Successors by Merger May Not be Debt Collectors

A recent decision from a Louisiana district court should provide some comfort to banks and other financial institutions who acquire other entities by merger – at least in the Fifth Circuit, they are not debt collectors.  As most know, Bank of America (BoA) acquired Countrywide Bank FSB and its mortgage portfolio in 2008.  In Jackson v. Bank of America, N.A., the consumer brought an FDCPA claim against BoA based upon its actions in a foreclosure suit and an underlying mortgage which originated with Countrywide.  The consumer alleged BoA was a debt collector under the FDCPA because his “loan was in default prior to the transfer from his original lender Countrywide to Bank of America.”  Jackson v. Bank of America, 2017 U.S. Dist. LEXIS 46117 at *6 (M.D. La. Mar. 28, 2017).

In reviewing the issue of whether BoA was a debt collector subject to the FDCPA, the court took judicial notice that BoA acquired the mortgage loan by merger and not by transfer or assignment while in default.  The acquisition by merger was a key factor for the court which also relied upon prior Fifth Circuit precedent, Brown v. Morris, 243 Fed. Appx. 31 (5^th Cir. 2007).  In Brown, the “Fifth Circuit considered that the term ‘obtained’ had not been defined under the FDCPA, and looked to the act’s legislative history noting how, ‘[t]he Senate Report accompanying the FDCPA explained that the purpose of the act was ‘to protect consumers from a host of unfair, harassing, and deceptive debt collection practices without imposing necessary restriction on ethical debt collectors.’” Jackson at *7.  As was the case in Brown, the court concluded that “obtained” was synonymous with “assigned” and ultimately, since the mortgage company had not been specifically assigned the mortgage for debt collection purposes but rather had acquired it through merger from its prior mortgage company, the mortgage company was not a debt collector.

In addition to those cases which rely upon the creditor’s primary purpose not being debt collection, this case should also prove useful to those representing successor creditors against debt collection claims-  particularly those where portions of the portfolios acquired are performing loans.

CFPB's Monthly Report Focuses on Student Loan Products

The CFPB’s most recent monthly report on consumer complaints spotlights student loans. 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.

 

Complaint Volume by Product

• The three most complained of consumer products remain debt collection, credit reporting and mortgage.
• Student loans continue to reflect the highest increase in change from last year– a 325% increase when comparing January-March 2017 to the same period in 2016. The CFPB attributes this increase to the updating of its student loan intake form to include complaints after Federal student loan servicing in late February 2016, as well as an enforcement action initiated by the CFPB against Navient in January 2017.
• Student loan complaints showed the greatest month to month decrease after spiking in January 2017 after what appears to be a response to the Bureau’s enforcement action against Navient.

Highlighted Product: Student Loans

 

The Report’s spotlighted consumer product, student loans, reflects that the majority of student loan complaints arise from non-federal student loans.  Interestingly, however, the majority of complaints described arise from federal student loans. 

• With respect to federal loans, consumers complain about difficulty with receiving information regarding alternative payment plans and particularly, the failure of servicers to provide more beneficial payment repayment options like income-driven repayment plans. 
• Consumers with nonfederal consumer loans complained most about the misapplication of payments and inaccurate accounting of payments.
• Consumers in general also complained about credit reporting inaccuracies.

 

Weltman takes on the CFPB's Stance on Meaningful Involvement

This week the CFPB filed suit in the Northern District of Ohio against Weltman, Weinberg & Reis, an Ohio law firm.  The complaint is a continuation of the CFPB’s attack on collection law firms and their level of meaningful involvement.  Similar to its enforcement action against Works & Lentz, the CFPB’s attack in Weltman is focused on prelitigation collection efforts.

In its complaint CFPB alleges that the attorneys at Weltman were not meaningfully involved with the firm’s pre-suit demand letters and collection calls.   The CFPB takes issue with the following alleged practices:

• Attorneys had not reviewed the individual account information before sending demand letters or allowing its non-attorneys to make collection calls;
• The letters are generated through an automated process;
• The letters are on the firm’s letterhead and contain the firm’s name in type face in the signature line;
• The use of the following language when attorneys have not generally review the corresponding consumer’s account prior to sending the letter:
  • “Failure to resolve this matter may result in continued collection efforts against you or possible legal action by the current creditor to reduce this claim to judgment.”
  • “This law firm is a debt collector attempting to collect this debt for our client and any information obtained will be used for that purpose.”
  • “Please be advised that this law firm has been retained to collect the outstanding balance due on this account.”

