Fourth Circuit Weights in on the Time Barred Proof of Claim Debate

Joining the proof of claim fray, the Fourth Circuit has held that the filing of a time barred proof of claim does not violate the FDCPA when the statute of limitations does not extinguish the debt. Dubois v. Atlas Acquisitions, No. 15-1495, 2016 U.S. App. LEXIS, *22-23 (4^th Cir. Aug. 25, 2016).

In joining the majority of circuits, the Fourth Circuit held that while filing a proof of claim is debt collection activity regulated by the FDCPA, the filing of a proof of claim that is time barred does not violated the FDCPA when the statute of limitations does not extinguish the debt.  In reaching its conclusion, the court was persuaded by several of the points articulated by other courts over the past two years:

·        In Maryland, the state where the bankruptcy was pending, the statute of limitations does not extinguish the debt.  It simply limits the avenues of recourse.

·        The court took a broad view of the meaning of a claim, holding that a “claim” is defined as a right to payment and that a creditor with a stale debt retains some right to payment.  As was the case in the Seventh Circuit, the Court drew support for its position from the Bankruptcy Code’s claim allowance procedures.  The court noted that the Bankruptcy Code contemplates the filing of time barred proofs of claim as evidenced by the fact that the statute of limitations is one of the enumerated grounds for disallowing a claim. 

·        The court was also persuaded by the unique circumstances presented in the bankruptcy context and concluded that the reasons why it is unfair or misleading to sue on a time barred debt are significantly diminished in a Chapter 13 bankruptcy:

o   First, the bankruptcy code contemplates the existence of a trustee who is charged with reviewing proofs of claim and objecting to time-barred claims thereby stopping the creditor from engaging in further collection efforts and discharging the claim;

o   Secondly, the amount paid into the bankruptcy by the debtor is not affected by the number of unsecured claims filed.  Therefore, there is no harm to the consumer (who the FDCPA is designed to protect) if additional claims are filed;

o   Thirdly, the Bankruptcy Rules require creditors to accurately state the last transaction and charge off date for the account, making stale claims easier to detect; and

o   Finally, the debtor in a Chapter 13 bankruptcy is a voluntary participant and instigator of the bankruptcy and not an involuntary party to a lawsuit.

Keys to the Decision.

The opinion is important for a number of reasons.  Parties seeking to rely upon it should note the following:

· First, the opinion does not hold that the Bankruptcy Code preempts the FDCPA.  In fact, the Court never reached the issue.

· Secondly, the court’s decision does not address the contents of the proof of claim or the conduct of the debt collector.  Many of the courts to date have gone to great lengths to limit their holdings to instances where the defendants filed accurate albeit time barred proofs of claim; however, as noted by the dissent, the majority opinion in this matter never reaches the conduct of the debt collector.  Instead, the Fourth Circuit’s opinion appears to focus solely on whether or not the statute of limitations extinguished the debt.

Guest Post: An Unanticipated Regulator of the Future – Credit Averse Millennials

By Mark J. Dobosz
August 22, 2016

A recent New York Times article by Nathaniel Popper reported the following, “Data from the Federal Reserve indicates that the percentage of Americans under 35 who hold credit card debt has fallen to its lowest levels since 1989…” Popper goes on to say, “Their reluctance could have lasting repercussions for millennials, as well as for the financial system and the economy.”  Just when you think all you had were government regulatory rules and regulations that may impact your bottom line, along comes the sleeper regulator of a generation of consumers with an aversion to credit and its risks.

Diversification in the profit centers of your practice has hopefully been part of your business plan in the years following the economic crash of 2008-2009.  Professional firms in all industries saw a new “normal” come to life and creditors rights attorneys and their firms were no exception. Preparing for a future that would need to include litigating collections from a diverse portfolio of creditor sources  (credit card, medical, bankruptcy, student loan, subrogation, commercial – just to name a few) became more and more pragmatic as the years of the recession marched forward.

In the article, Popper also comments, “But more recent data has also suggested that millennials are using credit cards less than people of a similar age did in the past – and they are taking on fewer auto loans and mortgage loans than people of a similar age did before the financial crisis.” One might easily dismiss this and think that they will need to buy homes and cars on relatively soon and so the equilibrium will balance itself. Not so the research reflects as Popper points out,  “ ‘It will probably take them longer to get access to credit,” said Gregory Elliehausen, an economist at the Federal Reserve specializing in consumer finance. “In the meantime their behavior and some of their habits will already have been formed.” ‘

So what does this mean for you and your firm in 2016 and beyond?

When was the last time you reviewed you business plan for your practice and your firm? Have you recently assessed your portfolio risks from a P/L standpoint? Have you projected out what would happen if you lost a significant concentration of your client portfolio? And if so, have you developed an action plan, or more importantly, are you in the process of making the necessary changes?
In addition to practicing a noble profession, never lose sight of the fact that you are an entrepreneur, a small business owner and masters of your fate.  Vigilance in the shifting sands of a credit-based economy has never been more important.

“I don’t want to go out and buy, buy, buy, even though that’s what society wants me to do.” …. “I want to save and invest for the long term.”
 Jason Towner – 32-year old private equity professional with no credit cards

As quoted in “Loaded with Debt, Young Americans Avoid Taking on More”
by Nathan Popper in the New York Times.

About the Author: Mark Dobosz currently serves as the Executive Director for NARCA – The National Creditors Bar Association. Mark is a one of NARCA’s speakers on many of the creditor’s rights issues impacting NARCA members. The National Creditors Bar Association (NARCA) is a trade association dedicated to creditors rights attorneys. NARCA's values are: Professional, Ethical, Responsible.

