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

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

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

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

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

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

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

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

District Court Decision is Mixed Bag Where Creditor Name is Misstated

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

The Good News.

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

The Bad News.

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

District Court Opinion Shows Collateral Impact of Crawford Decision

A recent decision out of the Southern District of Georgia shows the collateral impact of the Crawford v. LVNV Funding proof of claim decision issued by the Eleventh Circuit. In Crawford, the Eleventh Circuit ruled that the filing of a proof of claim was an attempt to collect a debt and that the filing of a proof of claim on time barred debt violated the FDCPA.   Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11^th Cir. 2014).  Since Crawford, the debate has raged on with several courts weighing in on the subject.  Under one rationale or another, the majority have held that the filing of a proof of claim on a time barred debt does not give rise to a claim under the FDCPA. The Eleventh Circuit, however, is sticking to its guns and a recent decision by the Southern District of Georgia reflects to the collateral impact of the Crawford decision.

In McNorrill v. Asset Acceptance, LLC, the court was confronted with the issue of whether the collection of money as a result of the filing of a time barred proof of claim is in and of itself a violation of the FDCPA.  McNorrill v. Asset Acceptance, LLC, C.A. No. 1:14-cv-210, 2016 U.S. Dist. LEXIS 95216 (S.D. Ga. Jul. 21, 2016).  In McNorrill, the plaintiff, a Chapter 13 debtor, contended that the defendant filed a proof of claim on time barred debt.  During the bankruptcy, neither the debtor nor the trustee objected to the proof of claim.  As a result, the defendant received payments under the debtor’s Chapter 13 plan.  The plaintiff contended that the debt buyer not only violated the FDCPA by filing the proof of claim, but also alleged that “Defendant’s collection [of] money as a result of filing of time-barred proofs of claim…is a false, deceptive, or misleading representation or an unfair means of collection of a debt.”  Id. at *4.

The debt buyer filed a motion to dismiss claiming that plaintiff’s claims were time barred.  The court agreed as to the consumer’s claim as to the filing of the proof of claim. The court, however, disagreed as to the remaining claim concluding that the claim as to the debt buyer’s acceptance of payments was an independent violation and because payments were received by the debt buyer within the one year of the filing of the action, the consumer’s claim was not time barred.

Turning to the merits of the claim, the court concluded that the debt buyer’s acceptance of Chapter 13 payments was independent of the filing of the proof of claim itself and stated a plausible claim for relief.  In making its determination, the court was persuaded by the same concerns noted by the Eleventh Circuit in Crawford – specifically, that payment of a time barred claim “necessarily reduces the payments to other legitimate creditors with enforceable claims.” Id. at *13.   Moreover, the court concluded that “whether the FDCPA prohibits Defendant’s acceptance of payments is a matter of the FDCPA and not Bankruptcy or state law, and the “permitted by law” language found in §1692f(1) is not relevant.”  Id. at *16. 

The decision makes clear the lasting impact of the Crawford decision, at least in the Eleventh Circuit with respect to continuing chapter 13 payments.  What is not clear is whether a bona fide error defense would be effective under these circumstances – particularly where the debt buyer has relied upon the prior overwhelming authority holding that the filing of a proof of claim is not subject to the FDCPA.

CFPB Monthly Complaint Report Focuses on Credit Card Accounts

The CFPB issued its monthly report on consumer complaints this 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. The product “spotlight” rotates monthly. This month’s report highlights credit card account complaints which was last in the “spotlight” in October 2015.

 Complaint Volume by Product

• The three products which yield the highest volume of complaints on a three month average remain debt collection, mortgage and credit reporting;
• A trend worth noting is that the number of debt collection complaints remains almost flat;
• Student loans indicated the highest increase in change from last year– a 62% increase when compared to 2015; and
• Payday loan complaints showed the greatest decrease from last year – a 15% decrease when compared to 2015.

Highlighted Product: Credit Card Accounts

Credit card providers and servicers should pay close attention to this month’s report as it highlights what are likely to be points of emphasis with regulators in upcoming examinations – particularly with regard to fair lending concerns, application of payments and assessment of fees and adequate explanation of terms. 

• As was the case when credit cards were last in the spotlight, the most common complaint involves billing disputes. Consumers remain confused as to how and when late fees can be assessed. 16% of all credit card complaints are categorized by the CFPB as involving billing disputes. Specifically:
• According to the Report, consumers complain about how payments are being applied, particularly to accounts where there are multiple balances because of balance transfers, cash advances and deferred interest purchases. The majority of these complaints appear to emanate from confusion about the terms of use.
• Consumers also complain about the application of fees and additional costs associated with their credit cards, particularly the application of late fees.

