CFPB Issues Complaint Report

This week the CFPB issued its third complaint report detailing the trends surrounding complaints submitted by or on behalf of servicemembers, veterans and their families.  The report highlights the complaints received by the CFPB from service members, the CFPB’s enforcement actions impacting servicemembers and finally, a discussion of the account management issues particular to servicemembers. 

Complaints:

The Report summarizes by product the complaints received from servicemembers.  The majority of complaints received were with regard to debt collection (39%) and mortgage (24%).  The most common type of debt collection complaint reported was about continued attempts to collect a debt that the servicemember contended was not owed.  The CFPB noted that in many of those cases, the attempt to collect the debt is not itself the problem, but rather the calculation of the underlying amount owed.  The Report also placed emphasis on complaints about debt collectors calling places of employment.  “This is of particular interest to the CFPB since we have received reports that some debt collectors are threatening service members by claiming that they will report unpaid debts to their commanding officer, have the servicemembers demoted in rank, or even have their security clearance revoked if they don’t pay up.” A Snapshot of Complaints Received from Servicemembers, Veterans, and their Families (Spring 2015) at  p. 9.

Enforcement Actions:

The Report highlights the CFPB’s three public enforcement actions in 2014 which were impactful for servicemembers.  These enforcement actions provided servicemembers with $94 million in refunds and other relief.

Identified Issues Particular to Servicemembers:

The most significant portion of the Report is its discussion of issues particular to servicemembers: account management.  The Report identifies account management as a common thread in many of the complaints that it received.  The Report identified two specific areas of concern:

1.  Monthly Fees for “Misuse.”

The CFPB defines “misuse” broadly as implying a consumer has not kept the necessary minimum daily balance, not set up a direct deposit required by the terms of the account, or not had the requisite activity on the account necessary to prevent fees.  The CFPB noted that the issue frequently stems from the bank’s change of terms and conditions.  While the account may have initially been opened as a Military No-Fee account, the account may have been changed to a new product requiring a minimum balance or automatic deposit in order to avoid new monthly changes.  The CFPB noted that because of the unique nature of military life (frequent deployments and moves, etc.), many servicemembers may not receive the change of terms and conditions sent by the bank and therefore were caught unaware of the change in requirements.  The CFPB also noted that because of frequent deployments, accounts may remain dormant for periods of time resulting in a dormancy/inactivity fee being charged.

1. Poor Customer Service Communication Means for Deployed Military

The Report also raised concerns that financial institutions do not have procedures in place to effectively communicate with servicemembers concerning their accounts when they are deployed.   The most expedient manner in which to deal with a complaint or inquiry is via phone; however, in many instances, the deployed servicemember does not have access to a telephone and is therefore relegated to communicating by email or other online systems.  The Report raises concerns that financial institutions are not providing sufficient means to communicate with deployed servicemembers.

 

Democratic National Committee May be Vicariously Liable under TCPA for Get out the Vote Calls

In a good news/bad news scenario,  the saga continues in the Obama for America TCPA action.  The good news for the Democrats is that the plaintiff's motion to certify a class was denied today.  The bad news - and what this blog entry is really about - is that DNC Services Corporation (a/k/a the Democratic National Committee) saw its motion for summary judgment denied recently.  

In Shamblin v. Obama for America, C.A. No. 8:13-cv-2428 (M.D. Fl. Apr. 17, 2015), the plaintiff filed a putative class action concerning two unsolicited auto dialed telephone calls to her cellular telephone that left pre-recorded messages on her voicemail system indicating they  were “paid for by Obama for America”.  The plaintiff filed suit alleging violations of the TCPA and contending that “despite the prohibition of robocalls to cell phones, and the FCC’s reminder that such calls are illegal, President Obama’s principal campaign committee, defendant Obama for America, with the assistance and participation of defendant DNC Services Corporation…, called voter cell phones with both auto-dialed and pre-recorded calls urging the recipients to vote for Barack Obama in the 2012 presidential election.” Slip Op. at 2-3.  In its motion for summary judgment, DNC contended that the undisputed facts demonstrated that it did not initiate or make any autodialed calls to the plaintiff and therefore had no direct liability to the plaintiff and that it was not vicariously liable for calls that other entities made. 