CFPB Enters Consent Order with Wells Fargo Over Payment Allocation Procedures

The CFPB has entered into a Consent Order with Wells Fargo Bank, N.A. asserting that it engaged in unfair and deceptive practices related to its student loan servicing practices. Specifically, the CFPB contended that Wells Fargo’s payment allocation and payment aggregation practices were unfair and deceptive and that it engaged in unfair practices related to credit reporting and late fees. Wells Fargo self-reported the issues to the CFPB and agreed to the consent order without any admission of liability.   The Consent Order requires Wells Fargo pay a $3.6 million monetary civil penalty, pay $410,000 in compensation to affected consumers and perform certain remedial acts.

According to the Consent Order, in 1999, Wells Fargo consolidated its monthly billing process such that it began grouping together consumers’ student loans serviced by Wells Fargo on one invoice when they shared the same due date. As a result, the consumer would receive one monthly billing statement which contained a single payment coupon. Wells Fargo, however, continued to treat each loan as a separate loan. Problems arose when a consumer made a partial payment and did not specify to which loan it should be applied. In those instances, Wells Fargo applied it first to any delinquent loans and then pro rata across the grouped loans. The net result was each of the grouped loans was delinquent and separate late charges were assessed on each loan. The CFPB took issue with the fact that Wells Fargo provided limited information to consumers about the potential consequences of making a partial payment and did not disclose to consumers that they could make a payment on any of the grouped loans and direct Wells Fargo to allocate the payment to that loan. Additionally, the CFPB took issue with the fact that Wells Fargo did not disclose to consumers its methodology for applying partial loan payments. The CFPB concluded that Wells Fargo’s “failure to disclose its payment allocation methodology to consumers and the ability to provide payment instructions on how to allocate payments, while allocating Partial Payments towards Grouped Accounts in a manner that maximized late fees incurred by many consumers, caused or was likely to cause substantial injury to consumers.” Consent Order, ¶ 23.

Additionally, in 2000, Wells Fargo began manually aggregating multiple payments made within a billing cycle, including any overpayments from the prior cycle. The CFPB found issues with the manual system which resulted in bank errors in reviewing and processing accounts. As a result, some consumers incurred erroneous late payments and had their accounts erroneously reported to the consumer reporting agencies. The CFPB concluded that Wells Fargo’s “failure to aggregate multiple Partial Payments submitted by consumers within the same billing cycle, where payments, if aggregated, would have satisfied the total amount due for the loan’s billing cycle, and its failure to refund or waive any resulting improper fees assessed, cause or was likely to cause substantial injury to consumers.” Consent Order, ¶ 46. Similarly, the CFPB found that Wells Fargo’s “failure to update or correct inaccurate credit reports for consumers who submitted multiple Partial Payments and Overpayments that, when they were aggregated…constituted an Eligible Payment, and whose student loan accounts, as a result of such aggregation, reflected receipt of an Eligible Payment, also caused or was likely to case substantial injury to consumers” and violated the FCRA. Consent Order, ¶ 47, ¶ 50-52.

The CFPB also found additional issues with Wells Fargo’s late fee assessment practices. Specifically, a system coding error "caused the daily late fee monitoring report to omit student loan accounts for consumers who made an Eligible Payment, inclusive of any amount in arrears, on the last day of the applicable Grace Period.” Wells Fargo self-reported this issue; however, the CFPB found that the erroneous late fees were never waived or refunded to the consumer.

As remediation, the CFPB required the bank to:

• Adopt and implement reasonable written policies and procedures concerning the accuracy and integrity of information concerning student loan accounts that is furnished to consumer reporting agencies;
• On or with all Repayment Schedules provided to a consumer before billing statements are sent on a grouping of consumer’s loans:
• A statement that the bank will accept partial statements;
• A statement and explanation of how partial payments will be allocated among grouped accounts in the absence of consumer instructions to the contrary, including examples; and
• A statement that the consumer can direct payments to any of the specific loans in the Grouped Accounts with clear instruction on how to do so, including examples.
• On or with each billing statement and on all consumer facing web pages:
• Clearly and prominently disclose the basic principles of the bank’s payment application and allocation methodologies, including those regarding partial payments; and
• A statement that the consumer can direct payments to any loan included within the consumer’s Grouped Accounts, along with instructions of how to do so and a description of the potential consequences.
• Correct all inaccurate credit reporting regarding consumers affected by the payment allocation and aggregation errors;
• Notify each affected consumer about this consent order and the potential that their credit was inaccurately reported and the actions taken by the bank to correct the same; and
• Unless instructed otherwise, the bank will continue to allocate partial payments for consumers with Grouped Accounts where all payments are current in a manner so as to maximize the number of loans within the Grouped Account on which a full payment can be made.

The Order will remain in effect for five years and additionally requires periodic reporting by the bank, as well as retention of certain records.


The Key Take-Aways for Banks of All Sizes?

• It is imperative to clearly disclose the methodology for application of payments and the implications of partial payments;
• Manual systems are fraught with error and the converse, automated systems need to be continually tested for errors;
• The Order is consistent with the recent guidelines issues by the CFPB and Department of Education, requiring student loan servicers to apply partial payments in a manner that satisfies the amount due on as many loans loans as possible unless the consumer directs otherwise; and
• The CFPB is very focused on credit reporting systems and policies.

