Guest Post: CFPB Seeks Information for Third Party Debt Collection Rules

Editor’s Note: On November 3, 2016, Smith Debnam’s Jerry Myers attended a meeting with the CFPB to discuss the proposed rules for third party debt collection.  Below, he shares his thoughts from the meeting.

On Thursday November 3, 2016 I joined a group of colleagues for a meeting with the CFPB to discuss its proposed rules for third party debt collection.  I was one of four attorney members of the National Creditors Bar Association in attendance.  We were joined by representatives from the American Collectors Association and the Debt Buyers Association. The CFPB had invited us to meet with them following their Small Business Review Panel discussion a couple of months earlier. 

Each of the industry groups was given an opportunity to speak about the impact of the proposed rules on their respective industries.  There were areas of common concern among the groups.  Examples include the numerous notices and disclosures the proposed rules would require, the limits on communications with consumers, and the definition of certain terms, such as “default” and “date of default” which are included in the rules on substantiation.  There was also considerable discussion about determining what constitutes a dispute and how disputes should be handled.  All of the groups are concerned about the costs of complying with the new rules. The groups also expressed a shared concern that the new rules, once effective, not be applied retroactively, as was the case in the PHH litigation.  Lastly, all groups encouraged the Bureau to publish the rules for creditors at the same time as the rules for the third party collectors.

The attorneys pointed out additional ways that the proposed rules raise difficult issues for attorneys handling debt collection cases.  First, the proposed rules require that the attorney provide the consumer with numerous disclosures and notices.  These notices, such as the proposed Statement of Rights, make it appear that the collection attorney is providing legal advice to the consumer.  Such advice would violate the Rules of Professional Conduct, since the attorney for the creditor may not also provide legal advice to the debtor.  The proposed rules would also require the attorney to provide a “litigation disclosure” in connection with each communication which includes or evidences a threat of litigation.  Since some have argued that most communications by a collection attorney at least imply a threat of litigation, must the attorney provide the litigation disclosure in every communication with a debtor?

The attorneys also pointed out the problems we will face under the proposed rules which impose restrictions on communication with consumers.  For example, contacts with a consumer are capped at two per week if the collector, or any collector who previously worked on the account, has had a “confirmed consumer contact” with the consumer.  Under the rules, a “confirmed consumer contact” exists once any collector, even a prior one, has communicated with the consumer about the debt, and the consumer has answered when contacted that he or she is the debtor or alleged debtor.  We explained that such a rule imposes an untenable restriction on attorneys involved in litigation.  Depending on how many contacts have been made in a given week, the attorney might not be able to inform a consumer, for example, that a hearing date had been changed by the court or that a settlement offer had been accepted by the creditor.

As mentioned above, the proposed rules require a collector to “substantiate” a debt before taking any action to collect it.  Among the items the attorney must substantiate are the date of default and amount owed at default; however, the terms “default” and “date of default” are used differently for different types of debt.  For example, on a credit card account, there could be several defaults, followed by charge-off, followed by additional payments.  Also, on an auto loan, there could be more than one missed payment, followed by a repossession, followed by a sale of the collateral and establishment of a deficiency balance.  Trying to define default, date of default, and amount due at default for all types of debt would be a daunting task.  We reminded the panel that accounts placed with third party collectors are by definition delinquent.  That being the case, we suggested that the creditor be allowed to pick a logical point in time, such as the date of charge-off for a credit card, to provide a statement indicating the balance at that time, and then account for any additional charges or credits experienced thereafter?

Representatives from the CFPB present at the meeting were actively engaged in the discussions and asked many questions seeking to clarify the information the industry panelists provided.  They invited written follow up expanding on points raised during the meeting.  Deadlines previously established for publication of the debt collection rules have been extended several times.  It appears likely that the deadline will be extended again as the CFPB seeks to better understand the inner workings of the industry they are attempting to regulate.

ABOUT THE AUTHOR: Jerry Myers practices law with the Smith Debnam firm in Raleigh NC and serves as its Managing Partner. He concentrates his practice in creditors' rights with an emphasis on debt collection, judgment enforcement, and commercial litigation.  He is certified as a specialist in the field of Creditors' Rights Law by The American Board of Certification.  Jerry is also a past President of the Commercial Law League of America.  Having practiced in the creditors' rights field for more than 25 years, he has written and lectured extensively on debt collection and judgment enforcement. Jerry was also instrumental in forming the North Carolina Creditors Bar Association, a specialty bar whose members are committed to advocating for the rights of those who make credit available, as well as to educating the general public on managing credit effectively.  He served as the organization's President 2010-2012.

