Post-Discharge Credit Inquiries by Mortgage Servicer did not Violate FCRA

 By: Landon G. Van Winkle

 

A divided panel of the U.S. Court of Appeals for the Ninth Circuit recently held that a mortgage servicer had a permissible purpose for pulling the consumer reports of three borrowers for whom it serviced two mortgages even though the borrowers’ personal liability on the mortgages had been discharged in bankruptcy. Marino v. Ocwen Servicing, LLC, 978 F.3d 669 (9th Cir. 2020).  Specifically, the servicer was authorized to access the borrowers’ consumer reports in order to evaluate them for loss mitigation options, such as a loan modification, short sale, or deed-in-lieu of foreclosure. Id. at 675.

The borrowers each owned a home subject to a mortgage serviced by Ocwen Loan Servicing, LLC (“Ocwen”). The borrowers subsequently filed bankruptcy, and each received a discharge, which discharged their personal liability under their respective mortgages. Following the discharges, Ocwen obtained the borrower’s credit reports. The borrowers, eight in total, sued Ocwen in a putative class action, alleging that it willfully violated the FCRA by obtaining their consumer reports without a permissible purpose, in alleged violation of 15 U.S.C. § 1681b(f)(1).

The U.S. District Court for the District of Nevada granted Ocwen’s motion for summary judgment. In doing so, it relied on a prior unpublished decision from the Ninth Circuit, Vanamann v. Nationstar Mortgage, LLC, 775 F. App’x 260 (9th Cir. 2018). In Vanamann, the Ninth Circuit dealt with identical facts—a borrower whose personal liability on a mortgage that was discharged in a bankruptcy and a mortgage servicer who subsequently accessed the borrower’s credit report. Marino, 978 F.3d at 672 (citing Vanamann, 775 F. App’x at 262). There, the plaintiff alleged only a willful violation of the FCRA, requiring her to demonstrate that Nationstar “engaged in conduct ‘known to violate the [FCRA]’ or acted in ‘reckless disregard of [a] statutory duty.’” Vanamann, 775 F. App’x at 262 (quoting Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 56–57 (2007)). To prove reckless disregard, the plaintiff had to prove that Nationstar’s interpretation of the FCRA was objectively unreasonable. Id. Nationstar argued that it had a permissible purpose under § 1681b(a)(3)(A), which permits a consumer reporting agency to furnish a consumer report to a person which the agency has reason to believe “intends to use the information in connection with a credit transaction involving the consumer . . . or review or collection of an account of, the consumer . . . .” 15 U.S.C. § 1681b(a)(3)(A). The Ninth Circuit assumed that Nationstar lacked a permissible purpose under § 1681b, but nevertheless affirmed the dismissal of the plaintiff’s FCRA claim, because the plaintiff could not demonstrate that Nationstar’s conduct was known to violate the FCRA, or that its interpretation of § 1681b(a)(3)(A) was objectively unreasonable. Id. Crucially, the panel noted that the FCRA contained no provision “addressing bankruptcy discharges for Nationstar to interpret, much less interpret recklessly.” Vanamann, 775 F. App’x at 262. Based on the nearly identical facts at issue in Vanamann, the district court concluded that Ocwen could not have willfully violated the FCRA, and therefore granted its motion for summary judgment.

On appeal, the Ninth Circuit affirmed the district court and cited Vanamann approvingly. However, it followed a somewhat circuitous route in analyzing the case. Rather than follow the straightforward process in Vanamann, in which the panel assumed that Nationstar had violated the FCRA, but found that any such violation could not have been willful, the Marino majority instead made a point to address the “threshold question of whether the defendant violated the FCRA.” Marino, 978 F.3d at 671. Addressing this “threshold question” was important, according to the majority, in order to “prevent the law in this area from stagnating.” Id. The majority’s basis for this approach was its view that since a defendant in an FCRA case could “nearly always avoid liability so long as an appellate court ha[d] not already interpreted” the FCRA provision at issue, if the appellate courts simply continued to dispose of cases on the basis that there was no negligent or willful violation of the FCRA, then “the question of statutory interpretation will likely never be answered.” Id. at 673–74.

Therefore, the majority first examined whether Ocwen’s conduct violated § 1681b(f)(1). Ocwen argued that § 1681b(a)(3)(A) provided it with a permissible purpose, because it was using the borrowers’ credit reports to evaluate them for loss mitigation options. Id. at 675. The borrowers argued that because they had vacated and “surrendered” their homes prior to Ocwen’s credit inquiries, and because they had never expressed any interest in avoiding foreclosure, Ocwen lacked a permissible purpose. Id. at 675–76. In rejecting these arguments, the majority observed that nothing in § 1681b(a)(3)(A) required a consumer to affirmatively request a foreclosure alternative before a servicer could review the consumer’s account to determine his or her eligibility. Further, the discharge injunction in the U.S. Bankruptcy Code specifically excepts from its ambit “a secured creditor’s efforts to seek ‘periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.’” Id. at 675 (quoting 11 U.S.C. § 524(j)(3)). Similarly, it was largely irrelevant whether the borrowers had vacated their homes prior to the credit inquiries at issue, since Ocwen “could have reasonably thought that even a debtor that moved out of his or her home might be interested in returning if Ocwen made a sufficiently attractive offer.” Id. at 676. The majority thus held that Ocwen articulated a permissible purpose to access the borrowers’ consumer reports under § 1681b(a)(3)(A). In dicta, however, the majority sought to cabin this holding somewhat when it opined that “[w]e imagine that if a consumer clearly informs the servicer or lender that he or she has no interest in avoiding foreclosure, then the servicer or lender might lack a permissible purpose for continuing to review the consumer’s credit.” Id. Then, in a single paragraph, the majority noted its “agreement with the district court that Ocwen did not willfully violate the FCRA.” Id. at 676.

