The CFPB Issues Report Condemning Auto Title Loans

In advance of issuing it’s rulemaking on pay day loans and other short term loans, the CFPB has issued its scathing Report on Single-Payment Vehicle Title Lending. Last year, the CFPB issued its pay day proposal to end “debt traps”. In that proposal, the CFPB proposed eliminating or significantly curtailing short term credit products which were secured by liens on the consumer’s vehicle. Today’s Report is likely to be used in support of the forthcoming rulemaking. Vehicle title loans are allowed in about half of the United States and allow consumers to secure a short term single payment loan using their vehicle’s title as collateral. The vehicle must be owed free and clear and the loan is generally based upon the value of the vehicle.

 

The Report is based upon the CFPB’s examination of nearly 3.5 million loans made in ten states between 2010 and 2013 (the height of the economic crisis). In the Report, the CFPB makes the following key findings:

 

• The average loan was $959 and carried an APR of 317%;
• Of the loans studied, 87% were reborrowed within 60 days;
• The loans have a high rate of default. A majority of the loans are reborrowed and of those, roughly 20% default and end up as repossessions;
• More than half of the loans become long term debt. In other words, over half roll over the loan four times or more; and
• As a result of the high percentage of rollover, loan sizes increase exponentially due to additional fees and interest.

The CFPB is considering a proposal which sets forth two alternative path for lenders to take when dealing with short term credit products: prevention and protection. Short term credit products are defined as being those credit products that would require the consumer to pay back the loan in full within 45 days. Lenders will have the ability to choose one of two business models:  

 

Prevention:

The “prevention” alternative focuses on the consumer’s ability to repay the loan. This alternative requires the lender to make a good faith determination at the outset of the loan as to whether the consumer has an ability to repay the loan when due, including all associated fees and interest, without reborrowing or defaulting. For each loan, the lender would be required to verify the consumer’s income, major monthly financial obligations and borrowing history (with the lender, its affiliates and possibly other lenders). A lender would generally have to comply with a 60-day cooling off period between loans. A second or third loan could only be made within the 60-day cooling off period where the lender could document a change in the borrower’s financial condition. In any event, after three covered short term loans, a mandatory 60-day cooling off period would have to elapse before the lender could make a covered short term loan to the consumer. 

 

Protection:

The “protection” alternative focuses on the repayment options and limiting the number of short terms loans a buyer could take out in any twelve month period. Under this alternative, a lender would not be required to determine the consumer’s ability to repay. Instead, the loan could not: (a) exceed $500; (b) be secured by the consumer’s vehicle; (c) carry more than one finance charge; (d) rollover more than twice; and (e) any rollover would have to taper off. The CFPB is contemplating two “tapering” alternatives. Under the first, the amount of principal on each rollover would taper in such a manner as to prevent an unaffordable balloon payment when the third payment is due. Under the second, the lender would be required to provide a no-cost extension to the consumer if the consumer was not able to pay off the loan in full at the end of the third loan.

  

In its Fall Rulemaking Agenda, the CFPB indicated that its rules on short term loan products were in the proposed rulemaking stage. Many in the industry expect the rules to be published shortly.

 

 

 

Supreme Court Rules in FDCPA case

Today, the Supreme Court unanimously reversed the Sixth Circuit in Sheriff v. Gillie, Docket No. 15-338, holding that letters sent on the Ohio Attorney General’s letterhead by private debt collectors are neither deceptive nor misleading.  While we are still digesting the opinion as to its long term import, here are our initial impressions:

Background

In Sheriff, the Ohio Attorney General appointed private law firms as “special counsel” to collect debt on the state’s behalf. When communicating with the debtors, the Ohio Attorney General required special counsel to use letterhead with the Attorney General’s Office logo and Attorney General’s name on it.  With regard to each of the letters in question, the signature block identified the private attorney by name and address and included the designation “special” or “outside” counsel to the State Attorney General.  Moreover, each letter included a statement that the communication was from a debt collector and its purpose was to collect a debt.  The consumers contended that the letters were deceptive and misleading attempts to collect consumer debts and violated the FDCPA.

The District Court granted summary judgment in favor of the debt collectors, holding that special counsel were officers of the state of Ohio and therefore covered under § 1692a(6)(C)’s exemption.  Gillie v. Law Office of Eric A. Jones, LLC, et al., 37 F.Supp.3d 928 (S.D.O.H. 2014).  Further, the Court held that even if the defendants were not exempt from the FDCPA, the statements at issue were not false or misleading.  The Sixth Circuit vacated the judgment concluding that special counsel were not exempt as officers of the state and remanded to the district court for trial on whether the use of the letterhead was misleading. Gillie v. Law Office of Eric A. Jones, LLC, et al., 785 F.3d 1091 (6th Cir. 2015). 