In reviewing the first issue, that of direct liability for the calls, the court relied on recent FCC opinions as to what factors should be considered in determining whether or not a party “initiated” a telephone call.  The court determined that an issue of fact existed as to whether the DNC was directly involved in placing the calls, citing to evidence that demonstrated that the DNC provided voter information to Obama for America, reviewed telemarketing scripts and provided technical support.    

As to the issue of vicarious liability, the court also declined to dismiss the claims.  Parties may be held vicariously liable under federal common law agency principles for TCPA violations committed by third parties.  Again relying on recent FCC opinions, the court noted that any of the following may demonstrate a principal/agent relationship: (a) allowing access to information and systems; (b) providing access to customer information; (c) approving telemarketing scripts; or (4) knowing of TCPA violations and failing to stop such violations.  In this case, the court noted that there was evidence to suggest that DNC approved robocall scripts and controlled access to and use of the voter file.  The court (a Bush appointee) further gave no credence to the disclaimer of agency relationship found in the Voter Data Exchange Agreement between the DNC and Obama for America.

Lender May Be Held Vicariously Liable for Servicer’s Violation of RESPA

A federal court has denied a lender’s motion to dismiss, holding that a lender may be held vicariously liable for its servicer’s violation of RESPA.  Rouleau v. US Bank, NA, C.A. No. 14-cv-568-JL, Op. No. 2014 DNH 084 (D.N.H. Apr. 17, 2015).  The Rouleaus sought a mortgage modification from their lender.  Before the lender took action on the loan modification, the loan was sold to US Bank and Nationstar Mortgage began servicing the loan.   Shortly thereafter, Nationstar sent a letter to the Rouleaus indicating that if they were in the process of applying for or providing information related to a workout with the original lender, Nationstar anticipated receiving their information soon and encouraged the Rouleaus to contact Nationstar to make sure it had the information necessary.  The Rouleaus made several unsuccessful attempts to contact Nationstar to discuss the modification.  The Rouleaus heard nothing from either Nationstar or US Bank until receiving notice from US Bank of a foreclosure sale.  The Rouleaus filed suit seeking to enjoin the foreclosure and seeking monetary damages against the original lender, US Bank, and Nationstar.   The claims against US Bank include a claim that US Bank is vicariously liable for it servicer Nationstar’s violation of RESPA.  US Bank moved to dismiss the RESPA claim asserting that it is not a servicer as said term is defined in Reg X and therefore not liable.

RESPA regulates the conduct of servicers of federally regulated mortgage loans.  A “servicer” is the person responsible for receiving payments from the borrower.  Under Reg X, a servicer must promptly review a modification application it receives 45 days or more prior to a foreclosure sale and notify the borrower within 5 days of receipt whether the application is complete or incomplete and if incomplete, what information is necessary to complete it.  12 C.F.R. §1024.41(b)(2).  The regulations further require that the servicer evaluate the borrower for loss mitigation options within thirty days of receiving the completed application and notify the borrower what options, if any, are available.  12 C.F.R. §1024.41(c)(1). The servicer cannot initiate foreclosure while a loss mitigation application is pending.  12 C.F.R. §1024.41(f)(2), (g).  Moreover, a servicer to whom servicing is transferred while an application is pending must maintain policies and procedures which are “reasonably designed to ensure that the servicer can identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer.” 12 C.F.R. §1024.38(b)(4)(ii).  RESPA further provides a private right of action for violations of Reg X.

In reviewing the claim, the court determined that RESPA created a “species of tort liability.”  As such, traditional vicarious liability rules applied, making principals vicariously liable for the acts of their agents or employees in the scope of their authority or employment. The court did not give deference to US Bank’s argument that it was not covered by the applicable regulations because it was not a servicer under RESPA’s definition of the term.  Instead, the court held that “RESPA does not limit liability to servicers, but provides that “[w]hoever” violates a statutory requirement may be held civilly liable.  Slip Op. at 17.  Absent any statutory, regulatory or judicial indication that RESPA does not incorporate traditional tort rules of vicarious liability, the court concluded that the lender could be held vicariously liable for RESPA violations of its servicer. 

Mortgage Servicer Settles with CFPB and FTC

The CFPB and FTC have announced a settlement with Green Tree Servicing LLC, a national mortgage servicing company, regarding its loan servicing and debt collection practices.  Under the proposed settlement, Green Tree will pay $63 million dollars of which $48 million will be paid to affected consumers and the remainder will be paid as a civil penalty.  Additionally, Green Tree will be subjected to significant and onerous remediation requirements.