Judge Bea concurred in the result and the reasoning of the majority regarding its conclusion that Ocwen did not willfully violate the FCRA. Id. at 676 (Bea, J., concurring). However, Judge Bea chided the majority for including “discussion of two matters not essential to the determination of this case.” Id. First, Judge Bea took issue with the majority’s analysis of whether Ocwen’s conduct violated the FCRA, an analysis which he noted was “not relevant to the decision of the case before us.” Id. Second, he took issue with the majority “imagin[ing] a hypothetical, which Plaintiffs did not plead nor prove, that the majority states may constitute a statutory violation of the FCRA.” Id. at 677. Judge Bea’s concern with the majority’s inclusion of a hypothetical FCRA violation appears particularly valid in the Ninth Circuit, where “dicta in panel opinions may become the binding law of the circuit.” Id. at 679 (citing United States v. Johnson, 256 F.3d 895, 947 (9th Cir. 2001)).

Mortgage servicers, at least in the Ninth Circuit, should take some comfort in the Court’s finding that such servicers retain a permissible purpose for accessing a borrower’s consumer report even after the borrower’s personal liability on the mortgage has been discharged, so long as the servicer intends to use the report to evaluate the borrower for loss mitigation options. However, mortgage servicers should remain wary of the limitations on this permissible purpose forecast by the Marino panel, and should consider adopting a policy to limit or modify future credit inquiries for loss mitigation accounts where the borrower unequivocally informs the servicer that he or she is not interested in pursuing loss mitigation options.

Landon Van Winkle is an associate at Smith Debnam and member of the firm's Consumer Financial Services Litigation and Bankruptcy sections.

CFPB Issues Semi-Annual Report to Congress

The CFPB has issued its semi-annual report to Congress.  The Report, which covers April through September of 2019, is mandated by Dodd-Frank and was released in conjunction with Director Kraninger’s testimony to the House Financial Services Committee.  Here are a few of our key take-aways.

Credit Reporting is a Focus of the Bureau.  The Report identifies credit scoring and credit reporting as a source of major concern for consumers.  Specifically, the report notes that the reporting of collections and bankruptcies have a significant impact on consumer credit scores and upon consumer lending. The Report also confirms what litigation trends are showing - credit reporting has surpassed debt collection as the most complained of consumer product.  In the twelve-month period ending September 30, 2019, credit reporting accounted for 43% of all consumer complaints.

Debt Collection Rule – Mum is the Word.  The Report is silent as to when a final debt collection rule will be forthcoming.  The Report simply indicates that the proposed rule was published and that the Bureau is reviewing the submitted comments with no indication as to when the final rule will be forthcoming.  Keeping in mind that the reporting period covered ended in September, perhaps that is not unusual except for the fact that the Report includes footnoted updates as to other issues addressed in the report.  Moreover, debt collection complaints no longer are the most complained of consumer product, having been surpassed by credit reporting.  For the year ending September 30, 2019, debt collection only accounted for 24% of all consumer complaints.

TCPA, FDCPA Complaints Show Decrease in 2018

According to WebRecon's December 2018 Report, TCPA and FDCPA complaints showed a substantial decrease in 2018.  WebRecon reports that, in comparison to 2017, FDCPA suits decreased 7.8% in 2018 and TCPA suits decreased 13.2% in 2018.  According to WebRecon, "FDCPA complaints are at their lowest point since 2008."  Picking up the slack were FCRA suits which increased 4.3%.  Interestingly, complaints to the  CFPB increased 5.9% in 2018 despite a more business friendly CFPB regime.  For further analysis, please check out WebRecon's blog which provides monthly analysis for the industry at WebRecon.

CFPB Report Reveals Impact Removal of Public Records Has on Credit Reporting: Did it Make a Difference?

The CFPB recently issued its second Quarterly Consumer Credit Trends Report which examines the impact of changes to credit reporting regarding the reporting of civil public records.  In 2015, the three major credit reporting agencies (“CRAs”) entered into settlements with over thirty states.  The settlements required the three CRAs to implement minimum personal identifying information (“PII”) standards and data collection frequency requirements for civil public records appearing on consumer reports.  The settlements also resulted in the CRAs discontinuing their reporting of civil judgments.

