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CFPB finds 33 percent decline in collections tradelines on credit reports
On February 14, the CFPB released a report examining debt collection credit reporting trends from 2018 to 2022. The Bureau’s report, Market Snapshot: An Update on Third-Party Debt Collections Tradelines Reporting, is based on data from the agency’s Consumer Credit Panel—a nationally representative sample of roughly five million de-identified credit records maintained by one of the three nationwide credit reporting companies. According to the report, from Q1 2018 to Q1 2022, the total number of collections tradelines on credit reports declined by 33 percent, from 261 million tradelines in 2018 to 175 million tradelines in 2022. The Bureau determined that this decline was driven by contingency-fee-based debt collectors (responsible for primarily furnishing medical collections tradelines), who furnished 38 percent fewer tradelines during this time period. The total number of unique contingency-fee-based debt collectors also declined by 18 percent (from 815 to 672).
In a related blog post, the Bureau estimated that while medical collections tradelines declined by 37 percent between 2018 and 2022, these tradelines still constitute a majority (57 percent) of all collections on consumer credit reports. The Bureau explained that the “decline may be partly explained by structural dysfunctions in medical billing and collections, which increase the risk that debt collectors will not meet their legal obligations” and can result in false and inaccurate information. The Bureau said it will continue to closely examine medical billing and collection practices and highlighted a bulletin published in January 2022, which reminded debt collectors and credit reporting agencies of their legal obligations under the FDCPA and the FCRA when collecting, furnishing information about, and reporting medical debts covered by the No Surprises Act. (Covered by InfoBytes here.)
2nd Circuit affirms dismissal of FDCPA, FCRA, RICO action
On January 19, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a debt collection action related to alleged violations of the FCRA, FDCPA, and the Racketeer and Influenced and Corrupt Organizations (RICO) Act. Plaintiff filed a complaint against a telecommunications company and related entities concerning a disputed past-due charge and subsequent debt collection proceeding. The district court dismissed the action and denied the plaintiff’s motion for sanctions. In affirming the dismissal, the appellate court concluded that the district court correctly determined that the plaintiff failed to state a claim under the FCRA on the basis that (i) the plaintiff failed to allege cognizable damages caused by the alleged violations; and (ii) the credit reporting agencies corrected the allegedly inaccurate information within 30 days of being notified. The 2nd Circuit held that the plaintiff’s FDCPA claims also failed, pointing to the U.S. Supreme Court’s decision in Henson v. Santander Consumer USA Inc., which found that “you have to attempt to collect debts owed another before you can ever qualify as a debt collector” under the FDCPA. According to the appellate court, the plaintiff claimed that the relevant defendants are or were creditors seeking to collect on debts owed to them, and that, as such, they do not qualify as debt collectors under the statute. Finally, the 2nd Circuit concluded that the district court correctly determined that the plaintiff failed to demonstrate how the communications he received from the defendant qualified as mail or wire fraud under RICO.
District Court grants motion to set aside default judgment in FDCPA, FCRA suit
On January 19, the U.S. District Court for the District of South Dakota granted a defendant “buy now, pay later” service’s motion to set aside the default judgment in an FDCPA and FCRA suit originally entered in a small claims court. According to the order, the plaintiff filed suit in small claims court alleging violations of the FDCPA and FCRA, but the defendant did not receive notice of the suit and, as such, did not respond to the claim. A default was entered against the defendant thereafter. Upon receiving notice of the default, the defendant removed the case to federal court and moved to set aside the default. With respect to removal, the court held that removal was timely because it was made within 30 days of receiving the notice of default and held that removal was proper based on federal question jurisdiction. With respect to the motion to set aside, the court set aside the judgment, finding that there was no evidence of bad faith on the defendant’s part, that there was no prejudice to the plaintiff, and that the defendant did have “meritorious defenses” to the plaintiff’s claims.