According to the complaint, Green Tree engaged in deceptive practices which included requiring good faith or upfront payments in violation of HAMP and refusing to honor “in process” loan modifications between the consumer and prior loan servicer.  Additionally, the complaint alleges that Green Tree engaged in unlawful debt collection practices both under the FDCPA as well as the general prohibition on unfair and deceptive acts set forth in §5 of the FTC Act and §§1031 and 1036(a)(1)(B) of the CFPA.  The proscribed debt collection practices set forth in the Complaint include:

• Disclosing debts to third parties, including family members, employers, coworkers and neighbors;

• Calls as early as 5 AM and as late as 11 PM;

• The use of profane language;
• Calling consumers between 7-20 times a day on a daily basis;
• Leaving multiple voice mail messages each day;
• Threatening consumers with arrest and imprisonment;
• Pressuring consumers to use a payment method that includes a $12 convenience fee per transaction without offering other alternatives for payment; and
• Taking payment from consumer accounts with their consent.

The complaint further alleges inaccurate credit reporting and problems with the administration of consumer escrow accounts.  Significantly with respect to the debt collection activities, the complaint encompasses accounts covered by the FDCPA (those accounts in which Green Tree became the servicer when the account was already past due) and those covered by the FTC Act and the CFPA (accounts in which Green Tree became the servicer pre-default). The Complaint additionally asserts claims under the FCRA and RESPA.

The Proposed Consent Order, in which Green Tree admits no wrongdoing, requires both monetary payments as well as remediation.  The Consent Order:

• Requires payment of $18 million dollars for the alleged misrepresentations relating to the alleged misrepresentations concerning payment methods requiring a convenience fee;

• Requires payment of $30 million dollars for the alleged misconduct involving short sales and in-process loan modifications;

• Requires payment of $15 million dollars in civil penalties to the CFPB;

• Prohibits the conduct complained of;

• Requires the establishment and use of a “comprehensive data integrity program reasonably designed to ensure the accuracy, integrity, and completeness of the data and other information about the accounts that” Green Tree services, collect or sells;

• Requires ongoing testing and correction of errors;

• Requires the submission and approval by the CFPB of a data integrity program;

• For eight years, requires a biennial assessment and report by a third party professional assessing the data integrity program which will be subject to review by the FTC;

• Requires the establishment of a “home preservation plan”, effective for five years, designed to “identify and review” identified consumers for "loss mitigation options, provide for the solicitation and fast-track evaluation of loss mitigation applications and stop pending foreclosure sales for such consumers to the extent necessary to permit the consumers to be solicited and considered for loss mitigation”;

• For 5 years requires quarterly disclosures to consumers with past due debts serviced by the Defendant which include customer service information, as well as directions as to how to contact the FTC and CFPB concerning the manner in which the account is being collected;

• Requires the provision to all employees, who are required to acknowledge their receipt in writing, of a lengthy and detailed notice of their responsibilities under the FDCPA;

• For five years, requires the delivery to all officers, directors, managers and members a copy of this Order, the FDCPA, the FCRA and RESPA;

• For five years, requires that a copy of the Order must also be provided to all employees, along with a copy of the aforementioned statutes relevant to their job responsibilities;

• Requires the delivery of certain compliance notices to the FTC for 15 years; 

• For fifteen years, subjects Green Tree to stringent record keeping (with a five year retention period) which includes a record of all complaints received from consumers, recordings to the extent allowed by state law of 90% of all telephone calls (limited to a two year retention period), copies of all training materials, accounting records, personnel records;  and

• Provides that the monetary obligations are nondischargeable in bankruptcy.

Key takeaways:

• The investigation is consistent with the targets identified by the CFPB:  markets where the consumer has no choice in his provider and businesses with large market share;

• In its attack on the pre default accounts Green Tree was servicing, the complaint is consistent with the CFPB’s position that it can regulate debt collection even regarding actors not covered by the FDCPA. It is important to note that the complaint did not limit itself to the authority of the FDCPA for accounts that Green Tree was servicing post default but also asserted authority to regulate violations with respect to accounts which were assigned to Green Tree pre-default and for which Green Tree was not a debt collector under the FDCPA; and

• While the debt collection activities complained of are egregious, the primary focus of the Consent Order appears to be directed towards the convenience fee issue and the loan modification and short sale issues.