• The Report also highlights complaints about credit decisions. Both initial credit decisions and servicing changes are frequent subjects of complaints. Specifically, the Report observes concerns with adverse actions and the negative impact that negative items in credit reports have on consumer’s creditworthiness;
• Deferred interest programs also are a source of complaints with consumers stating that the terms of the programs are not adequately explained;
• Another issue highlighted by the CFPB is the concern with credit card accounts being closed without notice due to concerns by the credit card companies as to fraud and identity theft.

So what might the credit card industry expect to see from regulators? Based upon the current complaint trends, the credit card industry is likely to continue to see a continued focus on to their application of credit card payments, as well as scrutiny as to the accuracy of their disclosures regarding special promotions. It would also not be surprising to see examiners scrutinize credit card products in their fair lending examinations based upon the volume of complaints concerning credit decisions.

District Court Opinion Delivers Mixed News on FDCPA Communications

A New York district court recently delivered a mixed bag of news on FDCPA claims involving third party communications.   In Duran v. Midland Credit Management, Inc., 2016 U.S. Dist. LEXIS 85843 (S.D.N.Y. Jun. 30, 2016), a collection letter addressed to the consumer was sent to his brother's address.  According to the complaint, the consumer never resided at the brother’s address, never provided the creditor with the address and never used that address to receive mail.  The plaintiff’s brother opened the letter without the consumer’s consent and as a result, a rift was created between the brothers which the consumer contended caused him emotional distress.  According to the plaintiff, the communication violated the FDCPA, including sections 1692c(b) and 1692c(a)(1) of the FDCPA. 

Section 1692c(b) of the FDCPA generally prohibits debt collectors from communicating with most third parties except with the prior consent of the consumer.  In support of its motion to dismiss, the debt collector pointed to the fact that the letter was properly addressed to the consumer and “plaintiff’s brother only learned of Plaintiff’s alleged debt after he violated federal criminal law by opening an envelope that was not addressed to him.” Id. at *7. The court agreed.


In reviewing the language of section 1692c(b), the court focused on whether the debt collector communicated with the consumer’s brother and the definition of “communicate”.  Turning to the dictionary, the court held that the applicable definition was “to transmit information, thought, or feeling so it is satisfactorily received or understood…This definition implies a degree of intent on the part of the communicator that his communication will be received or understood by another.”  Id. at *8. The court therefore concluded that a debt collector who addresses a sealed envelope to a consumer does not communicate with a third party “in connection with a debt” except to the extent the envelope itself reveals that the mailing is in connection with the collection of a debt.  Simply put,”[i]t would be unreasonable to construe “communicate with” so broadly as to encompass the accidental transmittal of information to an eavesdropper or interceptor.” Id. at *9.

With respect to the consumer’s 1692c(a)(1), the news was not as good for the debt collector and the court denied the motion to dismiss.  There, the consumer asserted the letter violated 1692c(a)(1) because, after previously sending correspondence to the consumer at his correct address, the debt collector sent a letter to the consumer at his brother’s address, an unusual place or place known or which should have been known to be inconvenient to him.  The court found that even if the brother had simply delivered the envelope to plaintiff without opening it, defendant would still have communicated with plaintiff at an unusual or inconvenient place.

The opinion is worth considering, particularly its language regarding “eavesdroppers”.  The court’s analysis of this issue may provide some small foothold for debt collectors – at least in the Southern District of New York- for some inadvertent third party disclosure issues.  In cases where messages are left on cell phones for consumers and inadvertently overheard by third parties, this language  coupled with the heightened expectation of privacy provided to cell phone communications, may be enough to preclude claims under section 1692c(b).

House Passes Budget Bill Containing Restraints on the CFPB

Last week, the House passed its 2017 appropriations bill.  The bill contains a number of provisions which are designed to place additional controls on the CFPB and signals the House’s concerns with the unbridled power currently harnessed by the CFPB.  Specifically:

• The bill funds the CFPB through the annual congressional appropriations process rather than allowing it to make transfers from the Federal Reserve;
• The bill restructures the leadership of the CFPB into a bipartisan five person commission; and
• The bill prohibits the use of funds to regulate pre-dispute arbitration agreements and delays the effective date of any regulation finalized by the Bureau regarding arbitration unless and until the CFPB has fulfilled certain specified reporting requirements.

A Senate Appropriations bill has not yet been passed, but the current Senate bill under consideration does not contain similar restraints on the CFPB.   A final congressional budget is not expected until later this year.