District Court gives preliminary approval to $11.5 million FCRA settlement
On January 6, the U.S. District Court for the Northern District of Georgia granted preliminary approval of a $11.5 million settlement in a class action FCRA suit, resolving allegations that a credit reporting agency (CRA) reported inaccurate or incomplete criminal and civil records. According to the plaintiffs’ motion for preliminary approval of the proposed settlement and memorandum in support, the defendant violated the FCRA by attributing criminal records to consumers that did not belong to them. The plaintiffs further alleged that “misattribution resulted from [the defendant’s] unreasonable procedures related to its using or failure to use certain identifying information in its matching algorithm.” In addition, the plaintiffs claimed that the defendant failed to report favorable dispositions in landlord-tenant records. The plaintiffs also alleged that the defendant “did not obtain complete and up-to-date public records from the source, instead relying on old or incomplete data obtained from its vendor(s) or retrieved through automated processes.” If final approval of the settlement is granted, attorney fees will account for about a third of the $11.5 million settlement amount. The estimated number of people who could benefit from the settlement is approximately 90,000, with awards for this group ranging from $40 to $800. The defendant will also be obliged under the settlement to provide data needed to identify members of the class. Further, class members whose names were misreported as tied to felonies or sex offenses, or who disputed their criminal records, will be paid higher payments than those linked to misdemeanors, lower-level offenses, or eviction records.
9th Circuit affirms decision in FCRA, CFPA, and TSR suit
In December, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s ruling holding an individual liable for violations of the FCRA, the TSR, and the CFPA after the defendant, who allegedly “played a central role” in the scheme — and other defendants — were sued by the CFPB for allegedly obtaining individuals’ credit reports illegally and charging advance fees for debt relief services. As previously covered by InfoBytes, the CFPB 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. However, the Bureau alleged that the defendants instead resold or provided the reports to numerous companies, including 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 and violated both the TSR and CFPA by placing telemarketing sales calls and sending direct mail to encourage consumers to consolidate their loans, while falsely representing that consolidation could lower student loan interest rates, improve borrowers’ credit scores, and allow borrowers to change their servicer to the Department of Education. Settlements have already been reached with certain defendants (covered by InfoBytes here, here, and here). In August 2021, the U.S. District Court for the Central District of California granted the Bureau’s motion for summary judgment against the individual defendant after determining that undisputed evidence showed that the individual defendant, among other things, “obtained and later used prescreened lists from [a consumer reporting agency] without a permissible purpose” in order to send direct mail solicitations from the businesses that he controlled to consumers on the lists as opposed to firm offers of credit or insurance. (Covered by InfoBytes here.)
In September 2021, the district court entered judgment in favor of the Bureau against the individual defendant. While the individual defendant objected to the judgment, the district court ultimately determined that the Bureau is entitled to a judgment for monetary relief of over $19 million as redress for fees paid by affected consumers. This restitution is owed jointly and severally with the student loan debt relief company defendants in the amounts imposed in default judgments entered against each of them (covered by InfoBytes here).
On the appeal, the 9th Circuit cited “undisputed” evidence demonstrating how the individual defendant “violated” the FCRA, TSR, and CFPA. According to the appellate court, the defendant “is individually liable for corporate violations of the CFPA.” The appellate court further noted that the individual defendant “‘participated directly’ in these deceptive practices and ‘had the authority to control them,’” had a “central role” in these practices,” was “‘recklessly indifferent to the truth or falsity of the misrepresentations,’ and did not attempt to verify the truthfulness of statements” regarding the companies he controlled.
CFPB releases regulatory agenda
Recently, the Office of Information and Regulatory Affairs released the CFPB’s fall 2022 regulatory agenda. Key rulemaking initiatives that the agency expects to initiate or continue include:
- Overdraft and NSF fees. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation Z with respect to special rules for determining whether overdraft fees are considered finance charges. According to the Bureau, the rules, which were created when Regulation Z was adopted in 1969, have remained largely unchanged despite the fact that the nature of overdraft services has significantly changed over the years. The Bureau is also considering whether to engage in pre-rulemaking activity in November regarding non-sufficient fund (NSF) fees. The Bureau commented that while NSF fees have been a significant source of fee revenue for depository institutions, recently some institutions have voluntarily stopped charging such fees.
- FCRA rulemaking. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation V, which implements the FCRA. As previously covered by InfoBytes, on January 3, the Bureau issued its annual report covering information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). CFPB Director Rohit Chopra noted that the Bureau “will be exploring new rules to ensure that [the CRAs] are following the law, rather than cutting corners to fuel their profit model.”