Supreme Court Denies Petition for Writ of Certiorari in Bankruptcy Proof of Claim Case

Yesterday, the United States Supreme Court denied the Petition for Writ of Certiorari in LVNV Funding, LLC v. Crawford.  The Court's refusal to hear Crawford leaves a split in the circuits as to whether proofs of claim are subject to the FDCPA.

In July of 2014, the Eleventh Circuit expanded the reach of the FDCPA to proofs of claim. Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11^th Cir. 2014).  Prior to the Crawford decision, the overwhelming majority of courts had resoundingly held that proofs of claim were not subject to the FDCPA.  As stated by one court in rejecting the notion that FDCPA claims could arise from proofs of claim, “there is strong and ample authority for the proposition that a creditor’s filing of a claim in a bankruptcy proceeding, even if the claim is prescribed by applicable state law, is not an unlawful debt collection practice actionable under the FDCPA…This court…is “convinced that the Code and Rules are up to the task of compensating a debtor for any damages or costs occasioned by, and to punish and deter, those who would abuse the bankruptcy claims process, such that an objection to claim and motion for sanctions, if warranted, will typically be the appropriate measures to take in cases involving stale claims by debt buyers.””  Jenkins v. Genesis Fin. Solutions, LLC, 456 B.R. 236 (E.D.N.C. Bankr. 2011) quoting B-Real, LLC v. Chaussee, 399 B.R.  225, 241 (9^th Cir. BAP 2008).

Despite the body of case law, however, the Eleventh Circuit held to the contrary.   In Crawford, the debtor commenced an adversary proceeding against a debt buyer, alleging that the filing of a time barred proof of claim violated the automatic stay and the FDCPA.  The debt buyer ultimately withdrew the proof of claim; however, the adversary proceeding proceeded forward.  The Bankruptcy Court granted LVNV’s motion to dismiss holding that the filing of a proof of claim, even one on time barred debt, did not constitute a violation of the FDCPA.  The district court affirmed. On appeal, the Eleventh Circuit reversed, holding that the filing of a proof of claim was an attempt to collect a debt and that the filing of a proof of claim for time barred debt violated the FDCPA.  In so holding, the court seemed to take issue with the fact that an otherwise uncollectible debt would result in some recovery under the Chapter 13 plan. “Such a distribution of funds to debt collectors with time-barred claims then necessarily reduces the payments to other legitimate creditors with enforceable claims.”  Crawford, 758 F.3d at 1261.   Additionally, the court premised its reversal on the notion that “a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt.”  Id.

Since Crawford, a number of similar actions have been filed throughout the United States.  Of the cases decided thus far, many have been highly critical of the Crawford decision and refused to follow its rationale. See, e.g., Donaldson v. LVNV Funding, LLC, C.A. No. 1:14-cv-01979-LJM-TAB (S.D. Ind. Apr. 7, 2015); Torres v. Asset Acceptance, LLC, C.A. No. 2:14-cv-6542-ER (E.D. Pa. Apr. 7, 2015); Torres v. Cavalry SPV I, LLC, C.A. No. 2:14-cv-5915-ER (E.D. Pa. Apr. 7, 2015).  These courts have been quick to point out the distinctions between the proof of claim process and litigation.  As noted by the Donaldson court,

there is no “threat” in a proof of claim that accurately reflects information about an unsecured debt that that the debtor has listed himself on his schedules.  It is neither a lawsuit nor a threat of a lawsuit; it’s a statement that a debt exists and its amount and there is no prohibition in the Bankruptcy Code against filing a proof of claim on an unsecured, stale debt.  Rather the Bankruptcy Code states that such debts are allowed, unless objected to by any party interest, which clearly includes the trustee or the debtor and should be disallowed if it is unenforceable under applicable law.

 

Id. at 9. 

In our view, Crawford is an outlier and simply, bad law. The filing of a proof of claim cannot constitute regulated "collection" activity and the Bankruptcy Code provides the proper mechanisms for protecting the debtor.

Final CARD Act Rule Issued Suspending Submission of Credit Card Agreements

The CFPB has issued its final rule, effective April 17, 2015, temporarily suspending card issuers' obligations to submit their credit card agreements quarterly to the CFPB.  The stated purpose of the rule is to reduce the burden on the CFPB while it works to develop a more efficient electronic submission system.  In its Summary, however, the CFPB also acknowledges that the repository was of little value to consumers.  See Submission of Credit Card Agreements under the Truth in Lending Act (Regulation Z), 80 Fed. Reg. 21153, 21156 (Apr. 17, 2015). As noted by one commenter, the submission and record repository requirements imposed costs without benefits. Id. at 21157.  Other requirements under the CARD Act, including card issuers' obligation to post their currently offered agreement on their own websites would be unaffected. 