The Report breaks civil public records into three broad categories: bankruptcies, judgments and tax liens. 

Bankruptcies:  The Report spends little, if any, time discussing bankruptcies because the number of bankruptcies being reported remained virtually unchanged after the new standards took effect.  The Report concludes this is an indication that bankruptcies were being reported with sufficient PII prior to July 1, 2017. 

Tax Liens and Civil Judgments:  The Report notes that the number of tax liens being reported dropped off significantly after July 1, 2017 with the reporting of state tax liens declining more than federal tax liens.  The reporting of judgment liens disappeared altogether in July 2017.  The Report then looked at the impact the reporting of tax liens and judgments had on credit scoring.  It should come as no surprise that with the new PII standards and removal of judgment liens, affected consumers’ credit scores increased.  The amount of increase, however, does not appear to be significant (0-15 points) and may be attributable to the fact that many of the consumers in those categories also had other derogatory tradelines.  What is interesting, however, is that the increase in scores did impact a fairly significant number of consumers (17%) and their placement into higher credit bands (for instance, movement from deep subprime to subprime).

As noted by the Report, there remains insufficient data to draw any conclusion as to whether the removal of public records will affect the predictability and accuracy of commercial credit scoring models.   

Credit Reporting Remains a High Priority for the CFPB

The CFPB confirmed credit reporting remains a high priority for the agency by issuing a special Supervisory Highlights devoted to credit reporting earlier this month.  The report was generally complimentary of the strides that credit reporting agencies have made but indicated significant concerns with furnishers’ compliance with the FCRA and its accompanying regulation, Regulation V.  Here are the key take-aways concerning furnisher compliance:

·        Furnishers need to beef up their compliance management systems to ensure compliance with the FCRA.  The CFPB noted that at one or more furnishers there was:

o   Weak oversight by management and the Board of Directors;

o   No formal data governance program;

o   Inadequate training of employees who handled furnishing and disputes; and

o   Weak monitoring and corrective action, including testing of accounts;

·        Furnishers need to ensure they have policies and procedures in place regarding the accuracy and integrity of the information they provide to consumer reporting agencies (“CRAs”).  Specifically, the Report highlights the need for policies and procedures that:

o   Address handling and investigation of disputes;

o   Address the creation and retention of documentation to substantiate dispute decisions;

o   Prevent duplicative or mixed file reporting;

o   Instruct how to conduct reasonable investigations of consumer disputes;

o   Address vendor management; and

o   For those institutions that have deposit accounts, ensure adequate enterprise-wide FCRA policies are in place that specifically address consumer deposit accounts and deal with them consistently in compliance with the FCRA including its dispute investigation and reporting requirements.

·        Furnishers need to bone up on their date of first delinquency or “DOFD” reporting. The Report noted:

o   Compliance issues where information is absent on incoming loan servicing data transfers.  In those instances, the Bureau noted that policies and procedures were not in place to require follow up and obtain and accurately report the DOFD; and

o   One or more furnishers failed to accurately report DOFD when the consumer filed bankruptcy.  Specifically, the Report observed furnishers updating the DOFD to reflect the date of bankruptcy filing rather than continuing to indicate the date of delinquency as being the month and year that the account first went delinquent.

·        Furnishers need to invest in quality control measures.  The Report noted the following deficiencies during its examinations of furnishers:

o   Failure to perform quality checks on the data furnished to CRAs;

o   Failure to test for the accuracy of information after it is furnished;

o   Failure to conduct ongoing periodic evaluations or audits of furnishing practices or data furnished to consumer reporting agencies; and

o   Failure to conduct audits of dispute information to identify and correct root causes of any inaccurate furnishing.

·        Furnishers’ policies and procedures need to adequately insure data accuracy.  The Report indicates that in more than one examination, examiners found:

o   Furnishers furnishing information to consumer reporting agencies which did not accurately reflect the information in the furnishers’ system;

o   Furnishers failing to update information previously furnished after determining the consumer information was not complete or accurate; and

o   Furnishers failing to promptly update payment information for charged off accounts where consumers made payments under payment plans;

·        Furnishers need to ensure they are handling disputes in compliance with Regulation V.  Specifically, the Report notes that examiners found that:

o   Furnishers struggled with direct dispute procedures and practices.  Specifically,

§  Furnishers failed to provide proper notice to consumers after determining that a dispute was frivolous or irrelevant;

§  Furnishers failed to conduct timely investigations; and

§  Furnishers failed to respond to direct disputes with sufficient specificity;

o   Furnishers struggled with indirect dispute procedures.  Specifically, furnishers failed to complete their investigations in a timely manner.

The Report should be reviewed by furnishers of credit information across all product types as it reflects the Bureau's examinations priorities and is likely to foreshadow future enforcement actions.