In the Supreme Court

The defendants’ petition to the Supreme Court posed two issues.  First, whether the defendants were exempt from the FDCPA’s coverage as “state officers” and secondly, whether the special counsel’s use of the Attorney General’s letterhead was false or misleading under §1692e.  Assuming for the purposes of argument that special counsel did not qualify as “state officers” for purposes of the FDCPA, the court held that the use of the Attorney General’s letterhead was not false or misleading and did not violate the FDCPA. 

By jumping to the second issue, the Court’s holding has broader implications that it might have otherwise had and yet, it does not address the issue we were all hoping to see addressed: the general liability standard for violations of §1692e. Currently, the circuits are split as to the general liability standard for debt communications. The majority of circuits rely on the least sophisticated consumer standard while other circuits have applied an “unsophisticated consumer.”   While the Court had the opportunity to adopt a singular test applicable across the circuits, it sidestepped the issue. 

Instead, the Court focused generally on whether the use of the Attorney General’s letterhead at the Attorney General’s direction was false or misleading and specifically, on whether it violated 15 USC §§1692e (9) and (14).  Subsection 9 prohibits debt collectors from falsely representing that a communication is “authorized, issued or approved” by a State.  Subsection 14 prohibits debt collectors from using a name other than their true name.  The Court concluded that the letters did not violate either provision.  Since the Attorney General required the use of his letterhead, “[s]pecial counsel create no false impression in doing just what they had been instructed to do.  Instead, their use of the Attorney General’s letterhead conveys on whose authority special counsel write to the debtor.”  Slip Op. 8-9.   Likewise, the Court concluded there was no violation of subsection 14.  “Far from misrepresenting special counsel’s identity, letters sent by special counsel accurately identify the office primarily responsible for collection of the debt…special counsel’s affiliation with that office, and the address…to which payment should be sent.”  Slip Op. at 9.

Key Take Aways

The biggest takeaway is what Sheriff did not do. While it tackled the issue with the broadest ramifications (the §1692e issue), it did not address the liability standard and nowhere is there any mention of the “least sophisticated consumer”.  Instead, the Court focused solely on the language of subsections 9 and 14 in the context of the underlying facts and whether the letters were in fact deceptive or misleading.  The Court concluded that not only was the communication accurate, but also was dismissive of any contention that the communication was deceptive, describing the letters as “milquetoast”. 

The second big takeaway comes from both the opinion and the oral arguments.  In both, the Court demonstrates a very practical approach to the FDCPA and does not appear to be inclined to expand liability under the FDCPA to include far-fetched notions of consumer confusion or intimidation. Instead, by keeping its opinion to the narrow issues presented, the Court appears content to focus on the underlying facts and rely upon the four corners of the statute, interpreting the Act in a practical and narrow manner, giving meaning to the Congressional intent of the Act.



Telephone Messaging Case Certified for Interlocutory Appeal

Perhaps the Eastern District of New York has finally had enough of the telephone messaging conundrum.  Last week, the Eastern District of New York certified Halberstam v. Global Credit and Collection Corp., 2016 U.S. Dist. LEXIS 3567 (S.D.N.Y. Jan. 11, 2016) for immediate appeal.  As we reported in an earlier post, in Halberstam, the debt collector’s call was answered by a third party who asked if he could take a message.  The debt collector responded as follows:

Name is Eric Panganiban.  Callback number is 1-866-277-1877…direct extension is 6929.  Regarding a personal business matter.

The issue as couched by the court was whether under the Fair Debt Collection Practices Act, a debt collector, whose telephone call to a debtor is answered by a third party, may leave his name and number for the debtor to return the call, without disclosing that he is a debt collector, or whether the debt collector must refrain from leaving callback information and attempt the call at a later time.  The court concluded that the message violated the FDCPA’s general prohibition on third party communications.   In so holding, the court determined that soliciting a call back is a “communication in connection with the collection of a debt.”  “In our case…the only purpose of…[the] call was quite obviously to collect the debt, and anyone, regardless of their level of sophistication, who knew that the call came from a collection firm would understand that purpose.” Halberstam at *9-10. 

Last week, the district court certified the matter for an interlocutory appeal to the Second Circuit.  In doing so, the court recognized the potential impact the issue has for the entire debt collection industry and noted that the defendant’s policy for leaving messages is a standard practice of many collection agencies to leave nonspecific call-back messages with third parties.  Additionally, the court appeared troubled that the “technical violation at issue will likely have a far greater benefit to the plaintiffs’ FDCPA bar than it will have in protecting debtors from abusive debt collection practices.”