Seventh Circuit Holds Parking Tickets Are Subject to FDCPA

The Seventh Circuit has held that unpaid parking fees and penalties for failure to pay may constitute a “debt” subject to the FDCPA where the obligation arises as a matter of contract and not as a statutorily assessed fine.  Franklin v. Parking Revenue Recovery Services, Inc., 2016 U.S. App. Lexis 14737 (7th Cir. Aug. 10, 2016).  In Franklin, the collection agency sent demand letters seeking to collect an unpaid parking fee and a $45 penalty for failure to pay.  The lot, while owned by a local governmental agency was operated by a third party management company. 

The consumers filed suit alleging violations of the FDCPA.  The district court entered summary judgment for the company, holding that the money owed did not constitute a “debt” as defined by the FDCPA.  The district court found the money owed was actually a fine for the individuals’ failures to follow the lot’s rules.  As such, it was not a contract and could not be a debt under the FDCPA.

On appeal, the Seventh Circuit reversed. In doing so, the court relied upon the operative definition of a debt covered by the FDCPA. Under section 1692(a)(5),  a covered debt is “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes.”   15 USC § 1692a(5).  The court noted that “the arising out of” language limits the FDCPA to obligations that are created by contract.  The critical issue before the court, therefore, was the legal source of the obligation.

Because there was no statute or ordinance requiring individuals to pay a penalty, the court concluded that the obligation to pay the penalty arose from the contract which was formed when the individuals chose to park in the lot.  “The signs at the parking lot offered a parking spot to all comers for $1.50 per day and noted a penalty for failing to pay…  [The Consumers] each accepted the offer – and thus formed a contract- when they parked in the lot.  Their obligation to pay the $46.50 is premised entirely on this contract.” Franklin at *8-9.

CFPB Issues Interpretive Rule to Reconcile Mortgage Servicing Rules with FDCPA

In an attempt to reconcile the Mortgage Servicing Rules with the FDCPA, the CFPB has issued an interpretive rule to clarify the interactions between the two.  The rule constitutes an advisory opinion under the FDCPA (15 U.S.C. §1692l(e)) and provides a safe harbor for actions done or omitted in good faith reliance upon the rule.  The rule comes in response to concerns raised by the mortgage industry, consumer advocate groups, and other stakeholders and is being released contemporaneously with the latest modifications to the Mortgage Servicing Rules.

The Rule provides three safe harbors:

1.     Confirmed Successors in Interest.  Under the revised Mortgage Servicing Rules, successors in interests are defined to include persons to whom an ownership interest in property secured by a mortgage loan has been transferred and includes a transfer by death or by divorce or property settlement.  The interpretative rule is designed to reconcile the narrower definition of permissible third parties identified in 15 U.S.C. 1692d(b) and facilitate mortgage servicers’ need to communicate with those successors in interest.  Under the FDCPA, debt collectors are generally prohibited from communicating with third parties in connection with collection of a debt absent a court order or prior consumer consent.  Section 1692d permits debt collectors to communicate with certain enumerated parties including the consumer’s spouse, parent (if the debtor is a minor), executor, guardian or administrator.  The Rule interprets 1692d to also include any confirmed successor in interest as that term is defined under the revised Mortgage Servicing Rules.  Under the Rule, mortgage servicers subject to the FDCPA do not violate the FDCPA by communicating with confirmed successors in interest about a mortgage loan secured by property in which the confirmed successor in interest has an ownership interest, in compliance with the Mortgage Servicing Rules. Mortgage servicers should note that the interpretative rule does not relieve servicers of their other obligations to comply with the FDCPA.  This portion of the Rule will take effect 18 months after it is published in the Federal Register.

2.      Required Early Intervention Notice.  The 2016 amendments to the Mortgage Servicing Rules and the FDCPA interpretive rule reconcile conflicts between the FDCPA’s cease and desist provisions and the Mortgage Servicing Rules’ early intervention notice requirements.  15 U.S.C. 1692d(c) generally prohibits debt collectors from further communications with the debtor after receiving a written request that the debt collector cease communications.   Meanwhile, the Mortgage Servicing Rules require servicers to provide certain written notices prior to initiating foreclosure.  The Rule allows for mortgage servicers who are debt collectors regarding covered mortgages to provide a modified written early intervention notice to borrowers who have invoked the cease communication provisions under the FDCPA unless the debtor or a covered borrower are in bankruptcy or there are no available loss mitigation programs.  The revised Mortgage Servicer Rules provide model language that will fall within the safe harbor:

 
This is a legally required notice. We are sending this notice to you because you are behind on your mortgage payment. We want to notify you of possible ways to avoid losing your home. We have a right to invoke foreclosure based on the terms of your mortgage contract. Please read this letter carefully.

Regulation X §1024.39(d)(3).  The Rule limits itself to 15 U.S.C. §1692d(c) and does not provide a safe harbor from any other violations that may arise from the communication.  This portion of the Rule will take effect 12 months after the Rule is published in the Federal Register.

3.     Borrower Initiated Communications After Invoking a Cease and Desist. 

The Rule also provides a safe harbor where the borrower has invoked a cease and desist and then initiates communications with the mortgage servicer regarding loss mitigation.  The Rule provides a safe harbor that any such communications with the servicer regarding loss mitigation do not violate 15 U.S.C. §1692d(c).  “Borrower-initiated conversations about loss mitigation options do not give rise to the burden of unwanted communications that FDCPA section 805(c) protects against.  Rather, they are sought out by borrowers for this narrow purpose.  The Bureau therefore concludes that a borrower’s cease communication notification pursuant to FDCPA section 805(c) should ordinarily be understood to exclude borrower-initiated communications with a servicer concerning loss mitigation because the borrower has specifically requested the communication at issue to discuss available loss mitigation options.”   The Rule further makes clear that the safe harbor is limited to discussions of any potentially available loss mitigation options.  The FDCPA protections remain in place to the extent the communications are outside the scope of loss mitigation conversations.  This portion of the Rule will take effect 12 months after the Rule is published in the Federal Register.