CFPB Monthly Report Returns its Focus to Credit Reporting and Mortgage Complaints Fall Out of the Top Three

The CFPB issued its monthly report on consumer complaints last week.  The report is a high-level snapshot of trends in consumer complaints. The Report provides a summary of the volume of complaints by product category, by company and by state.  Additionally, it highlights a product type.   This month’s report highlights credit reporting which was last in the “spotlight” in May 2016.  Here are the highlights of this month’s report:

·        Complaint Volume by Product

o   In a startling change from prior months, the three products which yielded the highest volume of complaints in January 2017 were debt collection, student loan and credit reporting.  This is the first month where mortgage complaints were not in the top three.  Student loan complaints jumped 537% over December 2016 numbers.  No explanation was provided for the sudden spike in student loan complaints between December and January.

o   For the three-month period, student loans indicated the highest increase in change –  388% when compared to 2016.  The CFPB explained this year to year increase as being partly attributable to the CFPB updating its student loan intake to include complaints about Federal student loan servicing in February 2016; and

o   On a monthly basis, complaints for all products except money transfer increased over December numbers.

·        Highlighted Product: Credit Reporting

o   The CFPB notes that, as has been the case each time credit reporting is highlighted, the most common credit reporting complaint in July was incorrect information on credit reports (76% of all credit reporting complaints);

o   The CFPB report indicates that these complaints frequently involved difficulties with disputing inaccuracies with their credit report.  A lot of these complaints center on issues with customer service. 

o   Many consumers additionally submitted complaints about inaccurate personal information on their reports involving incorrect or unrecognized names and addresses and “mixed” credit reports.

o   The report also notes that complaints about hard credit inquiries are increasing.  Consumers complain that hard inquiries appear when they did not take any action to apply for a loan.

o   The report also notes that complaints about accounts being reported where the consumer is in bankruptcy are also on the rise.

o   The Report notes that the Bureau is receiving complaints against specialty consumer reporting agencies and highlighted complaints involving rental, background and employment screening complaints. 

CFPB Continues to Expand Its Meaningful Involvement Requirements for Debt Collection Law Firms

The CFPB recently issued its third consent order involving a debt collection law firm and appears to be expanding its interpretation of “meaningful involvement”. The order, which was entered against two related debt collection firms and their principal, calls into question how debt collection firms fundamentally conduct business. See In the Matter of Works & Lentz, Inc., et al, File No. 2017-CFPB-0003. The order was entered without any admission of any facts or conclusions of the law except those required for jurisdiction. The consent order requires the firms to pay $$577,135 in restitution to consumers, engage in remediation of their business practices, and pay a $78,800 civil penalty.

The Consent Order alleges the law firms violated the FCPA and Regulation V (the FCRA) as follows:

• By failing to have attorneys meaningfully involved in the account prior to engaging in collection efforts;
• Where no attorney had reviewed the account, by sending demand letters and engaging in collections without including a disclaimer that no attorney had yet reviewed the account; 
• By allowing collectors to identify themselves as calling from a law firm where no attorney had yet been meaningfully involved in reviewing the account at issue; 
• By including an automated greeting for unanswered calls indicating that the caller had reached the law firm where not attorney had yet been meaningfully involved in reviewing the account at issue; 
• By notarizing affidavits executed by clients without properly verifying the signatures; and 
• By furnishing information to credit reporting agencies with having written policies and procedures in place to insure compliance with the FDCPA.

The Consent Order expands the expectations previously set forth by the CFPB in its two prior consent orders with law firms by impliedly setting forth the expectation that attorneys must be meaningfully involved with each account prior to initial demand letters being sent out and further limits the delegation that may be made to staff. 

It requires that, “in connection with the collection of a debt, if any attorney has not been meaningfully involved in reviewing the consumer’s account at issue and has not made a professional assessment of the debt”, the law firm may not:

• State or imply that a written communication in connection with the collection of a debt, including a demand letter, is from an attorney or on behalf of an attorney; 
• State or imply that a phone call in connection with collection of the debt is from or on behalf of an attorney; 
• Refer to “attorneys” or a “law firm” in any automated message that plays for consumers calling the firm regarding a debt; 
• State or imply an attorney has reviewed the account;  or
• State or imply that the firm may file suit or seek legal action.

Instead in those instances,

• The law firms must include in all demand letters or written communications with the consumer:
• A disclaimer that no attorney has reviewed the account at issue, 
• State in the signature block that the letter is from the “Collections Department” and
• Omit the name of any attorney and the phrase “Attorney at Law” from the signature block.
• In any oral communications, 
• Include a disclaimer that no attorney has been reviewed the account at issue; and
• Clearly identify the person making the call, his job title and identify themselves as being from the “Collections Department”.
• The firms may not refer to the potential of litigation or commence suit unless and until:
• An attorney has reviewed original account level documentation which includes at a minimum, the consumer’s name, the last four digits of the account number and the claimed amount, a document signed by the consumer evidencing the opening of the account or original account level documentation reflecting a purchase payment or actual use by the consumer or other documentation authorizing the creation of the account;
• Has made a professional assessment of the delinquency; and
• Obtained client consent to file suit on the specific account.