Senate Committee to Conduct Hearing on the TCPA

At the request of several financial services organizations, the Senate Committee on Commerce, Science and Transportation will convene a full committee hearing on the TCPA and its impact on consumers and business on May 18th.  According to the Committee's website, the hearing will examine the TCPA, the FCC 2015 Ruling (which is currently being appealed in the DC Circuit) and the application of the TCPA to new technologies which have arisen since the Act's adopting in 1991. 

TRID Update: More Changes Coming

In a recent letter to the industry, the CFPB acknowledged the continuing operational challenges presented by TRID, as well as the need for greater certainty and clarity within the rule itself.  In keeping with that, the CFPB has indicated that has begun drafting a Notice of Proposed Rulemaking (NPRM) which will incorporate some of the Bureau's existing informal guidance and provide greater clarity.  The CFPB expects to issue the NPRM this summer.  In the meantime, the CFPB continues to provide assurances that they and other regulators continue to focus their examinations on good faith efforts to come into compliance with TRID. 

CFPB Issues Annual Fair Lending Report

The CFPB has issued its annual Report summarizing its fair lending activities in 2015. The Report is comprehensive and lays out not only the activities of the Bureau but also its methodology in reviewing fair lending issues. For those not familiar, the Dodd Frank Act established an Office of Fair Lending and Equal Opportunity within the CFPB and charged it with “providing oversight and enforcement of Federal laws intended to ensure the fair, equal, and nondiscriminatory access to credit for both individuals and communities.” In doing so, the Office’s two primary tools are the Equal Credit Opportunity Act (“ECOA”) and the Home Mortgage Disclosure Act (“HMDA”).

 

While much of the Report has been previously discussed in prior blog entries, the key takeaways for lenders are as follows:

 

• The Bureau uses a risk based prioritization process to focus their enforcement and regulatory efforts on markets or products that represent the greatest risk for consumers. The Report confirms the Bureau is currently honed in on four products:
•  Mortgage Lending. Mortgage lending is a priority for the Office and they continue to focus on the HMDA data to identify risks in the areas of redlining, underwriting and pricing. In 2015, the Bureau resolved two public enforcement actions involving mortgage lending. 
• Indirect Auto Lending. The Report confirms that the Office remains focused on indirect auto lending and is conducting auto finance targeted ECOA reviews which generally include examination of three areas: credit approvals and denials, interest rates quoted by the lender to the dealer (“Buy Rates”) and any discretionary markup or adjustments to the Buy Rate. In 2015, the Bureau resolved two public enforcement actions involving discriminatory pricing and compensation.  
• Credit Cards. The Report suggests that this is a product which is receiving increased fair lending scrutiny. The Report indicates that the Bureau is “focused in particular on the quality of fair lending compliance management systems and on fair lending risks in underwriting, line assignment, and servicing,” including the treatment of consumers who indicate a preference to speak Spanish. 
• Small Business Lending. The Report indicates that the Bureau has begun targeted ECOA reviews of small-business lending and is focused on the quality of fair lending compliance management systems and on fair lending risks in underwriting, pricing and redlining.
• The Bureau is conducting three types of fair lending reviews:
• ECOA Baseline Reviews. The CFPB uses ECOA Baseline Reviews to evaluate how well an institution’s compliance management system identifies and manages fair lending risks. To this end, the Bureau updated their Baseline Review Modules in the CFPB Supervision and Enforcement Manual.
• ECOA Targeted Reviews. The CFPB uses Targeted Reviews to evaluate areas of heightened fair lending risks and generally focus on a specific line of business, including those identified above.
• HMDA Data Integrity Reviews. The CFPB makes no bones about it. HMDA data is a primary tool used to identify redlining issues.
•  The Report also summarizes the Bureau’s pending investigations:
• Mortgage Lending. The Report makes it abundantly clear that mortgage lending is among the Bureau’s top priorities and has focused its fair lending enforcement efforts on redlining practices. Currently, the Report indicates that it has a number of authorized enforcement actions in settlement negotiations and pending investigations.
•  Indirect Auto Finance. Similarly, the Bureau has prioritized discrimination resulting from discretionary loan pricing. The Report indicates the Bureau currently has a number of pending enforcement actions and several authorized enforcement actions in settlement negotiations.
• The Report also summarizes the new HMDA rule and indicates that the Bureau is in the pre rulemaking stage with respect to developing rules as to the collection of small business lending data as required by the Dodd Frank Act.