Seventh Circuit Joins the Fray Regarding Time Barred Proofs of Claim

Last week, the Seventh Circuit chimed in on whether time barred proofs of claim violate the FDCPA.   In Owens v. LVNV Funding, LLC, the Seventh Circuit affirmed three district court decisions which dismissed consumer’s FDCPA claims against debt buyers who filed time barred proofs of claim.  Owens v. LVNV Funding, LLC, Nos. 15-2044, 15-2082, 15-2109 (7^th Cir. Aug. 10, 2016).  In doing so, the Seventh Circuit joins the Second and Eighth Circuits in siding against the Eleventh Circuit’s decision in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014). 

In Owens, the consumers argued that the act of filing a proof of claim on a time-barred debt is inherently misleading because the term “claim” only includes legally enforceable obligations.  The consumers additionally argued that the filing of a time barred proof of claim is inherently deceptive because a debt buyer’s business plan depends upon the reality that the debtor, its counsel or the trustee may sometimes fail to object to time-barred claims, thus allowing the time-barred claim to receive payment to the detriment of the debtor and other creditors.

The Definition of a "Claim".

In rejecting the consumers’ arguments, the Court first noted that in most states, the statute of limitations does not extinguish the debt.  It simply limits the avenues of recourse. The court went on to reject the consumers’ narrow definition of “claim” instead holding that a “claim” is defined as a right to payment and that a creditor with a stale debt retains some right to payment.  The Court drew support for its position from the Bankruptcy Code’s claim allowance procedure and the fact that the Bankruptcy Code contemplates the statute of limitations as one of the enumerated grounds for disallowing a claim.  The Court therefore concluded that “a proof of claim on a time-barred debt does not purport to be anything other than a claim subject to dispute in the bankruptcy case.”  Slip Op. at 13.

The Dispositive Issue.

While the Court defined a claim broadly to include time-barred proofs of claim, it held that that issue was not dispositive of the case.  The dispositive issue before the Court was whether defendants’ conduct in filing the proofs of claim was false, deceptive or misleading under the FDCPA.  In concluding that it was not, the Court first noted that the act of filing a time-barred proof of claim is not in and of itself a violation of the FDCPA.  The Court sided with the Second and Eighth Circuit in rejecting the rationale of the Eleventh Circuit in Crawford.  The court distinguished between litigation and bankruptcy proofs of claim and held that concerns regarding the misleading or deceptive nature of filing time-barred claims is less acute in the bankruptcy context because the bankruptcy rules require the proof of claim to include the age of the debt and the claims process is designed to allow the debtor, its counsel, and the trustee to object to the claim. 

The Competent Attorney Standard.

In addressing whether the proofs of claim were false or misleading, the court rejected the unsophisticated consumer standard adopted in the Eleventh Circuit. Noting the presence of counsel in most cases and trustees in all cases, the court concluded the proper standard to evaluate the debt buyers’ action is that of the “competent attorney”. Slip Op. at 18. In reviewing the actions of the debt buyers, the Court concluded that there was nothing deceptive or misleading about the debt buyers’ conduct. In each instance, the proofs of claim provided accurate and complete information about the status of the debts and the debtor’s counsel had to look no further than the proof of claim to determine whether or not the statute of limitations had run.

Keys to the Decision.

The opinion is important for a number of reasons.  Parties seeking to rely upon it should note the following:

• First, the opinion does not hold that the Bankruptcy Code preempts the FDCPA.  Instead, the court’s opinion is consistent with its prior holding in Randolph v. IMBS, Inc., 368 F.3d 726 (7^th Cir. 2004) (holding that the Bankruptcy Code does not preempt the FDCPA) and that the two statutes can be read consistently and together.
• Second, the opinion does not hold that the act of filing a time-barred proof of claim is in and of itself a violation of the FDCPA.
• Finally, the court’s decision is limited to the facts presented.  In fact, the court goes to great lengths to note that “if defendants had filed proofs of claim with inaccurate information, or had otherwise engaged in deceptive or misleading debt collection practices, plaintiffs would have a cause of action under the FDCPA.” Slip Op. at 19.

A Primer to the CFPB Proposed Payday Rule: What You Need to Know

Earlier this summer, the CFPB issued its proposed payday rule. Hailed as an attempt to end “payday traps”, the 1,334 page missive addresses both short term loans and certain longer term high cost loans. In addition to restricting the structure of loans, the proposed rule places limitations on how lenders collect on covered loans and mandates extensive record retention policies. The period to comment on the proposed rule runs through September 14, 2016 and stake holders are encouraged to review the proposed rule carefully and submit comments as appropriate.

In a Nutshell. The proposed rule places limitations on short term loans, as well as certain higher cost longer term loan products. Covered short term credit products are defined as being those credit products that would require the consumer to pay back the loan in full within 45 days. Proposed 1041.3(b)(1). Covered longer term loan products are those which have a total cost of credit exceeding 36% and are repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle. See Proposed 1041.3(b)(2). The proposed rule applies to a wide variety of loan products and will impact nonbank lenders, as well as banks and credit unions. Importantly, the pay day rule excludes from coverage purchase money security credit secured solely by a car or other purchased consumer goods, real property or dwelling secured credit if the lien is recorded or perfected, credit cards, student loans, non-recourse pawn loans, overdraft services and lines of credit. Proposed 1041.3(e).

