaint in 2020 in the U.S. District Court for the Central District of California claiming the defendants violated the FCRA by, among other things, illegally obtaining consumer reports from a credit reporting agency for millions of consumers with student loans by representing that the reports would be used to “make firm offers of credit for mortgage loans” and to market mortgage products, but instead, the defendants allegedly resold or provided the reports to companies engaged in marketing student loan debt relief services. The defendants also allegedly violated the TSR by charging and collecting advance fees for their debt relief services. The CFPB further alleged that the defendants violated the TSR and CFPA when they used telemarketing sales calls and direct mail to encourage consumers to consolidate their loans, and falsely represented that consolidation could lower student loan interest rates, improve borrowers’ credit scores, and change their servicer to the Department of Education. Settlements have already been reached with certain defendants (covered by InfoBytes here and here).
The May 4 settlement reached with one of the defendant companies requires the payment of a $1 civil money penalty to the Bureau because of the defendant’s limited ability to pay. The defendant, who neither admits nor denies the allegations, is ordered to promptly take dissolution steps and is banned from offering or providing consumer financial products or services. The defendant is also prohibited from using or obtaining consumer reports for any purpose and must comply with reporting requirements.
A second settlement was reached the same day with one of the individual defendants. Under the terms of the settlement, the defendant also is required to pay a $1 civil money penalty, as well as $3,000 out of $7 million in consumer redress, of which full payment is suspended provided other obligations are fulfilled. The defendant, who neither admits nor denies the allegations, is permanently banned from providing debt relief services or telemarketing consumer financial products or services. The defendant is also prohibited from using or obtaining “prescreened consumer reports” for any purpose, and is further required to, among other things, comply with reporting requirements and fully cooperate with any other investigations.
On April 29, the FTC announced a civil complaint and stipulated order filed by the DOJ on its behalf against a home security and monitoring company accused of allegedly violating the FCRA by improperly obtaining consumers’ credit reports to help potential customers qualify for financing for its products and services. According to the complaint, company employees allegedly engaged in a process known as “white paging,” in which the credit history of another individual with the same or similar name as the potential customer is used to qualify the potential customer for the company’s financing program. Additionally, the FTC claimed that company sales representatives allegedly added “impermissible co-signers” to accounts for unqualified customers by unlawfully using the credit history of the “co-signers” without their permission. In the event a customer defaulted on a loan, the company referred the impermissible co-signer to its debt buyer, potentially harming the co-signer’s credit score and subjecting the individual to debt collections, the FTC stated. According to the complaint, the company was aware of the misconduct, terminated hundreds of sales representatives as a result of these practices, but later rehired some of the same sales representatives because they generated millions of dollars in revenue.
Under the terms of the stipulated order—the largest to date for an FTC FCRA action—the company is required to pay a $15 million civil money penalty, as well as $5 million to compensate harmed individuals. Additionally, the company must (i) implement an employee monitoring and training program to prevent further FCRA violations; (ii) establish and maintain an identity theft prevention program; (iii) establish a customer service task force to verify all accounts that reference more than one address or include a co-signer before referring the accounts to a debt collector and assist individuals who were improperly referred to debt collectors; and (iv) obtain biennial assessments by an independent third party to ensure compliance.
While the Commission voted 4-0 to approve the stipulated final order, Commissioner Rohit Chopra issued a separate statement noting that he believes the FTC “should have also alleged that the company violated the FTC Act’s prohibitions on deceptive practices by falsifying credit applications,” and that because the company “turned a blind eye to obvious compliance failures by its sales force” it also allegedly “violated the FTC Act’s prohibition on unfair practices.”
On April 28, the U.S. Court of Appeals for the Eleventh Circuit vacated a district court’s judgment, holding that it was unclear whether a credit reporting agency (CRA) took “reasonable procedures to assure maximum possible accuracy of the information” as required under the FCRA after a consumer claimed his credit report contained inaccuracies. The consumer contacted the CRA after noticing his credit report showed he was delinquent on a mortgage that was discharged in bankruptcy. The CRA sent an automated consumer data verification to the mortgage servicer who confirmed the debt. The consumer claimed that the CRA did not take further steps to investigate the situation and failed to correct the credit report until after the consumer commenced the litigation against the CRA for willfully violating the FCRA. The district court disagreed with the consumer, concluding that under both § 1681e and § 1681i, the CRA’s actions were reasonable as a matter of law. Among other things, the consumer failed to provide the CRA “with specific information from which it could have discovered that he no longer owed money” on the mortgage, the district court found, determining also that the consumer’s “theory of liability was a ‘bridge too far’ because it would require [CRAs] to examine court orders and other documents to determine their legal effect.”