 

Law Firm's Garnishment Activities Do Not Violate FDCPA

Courts have long debated  the extent to which a debt collection attorney’s representations to opposing counsel or the court during the course of litigation may violate the FDCPA and the results from different circuits have varied greatly.  See, e.g.,  Hemmingsen v. Messerli & Kramer, 674 F.3d 814 (8^th Cir. 2012);  O’Rourke v. Palisades Acquisition XVI, LLC, 635 F. 3d 938 (7^th Cir. 2011); Miller v. Javitch, Block & Rathbone, 561 F.3d 588 (6^th Cir. 2009); Sayyed v. Wolpoff & Abramson, 485 F. 3d 226 (4^th Cir. 2007).  A recent decision by a Minnesota district court sheds some light on the issue and provides a positive decision for debt collection attorneys. Carney v. Unifund CCR, LLC, 2016 U.S. Dist. LEXIS 168707 (Dec. 6, 2016). 

The case arose from the law firm’s post judgment efforts to garnish wages.  After serving a garnishment summons, the consumer claimed the funds  as exempt.  The collection attorney filed an objection to the exemption, but filed it one day late.  Because of the untimeliness of the objection, the court ordered the funds released without making a ruling on the merits.  The defendants then made four additional attempts to garnish funds. The consumer filed suit against the creditor and its attorneys asserting the defendants violated sections 1692e and f by making further attempts to garnish wages which defendants knew were exempt and by making false representations in the objection as to its merits and as to its timeliness.  The defendants moved to dismiss.

In ruling in favor of the defendants, the court determined that there was nothing unlawful in defendants’ multiple efforts to garnish wages and noted that there had been no adjudication on the merits as to whether the consumer’s funds were exempt. 


Turning to whether the defendants had made false representations to the state court over the timeliness of their objection, the court looked to whether the defendants’ actions were permissive litigation activity.  The court began its analysis with a review of the Supreme Court’s decision in Heintz v. Jenkins before turning to the Eighth Circuit’s analysis of permissive litigation activities.  The court noted that, at least in the Eighth Circuit, the analysis is done on a case by case basis.  In reviewing the representations at issue, the court looked to whether the representations were closely related to the actual debt collection.  In determining the representations were permissive litigation activity, the court noted the purported misrepresentations were as to a filing deadline and had nothing to do with the amount of the debt or the debt itself and were not made to the debtor.  Carney at * 12.  To the contrary, the “alleged misrepresentations were arguments that, if accepted, would have permitted the state court judge to hear the merits of Defendants’ objection.  That Defendants’ arguments were rejected does not lead to a plausible inference that the statements were false or misleading.”  Id.  The key to the decision was the attorney’s ability to put as much separation as possible between the representations at issue and the consumer and the associated debt.

CFPB Hones Its Fair Lending Agenda for 2017

A recent blog post from the CFPB indicates it will focus its Fair Lending efforts in three directions in 2017.  According to the post, the CFPB will increase its focus on: (a) redlining; (b) mortgage and student loan servicing; and (c) small business lending. 

Redlining. The Bureau’s has shown a renewed interest in redlining claims in the past two years.  In 2017, the Bureau “will continue to evaluate whether lenders have intentionally avoided lending in minority neighborhoods.” 

Mortgage and Student Loan Servicing. The Bureau’s turn to the mortgage and student lending markets is likely to take up where its focus on auto lenders and credit card providers left off.  The Bureau has indicated it will determine “whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a solution with the servicer because of their race or ethnicity.”  Entities in these markets should pay close attention to the Bureau’s recent use of mystery shoppers in other fair lending investigations. 

Small Business Lending.  Finally, the Bureau’s focus on small business lending should come as no surprise.  Its last two rule making agendas have included small business lending. Currently, the CFPB’s efforts have been in the pre-rule making stages, but it would not be surprising to see their “research” include examinations results as they move towards developing proposed regulations.

CFPB Introduces Its “Consumer Credit Trends” Tool

Roughly eighteen months ago, the CFPB introduced its Monthly Complaint Reports which provide monthly summaries of complaints received in the complaint portal against financial service providers regarding a number of financial service products.  Each month, the CFPB issues a report summarizing the information. 

This week, the CFPB introduced a new research tool, its Consumer Credit Trend Tool.  According to the CFPB, the new tool’s purpose is to track originations of various consumer credit products.  In its current beta form, the tool pulls information from one of the three major consumer reporting agencies in a “de-identified manner”.  The Bureau’s release indicates that “de-identified” means that no information is provided to the CFPB as to the consumers’ identities including names, social security numbers or addresses are provided to the CFPB with the data.  For now, the tool will focus on four credit products: mortgage, student loan, credit cards and auto loans.   The CFPB press release, however, indicates that the CFPB “plans to include other consumer credit products and information on credit applications, delinquency rates, and consumer debt levels” and plans to update the information regularly and provide analysis of notable findings. 

Offer of Judgment Coupled with Deposit of Funds Does not Moot Claims

A district court in Illinois has slammed the door on an attempt to moot a class action by coupling an offer of judgment with a motion under Rule 67 to deposit funds with the court.  In Wendell H. Stone Co. v. Metal Partners Rebar, LLC, the plaintiff filed a putative class action seeking damages for violations of the Junk Fax Prevention Act.  Wendell H. Stone Co. v. Metal Partners Rebar, LLC, 2016 U.S. Dist. LEXIS 167574 (N.D. Ill. Dec. 5, 2016). Before the plaintiff could file its motion to certify the class, the defendant moved to deposit funds with the court which defendant claimed would fully satisfy the named plaintiff’s individual claims and requested the court enter judgment in favor of the plaintiff.  On the same day, the defendant made an offer of judgment in the same amount plus accrued costs.  The issue before the court was whether the defendant’s deposit of funds could render moot both the individual claims and the plaintiff’s attempt to pursue a class action. 

The case comes on the heels of the Supreme Court’s ruling this year in Campbell-Ewald v. Gomez, __ U.S. __, 136 S.Ct. 663 (2016).  In Campbell-Ewald, the Supreme Court held that a Rule 68 offer of full statutory relief does not moot a class action.  See Campbell-Ewald v. Gomez, __ U.S. __, 136 S. Ct. 663 (2016).  In Campbell, the majority held that a case becomes moot only “when it is impossible for a court to grant any effectual relief whatever to the prevailing party.” Id., 136 S. Ct. at 670.  The court continued its rationale by noting that since the defendant’s offer lapsed without acceptance, they retained the same stake in the litigation they had at the outset. In other words, “[a]n unaccepted settlement offer-like any unaccepted contract offer – is a legal nullity, with no operative effect.” Genesis Healthcare Corp. v. Symczyk, __ U.S. __, 133 S. Ct. 1523, 1534 (2013) (Kagan, J., dissenting). 

A glimmer of hope, however, arose for defendants in the dissenting opinions of Chief Justice Roberts and Justice Alito. Both noted that the majority in Campbell-Ewald did not say that payment of complete relief would lead to the same conclusion.  In fact, Justice Alito’s dissent went so far as to suggest that a defendant could moot a case by paying over the money sought by plaintiff either by handing them a certified check or by depositing the funds in an account in plaintiff’s name or with the court. Campbell-Ewald, 136 S.Ct. 663, 684.

The defendant in Stone attempted to do as Justice Alito suggested; however, the district court gave little credence to Alito's dissent.  Instead, the court held that the defendant cannot render moot either the plaintiff’s individual or class claims by its motion to deposit funds. In doing so, the court relied upon Supreme Court's majority opinion in in Campbell-Ewald as well as existing Seventh Circuit authority. "If submitting an offer immediately rendered a case moot, the court would have no authority to enter a decree, enforce the offer or ensure that the plaintiff receives the relief provided for in the offer.  Therefore a plaintiff's claim cannot be rendered moot- based on the premise that he has received full relief- before the Court actually exercises its authority to grant the relief." Stone at * 8-9. "The court concluded, therefore that the only time plaintiff's claims could become moot would be after the defendant has made the deposit and the court has entered judgment in plaintiff's favor. 

The court continued by noting that it would not render judgment in favor of the plaintiff because doing so would undermine the purposes of the class action device.  Additionally, the court noted that doing so would circumvent the purpose of Rule 68 which authorizes offers not deposits. 

Finally, the court noted that even if the deposit of funds could render a plaintiff’s claim moot, the offer in this case would not have that effect because the parties disputed whether or not the offer would make the plaintiff whole.  Because the court could not determine whether the offer would provide complete relief on the individual claim, the deposit would not render either the individual of class claims moot.

Defendants contemplating using Rule 67 as a vehicle to moot class actions should take note that, in this case, while the court denied the request that judgment be entered, it  did grant the defendant's motion to deposit funds.  Defendants therefore should be aware therefore of the risk that the court may grant the Rule 67 motion to deposit funds while denying the remainder of the relief sought.

 

CFPB Consent Orders Serve as a Reminder to Mortgage Industry on Advertising Practices

A recent series of CFPB consent orders should remind the mortgage industry to carefully monitor its advertising practices.  The MAP Rule prohibits deceptive and misleading commercial communications regarding any term of any mortgage credit product.  12 CFR Part 1014.   The three orders, which were entered into with reverse mortgage companies, include almost $800,000 in civil penalties and remediation.  Each of the consent orders will remain in place for five years. Each of the orders was entered with the consent, but without any admission of liability, by the reverse mortgage company.

Significantly for the mortgage industry, the consent orders provide insight into the CFPB’s expectations for compliance management as to advertising policies for mortgage products.  The Orders require each respondent to develop a comprehensive compliance plan designed to ensure that each Respondent’s advertising complies with all applicable laws and regulations.  At a minimum, the Orders suggest a Compliance Management System should include:

• A process for reviewing each advertisement for compliance with the MAP Rule and Dodd Frank’s general prohibition against unfair, deceptive and abusive acts and include:
  • A process requiring review of all telemarketing scripts;
  • A process for reviewing all advertisements and documenting each review;
• Development of a compliance management policy designed to detect and prevent violations of law;
• A description of the entity’s compliance organizational and reporting structure;
• Written job descriptions for all employees with duties under the advertising compliance policy;
• An allocation of resources to compliance commensurate with the size, complexity and business operations of the organization to insure adequate compliance programs;
• Mandatory ongoing training for employees and vendors involved in advertising regarding all relevant federal consumer financial laws and prohibitions tailored to each individual’s responsibilities and duties;
• A plan for timely and corrective action to remedy any material non-compliance;
• A requirement that the compliance plan be updated on a regular basis (the orders mandate at least every two years or as required by changes in laws or regulations);
•  An advertising retention policy which complies with 12 CFR 1014.5 and includes:
  • A requirement that all materially different commercial communications, as well as sales scripts, training materials, and marketing materials regarding any term of any mortgage credit product be stored in a central location accessible to personnel responsible for compliance;
  • A requirement that all material changes to any website operated by entity be documented to the extent it contains commercial communications;
  • A requirement that requires retention of all documents which describe or evidence all mortgage credit products available to consumers in the time period in which commercial communications were made regarding any term of any mortgage credit product, including the name and terms of each mortgage credit product;
  • A requirement that requires retention of documents describing or evidencing all additional products or services that are or may be offered or provided with the mortgage credit products available to consumers during the time period in which the person made or disseminated each commercial communication regarding any term of any mortgage credit product, including but not limited to the names and terms of each such additional product or service available to consumers; and
  • Requires retention for twenty four months from the last date of the commercial communication regarding any term of any mortgage credit product.

Mortgage industry players should carefully review their current policies and advertisements to insure their compliance with the MAP Rule and are reminded to also shore up their vendor management in this regard, as well.

PreCollect Letters Spell Trouble for Creditor under FDCPA

Creditors and debt collectors who utilize pre-collect practices should pay close attention to a recent opinion from the Eastern District of Michigan. In Parker Burns v. Ross Stuart & Dawson, Inc., 2016 U.S. Dist. LEXIS 165587 (E.D. Mich. Dec. 1, 2016), the collection agency agreed to provide the creditor with demand letter services which involved a series of three letters per debt account.  Each letter contained a remittance slip, return address and telephone number provided by the creditor. The consumer filed suit alleging “[d]efendants are violating §§1692e and e(10) of the FDCPA ‘with a contracted scheme and plan to using [sic] false, deceptive and misleading representations and means in connection with the collection of debts… using letters such as [the letter sent to Plaintiff].”  Id. at *6.  The consumer further alleged that the creditor violated 15 U.S.C. §1692e(14) by using the collection agency  ”to conduct its own debt collection under the guise of just being the creditor even though the letter…is written to promote all contact and collection efforts” by only the creditor.  Id. at *6-7.  The creditor moved to dismiss the FDCPA claims asserting that it was not a debt collector and that it was not engaged in a “flat rating” scheme.

While the FDCPA generally does not subject creditors to liability, there is one exception: creditors may be liable when the creditor “in the process of collecting its own debts, uses any name other than his own which would indicate that a third person is collection or attempting to collect such debts.”  15 U.S.C. §1692a(6).  Moreover, a creditor may be liable under section 1692a(6) when it participates in “flat rating.”  “Flat rating” is prohibited under section 1692j of the FDCPA and occurs when a series of collection letters bearing the letterhead of the collection agency is sold to a creditor but the collection agency is not actually involved in the collection efforts.