Short Term Loan Products
 When the CFPB first rolled out its payday proposal in 2015, it couched its two alternatives for lenders making short terms loans as “prevention” and “protection”. The proposed rule leaves those two alternatives largely intact. 

Prevention or the Ability to Repay. Under the proposed rule, it is an abusive or unfair practice for a lender to make a covered short term loan without reasonably determining the consumer’s ability to repay the loan. See Proposed §1041.4. Under the proposed rule, the lender is required 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. For each loan, the lender is required to verify the consumer’s net income and major financial obligations through the consumer’s written statement, as well as independent verifying sources. The lender additionally is required to take into account the consumer‘s basic living expenses and review the consumer’s borrowing history from the records of the lender and its affiliates, as well as the consumer’s credit report. See Proposed 1041.5(b) and 1041.6(a)(2). There is a rebuttable presumption that a consumer does not have the ability to repay during any period in which the consumer has certain other covered and non-covered loans and for 30 days thereafter. Proposed 1041.6(b). Additionally, a lender would be prohibited from making a covered short term loan to a consumer who has already taken out three covered short term loans within 30 days of each other.

Protection or the Principal Payoff Exemption. The “protection” alternative focuses on the consumer’s repayment options and limits the number of short terms loans a consumer may take within a twelve month period. Under this exemption, a lender is not required to assess the consumer’s ability to repay but is required to consider the consumer’s borrowing history. Proposed 1041.7(a). Section 1041.7 allows the lender to make a series of three tapering closed end loans of which the initial loan cannot not exceed $500, the second loan cannot be greater than two thirds of the principal amount of the first loan in the sequence, and the third loan cannot not be greater than one third of the principal amount of the first loan in the sequence. The rule additionally restricts the amortization and allocation of payments to principal and interest and prohibits the loans from being secured by the consumer’s vehicle. This alternative is not available if it would result in the consumer having more than six short-term loans during a consecutive 12 month period or being in debt for more than 90 consecutive days on covered short term loans during a consecutive twelve month period. Proposed 1041.7(c). Lenders using this exemption will be required to provide the consumer with certain mandated, clear and conspicuous disclosures. Proposed 1041.7(e). Model forms are provided within the proposed rule.
Longer Term Loan Products
 The proposed rule not only covers traditional payday loans, but also “longer-term” credit products. Specifically, the rule regulates 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. Proposed 1041.3(b)(2). Like short term loans, the rule offers alternative “prevention” and “protection” approaches and does not vary significantly from the Bureau’s initial proposal. 

Prevention or the Ability to Repay Option. Similar to short term loans, 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. Proposed 1041.9. As is the case with the short term loan provisions, the lender is 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 rule describes “major financial obligations” as being a consumer’s housing expense, minimum payments and any delinquent amounts due under any debt obligation, child support and other legally required payments. Proposed 1041.9(a)(2). The rule additionally requires the lender, in assessing the consumer’s ability to repay, to take into account the possible volatility of the consumer’s income, obligations or basic living expenses during the term of the loan. Proposed Comment 1041.9(b)(2)(i)-2. Similarly, the rule adds additional rebuttable presumptions of unaffordability for longer term loans. See generally Proposed 1041.10. 

Protection or Alternative Exemptions. For longer term loans, the rule provides two exemptions to the ability to repay requirement. Under both exemptions, the loan term must be of a minimum duration of 46 days and the loan would be required to fully amortize. The first of these exemptions largely mirrors the National Credit Union Administration (“NCUA”) program for “payday alternative loans” and is referred to by the CFPB as the “PAL approach”. Specifically, the lender is 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. Proposed 1041.11.

The second exemption allows the lender to make loans that meet certain structural conditions and is referred to by the CFPB as the “Portfolio approach”. Small lenders using this approach will be required to conduct underwriting but would have flexibility to determine what underwriting to undertake subject to the conditions set forth in Proposed 1041.12. Among the conditions, the loan is required to have fully amortizing payments and a term of not less than 46 days nor more than 24 months. Proposed 1041.12. Additionally, the loan cannot not carry a modified total cost of credit of more than 36% excluding a single origination fee of no more than $50 (or that is originally proportionate to the lender’s underwriting costs). Proposed 1041.12(b)(5). Additionally, the projected annual default rate on all loans made pursuant to this alternative must not exceed 5% and the lender would be required to refund all origination fees paid by borrowers in any year in which the annual default rate to in fact exceed 5%. Proposed 1041.12(d).

Payment Restrictions

All covered loans, whether short term or longer term, are subject to certain collection restrictions. As rationale for the restriction, the CFPB has cited 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 proposed rule contains two key notice requirements. First, lenders are required to provide at least three business days advanced written notice before any attempt to withdraw payment from a consumer’s checking, savings or prepaid account. Prohibited payment transfers are defined broadly and include electronic fund transfers, ACH transfers, and an account holding institution’s transfer of funds. Proposed 1041.14(a)(1). The proposed notice requirements are specific and model forms are included within the rule. In general, however, the notice must contain specific transaction based information 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. Proposed 1041.15. 

Secondly, the proposed rule prohibits a lender from initiating a payment transfer from a consumer’s account in connection with a covered loan after the lender’s second consecutive attempt to withdraw payment has failed for lack of sufficient funds unless and until the lender obtains from the consumer a new and specific authorization to make further withdrawals. Proposed 1041.13.

Compliance Requirements.