On appeal, the Eleventh Circuit disagreed that the measures taken by the CRA after it was notified of the inaccuracy in the consumer’s report were “‘reasonable’ as a matter of law.” The CRA did “nothing, although it easily could have done something with the information” provided by the consumer, the appellate court wrote. However, the court emphasized that its decision was a narrow one. “Just as we cannot hold that [the CRA’s] procedures were per se reasonable, we do not hold that they were per se unreasonable,” the appellate court wrote, noting that it also could not “hold that in every circumstance where a plaintiff informs a [CRA] of an inaccuracy, the agency must examine court records to independently discern the status of a debt.” Additionally, the appellate court determined that although a bankruptcy discharge does not expunge a debt, the consumer’s credit report was still factually inaccurate because he “was no longer liable for the balance nor was he ‘past due’ on any amount for more than 180 days.”
On April 19, the FTC’s Bureau of Consumer Protection wrote a blog post identifying lessons learned to manage the consumer protection risks of artificial intelligence (AI) technology and algorithms. According to the FTC, over the years the Commission has addressed the challenges presented by the use of AI and algorithms to make decisions about consumers, and has taken many enforcement actions against companies for allegedly violating laws such as the FTC Act, FCRA, and ECOA when using AI and machine learning technology. The FTC stated that it has used its expertise with these laws to: (i) report on big data analytics and machine learning; (ii) conduct a hearing on algorithms, AI, and predictive analytics; and (iii) issue business guidance on AI and algorithms. To assist companies navigating AI, the FTC has provided the following guidance:
- Start with the right foundation. From the beginning, companies should consider ways to enhance data sets, design models to account for data gaps, and confine where or how models are used. The FTC advised that if a “data set is missing information from particular populations, using that data to build an AI model may yield results that are unfair or inequitable to legally protected groups.”
- Watch out for discriminatory outcomes. It is vital for companies to test algorithms—both prior to use and periodically after that—to prevent discrimination based on race, gender, or other protected classes.
- Embrace transparency and independence. Companies should consider how to embrace transparency and independence, such as “by using transparency frameworks and independent standards, by conducting and publishing the results of independent audits, and by opening. . . data or source code to outside inspection.”
- Don’t exaggerate what your algorithm can do or whether it can deliver fair or unbiased results. Under the FTC Act, company “statements to business customers and consumers alike must be truthful, non-deceptive, and backed up by evidence.”
- Data transparency. In the FTC guidance on AI last year, as previously covered by InfoBytes, an advisory warned companies to be careful about how they get the data that powers their models.
- Do more good than harm. Companies are warned that if their models cause “more harm than good—that is, in Section 5 parlance, if it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers and not outweighed by countervailing benefits to consumers or to competition—the FTC can challenge the use of that model as unfair.”
- Importance of accountability. The FTC warns of the importance of being transparent and independent and cautions companies to hold themselves accountable or the FTC may do it for them.
On April 12, the U.S. District Court for the Northern District of California denied defendants’ motion to compel arbitration in a matter alleging a lender denied plaintiffs’ applications based on their immigration status. The plaintiffs filed a putative class action against the defendants, alleging the lender denied their loan applications based on one of the plaintiff’s Deferred Action for Childhood Arrivals (DACA) status and the other plaintiff’s status as a conditional permanent resident. The plaintiffs claimed that these practices constituted unlawful discrimination and “alienage discrimination” in violation of federal law and California state law. The plaintiffs also alleged that the lender violated the FCRA by accessing one of their credit reports without a permissible purpose. The defendants moved to compel arbitration and dismiss the claims.