The order is problematic on a number of levels. First, the CFPB’s utter disdain for collection attorneys is apparent in its discussion of their contingent fee arrangements and concerns with use of the firm’s name in the automated recordings. To the point, by prohibiting the law firms from identifying themselves as such when there has not been meaningful attorney involvement with the account and no "professional assessment" has been made, the Consent Order effectively requires the law firm to violate 15 U.S.C. 1692e by not disclosing the true name of the debt collector. To counteract that concern, the Order makes it implicitly clear that attorneys will need to be meaningfully involved at the intake point forward and yet fails to clearly articulate what that means. Remember, that the Hanna Consent Order set the expectation that that Hanna have in hand account documentation before engaging in collection efforts, but did not require the law firm document their meaningful involvement except prior to filing suit. The current consent order suggests that is not enough.

Debt collection law firms should assess risk in light of the CFPB consent order. The consent order appears to expand the CFPB’s expectations as to what constitutes meaningful involvement. Firms should additionally review their demand letter and staff practices to insure compliance with this latest consent order.

CFPB Consent Orders with Consumer Reporting Agencies Focus on Marketing Practices not Credit Reporting

Marketing practices remain at the forefront of CFPB activity as evidenced by two recent consent orders entered into with TransUnion and Equifax.  The consent orders combine to require the CRAs to pay more than $17.6 million in restitution to affected consumers and an additional $5.5 million in civil monetary penalties. Both consent orders will remain in place for five years and were entered without any admission of liability by the consumer reporting agencies (the “CRAs”).



Surprisingly, the violations identified by the CFPB have very little if anything to do with credit reporting.  Instead, the orders are focused on the CRAs’ marketing of credit related reporting services.  According to the Consent Orders, the CRAs marketed and sold consumers credit scores and credit related products.  The CFPB took issue with: (a) the scores being marketed and represented as being the same scores lenders typically used to determine a consumer’s creditworthiness; and (b) the CRAs not adequately disclosing the monthly charges for the services if not cancelled during the free trial period.  Additionally, with respect to Equifax, the CFPB asserted a violation of Regulation V’s prohibition against CRAs advertising its credit products through the centralized credit reporting source for annual free credit reports prior to delivery of the consumer’s free annual credit report.



Specifically, the CFPB asserted TransUnion and Equifax “represented, directly or indirectly, expressly or impliedly, that the credit scores it marketed and sold to consumers were the same scores typically used by lenders or other commercial users for credit decisions.”  Equifax Order, ¶ 23; see also TransUnion Order, ¶ 29.  Additionally, the CFPB asserted that TransUnion and Equifax failed to adequately disclose that consumers, unless they opted out in the free trial period, would automatically be enrolled in a subscription based service with monthly fees.



In addition to the restitution and monetary penalty elements, the Consent Orders require remediation by the two CRAs and provide further insight into the CFPB’s continuing focus on marketing practices of financial institutions.  Beyond the obvious (a prohibition against misrepresenting products and payment terms), the Orders set forth the CFPB’s expectations regarding:

·        Informed Consent.  The Orders require the CRAs obtain express informed consent from consumers before enrolling them in what the CFPB terms as “Negative Option billing structures” (the requirement that a consumer affirmatively opt out in the trial period or incur monthly charges).  Specifically, the orders require the CRAs to include:

o   In their internet offers, a check box on the page where payment information is collected requiring consumers to affirmatively consent to the billing structure.  The Orders further require the check box be conspicuous and clearly state “that the consumer agrees to be billed for the product unless the consumer cancels before the trial period expires.”  The Orders additionally require that adjacent to the check box, the CRAs must disclose the amount of the recurring charge and the billing interval; the date the trial period expires; and the amount the consumer will be charged.  Similarly, the CRAs must provide a simple mechanism for immediate cancellation which must, “at a minimum, be substantially similar to the mechanism(s) the consumer used to initiate the purchase” of any credit-related product.

o   For oral offers, the Orders require the CRAs obtain “affirmative and unambiguous” oral confirm that the consumer affirmatively consents to authorizing payment for the credit-related products and understands the necessary steps to cancel the services and future charges.

·        Clear and Conspicuous Disclosure. Additionally, with regard to the offering of educational credit scores (those offered for consumer purposes but rarely used by lenders), the CRAs are required to clearly and conspicuously disclose the nature of the score and clearly and conspicuously disclose the credit scores sold to consumers are not the same scores used by lenders or other commercial users, that there are various types of credit scores, and that lenders use a different type of credit score in making their lending decisions.  The Consent Orders require that the CRAs include these disclosures in written communications under the label “What You Need to Know” and that the label be in a font size double that of the disclosure.