The rule imposes new reporting, record keeping and compliance requirements. In general, the rule requires lenders to furnish information regarding covered loans to all registered information systems which presumably will include the national consumer reporting agencies. See generally Proposed 1041.16. The proposed rule requires lenders to furnish particular information about the consumer and the loan throughout the loan’s history. 

If finalized, the rule will also mandate a 36 month retention period for most records (paper and electronic) relevant to the loan and its history. Section 1041.18(b) requires the lender retain the loan agreement, as well as certain documentation obtained in connection with a covered loan including: the consumer report, verification evidence, written statement of expenses obtained from the consumer and payment authorizations. Additionally, the lender is required to retain certain electronic records in tabular form which document, among other things, the lender’s process for determining the consumer’s ability to repay the loan, the payment history and loan performance. 

Finally, the rule mandates the establishment of a compliance management system for lenders who choose to make loans covered by the proposed rule. Lenders are required to establish a compliance program that is “reasonably designed to ensure compliance” with the approving and making of covered loans. The rule requires lenders adopt written policies and procedures appropriate to the size and complexity of the lender and its affiliates and the nature and scope of their covered loan lending activities. See Proposed §1041.18.

 Impacts of the Proposed Payday Rule

While there is no doubt that there may be need for reform, the proposed rule 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 small lending market. Both of these impacts are acknowledged by the CFPB and are of concern to stakeholders.   

Impact on Consumers. In its present form, the rule significantly curtails short term loans, 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. Outline of Proposals under Consideration and Alternatives Considered, pp. 40-44 (Mar. 26, 2015). 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.

Impact on Lenders. In its present form, the proposed rule significantly increases the operational costs involved in making covered loans. Lenders will 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 costs in terms of time for making each loan and collecting it will be significant. This is particularly true when taking into account the fairly minimal amount of each loan.

It is important to note that the payday rules have been issued under the CFPB’s authority to prevent unfair, deceptive and abusive practices. While there is no private right of action provided within the rules, it will provide another avenue for litigation as consumer attorneys are likely to boot strap violations of the rules as a violation of state unfair and deceptive trade practice statutes. Moreover, in addition to the aforementioned increase in operational and underwriting costs of making covered loans, the rules will add an additional layer of examination requirements on federal regulators.  

Already, stakeholders are expressing serious concerns about the proposed rule. In a recent letter to the CFPB, the Independent Community Bankers and Credit Union National Association have indicated that if passed in its present form, the rule “would unquestionably disrupt lending by credit unions and community banks.” Letter to Director Richard Cordray (June 27, 2016). The letter notes that “[t]he requirements outlined in the proposed rule…are extremely complex and prescriptive, and inconsistent with how credit unions and community banks that know their members and customers underwrite a loan that can be for a relatively small amount of money… subjecting them to a lengthy list of requirements would undoubtedly significantly reduce consumer options for these loan products.” Id. 

Congress has additionally inserted itself in the discussion. The House 2017 Financial Services Bill seeks to delay finalization of the rule until the CFPB submits a detailed report, with public comment, on the consumer impact and identifies existing short term credit products to replace the current sources of small term, small dollar credit. Press Release: Appropriations Committee Approves Fiscal Year 2017 Financial Services Bill (June 9, 2016).


Conclusion

As noted, the comment period for the proposed rule will run through September 14, 2016 and stakeholders should review the proposed rule carefully with counsel and submit comments as appropriate. It is clear that the payday proposed rule has the attention of the legislative branch as well as major stakeholders and it is likely there will be some modifications before a final rule is adopted. When finalized, the CFPB has proposed that the final rule will not take effect under 15 months after publication of the final rule. There appears, therefore, to be a fairly lengthy time period for the industry to ramp up in anticipation of the effective date.

Furnisher Does Not Violate FCRA by Reporting Discharged Debt

A district court in Nevada recently granted a mortgage company’s motion to dismiss FCRA claims where the reported debt had been discharged in bankruptcy.  The opinion serves as a reminder of the rules governing the reporting of discharged debt.  In Riekki v. Bayview Fin. Loan Servicing, the consumer alleged that the subject debt was discharged pursuant to his Chapter 13 bankruptcy and that the creditor continued to report balances through the pendency of the bankruptcy as well as post-petition.  Riekki v. Bayview Financial Loan Servicing, 2:15-cv-2427, 2016 U.S. Dist. LEXIS 99527 (D. Nev. Jul. 28, 2016).  The consumer disputed the credit reporting noting that the “balance on the account should be “$0” and the status should be reporting as current” as a result of his discharge.  [Complaint, ¶ 192].  On motions to dismiss, the defendant contended that the plaintiff’s FCRA claim failed as a matter of law because the reporting of delinquencies during the pendency of a bankruptcy proceeding or after discharge is not inaccurate under the FCRA. The defendant further pointed to the provisions of 15 U.S.C. §1681c which allows for the reporting of collection issues for seven years after a bankruptcy discharge and reporting the bankruptcy itself is allowed for ten years after the discharge. The court agreed holding that 15 U.S.C. §1681c “undermines any arguments that…debts discharged in bankruptcy [are] unreportable.”  Riekki at *5.

District Court Requires Heightened Allegations to Support Willful Violation of the TCPA

A district court in Michigan has determined that plaintiffs should be held to a heightened pleading standard for willful violations for the TCPA.  Duchene v. OnStar, LLC, Case No. 15-13337, 2016 U.S. Dist. LEXIS 97129 (E.D. Mich. Jul. 26, 2016).  In Duchene, plaintiff alleged that he received a number of calls from defendant on his cell phone without his prior express consent.  The plaintiff asserted two claims against the plaintiff under the TCPA: a claim for statutory violation (carrying a $500/violation statutory penalty) and a claim for willful violations (carrying a $1,500/violation statutory penalty). The defendant moved to dismiss the complaint.