With respect to the defendants’ motion to compel arbitration, the lender claimed that the DACA plaintiff “expressly consented to arbitration” when he was required to check a box labeled “I agree” in order to proceed with his online student loan refinancing application back in 2016. However, the DACA plaintiff argued the arbitration agreement “lacked adequate consideration” because he was ineligible for a loan as a DACA applicant, and that even if it were a valid agreement, it only applied to his 2016 application and not to his subsequent attempts to refinance his student loans. In denying the lender’s motion to compel arbitration, the court concluded that the DACA plaintiff did not claim that he was seeking to reopen or have the lender reconsider his 2016 application, but rather he asserted that these were “standalone attempted transactions,” and as such, did not fall within the scope of the 2016 arbitration agreement.
In reviewing whether the lender’s policies constitute alienage discrimination, the court determined, among other things, that while the lender “asserts that it does not discriminate against non-citizens because some non-citizens—namely [lawful permanent residents] and some visa-holders—are still eligible to contract for credit with [the lender],” the distinction “is not supported by the language of the statute,” noting that under 42 U.S.C. § 1981, protections “extend to ‘all persons within the jurisdiction of the United States.’” Additionally, the court ruled that the second class of conditional permanent residents whose credit reports were pulled by the lender and allegedly experienced a decrease in their credit scores—despite plaintiffs claiming the lender’s policy states that permanent residents are ineligible for loans if their green cards are valid for two years or less—may proceed with their FCRA claims.
On April 9, the U.S. Court of Appeals for the Second Circuit held that a credit reporting agency’s (CRA) report that a judgment was “satisfied” was accurate and not misleading under the FCRA. According to the opinion, a debt collection action was brought and default judgment entered against the plaintiff. The parties ultimately filed a joint stipulation to resolve the action and discontinue all claims with prejudice. Afterwards, the CRA’s report showed the default judgment, but was later amended to read “judgment satisfied”—a statement that the plaintiff allegedly repeatedly disputed. The plaintiff ultimately filed a lawsuit against the CRA, alleging the agency “willfully and/or negligently violated various FCRA provisions by persisting in publishing [the] report and failing to follow certain of the FCRA’s procedural notice requirements.” Among other things, the plaintiff claimed that the CRA also violated the FCRA’s source-disclosure and reinvestigation provisions and should have disclosed that the information about the judgment came from a contractor-intermediary working for the CRA. The district court dismissed one of the FCRA claims and granted summary judgment to the CRA on the remaining FCRA claims.
On appeal, the 2nd Circuit agreed with the district court, concluding first that there was no FCRA reporting violation because the description of the judgment as “satisfied” was accurate. Moreover, the appellate court wrote, even if the CRA should have disclosed that the contractor was the source, the plaintiff “failed to present any evidentiary basis for concluding that he suffered actual damages” resulting from the CRA’s failure to not disclose or treat the contractor as a source or furnisher of the information about the judgment. The 2nd Circuit further rejected the plaintiff’s claims against the CRA for willful violations of sections 1681g and 1681i, concluding that the sections “can be reasonably interpreted not to require such a disclosure and no more need be shown.”
On April 5, the U.S. Court of Appeals for the Eleventh Circuit held that an arbitration provision survived the termination of a subscriber agreement between a defendant cable company and a customer. According to the opinion, the plaintiff obtained services from the defendant in December 2016, and signed a subscriber agreement containing an arbitration provision covering claims that arose before the agreement was entered into and after it expired or was terminated. The plaintiff terminated the defendant’s services in August 2017, but later called the defendant in 2019 to inquire about pricing and services. The plaintiff filed a putative class action, alleging the defendant violated the FCRA when it accessed his credit report during the call without his permission, thus lowering his credit score. The defendant moved to compel arbitration, which the district court denied, ruling that while the parties may have intended for the arbitration provision to survive termination of the subscriber agreement, the plaintiff’s claim fell outside the scope of the subscriber agreement because “no reasonable person would believe that the Arbitration Provision was so all-encompassing as to apply to all claims regardless of when they occurred or whether they related to the agreement.” Moreover, the district court ruled that the Federal Arbitration Act (FAA) “could only compel [the plaintiff] to arbitrate his FCRA claim if it ‘arose out of’ or ‘relate[d] to’ the 2016 subscriber agreement, which the district court held it did not.