As acknowledged by the CFPB, it views collection law firms as collection agencies not law firms at any time prior to an attorney reviewing the consumer’s account file and determining that the consumer owes the amount demanded.  This viewpoint is similar to what was reflected in the CFPB’s consent order with Works & Lentz in which the Consent Order required 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 CFPB position is that the communications must include a disclaimer that no attorney has reviewed the account at issue and refrain from referring to the “law firm.”

As we have stated before, this approach 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.

 

The good news is that Weltman has decided to fight and its press release emphasizes that t Weltman fully cooperated with the CFPB’s two and a half year investigation and that the investigation failed to uncover any instance of consumer harm. 

 “We fundamentally disagree with the CFPB's allegations and believe that this lawsuit is the result of our firm's refusal to be strong-armed into a Consent Order," said WWR Managing Partner Scott Weltman. "We are a law firm that is legally allowed, under federal and state law, to provide collection and legal services. We are being truthful with consumers and factually accurate when we use our name and our company's letterhead for proper debt collection activity. WWR has taken every reasonable step to ensure that it collects on consumer debts in compliance with those statutes and to ensure that every statement made to consumers is accurate and not misleading. I'd also like to emphasize that the CFPB’s two-and-a-half-year investigation into our firm did not uncover a single instance of consumer harm.”

 

Collection law firms should closely monitor the Weltman litigation and continue to review their own practices.  For now, the CFPB’s position on meaningful attorney involvement requires meaningful attorney involvement to be documented from the time of intake through the closure of the file to prevent any undue attention from the CFPB.

 

 

 

CFPB Issues its Annual Fair Lending Report and Sets its 2017 Agenda

The CFPB has issued its 2016 Fair Lending Report which provides a summary of the Bureau’s efforts in fair lending for 2016.  The Report also includes an indication of the Bureau’s fair lending priorities for 2017.  Here are the highlights:

·        A Risk Prioritization Approach. The Report confirms that the Bureau takes a risk-based prioritization approach to supervisory and enforcement.  Risk based prioritization considers several factors including cooperation with the Bureau’s special population offices, consumer complaints, tips and leads from advocacy groups, whistleblowers and other governmental agencies, supervisory and enforcement history and, of course, analysis of HMDA and other data.

·        2016 Fair Lending Activities.  The Report indicates that its 2016 focus was on mortgage and indirect auto lending, as well as credit card account management.  While the Bureau is expected to continue investigations in these three areas, it will also increase its focus on other segments of consumer credit.

·        2017 Fair Lending Priorities. Based upon this approach, the Bureau intends to increase its focus in the areas of redlining, mortgage and student loan servicing and small business lending.

·        Mortgage and Student Loan Servicing. The Report expresses concerns as to whether student loan and mortgage servicers are handling workouts and loss mitigation differently with customers based upon their race, ethnicity, sex or age.

·        Small Business Lending.  Dodd Frank charges the CFPB with ensuring that women owned and minority businesses have fair access to credit.  The CFPB intends to begin exercising small business lending supervisory authority to ensure fair access to credit.

·        Fair Lending Supervisory Observations.  The Report recaps examination observations which were previously provided by the CFPB in its 2016 Summer and Fall Supervisory Highlights and reported previously.

·        Redlining.  While we are not going to rehash all of the 2016 Supervisory Highlights, the Bureau’s observations as to redlining bear repeating. The Report indicates the factors considered by the CFPB is assessing redlining risk and provides the following laundry list:

o   Strength of the institution’s compliance management system including its underwriting policies and guidelines;

o   Unique attributes of the relevant geographic area, including population demographics, credit profiles and the housing market;

o   Lending patterns including applications and originations with and without purchased loans;

o   Peer and market comparisons;

o   The institution’s physical presence in the area (full service branches, ATM only branches, brokers and loan production offices, etc.) as well as the services offered;

o   Marketing;

o   Mapping;

o   CRA assessment area and market area more generally;

o   The institution’s lending policies and procedures record;

o   Additional, miscellaneous evidence (including whistleblower tips, loan officer diversity, testing, and comparative file reviews); and

o   An institution’s explanation for apparent disparate treatments.

·        Ongoing Investigations.  The Bureau’s ongoing investigations and referrals to DOJ include discrimination in mortgage and auto lending, as well as discrimination in credit card account management.

Based upon the Report and prior announcements regarding fair lending prioritization from the Bureau in the past several months, mortgage and student loan servicers should be re-examining their policies and procedures as to loss mitigation and workouts to ensure their practices are consistent with the Equal Credit Opportunity Act and other fair lending mandates.