Under the TCPA, a plaintiff is entitled to treble damages where the defendant willfully or knowingly violates the Act.  47 U.S.C. § 227(b)(3).   The TCPA does not define the terms “willful” or “knowingly” and a split in authority has developed as to what constitutes a willful or knowing violation.   While some courts have required a heightened standard (requiring plaintiff show that the defendant knew or should have known its actions violated the TCPA), others have required that plaintiff simply allege the defendant made the illegal contact with the plaintiff voluntarily. 


On its motion to dismiss the willful violation claim, the defendant contended that “intent under the TCPA does not required any malicious or wanton conduct but it does require that the Plaintiff plead and prove knowing conduct.”  Duchene at *15.  Defendant went on to argue that the complaint did not include any facts to show that Defendant knew its calls violated the TCPA, including any allegations that plaintiff alerted the defendant at any time that he was not the intended target of the calls or that he did not consent to the calls.  The Court agreed, holding that a “willful or knowing violation of TCPA requires that Plaintiff has to plead that Defendant was made aware or/notified that Plaintiff did not consent to calls from Defendant.” Id. at *19. 


The case may provide an important foot hold for TCPA defendants in cases where the plaintiff simply lets the phone ring and ring in an effort to amass as many violations as possible.  While it does not provide a shield to statutory TCPA violations (the motion to dismiss was denied as to that claim), it may provide a defense to willful claims where the plaintiff makes no effort to address the unwanted calls.

Guest Post: Personal Finance = Personal Responsibility

By: Mark Dobosz
August 3, 2016

A columnist in a major newspaper today suggested that limiting consumer choices in some cases might be good. That curbing access to credit may be good. And last but not least – suggested that some people need protection from bad financial practices – and their own bad decisions.

In her September 2015 article  “When the Government Tells Poor People How to Live” author Alana Semuels writes,

Is this the role government ought to be playing in people’s lives? John Stuart Mill condemned such efforts, writing, ‘The only purpose for which power may be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.’ People may make bad choices, Mill and others argue. But that’s one of the costs of a free society. And it’s not as though government intervention is risk-free: The government may make even worse decisions on people’s behalf. Or, when it treats them like children, why expect that they will ever act like adults?

It would appear that the movement to protect consumers from financial bad practices to expand to personal bad decisions has gained headway from many organizations including regulatory agencies in the financial services sector.

In looking at the equation of Personal Finance = Personal Responsibility, a great definition has been proposed by Clay Skurdal – a 30+ year veteran of the financial services industry. He proposes that there are 6 characteristics of those who take personal responsibility for their finances.

1.  “Have a spending plan, or budget, is nothing more than a written plan detailing income and expenses before they occur. Having a plan in place shows diligence;
2. Saving money is a priority - Saving, by definition, is spending less than you make.
3. They recognize the difference between “needs” and “wants - You’ll be amazed how much you can save by cutting out “want”.
4. They refuse to borrow money - if you already struggle to pay your mortgage each month and keep the lights on, the last thing you need is another monthly payment obligation. If you can’t afford to save toward this, then you can’t afford the monthly payment that would result from taking out a loan either.
5. They don’t wait for friends, family, the government, or others to rescue them - don’t make the mistake of expecting these sources of income to make up for a lack of financial planning.
6. They are givers - Givers are the happiest, most fulfilled people in the world. Giving of your time, money, effort, and energy takes the focus off of your own problems. You need to get your focus off your problems from time to time, for your own sanity’s sake. Those who are constantly worried about their money, or their lack of it, have difficulty focusing on anything else. It makes them not as productive at work, for example, which can cost them a raise or even their job.”

It would be beneficial if we paused and took a step back from proposals to enact regulations and laws protecting people from their own bad decisions. We cannot assume that these people want saving or merely want to escape their rightful personal responsibility for their decisions.

In a country of 318 million people, more than 75% of Americans responsibly deal with their finances. (Regulators estimate roughly 70 million Americans are contacted by debt collectors each year. 2016 Consumer Financial Protection Bureau -CFPB estimate) As any teacher might tell you, setting rules for the small minority of the class can often have unintended consequences for thee majority of the students in the class who are not the challenge.

"In the long run, we shape our lives, and we shape ourselves. The process never ends until we die. And the choices we make are ultimately our own responsibility.”

Eleanor Roosevelt

 About the Author: Mark Dobosz currently serves as the Executive Director for NARCA – The National Creditors Bar Association. Mark is a one of NARCA’s speakers on many of the creditor’s rights issues impacting NARCA members. The National Creditors Bar Association (NARCA) is a trade association dedicated to creditors rights attorneys. NARCA's values are: Professional, Ethical, Responsible.

FDIC Seeks to Supplement Vendor Management FIL with Third Party Lending Guidelines

As vendor management continues to be a key issue for regulators, the FDIC has issued its Proposed Guidelines for Third-Party Lending. The deadline to comment was originally September 12, 2016 and was extended through October 27, 2016 in response to several requests for an extension of time. 