- Section 1033 rulemaking. Section 1033 of Dodd-Frank provides that covered entities, such as banks, must make available to consumers, upon request, transaction data and other information concerning consumer financial products or services that the consumer obtains from the covered entity. Over the past several years, the Bureau has engaged in a series of rulemaking steps to prescribe standards for this requirement, including the release of a 71-page outline of proposals and alternatives in advance of convening a panel under the Small Business Regulatory Enforcement Fairness Act (SBREFA). The outline presents items under consideration that “would specify rules requiring certain covered persons that are data providers to make consumer financial information available to a consumer directly and to those third parties the consumer authorizes to access such information on the consumer’s behalf, such as a data aggregator or data recipient (authorized third parties).” (Covered by InfoBytes here.) The Bureau anticipates issuing a SBREFA report in February.
- Amendments to FIRREA concerning automated valuation models. The Bureau is participating in interagency rulemaking with the Fed, OCC, FDIC, NCUA, and FHFA to develop regulations to implement the amendments made by Dodd-Frank to FIRREA concerning appraisal automated valuation models (AVMs). The FIRREA amendments require implementing regulations for quality control standards for AVMs. The Bureau released a SBREFA outline and report in February and May 2022 respectively (covered by InfoBytes here), and estimates that the agencies will issue a notice of proposed rulemaking (NPRM) in March.
- Property Assessed Clean Energy (PACE) financing. The Bureau issued an advance notice of proposed rulemaking (ANPRM) in March 2019 to extend TILA’s ability-to-repay requirements to PACE transactions. (Covered by InfoBytes here.) The Bureau is working to develop a proposed rule to implement Economic Growth, Regulatory Relief, and Consumer Protection Act Section 307 in April.
- Nonbank registration. The Bureau issued an NPRM in December to enhance market monitoring and risk-based supervision efforts by including all final public written orders and judgments (including any consent and stipulated orders and judgments) obtained or issued by any federal, state, or local government agency for violation of certain consumer protection laws related to unfair, deceptive, or abusive acts or practices in a database of enforcement actions taken against certain nonbank covered entities. (Covered by InfoBytes here.) In a separate agenda item, the Bureau states that the NPRM would also require supervised nonbanks to register with the Bureau and provide information about their use of certain terms and conditions in standard-form contracts. The Bureau proposes “to collect information on standard terms used in contracts that are not subject to negotiating or that are not prominently advertised in marketing.”
- Credit card penalty fees. The Bureau issued an ANPRM last June to solicit information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses. (Covered by InfoBytes here.) Under the CARD Act rules inherited by the Bureau from the Fed, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. Calling the current credit card late fees “excessive,” the Bureau stated it intends to review the “immunity provision” to understand how banks that rely on this safe harbor set their fees and to examine whether banks are escaping enforcement scrutiny “if they set fees at a particular level, even if the fees were not necessary to deter a late payment and generated excess profits.” The Bureau is considering comments received on the ANPRM as it develops an NPRM that may be released this month.
- Small business rulemaking. Section 1071 of Dodd-Frank amended ECOA to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses, and directed the Bureau to promulgate rules for this reporting. An NPRM was issued in August 2021 (covered by InfoBytes here). The Bureau anticipates issuing a final rule later this month.
2nd Circuit affirms dismissal in FCRA suit
On January 4, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s decision to grant summary judgment for a credit reporting agency (defendant) in a suit alleging FCRA violations. According to the opinion, four years after the plaintiff took out a student loan, he filed for bankruptcy protection. The bankruptcy court issued a final decree of discharge, which released the plaintiff from all “dischargeable debts,” but did not specifically indicate that the loan was discharged. The student loan servicer indicated that the student loan was not discharged, and the plaintiff executed a loan modification agreement with the loan holder and made payments for several years. The plaintiff filed suit against the defendant consumer reporting agency, alleging that it violated the FCRA and New York law for including the loan on his credit report. The district court granted summary judgment in favor of the defendant after determining that the consumer’s loan had not been discharged. The plaintiff appealed.
On appeal, the 2nd Circuit noted that the plaintiff’s claim “hinges on the resolution of an unsettled legal question”: whether the loan was in fact discharged in the bankruptcy proceeding. Making such a determination would have required the defendant to resolve a legal question related to the debt, which the appellate court concluded was not required under the FCRA. As a result, the appellate court affirmed the dismissal of the plaintiff’s complaint because the alleged inaccuracy is not considered to not be an actionable “inaccuracy” under the FCRA.
CFPB report on credit bureaus hints at rulemaking
On January 3, the CFPB released its annual report, pursuant to Section 611(e)(5) of the FCRA, on information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). According to the report, the Bureau received 488,000 consumer complaints about the CRAs from October 2021 through September 2022. The Bureau’s analysis revealed that 93 percent of consumers reported having previously attempted to fix their problem with the company. The report also noted that the use of problematic response types has decreased, and most complaints now receive “more substantive and tailored” responses. The report found that most responses from the CRAs describe the outcomes of consumers’ complaints. The Bureau highlighted areas that the CRAs should prioritize given the “challenges facing market participants and policy makers,” including: (i) considering consumer burden when implementing automated processes; (ii) recognizing how current processes will need to evolve in light of new technologies that can generate similar-sounding complaints that are in fact unique; and (iii) considering how to transition the market from control and surveillance to consumer participation. According to CFPB Director Rohit Chopra, the Bureau “will be exploring new rules to ensure that [the CRAs] are following the law, rather than cutting corners to fuel their profit model.”
FDIC issues November enforcement actions
On December 30, the FDIC released a list of orders of administrative enforcement actions taken against banks and individuals in November. The FDIC made public nine orders consisting of “two consent orders; two orders terminating deposit insurance; three orders to pay civil money penalties; one order terminating consent order; and one Section 19 order.” Among the orders is a civil money penalty against a Wisconsin-based bank related to violations of the Flood Disaster Protection Act. The FDIC determined that the bank had engaged in a pattern or practice of violations that included the bank’s failure to: (i) obtain adequate flood insurance on the building securing a designated loan at the time of loan origination; (ii) obtain adequate flood insurance at the time of the origination; (iii) notify borrowers that the borrower should obtain flood insurance where a determination had been made that flood insurance had lapsed or a loan was not covered with the required amount of insurance; (iv) provide borrowers with a Notice of Special Flood Hazard and Availability of Federal Disaster Relief Assistance when making, increasing, extending or renewing a loan; and (v) provide borrowers with a Notice of Special Flood Hazard and Availability of Federal Disaster Relief Assistance within a reasonable time before the completion of the transaction. The order requires the payment of a $39,000 civil money penalty.
The FDIC also issued a civil money penalty against an Oregon-based bank for allegedly violating Section 8(a) of RESPA “by entering into mortgage lead generation arrangements with the operator of a real estate website and the operator of an online loan marketplace that were used to facilitate and disguise referral payments for mortgage business.” The FDIC also determined that the bank violated the FTC Act “by making deceptive and misleading representations in three of the bank’s prescreened offers of credit” and violated the FCRA “by obtaining the consumer reports of former loan clients with recent credit inquiries without a legally permissible purpose.” The order requires the payment of a $425,000 civil money penalty.
Additionally, the FDIC issued a consent order against a Tennessee-based bank alleging the bank engaged in “unsafe or unsound banking practices relating to weaknesses in capital, asset quality, liquidity, and earnings.” The bank neither admitted nor denied the allegations but agreed, among other things, that its board would “increase its participation in the affairs of the bank by assuming full responsibility for the approval of the bank’s policies and objectives and for the supervision of the bank’s management, including all the bank’s activities.” The bank also agreed to maintain a Tier 1 Leverage Capital ratio equal to or greater than 8.50 percent and a Total Capital ratio equal to or greater than 11.50 percent. The FDIC also issued a consent order against a New Jersey-based bank claiming the bank engaged in “unsafe or unsound banking practices relating to, among other things, management supervision, Board oversight, weaknesses in internal controls, interest rate sensitivity, and earnings.” The bank neither admitted nor denied the allegations but agreed, among other things, that it would retain a third-party consultant “to develop a written analysis and assessment of the bank’s board and management needs (Board and Management Report) for the purpose of ensuring appropriate director oversight and providing qualified management for the bank.”