On appeal, the appellate court disagreed, concluding that the plaintiff’s FCRA claim relates to the 2016 subscriber agreement since the defendant was only able to conduct the credit check during the phone call because of its previous relationship with the plaintiff. The plaintiff argued that he was calling to obtain new services and not to reconnect services, but the appellate court countered that the “reconnection provision” contained within the subscriber agreement provides broad language that defines terminate, suspend, and disconnect as not necessarily being mutually exclusive. However, the 11th Circuit clarified that its holding is narrow, and that because it concluded that the plaintiff’s claim did arise out of the subscriber agreement the court did not need to and was not making a determination about whether the “broad scope” of the arbitration provision in the subscriber agreement is enforceable under the FAA.
On April 1, the U.S. Court of Appeals for the Fifth Circuit upheld a district court’s ruling in favor of defendant credit repair organizations (including a law firm), holding that plaintiff data furnishers failed to provide sufficient evidence supporting their claims of fraud and fraud by nondisclosure. The plaintiffs filed suit, alleging that the defendants were sending dispute letters that appeared to have come directly from the defendants’ debtor clients. Under the FCRA and the FDCPA, the plaintiffs are obligated to investigate disputed debts that come directly from debtors. Letters from law firms, the plaintiffs argued, do not trigger such requirements. According to the plaintiffs, the disputes they were receiving were costing them money to investigate, which they would not have spent if had they known the letters were coming from a law firm. A jury returned a verdict in favor of the plaintiffs on their claims of fraud and fraud by non-disclosure and awarded them roughly $2.5 million. The district court ultimately vacated the jury’s verdict, however, explaining that the evidence failed to show that the defendants made any false misrepresentations, material or otherwise, when they signed their clients’ names on letters mailed to the plaintiffs. The law firm defendant “had the legal right to sign its clients’ names on the correspondence it sent on their behalf to data furnishers who reported inaccurate information about the clients’ credit,” the district court wrote.
On appeal, the 5th Circuit determined, among other things, that the plaintiffs did “not provide any precedential support or explanation for their assertion that these facts demonstrate Defendants committed fraud and fraud by non-disclosure beyond the observation that the jury found for them on those claims.” Moreover, the appellate court disagreed with the plaintiffs’ argument that the engagement agreements that clients signed with the defendant law firm, which allowed it to send dispute letters on a client’s behalf, were fraudulent because the defendant law firm did not discuss the letters with the consumers first. According to the appellate court, the existence of any such discussion was immaterial because the engagement agreements allowed the defendant law firm to send letters on a client’s behalf. However, the appellate court noted that “[w]hile we do not hold today that there are no situations in which a third party may act fraudulently when it mails dispute letters (and leave for another day what those situations may be), we can safely say that this is not one of them.”
- Daniel R. Alonso to moderate an interactive roundtable at the Latin Lawyer and GIR Connect: Anti-Corruption & Investigations Conference
- APPROVED Checkpoint Webcast: You have license renewal questions, we have answers
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jeffrey P. Naimon to discuss "Truth in lending” at the American Bar Association National Institute on Consumer Financial Services Basics
- Daniel R. Alonso to discuss anti-money-laundering at FELABAN Spanish-language webinar “Perspective for banks: LAFT, FINCEN, OFAC, Cryptocurrency”
- Daniel R. Alonso to discuss "What’s new in BSA/AML compliance?" at the Institute of International Bankers Regulatory Compliance Seminar
- Marshall T. Bell and John R. Coleman to speak at 2021 AFSA Annual Meeting
- Jon David D. Langlois to discuss "Regulatory update: What you need to know under the new boss; It won’t be the same as the old boss" at the IMN Residential Mortgage Service Rights Forum (East)
- Daniel R. Alonso to discuss internal investigations at the Institute of Internal Auditors of Argentina Spanish-language webinar
- Benjamin B. Klubes to discuss “Creating a Fantastic Workplace Culture”
- John R. Coleman and Amanda R. Lawrence to discuss “Consumer financial services government enforcement actions – The CFPB and beyond” at the Government Investigations & Civil Litigation Institute Annual Meeting
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek