Thursday, October 26, 2017

Congress Votes to Repeal CFPB’s Arbitration Rule

By Zachary Dunn
October 26, 2017

The Senate voted on Tuesday, October 24, to repeal the CFPB’s Arbitration Rule first proposed in May of 2016 and issued in its final form in July. The rule would have imposed limitations on the use of pre-dispute arbitration agreements by covered providers of consumer financial products and services. 

Under the Congressional Review Act, 5 U.S.C. § 801 et seq, Congress had 60 legislative days from the date of final rule enactment to pass a joint resolution of disapproval to block the rule from taking effect.  The House of Representatives passed its resolution of disapproval on July 25, 2017 by a vote of 231-190, and the Senate passed its resolution on Tuesday by a vote of 51-50.  Senators Lindsay Graham of South Carolina and John Kennedy of Louisiana broke away from their Republican colleagues to vote against the measure, and Vice President Mike Pence cast the deciding vote in favor of the resolution.

Due to this vote, the Rule may not be reissued in the substantially same form, and a new rule that is substantially the same may not be issued.  See 5 U.S.C. § 801(b)(2).

Zachary Dunn is an attorney practicing in Smith Debnam's Consumer Financial Services Litigation and Compliance Group. 

CFPB Issues “Principles” for the Protection of Consumer Authorized Data Sharing and Aggregation

By Caren Enloe
October 26, 2017

With the growth of technology and the development of the fintech market, an unprecedented amount of consumer financial data has become available.  While protections through the FTC Safeguard Rule and EFTA provide certain consumer protections, there are coverage gaps as the regulatory scheme has struggled to keep up with technological advancements. 

In recognition of these competing forces and this growing market of consumer services, the CFPB issued a Request for Information in November of 2016 inquiring as to market practices related to consumer access to financial information and related data aggregation services.  Last week, the CFPB published their findings, as well as their Consumer Protection Principles which are designed to “reiterate the importance of consumer interests to all stakeholders in the developing market for services based on the consumer-authorized use of financial data.”  While the Principles are “not intended to alter, interpret, or otherwise provide guidance on the scope” of existing consumer protections under existing statutes and regulations or establish binding requirements or obligations relevant to the Bureau’s exercise of its rulemaking, supervisory or enforcement authority”, they appear to be the first step in filling some of the current regulatory gaps.

The CFPB Principles address nine general areas of concern:

  • Access.  The Principles recognize the right of consumers to be “able, upon request, to obtain information about their ownership or use of a financial product or service” from the product or service provider.  The Principles also support the consumer’s right to “authorize trusted third parties to obtain such information from account providers to use on behalf of consumers, for consumers benefit, and in a safe manner.”   
  • Data Scope and Usability.  The Principles set forth that the scope of data that may be made available should be broad; however, the data available to “third parties with authorized access” should be limited to that which is “necessary to provides the product(s) or service(s) selected by the consumer and only maintain such data as long as necessary.”
  • Control and Informed Consent.  The Principles emphasize the consumer’s right to control data access and the need for terms as to access, storage, use and disposal to be clearly communicated and understood by the consumer.  The Principles additionally emphasize the importance that the consumer understand and be provided with data sharing revocation terms that can readily and simply be invoked as to access, use and storage of data.
  • Authorizing Payments.  The Principles advocate for separate and distinct authorizations for data access and payment authorization.
  • Security.  The Principles recognize the gaps that potentially exist in the FTC Safeguard Rules and whether or not certain data aggregation providers are required to comply (as they may fall into a gap between covered financial service providers and vendors).  With regard to security, the Principles recognize the need for market participants to securely access, store, use, and distribute data in formats and manners which protect against security breaches.  The Principles further advocate for secure access credentials and effective processes that “mitigate the risks of, detect, promptly respond to, and resolve and remedy data breaches, transmission errors, unauthorized access, and fraud, and transmit data only to third parties that also have such protections and processes” in place.
  • Access Transparency.  Consumers should be informed of or able to readily ascertain “which third parties that they have authorized are accessing or using information regarding the consumers’ accounts or other consumer use of financial services.”  The Principles emphasize the ability of consumers to ascertain the “identity and security of each such party, the data they access, their use of such data, and the frequency at which they access the data.”
  • Accuracy.  The Principles express the expectation that data that consumers access or authorize others to access is current.
  • Ability to Dispute and Resolve Unauthorized Access.  The Principles set forth the expectation that consumers “have reasonable and practical means to dispute and resolve instances of unauthorized access and data sharing, unauthorized payments conducted in connection with or as a result of either authorized or unauthorized data share access, and failures to comply with other obligations , including the terms of consumer authorizations.”
  • Efficient and Effective Accountability Mechanisms.  Commercial participants are held accountable for “the risks, harms and costs they introduce to consumers” and are “incentivized and empowered effectively to prevent, detect and resolve unauthorized access and data sharing, unauthorized payments” and “failures to comply with other obligations, including terms of consumer authorizations.

The Bureau’s Report as to the November RFI reflects consensus amongst stakeholders that market participants need to work together to develop data access and use practices that are based upon a shared set of standards and expectations that address consumer protection.  Those engaged in fintech should carefully monitor developments in this area, as well as the CFPB’s developing position as to their role in regulating the same.

Wednesday, October 25, 2017

Debtor’s Actions Immediately After Default Doom Time Barred ECOA Claim

By Zachary Dunn
October 25, 2017

An unpublished opinion from the Sixth Circuit provides a useful application of the statute of limitations to bar a debtor’s claims under the Equal Credit Opportunity Act, 15 U.S.C. § 1691e (“ECOA”).  In Guy v. Mercantile Bank Mortg. Co., 2017 U.S. App. LEXIS 19329 (6th Cir. 2017), the Guys, a married African-American couple, owned and operated separate businesses.  Id. at *1-2.  Each business received a loan from Mercantile Bank Mortgage Company (“Mercantile”) through one loan officer, Pat Julien, in 2000 and 2006, respectively.  Each loan was subsequently refinanced at least once through Julien.  Id. at *2. 


When Julien left Mercantile in 2006, the Guy’s accounts were transferred to a different loan officer.  The Guys alleged that they began receiving different treatment after their loans were transferred, and Paula Guy, one of the plaintiffs, wrote a letter to Mercantile expressing her concern that black clients were “being treated differently” than they had been under Julien.  Id.  Mercantile changed its policies between 2006 and 2009, and began to “aggressively enforce standards it had ignored for years” with the goal, the Guys alleged, of “eliminat[ing] minority business borrowers.”  Id. at *2-3.


In January 2008, Mercantile “pulled the funding” on the Guys’ projects and accelerated the debt, citing alleged payment delinquencies and past-due real-property taxes.  While the bank previously accepted late payments during a “grace period,” Mercantile did not accept any late payments from the Guys after January 2008, and Mercantile eventually seized the Guys’ real property, foreclosed on other collateral, garnished their wages, and obtained a deficiency judgment against them. Id. at *3.


The Guys initially sought legal representation in 2008, but did not retain counsel.  The Guys did not pursue their claims against Mercantile until 2015, when they filed suit alleging Mercantile’s adverse loan actions “were pretextual and that Mercantile terminated its lending relationship with them, at least in part, because of their race.”  Id. at *4.  The district court noted that Mercantile disclosed emails though discovery which “arguably show racial animus,” but dismissed the Guys’ complaint as barred by the statute of limitations.  Id.  The Guys appealed, arguing that the statute of limitations was extended by the discovery rule or by the doctrine of fraudulent concealment.


The Sixth Circuit disagreed with the Guys on each issue, and affirmed the judgment of the district court.  The court began by noting that while the discovery rule will generally toll the running of a statute of limitations until a plaintiff discovers or should have discovered his or her injury, the US Supreme Court has “been at pains to explain that discovery of the injury, not discovery of the other elements of a claim, is what starts the clock.” Rotella v. Wood, 528 U.S. 549, 555, 120 S. Ct. 1075, 145 L. Ed. 2d 1047 (2000).  The Guys were injured, and knew they were injured, when Mercantile took adverse lending actions against them.  Those injuries took place in 2008 and 2009, making the Guys’ claims barred by the statute of limitations.  The court went on to hold that even if the discovery rule applied to the ECOA, the Guys sought legal representation in 2008, shortly after the adverse lending actions occurred, which indicated they “were not only aware of their injuries but also that legal recourse might be available.” Id. at *7.


The court also found that the Guys’ claims could not survive under the doctrine of fraudulent concealment.  In order to toll the statute of limitations based on fraudulent concealment, a plaintiff must prove that: “(1) [the] defendant[] concealed the conduct that constitutes the cause of action; (2) defendant['s] concealment prevented plaintiffs from discovering the cause of action within the limitations period; and (3) until discovery, plaintiffs exercised due diligence in trying to find out about the cause of action.”  Id. at *7 (citations omitted).  While false statements that conceal facts respecting the merits of a plaintiff’s claims may serve as a basis for equitable tolling, “such relief is warranted only when the defendant's allegedly fraudulent statements constituted a plausible explanation that lulled the plaintiffs into not filing their claims sooner.”  Id. at *8.  Here, the Guys admitted in their complaint that they immediately doubted the veracity of Mercantile’s stated reasons for calling their loans, which demonstrated that they were not “lulled” into not filling their complaint sooner.


As this case makes evident, a debtor’s actions immediately after an adverse lending decision can have decisive implications for his or her claims.  If a debtor files a lawsuit under ECOA for actions which took place years earlier, seeking discovery into his or her actions immediately after the adverse lending decision may prove useful.

Zachary Dunn is an attorney practicing in Smith Debnam's Consumer Financial Services Litigation and Compliance Group. 

Tuesday, October 17, 2017

Eleventh Circuit Continues to Explore Definition of Debt Collector

An unpublished opinion from the Eleventh Circuit continues its analysis of the definition of a debt collector and continues to narrow the applicability of the FDCPA.  As many may recall, the Eleventh Circuit’s opinion in Davidson v. Capital One Bank, 797 F.3d 1309 (11th Cir. 2015) was one of the first opinions to parse the definition of a debt collector under 15 U.S.C. §1692a(6).  That decision, of course, was followed up by the Supreme Court’s decision in Henson v. Santander Consumer USA, __ U.S. __, 137 S. Ct. 1718, 171-22 (2017) in which the Supreme Court held that a debt buyer may collect its own accounts under certain circumstances without triggering the FDCPA.


In Kurtzman v. Nationstar Mortgage, LLC, 2017 U.S. App. LEXIS 19750 (11th Cir. Oct. 10, 2017), the consumer filed an action against its mortgage servicer, Nationstar, seeking to stay foreclosure proceedings and recover damages under the FDCPA.   Nationstar filed a motion to dismiss, in part, because it contended the consumer failed to adequately allege Nationstar was a debt collector.  The district court agreed and dismissed the FDCPA claims. 


On appeal, the Eleventh Circuit noted that in order to state a claim under the FDCPA, the consumer must plausibly allege sufficient facts to allow the court to draw a reasonable inference that the defendant is a debt collector under the FDCPA’s definition.  The Court concluded, however, that the consumer had failed to plead sufficient allegations.  “Kurtzman’s complaint totally omits factual content that would enable us to infer that Nationstar qualifies as a debt collector.  The complaint is silent regarding whether the principal purpose of Nationstar’s business is collecting debts, and it only generally asserts that Nationstar ‘regularly attempted to collect debts not owed to [it]” Kurtzman at *5-6.  The Court went on to observe that the only factual allegation in Kurtzman’s complaint that might have supported Nationstar’s status as a debt collector is that the debt collected was in default when Nationstar acquired it.  “But it is the law of this Court that a “non-originating debt holder [does not qualify] as a ‘debt collector’ for purposes of the FDCPA solely because the debt was in default at the time it was acquired.” Id. at *6.


The opinion, while unpublished, is useful in that it continues to judicially narrow the scope of the FDCPA and should serve as a reminder to the consumer bar of the importance of meeting its minimum pleading requirements.

Monday, October 16, 2017

District Court Provides Successful Road Map for Bona Fide Error Defense

By Zachary Dunn
October 16, 2017

The FDCPA, through section 1692d(6), prohibits a debt collector from placing telephone calls to a debtor “without meaningful disclosure of the caller’s identity.”  15 U.S.C. § 1692d(6).  The FDCPA also includes a “bona fide error” defense to violations of its mandates, including violations of Section 1692d(6).  15 U.S.C. § 1692k(c) provides that “[a] debt collector may not be held liable in any action brought under this subchapter[, the FDCPA,] if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.”  Once a violation of the FDCPA has been shown, the debt collector must establish that the violation was (1) unintentional, (2) a bona fide error, and (3) made despite the maintenance of procedures reasonably adapted to avoid the error.  See Johnson v. Riddle, 443 F.3d 723, 727-28 (10th Cir. 2006).

A recent case from the US District Court for the District of Utah provides a useful roadmap for a debt collector attempting to use the bona fide error defense against an alleged violation of 15 U.S.C. § 1692d(6).  In Berry v. Van Ru Credit, 2017 U.S. Dist. LEXIS 164266 (D. Utah Sep. 11 2017), the debtor, Berry, defaulted on student loans he had taken out with the US Department of Education. The loans were placed with Van Ru for collection, and a representative of Van Ru contacted Berry and informed him that the Department of Education had the right to pursue an involuntary wage garnishment or a federal tax offset against him should his loans remain in default.  Id. at *2.  However, the representative failed to state that he was calling from Van Ru during the initial call.  Id. at *18.  That failure, Berry alleged, was a violation of 15 U.S.C. § 1692d(6).

While the court held that the representatives failure to inform Berry that he worked for Van Ru “violated . . . the FDCPA,” id at *19, Van Ru argued that it was entitled to the bona fide error defense because it did not intend to violate the FDCPA.  The court agreed, finding that Van Ru had met each of the three prongs for a successful bona fide error defense.   

As to the first prong, the court found that there was no evidence to support a finding that Van Ru intentionally violated the FDCPA and, in fact, there was evidence that the representative provided meaningful disclosure that he was calling from Van Ru in subsequent calls.  As to the second prong, the court noted that while the Van Ru representative did not identify himself as such, he did identify the Department of Education as the client, which demonstrated that any error was “in good faith, genuine, and bona fide.”  Id. at *20. 

Key to the court’s decision was a review of the policies and procedures implemented and followed by Van Ru representatives during live telephone calls with consumers.  Those procedures included a requirement that each representative disclose: (1) their identity; (2) that the representative is calling from Van Ru; and (3) that the call is being made on behalf of a Van Ru client.  Under Van Ru’s procedures, when a representative contacts a consumer over the phone, the representative is prohibited from making any false or misleading statement to the consumer.  The court noted that these procedures were available online to all Van Ru representatives to serve as a reference throughout their employment with the company, and that all representatives are specifically trained on the policy. 

The court also detailed Van Ru’s training procedures that all representatives must undergo before contacting consumers.  Van Ru provided an initial three week training program for all new hires which detailed both company policy and the laws and regulations governing collection activities; required new hires to pass an exam on the requirements of the FDCPA before making collection calls; and required all representatives to participate in seven additional weeks of ongoing training once released to the floor, including “side-by-side coaching, system navigation, and work effort reviews.” See id. at *6-7.  After the first 10 weeks of training, Van Ru conducted refresher training on a monthly and as needed basis, provided workshops and remedial training sessions, and mandated retraining for all representatives twice per year.  Any representative who failed the mandatory retraining exam three times was automatically terminated, and any representative who violated Van Ru’s policies were subject to disciplinary action, up to and including termination.  Id.

The court found these procedures to be “specific and extensive” and, because Van Ru was able to meet all three prongs of the test, the court concluded Van Ru was entitled to the bona fide error defense.  Id. at *20-21.  This case provides an example of the types of detailed policies and procedures a debt collector should have in place, and vigorously enforce, in order to be entitled to 15 U.S.C. § 1692k(c)’s bona fide error defense.
Zachary Dunn is an attorney practicing in Smith Debnam's Consumer Financial Services Litigation and Compliance Group. 

Monday, October 2, 2017

Eleventh Circuit Holds Voice Mail Message is a Communication

The Eleventh Circuit has held that a voice mail message left for a consumer is a “communication” under the FDCPA.  In Hart v. Credit Control, LLC, 2017 U.S. App. LEXIS 18375 (11th Cir. Sept, 22, 2017), the debt collector left a message which stated:

This is Credit Control calling with a message.  This call is from a debt collector. Please call us at 866-784-1160.  Thank you.

Hart at *2.  The message was the first communication.  The consumer filed suit alleging two violations of the FDCPA. First, the consumer alleged that the message was a “communication” under the FDCPA and violated 15 U.S.C. §1692e(11) because it failed to disclose that “the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose.”  Secondly, the consumer alleged the message did not meaningfully disclose the caller’s identity and therefore violated 15 U.S.C. §1692d(6).

The debt collector moved to dismiss relying, in part, on Zortman v, J.C. Christensen & Assocs., Inc. 870 F. Supp. 2d 694 (D. Minn. 2012) and similar cases which had previously rejected the consumer’s argument and noting that the message provided no more information than would be available from a hang-up or missed call.  The District Court agreed and granted the motion to dismiss, concluding that the instant message was not a communication for purposes of the FDCPA.  The District Court further held that the message disclosed enough information so as not to mislead the recipient as to the purpose of the call.  Importantly, the court held that it is the debt collector’s identity not that of the individual caller which is meaningful to a consumer.

Meaningful Involvement.

On appeal, the Eleventh Circuit reversed in part and affirmed in part.  With respect to the meaningful disclosure issue, the appellate court agreed with the district court.  Noting that the FDCPA is silent on what constitutes meaningful disclosure, the court looked to the purpose of the FDCPA.  “The FDCPA provides consumers with recourse following abusive behavior by debt collectors during the course of collecting a debt.  Given this scheme, the debt collection company’s name is plenty to provide ‘meaningful disclosure.’”  Hart at *9-10.

What is a Communication?

The Eleventh Circuit, however, disagreed with the district court as to whether the voice mail message constituted a communication, holding that the voice mail “falls squarely within the FDCPA’s definition of a communication.” Id. at *5.  Looking to the express language of the statute, the FDCPA defines a communication as being “the conveying of information regarding a debt [either] directly or indirectly to any person through any medium.”  15 U.S.C. §1692a(2).  The court concluded that the message fell squarely within the definition.  “The voicemail, although short, conveyed information directly to Hart – by letting her know that a debt collector sought to speak with her and by providing her with instructions and contact information to return the call.  The voicemail also indicated that a debt collector was seeking to speak to her as part of its efforts to collect a debt.”  Id. at 5-6.  The court was dismissive of the debt collector’s assertion that the voice mail message did not disclose any more information than what would have been revealed in a hang up call. Doing so would require that it ignore the plain language of the statute – “[i]n order to be a considered a communication, the only requirement of the information that is to be conveyed is that it must be regarding a debt… There is no requirement in the statute that the information must be specific or thorough in order to be considered a communication.”  Id. at *6.

What's Next?

The court’s opinion leaves debt collectors, at least in the Eleventh Circuit, in peril should they decide to leave messages for consumers.  Once again, they are left with Hobson’s Choice- either include all necessary disclosures and run the risk of violating the third party disclosures prohibitions or leave no message and fail to provide the required disclosures.  The question that needs to be evaluated further is whether debt collectors need consider whether the message is left on a cell phone (where there is a great expectation of privacy and therefore less risk of third party disclosure) or a land line.