CFPB, FTC say furnishers’ investigative duties extend to legal disputes
On December 16, the CFPB and FTC filed an amicus brief in a case on appeal to the U.S. Court of Appeals for the Eleventh Circuit concerning two related FCRA cases in support of plaintiffs-appellants and reversal of their suits involving a defendant hotel chain’s summary judgments. Both cases involve the same defendant company. In one case, the plaintiff entered into a timeshare agreement with the defendant for a property and made monthly payments for approximately three years. When the plaintiff stopped making payments, the plaintiff mailed the defendant letters that disputed the validity of, and purported to rescind, the agreement, while permitting the defendant to retain all prior payments as liquidated damages. The plaintiff obtained a copy of his credit report from a credit reporting agency (CRA), which stated that he had an open account with the defendant with a past-due balance. In three letters to the CRA, the plaintiff disputed the credit reporting. The letters stated that the plaintiff had terminated his agreement with the defendant and that he did not owe a balance. After the CRA communicated each dispute to the defendant, the defendant certified that the information for the defendant’s account was accurate. The plaintiff sued alleging the defendant violated the FCRA when it verified the accuracy of his credit report without conducting reasonable investigations following receipt of his indirect disputes. The defendant moved for summary judgment, alleging, among other things, that the plaintiff’s claim that he was not contractually obligated to make the payments to the defendant that are reported on his credit report as being due “is inherently a legal dispute and is not actionable under the FCRA.” The district court granted the defendant’s motion for summary judgment, which the plaintiff appealed.
In the other case, the plaintiff entered into a timeshare agreement with the defendant. She made a down payment and the first three installment payments, but did not make any additional payments. The plaintiff sent letters to the defendant disputing the validity of, and attempted to cancel, the agreement. The defendant reported the plaintiff’s delinquency to the CRA. In three letters to the CRA, the plaintiff disputed the credit reporting. After the CRA communicated the disputes to the defendant, the defendant determined there was no inaccuracy in the reporting. The plaintiff sued alleging the defendant violated the FCRA when it verified the accuracy of her credit report without conducting reasonable investigations following receipt of her indirect disputes about credit reporting inaccuracies. The district court granted the defendant’s motion for summary judgment, which the plaintiff appealed.
The CFPB and FTC argued in favor of the plaintiffs-appellants. According to the agencies, furnishers’ duty under the FCRA to reasonably investigate applies not only to factual disputes, but also to disputes that can be labeled as legal in nature. The agencies made three arguments to support their contention. First, a reasonable investigation is required under the FCRA to comport with its goal to “protect consumers from the transmission of inaccurate information about them.” The agencies argued that reasonableness is case specific, but it can “be evaluated by how thoroughly the furnisher investigated the dispute (e.g., how well its conclusion is supported by the information it considered or reasonably could have considered).”
Second, the agencies argued that Congress did not intend to exclude disputes that involve legal questions. The FCRA describes the types of indirect disputes that furnishers need to investigate, which are “those that dispute ‘the completeness or accuracy of any item of information contained in a consumer’s file.’” The agencies said nothing suggests that Congress intended to exclude information that is inaccurate on account of legal issues. Furthermore, the agencies noted that a lot of “inaccuracies in consumer reports could be characterized as legal, which would create an exception that would swallow the rule.” Consumer reports generally include information regarding an individual’s debt obligations, which are generally creatures of contract. Therefore, “many inaccurate representations pertaining to an individual’s debt obligations arguably could be characterized as legal inaccuracies, given that determining the truth or falsity of the representation could require the reading of a contract.”
Lastly, the agencies argued that an “atextual exception for legal inaccuracies would create a loophole that could swallow the reasonable investigation rule.” The agencies urged that “[g]iven the difficulty in distinguishing ‘legal’ from ‘factual’ disputes,” the court “should hold that there is no exemption in the FCRA’s reasonable investigation requirement for legal questions” because it would “curtail the reach of the FCRA’s investigation requirement in a way that runs counter to the purpose of the provision to require meaningful investigation to ensure accuracy on credit reports.”