The provision of the CARD Act in question, 12 C.F.R. 1026.58(c), required card issuers to post agreements for open end consumer credit cards on their website and to submit them quarterly to the CFPB.    Under the prior rule, the agreements were manually submitted to the CFPB via email on a quarterly basis.  By its own admission, the CFPB acknowledges that the process was unnecessarily cumbersome on both the cards issuers and the CFPB.  The disclosed purpose of the proposed suspension is to allow the CFPB time to work on a more streamlined and automated electronic submission system.  Under the rule, submissions due April 30, 2015, July 31, 2015, October 31, 2015 and January 31, 2016 will not be required.  Submissions will resume on April 30, 2016.  See 12 C.F.R. 1026.58(g).  Notably, in response to the proposed rule, commenters urged the CFPB to consult with the financial institutions before finalizing any new technical specifications - perhaps through a notice and comment period.  Initial indications, however, suggest the CFPB will not be soliciting comments regarding the technical specifications.  Id. at 21155.

The rule does not affect the required annual submission of collect credit card agreements and related data, the biannual submission of credit card pricing and availability information, or the requirement that card issuers post agreements on their website. 

TCPA: Primary User of Phone has Standing to Bring TCPA Claim

The primary user of a cell phone has standing to bring a TCPA claim irregardless of whether he is the subscriber of the account according to the Middle District of Florida.  In Soulliere v. Central Florida Investments, Inc., C.A. No. 8:13-cv-02860 (M.D. Fl. Mar. 24, 2015), the consumer filed suit against a time share resort, its homeowner association, its management services firm and the management firm’s parent company alleging violations of the TCPA.  The consumer alleged that the management firm violated the TCPA by calling his cell phone without prior express consent.  The consumer alleged the remaining defendants were vicariously liable for the calls.

In cross motions for summary judgment a key issue was whether the consumer had standing to sue.  Defendants contended that because the consumer’s employer provided the cell phone to the consumer for his use, the consumer was not the subscriber and therefore not the called party.  In a fairly detailed analysis, the court acknowledged that the Eleventh Circuit has held that the “called party” means the subscriber of the cell phone service.  The court however, cautioned against construing the term too narrowly, noting that the subscriber may transfer primary use of the telephone to another person thereby authorizing that primary user to consent to being called.  The court therefore construed the TCPA to provide standing to the primary or regular user of the cell phone.  Like other cases, this case leaves open whether the standing provided to the primary user mutually excludes standing to the subscriber.

FTC Announces Settlement with Debt Brokers

The FTC announced today that it has settled two data breach cases with debt brokers. In complaints filed last year, the FTC contended the debt brokers posted consumers’ personal identifying information, including bank account information, credit card numbers, birth dates, and information about debts the consumers allegedly owed on public websites in an unencrypted manner.   See Federal Trade Commission v. Bayview Solutions, LLC, Doc. No. 1:14-cv- 01830 (D.D.C. Apr. 13, 2015); Federal Trade Commission v. Cornerstone and Company, LLC, Doc. No. 1:14-cv-01479 (D.D.C. Apr. 13, 2015). The FTC contended the disclosures violated the consumers’ privacy, put them at risk of identity theft, and exposed them to “phantom” debt collection, resulting in violations of Section 5 of the FTC Act and the Safeguard Rules of the Gramm Leach Bliley Act.  Under the Stipulated Orders, the debt buyers are required to establish, implement and maintain a written information security program in compliance with the Safeguard Rules which will be assessed, audited and certified periodically for twenty (20) years. 

Debt buyers and sellers should keep in mind that they are subject to Gramm Leach Bliley’s safeguard rules and are required to maintain, protect and secure consumers’ records and information. Under the Safeguard Rules, covered entities must develop a written information security plan (“WISP”) to protect customer information. The Rules require that the WISP be appropriate to the financial institution's size and complexity, the nature and scope of its activities, and the sensitivity of the customer information at issue.  Covered institutions are required to:

·       designate one or more employees to coordinate the program;

·       identify and assess the reasonably foreseeable risks to customer information in each relevant area of the company's operation, and evaluate the effectiveness of current safeguards for controlling these risks;

·       design and implement a safeguard plan to manage the identified risks and regularly test or monitor such safeguards;

·       select and oversee appropriate service providers and require them (by contract) to implement safeguards; and

·       continue to evaluate the program and make adjustments in light of changes to its business arrangements or the results of its security tests.