District Court Takes Perplexing View on FDCPA Standing

An Illinois district court has taken a broad view of standing under section 1692e of the FDCPA.  In Koval v. Harris & Harris, Ltd., 2017 U.S. Dist. LEXIS 53124 (N.D. Ill. Apr. 5, 2017), a demand letter addressed to Michael Koval was opened and read by his daughter, Kate Koval, who serves as his legal guardian and allegedly had authority to open and read her father’s mail and make decisions on his behalf concerning the mail.  Kate Koval took issue with certain statements contained in the demand letter and filed suit against the debt collector in her individual capacity alleging violations of 15 U.S.C. §1692e. 

The debt collector moved to dismiss the complaint.  In doing so, the debt collector maintained that Kate Koval did not have standing in her individual capacity to make claims under section 1692e as she was not an obligor on the debt and had not brought the suit in her representative capacity. 

Section 1692e prohibits false, deceptive, or misleading representations in connection with the collection of any debt.  Generally, the FDCPA’s purpose is to protect against abusive debt practices.  While several of the FDCPA’s sections are specific as to their intended scope (see, for instance 1692d) and whether they include persons other than the consumer, section 1692e is silent.

In addressing the debt collector’s argument that Kate Koval did not have standing to sue in her individual capacity, the court looked at other provisions of the FDCPA and concluded that while certain provisions are expressly limited to communications with the consumer (for instance, 1692g), section 1692e contains no such limitation.   The court therefore looked to whether the plaintiff was within the statutory provision’s zone of interest.  Relying on Seventh Circuit case law which instructed that “[t]he protections of the FDCPA generally do not extend to third parties, unless that person ‘can be said to stand in the consumer’s shoes,’” the court concluded that as her father’s legal guardian plaintiff was in the zone of protection.  “Protecting close associations…is consistent with the statute’s own definition of “consumer”.  Koval at *4.

Moreover, the court was influenced by two other factors.  First, the FDCPA’s definition of “consumer” includes the consumer’s legal guardian.  The plaintiff, therefore, could have sued in her representative capacity and avoided the standing issue altogether.  Secondly, the FDCPA provision at issue (1692e) did not explicitly limit itself to consumers. 

The court’s decision is troublesome.  While it is apparent from its face that the court is attempting to take an equitable and practical view under the facts, it does not prevent the conclusion that the court has allowed a third party to sue personally and potentially recover personally damages for a collection letter sent to someone else. 

$1.90 Can’t Buy You an FDCPA Violation

A consumer who sued a debt collector over an inaccurate statement as to the amount of a settlement offer recently saw his complaint dismissed for lack of standing.  In Allgire v. HOVG, LLC, the plaintiff was contacted regarding a medical debt and offered a settlement for the discounted sum of $318.00.  Allgire v. HOVG, LLC , C.A. No. 1:16-cv-961, 2017 U.S. Dist. LEXIS 37739 (S.D. Ind. Mar. 16, 2017). The debt collector advised Mr. Allgire that the settlement amount represented a 25% discount of the balance owed.  In reality, a 25% discount of the amount owed was $316.10 not $318.00, a difference of $1.90. 

In his complaint, Mr. Allgire contended the statement misled him “by describing the discounted settlement amount to be equal to 25 percent of the total amount of the debt when the dollar amount stated was $1.90 more than 25 percent of the debt.” Allgire at *3.   Allgire further contended the representation violated both 15 U.S.C. 1692e(2)(A) and e(10) which prohibit a debt collector from using any false, deceptive or misleading representation or means to collect a debt and prohibit the false representation of the character, amount or status of any debt.  Problematic for Mr. Allgire, however, was his acknowledgement that he did not accept the offer to settle.  The debt collector moved to dismiss asserting Allgire did not have standing to bring the claim.

In reviewing Allgire’s Article III standing, the court was quick to point out that it is possible to allege  statutory violations of 15 U.S.C. 1692e without any resulting harm or risk of harm; however, in order to be actionable under the FDCPA, the representations must be material.  “The court therefore concluded that “bare allegations of the types of violations alleged by the Plaintiff do not entail a degree of risk sufficient to establish a concrete injury.“  Id.  at * 9. 

The court was equally dismissive of the consumer’s assertion that he was confronted with the threat of concrete harm and specifically, that he “had no reason to believe that the settlement offer given was valid or would be honored by the Defendant.”  As the plaintiff acknowledged that he did not pay the settlement amount, the court noted that such harm was, at best, conjectural and hypothetical and not sufficient to establish an actual injury in fact.

The case continues a trend of good news for the ARM industry as courts continue to use standing as a basis to dismiss hyper technical violations of the FDCPA and other consumer protection statutes.