In reviewing the letters at issue here, the court set forth a number of factors to be considered when determining whether a collection agency’s participation in debt collection activities is enough to maintain a creditor’s exemption under the FDCPA.  Factors weighing in favor of voiding the creditor’s exemption include:

• The collection agency is acting as a “mere mailing service”;
• The letter states that if the debtor does not pay, the account “will be referred for collection”;
• The collection agency is paid for sending the letters and not based on a percentage of the collection;
• The collection agency does not receive payments;
• The collection agency does not initiate further action if there is no response to the letter;
• The collection agency does not receive files of the debtors;
• The collection agency never discusses the collection process or what next steps should be taken;
• The collection agency is not authorized to initiate calls;
• The collection agency is not authorized to negotiate payment;
• Any correspondence received by the collection agency is forwarded to the creditor for response;
• The letters do not include the collection agency’s address or telephone number;
• The letters direct questions and payments to the creditor directly;
• The creditor maintains substantial control over the content of the letters; and
• The collection agency does not provide traditional debt collection services, including location services, direct contact with the debtor.

Id. at *12-14.   In this case, the court found that there was sufficient facts to assert the creditor was a debt collector under section 1692a(6).  The court found that the creditor paid the collection agency based on the number of letters sent, not on the percentage of debts collected.  Moreover, the letter at issue directed the consumer to send payments to the creditor’s address or pay the creditor by credit card and directed consumers contact the creditor with any questions.  Additionally, the court concluded after reviewing the parties’ agreement that, aside from sending the letters, it did not provide for the collection agency to have any further involvement in the collection activity.

Collection agencies and creditors who are involved in pre-collect services should review the opinion carefully in conjunction with the provisions of 15 U.S.C. §1692j to insure the collection agency’s services are structured in such a way to avoid the collection agency being held liable for flat rating and to preserve the creditor’s status as a party not subject to the FDCPA.

CFPB Issues Fall Agenda

The CFPB published its Fall 2016 Rulemaking Agenda last week. The Agenda, which is a federal requirement, was issued in the “early fall” and therefore does not take into account the effect the election may have on the CFPB or its current configuration. While the Agenda is worth monitoring and provides insight into the CFPB’s hot button issues, there is no certainty as to what the next six months will hold.

Payday Lending: As most know, the CFPB published its proposed rule on July 22, 2016. The Comment period ended on October 7, 2016. The rule has met significant opposition and it is telling that no further estimation or target dates have been set by the CFPB for a final rule.

TRID: The CFPB published its proposed amendments to TRID in the form of a Notice of Public Rulemaking in July 2016.The proposed amendments “memorialize the Bureau’s informal guidance on various issues and include clarifications and technical amendments.” The comment period expired October 18, 2016 and the Bureau has set a target date of March 2017 for publication of the Final Rule.


Overdrafts: Since at least the spring of 2015, the CFPB has indicated that they are conducting research to assess whether rulemaking is warranted. Since then, the CFPB does not appear to have made much public headway. The Fall Agenda, like its recent predecessors, indicates the Bureau is still engaged in pre rule making activities. The Rulemaking Agenda bumps the target date for further activity from August 2016 to January 2017 for further pre-rule making activity.

Debt Collection: One of the biggest stories that remains is when a proposed rule as to debt collection will be issued. The CFPB has not committed to a time line but has made progress. In a surprise to many, the CFPB has bifurcated the process by addressing third party and first party collections separately. A SBREFA Panel was convened as to the CFPB’s third party debt proposal in August 2016 and the CFPB continues to meet with interested parties. A proposal as to first party collections is the next likely step. The CFPB estimates further pre-rule activities in February 2017.

Arbitration: The CFPB published its proposed Arbitration Rule in the form of a Notice of Public Rulemaking in May 2016 and has targeted February 2017 for a final rule.

Women owned, Minority owned and Small Business Data Collection: The CFPB is in the early stages of developing rules to require financial institutions to report information about their lending to women-owned, minority owned and small businesses. The CFPB has indicated a desire to model any data collection after their recently released HMDA Rules. Pre-rule activities are expected to continue in the first part of 2017.

Supervision of Larger Participants in Installment Loan and Vehicle Title Loan Markets: The CFPB is considering rules expanding its larger participants supervision to include consumer installment loans and vehicle title loan markets. The Bureau is also considering “whether rules to require registration of these or other non-depository lenders would facilitate supervision”. The CFPB has targeted May 2017 for pre-rule activities.