The FTC has published its tips for keeping data secure for companies buying and selling debt:

·       Don’t publicly post or make consumer information publicly available when selling portfolios.

·       Store information securely.  The FTC recommends limiting access to only those employees who need access and maintaining data in password protected files.

·       Minimize the amount of information shared with potential buyers, verify their identities and insure they have safeguards in place to protect any information shared.

·       Transfer data securely using encrypted or password protected files.

·       Dispose of data safely.

·       Have a plan in place to deal with a breach and be familiar with any relevant state statutes governing data breaches.

·       Consult the FTC website for free information

The CFPB Payday Proposal (Part Three): Cost Will Drive Players from the Market

Earlier this week, we reviewed the short-term loan and the longer-term loan components of the CFPB’s Payday Proposal.  Today, we turn our attention to the CFPB’s proposal as to collection practices component for these loans, as well as the less publicized compliance component.  As the title of this post suggests, if passed, the CFPB’s proposal will result in a contraction of the market because of the additional cost burden the proposal will place on smaller lenders.

 

Payment Collection Practices:

The CFPB proposal includes restrictions on collection practices for covered short-term and longer-term loans.  As rationale for the restriction, the CFPB cites to the “substantial risk of consumer harm, including substantial fees and, in some cases, the risk of account closure” which may come if lenders are allowed to collect payment from consumers’ checking, savings and prepaid accounts.  See Outline of Proposals Under Consideration and Alternatives Considered, p. 28 (Mar. 26, 2015). The CFPB therefore proposes to require advanced notice of any lender-initiated attempt to collect payment from a consumer’s account and to restrict the number of attempts to collect payments.

Notice:

The CFPB proposal would require written notice to a consumer prior to each lender-initiated attempt to collect payment from a consumer’s checking, savings or prepaid account.  The CFPB is contemplating a proposal which would require notice no less than three business days and potentially no more than seven business days prior to each attempt to collect.  The notice would require specific transaction based information be included, including the exact amount and date of the collection attempt, the payment channel through which collection will be attempted, a break down as to how the payment will be applied, the loan balance, and contact information for the lender.  Id., p. 29.  The CFPB is contemplating allowing electronic notification.

                Limitations:

The CFPB is concerned that multiple unsuccessful attempts to collect payments results in the consumer incurring insufficient fund charges, returned fees charged by lenders and costs related to account closure.  Therefore, the CFPB proposal would prohibit lenders from making more than two consecutive unsuccessful attempts to collect funds.  After that, the lender would be required to obtain a new authorization from the consumer.

Compliance Requirements:

What is omitted from the CFPB Fact Sheet and its press release is the fact that the CFPB is also considered a proposal to require lenders to maintain policies and procedures that are “reasonably designed to achieve compliance” with the short term and longer term loan proposals.  The compliance piece of the proposal would require that the lender adapt policies and procedures that “would cover the lender’s process for determining ability to repay when originating covered loans; reporting to and checking covered loan information in commercially available reporting systems; maintaining the accuracy of loan information furnished to a commercially available reporting system; documenting the ability to repay determination in the consumer’s loan file; overseeing third party service providers; ensuring that payments notices are provided; and tracking the payment presentments on a loan.” Id., p. 31.

                Record Keeping Requirements:

The proposal contemplates record retention for 36 months, including:

• Documentation of the ability-to-repay determination;
• Verification of the consumer’s history of covered loans;
• Application of any of the alternative requirements for certain loans;
• Documentation of the payment presentments;
• Documentation as to whether any attempts triggered the limitation on payment presentments and details of any new authorization; and
• Documentation of the notices sent prior to collection.

The proposal also contemplates annual reports encompassing data sufficient to monitor performance of covered loans, including information on defaults and reborrowing.

Impacts of the Payday Proposal for Lenders

While there is no doubt that there may be need for reform, the CFPB’s proposal absolves the consumer of any responsibility for good decision making and is likely to have two key impacts: (a) make short term credit harder for consumers to come by; and (b) contract the market.  Both of these impacts are acknowledged by the CFPB. 