·        Compliance Management.  Similar to other recent enforcement orders, the consent orders require the development and implementation of policies and procedures designed to improve the effectiveness of their communications with consumers and prevent communications which have a tendency to deceive consumers. 

o   The policies and procedures at a minimum should include:

§  At least an annual collection and review of performance metrics, including a review of both internal consumer complaints, as well as consumer complaints received by federal and state regulators;

§  At least an annual collection and review of data regarding consumers’ perceptions of, among other things, the CRAs’ advertising regarding the nature of their credit products (specifically, credit scores), the pricing structure and other material terms for an assessment of “consumer confusion” regarding the products and services offered to consumers; and

§  At least an annual assessment of advertisements to determine what adjustments should be made to enhance consumer understanding of the consumer products issues.

o   Submission of a comprehensive compliance plan designed to insure the CRAs’ marketing and advertising practices comply with all applicable federal consumer financial laws (including the Consumer Financial Protection Act (and its UDAAP provisions) and the FCRA;

o   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);

o   An advertising retention policy which will remain in effect for the life of the Orders (five years) and includes:

§  Copies of all advertisements, as well as sales scripts, training materials, and marketing materials relating to the credit related products, including any such materials used by third parties or affiliates;

§  A record of the date and location or placement that each advertisement is made accessible to the public and to the extent the information is available, the number, type and cost of all credit related products purchased through the advertisement and any and all modifications made to the advertisement including its mandated disclosures;

§  For all internet advertisements, the impressions, number of visits, unique visitors and clicks on the advertisement, as well as the number of purchases;

§  Accounting records showing the gross and net revenues generated by the credit related products;

§  All non-telephonic consumer complaints and refund requests relating to credit related products; and

§   Retain telephone communications with consumers consistent with current retention policies.

Entities subject to regulation should be taking notice of the number of enforcement orders which are now focusing on the marketing and advertising of consumer financial service products and reviewing their products under any product specific regulations, as well as the Consumer Financial Protection Act’s UDAAP umbrella. 

District Court Opinion Upholds Reasonable Investigation of Credit Dispute

A recent decision out of the Northern District of Georgia serves as a reminder to both consumers and furnishers of information as to the furnisher’s obligation to reasonably investigate a dispute under the federal Fair Credit Reporting Act.  In Taylor v. Georgia Power Company, the consumer disputed the power company’s reporting of her account as delinquent with the consumer reporting agencies (“CRA”).  The consumer submitted a dispute to the CRA disputing that she owed anything to the power company.  The CRA, in turn, passed on the dispute to the power company. 

Under section 1681s-2(b) of the FCRA, upon receipt of the dispute from the CRA, the power company was required to conduct a reasonable investigation of the identified dispute and report the results of its investigation to the CRA.  The power company investigated the dispute based upon the information it had been provided by the consumer and the information it had in its file.  Based upon its investigation, the power company verified the information being reported was accurate.  The consumer filed suit alleging the power company failed to conduct a reasonable investigation. 

The district court granted summary judgment in favor of the power company.  In doing so, the court held that the issue of whether an investigation is reasonable turns on whether the furnisher acquired sufficient evidence to support the conclusion that the information was true.  “A furnisher ‘need not do more than verify that the reported information is consistent with the information in its records’ for an investigation to be reasonable.  Moreover, “the scope of the furnisher’s investigation may be narrow if the plaintiff provides only ‘scant information’ regarding the nature of the dispute.”  Because the consumer failed to provide any information beyond stating that she told an employee of the power company that she did not owe on the account, the power company’s investigation was reasonable when it reviewed all the information in its possession and verified the consumer’s name, birthdate, social security number and the amount owed on the account.

Consumers should take note that the burden to effectively dispute a credit reporting lies with the consumer.   A reasonable investigation can only be based upon information in the possession of the credit furnisher at the time of the dispute.    

CFPB Supervisory Highlights: A Mixed Bag for Debt Collectors

The CFPB’s Fall Supervisory Highlights contains a mixed bag for debt collectors.  As you may recall, the Report highlights examinations that were conducted between May and August 2016 and provides a high level summary of the key findings made by the CFPB and the current emphasis of examiners.  Debt collection appears to be back as a point of emphasis for examiners.  The Report makes the following observations which should be heeded by debt collectors:

• CONVENIENCE FEES. Convenience fees continue to be a theme carried over from the Summer Supervisory Highlights.  The CFPB again noted in one or more examinations, the CFPB observed one or more debt collectors charging unauthorized convenience fees to process payments by phone or online.
• INADEQUATE CALL PROCEDURES.  The Report notes that weak Compliance Management Systems attributed to a number of concerns with communications both between the debt collector and the consumer and the debt collector and a third party. While noting these deficiencies, the Report also offered praise for those debt collectors who had “well-established, formal compliance program[s] that met CFPB’s supervisory expectations”, particularly those who used scripts to improve adherence to compliance policies and regularly monitored script adherence. The following deficiencies are highlighted:
  • In one or more examinations, examiners identified collection calls in which the debt collector made false representations regarding the impact that the debt or payment of the debt may have on a consumer’s creditworthiness;
  • The CFPB noted deficiencies with the practices of one or more examined entities concerning third party communications.  Specifically, the Report notes that in one or more examinations, collectors disclosed the debt to third parties, disclosed their employer to third parties without first being asked.

• COMPLIANCE WITH THE FCRA. The Report also noted issues with compliance with Regulation V and the FCRA, continuing a theme raised in the Summer Supervisory Highlights. 
  • Specifically, the Report notes that entities are still struggling with differentiating FCRA disputes from general consumer inquiries, complaints and debt validation requests.  To that end, Supervision directed one or more entities to develop and implement reasonable policies and procedures and establish training to ensure FCRA disputes are appropriately logged, categorized and resolved. 
  • Along similar lines, the Report noted inadequate dispute resolution policies and procedures at one or more examined entities. The Report noted that one or more debt collectors never investigated indirect disputes that either lacked detail or were not accompanied by documentation with relevant information. 
  • The Report also notes concerns with direct disputes.  Regulation V requires that furnishers provide consumers with a notice of determination if a dispute is determined to be frivolous.  In one or more examinations, the examiners noted that the notices failed to advise the consumers of what additional information was needed for the collector to complete its investigation.
• REGULATION E.  The examiners also noted deficiencies with one or more entities compliance with Regulation E.  Specifically,
  • Examiners found that one or more debt collectors failed to provide consumers with the requisite copies of the terms of the authorization, either electronically or in paper form; and
  • Examiners also found that one or more debt collectors who did provide notice, sent deficient notices that failed to describe the recurring nature of the preauthorized transfers from the consumer’s account.
     

The Report reflects that examiners are now focusing on issues aside from compliance with the FDCPA.  Compliance officers need to take a comprehensive look at their policies and procedures and insure their compliance management systems are reflective of compliance with all applicable consumer financial laws which impact their operations.

 

Informational Injury Not Enough to Create Article III Standing

A district court in California has dismissed a complaint alleging violations of the FCRA’s informational provisions because the plaintiff did not have Article III standing.  Nokchan v. Lyft, Inc., Case No. 15-cv-03008-JCS. 2016 U.S. Dist. LEXIS  (N.D. Cal. Oct. 5, 2016).  In Nokchan, an employee of Lyft alleged Lyft failed to provide certain disclosures regarding credit and background checks during the application process.  In response, Lyft filed a motion to dismiss asserting that the plaintiff lacked standing under Article III and citing the Supreme Court’s recent decision in Spokeo v. Robins, 136 S. Ct 1540 (2016).

Since the Spokeo decision, there has been much debate as to which, if any, bare statutory violations provide a sufficient injury in fact to support Article III standing.  In Spokeo, the court held that a plaintiff invoking federal jurisdiction must have an injury in fact – one that is both concrete and particularized, as well as actual.  The Court noted, however, that certain intangible harms may be elevated by Congress to meet the Article III requirements. 

Since Spokeo, plaintiffs and certain courts have relied upon the examples of intangible harms elevated to injury in fact cited by the Supreme Court in Spokeo to distinguish informational injuries from other bare statutory injuries. Those courts have read Spokeo broadly to mean that bare violations of informational statutory provisions are sufficient to assert an injury in fact.   A recent Eleventh Circuit panel, for example, held that bare violations of the FDCPA’s informational provisions found in 15 U.S.C. §1692g were sufficient to grant Article III standing even absent allegations of economic or physical harm.  See, e.g., Church v. Accretive Health, Inc., 2016 U.S. App. LEXIS 12414 (11th Cir. July 6, 2016).  In doing so, the court in Church relied upon the statutory examples cited by the Court in Spokeo.

In Nokchan, the plaintiff asserted bare violations of the FCRA’s informational provisions requiring certain disclosures be made to prospective employees prior to conducting a background check.  The plaintiff did not allege that he was confused by the documents Lyft provided or that if Lyft had complied with the FCRA that he would not have consented to the background and credit checks.  Additionally, he did not allege any actual harm that he suffered as a result of Lyft’s alleged statutory violations.  In contrast, he was actually hired by Lyft and continued to work for them. 

Once the Court found there was no actual or concrete harm suffered by the Plaintiff, it looked to see whether the statutory violations alone were sufficient to provide Article III standing under Spokeo.  In rejecting the rationale used by the Eleventh Circuit in Church, the court in Nokchan noted that the examples provided by the Court in Spokeo of intangible injuries created by statute “involved interests of much greater and broader significance to the public than those at issue in Church… In short, the Court rejects the view that the proposition that every statutory violation of an “informational” right “automatically” gives rise to standing.  Nokchan, 2016 U.S. Dist. LEXIS at 24.  Moreover, “[w]hile procedural violations that have resulted in real harm- or even a risk of real harm – may be sufficient to meet this requirement, Plaintiff in this case has alleged no such injury.” Nokchan at *10.   Because the plaintiff failed to assert any tangible or intangible injury in fact, the court dismissed the action.

CFPB Enters into Consent Order with Fintech Company

The CFPB has made it abundantly clear that it expects fintech companies to abide by the same rules as traditional brick and mortar lenders.  The Bureau’s consent order with San Francisco online lender Flurish, Inc. highlights the need for startups to effectively vet their products prior to launch to ensure compliance with the consumer protection regulatory scheme. Flurish, Inc., which does business as LendUp, is required to pay $1.82 million in retribution to affected consumers and a $1.8 million civil monetary penalty to the CFPB. 