In its proposal, the FDIC outlines the risks associated with third party lending, sets forth its minimum expectations for associated risk management systems, its supervisory considerations and the examination procedures related to third party lending.  Here are the highlights:

• The Proposed Guidelines defines third-party lending as being an arrangement that relies on a third party to perform a significant aspect of the lending process.  It includes situations where the insured institution originates loans for third parties, situations where the insured institution originates loans through third party lenders or jointly with third party lenders and situations where the institution originates loans using third party platforms.
• The Guidelines make clear that an institution’s board of directors and senior management are ultimately responsible for managing third party lending arrangements and cannot divest itself of liability.
• The Proposed Guidelines reiterate much of what is set forth in FIL-44-2008 regarding third party risk management.
• Specifically, the proposal makes clear that risk management programs should consider the following risks: strategic, operational, transaction, pipeline and liquidity, model, credit, lending compliance, consumer compliance, and BSA/AML.
• In that regard, the Proposal  requires that institutions engaged in third-party lending develop a risk management program that incorporates:
• Strategic planning which establishes the risk tolerance limits and ensures necessary management, staffing and expertise to properly manage, oversee and audit third party lending relationships.  Strategic planning should also address and incorporate exit strategies and back up plans for third-party lending arrangements that do not go as planned;
• Third-Party Lending Policies that at a minimum:
• Limits the total capital for each third party arrangement and for the program overall;
• Establishes policies and additional requirements for selecting and establishing third-party lending relationships;
• Establishes minimum performance criteria, requirements for independent review of each third party and oversight management for each third-party relationship;
• Establishes monitoring to identify, assess and mitigate risk including fair lending;
• Establishes reporting processes including board reporting;
• Requires access to data and other program information;
• Defines permissible loan types;
• Establishes underwriting, administration and quality standards;
• Establishes a consumer complaint process;
• Addresses capital and liquidity support and allowance for loan and lease concerns;
• Ensures the compliance officer has adequate authority, resources, accountability and knowledge to insure compliance with relevant consumer protection laws and regulations that apply to each third-party lending arrangement; and
• Maintains an appropriate training program for the institution and insure that third party personnel maintains and institutes the same.

• The Proposed Guidelines also make it clear that all proposed third-party lending arrangements should fit within the institution’s strategic plan and business model. 
• Additionally, third-party lending relationships require ongoing oversight and due diligence and sets forth the FDIC’s minimum expectations which include such matters as :
  • Policies and procedures;
  • Credit quality of loans solicited or underwritten;
  • Management information systems;
  • Compliance management systems;
  • Consumer complaints;
  • Litigation or enforcement actions;
  • Information security programs;
  • Compliance with relevant guidance, regulations and laws regulating the loans; and
  • Repurchase activity and volume.

• The Proposal sets forth the minimum expectation that institutions understand the models used by third-party lenders to insure they are consistent with the institution’s underwriting and loan policies and compliance with applicable consumer protection laws, among other things.
• Like other third party relationships, third-party lending relationships should be memorialized by a contractual agreement establishing the parties’ rights and the lender’s expectations.  The Proposed Guidelines reiterate that contractual agreements should address:
  • Indemnification, representations, warranties, recourse and other protections to limit the institution’s exposure;
  • Termination rights;
  • The Institution’s right to require the third party to implement policies and procedures for any function or activity it outsources to the third party; and
  • Allow the institution full access to information or data necessary to perform its risk and compliance management responsibilities.

• The FDIC expects that credit underwriting and administration guidelines will be established by the institution and not the third party. 
• Partnering with third parties does not relieve the institution from ultimate responsibility for compliance with all applicable laws and regulations, including consumer protection and fair lending.  “Third parties that have direct contact with borrowers, develop customer-facing documents, or provide new, complex, or unique loan products require enhanced compliance-related due diligence and oversight by the institution to ensure areas of potential consumer harm are identified and mitigated…and should be particularly attuned to potential elevated fair lending risks.”
• Institutions engaged in significant lending activities through third parties will received increased supervisory attention, including concurrent and more frequent examinations.

The proposal should come as no surprise to lenders who have been monitoring the recent enforcement actions and continued focus on third party vendor management issues from all regulators. As the FIL will apply to all FDIC-supervised institutions engaged in third-party lenders, FDIC institutions should reassess their risk management programs and compliance management systems to insure they are in compliance with the proposed guidelines.

District Court Decision is Mixed Bag Where Creditor Name is Misstated

When confronted with the issue of whether the name of the creditor was a material representation for purposes of 15 U.S.C. 1692e and 1692g, a district court in New Jersey issued a good news/bad news decision.  In Cohen v. Dynamic Recovery Solutions, a debt buyer sent an initial demand letter which misidentified the creditor.  See Cohen v. Dynamic Recovery Solutions, 2016 U.S. Dist. LEXIS 97016 (D.N.J. Jul. 26, 2015).  The consumer filed suit under the FDCPA alleging, among other things, that the misidentification of the creditor violated both 15 USC 1692e and g. 

The Good News.

Section 1692e of the FDCPA prohibits the use of false, deceptive or misleading information.  In the Third Circuit, false statements must be material in order to be actionable under 15 U.S.C. 1692e. The collection agency acknowledged that the letter misidentified the creditor, but argued that the misidentification was not material because since the creditor was not the original creditor, the consumer would not have recognized either the incorrect name that was actually listed or the correct name.  The court noted that because the complaint contained no allegations of any familiarity with either the creditor listed or the correct creditor or any allegations suggesting that the name of the owner of the debt impacted him in any way, the court the name of the debt owner was not material.  The court therefore granted the motion to dismiss as to the plaintiff’s claim under section 1692e as to the defendant’s inclusion of the incorrect name of the debt owner.

The Bad News.

Materiality, however, is not an element of section 1692g(a) which requires that debt collectors provide consumers with certain information, including the name of the owner of the debt, within five days of the initial communication with the debtor.  Because the letter did not strictly comply with section 1692g, the court denied the motion to dismiss as to section 1692g.