                Impact on Consumers:

If the CFPB proposal comes to fruition, short term loans are likely to become largely a thing of the past, a fact acknowledged by the CFPB. The CFPB simulations indicate that using the ability to repay option (“prevention”), loan volume is likely to fall between 69-84%.  Their simulation using the alternative option (“protection”), would result in a 55-62% decline of loan volume.  Id., pp. 40-44.  These simulations take into account only the more restrictive requirements to qualify for short term loans and do not take into account the operational impact on lenders (which will be discussed below).  The CFPB concedes that as a result, it is likely that “[r]elatively few loans could be made under the ability-to-repay requirement.”  Id., p. 45. Moreover, [m]aking loans that comply with the alternative requirements…would also have substantial impacts on revenue.” Id. The CFPB concludes, therefore, that the proposal could lead to substantial consolidation in the market.

Similarly, the impact on longer-term loans is likely to significantly constrict the availability of these loan products.  The data is particularly telling regarding the PTI alternative of 5%/6 months (“Protection”). The CFPB data indicates that less than 10% of current loans would meet the PTI alternative of 5%/6 months. Id., p. 50.

                Impact on Lenders:

If passed, the CFPB proposal will have significant impact on the operational costs involved in making loans which fall within the proposal.  The CFPB acknowledges that lenders may be required to invest in computer systems and software to comply with the record keeping requirements and invest time in developing policies and procedures regarding the new requirements and in training staff.  Additionally, the CFPB acknowledges that entities will be required to invest in contracts with reporting entities as they will be required to be both data furnishers and as users of information.  The CFPB also acknowledges the costs in terms of time for making each loan and collecting it would be significant.  This is particularly true when taking into account the fairly minimal amount of each loan.

Coupling the significant restrictions to qualify for short term credit with revenue and operational impacts, if the proposal comes to fruition no one will win.  Few consumers who truly are in need of short term credit will be able to qualify.  Moreover the cost in making, servicing and collecting these loans will increase exponentially, making it impracticable for lenders to provide these loan products.

Courts Continue to Push Back on the Crawford Proof of Claim Decision

Two more courts have weighed in this week on whether filing a proof of claim on a time barred debt is a violation of the FDCPA.  With a resounding “no”, the Eastern District of Pennsylvania and the Southern District of Indiana both declined to follow Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11^th Cir. 2014).   See Donaldson v. LVNV Funding, LLC, C.A. No. 1:14-cv-01979-LJM-TAB (S.D. Ind. Apr. 7, 2015); Torres v. Asset Acceptance, LLC, C.A. No. 2:14-cv-6542-ER (E.D. Pa. Apr. 7, 2015); Torres v. Cavalry SPV I, LLC, C.A. No. 2:14-cv-5915-ER (E.D. Pa. Apr. 7, 2015).

In each case, the debtor claimed that by filing proofs of claim, the creditor violated 1692e by making a false representation of the character, amount or legal status of the debts, by threatening to take an action that cannot legally be taken, and by using false representation or deceptive means to collect or attempt to collect the debts because the debts were not legally enforceable.  The debtors further contended the creditor violated 1692f by using an unfair or unconscionable means to collect or attempt to collect the debts. 

Donaldson v. LVNV Funding, LLC                                                                                                                

In Donaldson, the court took a pragmatic viewpoint.  It held that while a proof of claim is an action to collect a debt, “a proof of claim that accurately reflects data about the debt, including the date of last payment, is not false, deceptive or misleading on its face.”  Donaldson, Slip Op. at 8.  The court went on to debunk the debtor’s argument that the proof of claim was a threat to take an action that cannot be legally taken by noting that

 

there is no “threat” in a proof of claim that accurately reflects information about an unsecured debt that that the debtor has listed himself on his schedules.  It is neither a lawsuit nor a threat of a lawsuit; it’s a statement that a debt exists and its amount and there is no prohibition in the Bankruptcy Code against filing a proof of claim on an unsecured, stale debt.  Rather the Bankruptcy Code states that such debts are allowed, unless objected to by any party interest, which clearly includes the trustee or the debtor and should be disallowed if it is unenforceable under applicable law.