LendUp held itself out as providing online single payments loans and installment loans and touted its “step up” system as allowing consumers to build up credit and improve credit scores.  The Consent Order highlights violations of multiple consumer protection laws, including the Truth in Lending Act and Fair Credit Reporting Act.  According to the Order,

·        LendUp’s loan-program marketing was misleading.  LendUp marketed its loan programs with claims they would build a consumer’s credit and credit scores by allowing consumers to move up the “LendUp Ladder” by taking out additional loans with more favorable terms.  Although advertised nationally, the two top level tiers of LendUp’s loans, however, were not available except in California.  Moreover, LendUp did not furnish any information to the credit reporting agencies to improve consumer’s credit scores until at least February 2014.

·        LendUp also ran amuck of the Truth in Lending Act in a number of ways:

o   LendUp allowed consumers applying for its lowest tier single payment loans the option to choose a loan maturity date as late as the consumer’s state allowed or an earlier date.  Where the earlier date was selected, the consumer was provided a discount on the origination fee.  If the consumer later extended the repayment fee, the discount was reversed.  According to the Consent Order, LendUp failed to disclose the potential for reversal to the consumer at the time they signed their loan agreement.

o   LendUp also violated the Truth in Lending Act by understating the APR.  According to the Order, LendUp failed to incorporate into its APR the portion of expedited funding fees which were retained by LendUp.  LendUp also used a faulty APR calculation tool for a period of time and did not have adequate testing provisions in place to identify the issue.

·        LendUp also ran afoul of the Fair Credit Reporting Act and Regulation V’s requirement that it have in place written policies and procedures about the accuracy and integrity of the information it furnished to credit reporting agencies. LendUp did not have any such policies and procedures in place until April 2015.

Lessons to be Learned.

·        The Order supports earlier statements by the CFPB that it holds fintech companies to the same standards as other lenders.

·        The CFPB continues to rely upon the Unfair and Deceptive Provisions on the Consumer Financial Protection Act to enforce through consent orders where other statutory authority does not exist.

·        Fintech startups should be reminded that it is essential they review consumer financial service products carefully with a lawyer well versed in the regulatory scheme before they rollout new products to ensure compliance.

·        Marketing is subject to the same scrutiny as the product itself.

Deposit Accounts Remain in the CFPB Crosshairs

The CFPB issued its monthly report on consumer complaints this week making it clear that consumers’ access to depository accounts remains a focal point for the CFPB. The monthly report is a high level snapshot of trends in consumer complaints and spotlights a different product type each month on a rotating basis. The Report provides a summary of the volume of complaints by product category, by company and by state.   

 

This month’s report highlights "bank account and service" complaints and echoes a recurring concern for the CFPB: that it believes that banks are under serving a portion of the banking population who are being rejected from the banking system because they have a poor depository account history. We have previously published posts on a number of occasions concerning the CFPB’s focus on deposit accounts and credit reporting and this month’s complaint report confirms the CFPB’s continued concerns. In its press release, CFPB Director Richard Cordray is quoted as saying: “Deposit accounts are an essential component of millions of consumers’ financial lives…We are concerned that consumers continue to face difficulties accessing and managing this cornerstone financial tool. Consumers who are eligible for a deposit account should be able to get one and use it effectively.”  

 

Here are the highlights of this month’s report:

 Complaint Volume by Product

•  The four products which yield the highest volume of complaints on a three month average remain debt collection, credit reporting, mortgage and bank account or service;
•  A trend worth noting is that the number of debt collection and mortgage complaints showed a significant decrease in volume over the same three month period in 2015;
• For the three month period, student loans and bank account or service indicated the highest increase in change – 64% (student loan) and 26% (bank account or service) when compared to 2015; and
• On a monthly basis, debt collection and mortgage complaints were both down in July compared to June.

 Highlighted Product: Bank Account or Service

•  The CFPB notes that, the overwhelming majority of complaints regarding bank accounts or service revolve around checking accounts (64% of all bank account or service complaints);
• The CFPB report indicates that complaints “about the use of consumer and credit reporting data for account screening are increasingly common”;
• The CFPB report also emphasizes that complaints related to overdrafts, particularly as to transaction ordering are also common;
• Consumers also complain regularly about the disparity between the size of overdraft fees when compared to the relatively small purchase that triggers the fee;
• Consumers remain frustrated concerning bank holding policies as they pertain to deposits and the delay in crediting funds;
• The report also notes complaints about error resolution procedures for their deposit accounts; and
•  As expected, the national banks are the targets of the majority of complaints, but several regional banks also appear on the “most complained about companies” list.

 As the CFPB continues to focus on consumer access to depository accounts and overdrafts, banks and credit unions of all sizes should expect their compliance management systems regarding the same to face further scrutiny by regulators and should expect to see additional guidance issued by regulators regarding the use of overdraft fees.