 

Id. at 9.  The court also held that the filing of the proof of claim was neither and unfair nor an unconscionable means to collect a debt.  The court noted that a proof of claim is a document created by statute and rule and filed in a forum with additional safeguards to protect consumers, namely the provisions of the automatic stay, the provisions for claim objections, the appointment of a trustee, and representation of an attorney.  The court therefore determined that the unsophisticated consumer standard, which was applied in Crawford, has no application in this context.

Torres v. Asset Acceptance, LLC and Torres v. Cavalry SPV I, LLC

In the Torres matters, the court noted the split in circuits which had previously reviewed the issue.  In reviewing Crawford from the Eleventh Circuit, as well as the Second Circuit’s decision in Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2d Cir. 2010), the court focused on whether the consumer was adequately protected by the provisions of the Bankruptcy Code and the mechanisms in place to protect consumers from abuses.  The court sided with the Second Circuit concluding that the Bankruptcy Code adequately protects debtors from proofs of claim abuses.  The court noted that the Bankruptcy Code provides adequate remedies to address creditor misconduct and noted there is “no risk that the debtor will be tricked into settling a time-barred debt in order to avoid a lawsuit when, as here, she is already party to a legal proceeding that she initiated in order to “settle” her outstanding debts.” Torres v. Asset Acceptance, LLC, footnote 10. 

As an update on Crawford, we previously reported that LVNV Funding had filed a petition for writ of certiorari, appealing the 11^th Circuit’s decision.  The matter is scheduled for conference before the justices on April 17, 2015. We therefore can expect a ruling on the petition for writ by the end of April.

A Look at the CFPB Payday Proposal: Part 2 (Longer-Term Loans)

In yesterday’s post, we began our examination of the CFPB Payday Proposal focusing on short-term loans or those where the term of the loan is 45 days or less.  The CFPB’s proposal also encompasses “longer-term” credit products.  Specifically, the CFPB proposal intends to regulate loans with a duration of more than 45 days that have an all-in APR in excess of 36% (including add-on charges) where the lender can collect payments through access to the consumer’s paycheck or bank account or where the lender holds a non-purchase money security interest in the consumer’s vehicle.  Like short term loans, the CFPB is offering two alternatives to lenders: prevention or protection.

Prevention:

Similar to the short term loans, the “prevention” alternative focuses on the consumer’s ability to repay the loan.  This alternative requires the lender to make a good faith determination at the outset of the loan as to whether the consumer has an ability to repay the loan when due, including all associated fees and interest, without reborrowing or defaulting.  Like short term loans, the lender would be required to determine that the consumer has sufficient income to make the installment payments on the loan after satisfying the consumer’s major financial obligations and living expenses.  The CFPB describes “major financial obligations” as being those expenses that are significant in their amount and cannot be readily eliminated or reduced in the short term and contemplates them including housing payments, required payments on debt obligations, child support and other legally required payments.  The CFPB has disclosed that they are contemplating a broader definition that would also include utility bills and regular medical payments. Under the prevention option, if the consumer is having difficulty making the payments, the lender would be prohibited from refinancing the amount into another similar loan without documentation that the consumer’s financial condition had improved enough to be able to repay the loan.

Protection:

The CFPB is actually considering two options that would not contemplate an “ability to repay” analysis.  Under both options, the loan term would have a minimum duration of 45 days and a maximum duration of six months and the loan would be required to fully amortize.  The first of these proposals largely mirrors the National Credit Union Administration (“NCUA”) program for “payday alternative loans.”  Specifically, the lender would be required to verify the consumer’s income and that the loan would not result in the consumer having received more than two covered longer-term loans under the NCUA type alternative from any lender in a rolling six month term.  Additionally, assuming the consumer meets the screening requirements, the lender could extend a loan between $200-$1,000 which had an application fee of no more than $20 and a 28% interest rate cap.  .”  See Outline of Proposals Under Consideration and Alternatives Considered , p. 21 (Mar. 26, 2015). As an alternative, the lender could make a loan with payments below a 5 payment to income ration so long as: (a0 the lender verifies the consumer’s income and determines that the loan would not result in the consumer receiving more than two covered longer-term loans under the PTI alternative within a rolling twelve month period.  Assuming the consumer meets this criteria, the lender could make a loan which limits periodic payments to no more than 5% of the consumer’s expected gross income for the payment period.  Id.

In tomorrow’s post, we will discuss the CFPB’s proposal regarding payment collection and their contemplated compliance requirements.