Has Mulvaney Gone Too Far? A Look at the CFPB’s Semi Annual Report to Congress

The CFPB has issued its semi-annual report to Congress, leaving little doubt as to the agenda of Acting Director, Mick Mulvaney.  While the information contained in the actual report is largely inconsequential, it is Mulvaney’s opening message which should raise eyebrows of both consumer advocates and the consumer financial service industry.  Mulvaney quotes the Federalist Papers and draws on James Madison’s definition of tyranny when describing the CFPB’s Director (an accumulation of all powers, legislative, executive and judiciary in the same hands).  While scathingly describing the position he currently holds, Mulvaney blames Congress for creating an agency “primed to ignore due process and abandon the rules of law in favor of bureaucratic fiat and administrative absolutism.”    Citing the Bureau’s lack of accountability to any branch of government, Mulvaney includes a request that Congress amend Dodd Frank to:

• Fund the Bureau through Congressional appropriations
• Require legislative approval of major Bureau rules;
• Ensure the Director is answerable to the President in the exercise of executive authority; and
• Create an independent Inspector General for the Bureau.

By footnote, Mulvaney notes that the legislative proposals are his own and that no other officer or agency approved the legislative recommendations prior to submission.  Mulvaney is scheduled to appear before the House Financial Services Committee this week.

The proposal and the positions being advocated by Mulvaney should be of concern for both consumer advocates and the consumer financial services industry – particularly the second proposal.  Requiring legislative approval of all major Bureau rules essentially defeats the purpose of an agency delegated with rule making abilities if all such rules are to be subject to Congressional approval.  The debt collection industry, particularly, is clamoring for clarity as to how a statute adopted in the 1970s should be applied with today’s technology.  Agency rulemaking without the requirement of Congressional approval is a much more efficient means to provide that clarity if the positions of all stakeholders are fairly considered

Moving to the actual report itself, there is very little to report except that it acknowledges that the CFPB is still working towards a release of a proposed rules concerning debt collection.  Interestingly, it appears that the CFPB is now narrowing its debt collection focus to communication procedures and consumer disclosures and moving away from some of the other proposals contained in the original proposal. 

For those wondering, Mulvaney’s term as acting director is for 210 days but can be renewed and/or extended should Trump make a nomination for a permanent director prior to the expiration of that term.

DC Circuit Turns Away Healthcare Challenges to TCPA Declaratory Ruling

By Zachary K. Dunn

In ACA International v. Federal Communications Commission, 2018 U.S. App. LEXIS 6535 (2018), the DC Circuit rejected a series of challenges to the FCC’s 2015 Declaratory Ruling brought by Rite-Aid related to the partial-exemption to the prior-consent requirement for healthcare related calls. The Court rejected two separate arguments: first, that the Declaratory Ruling conflicts with HIPPA; and second, that the Declaratory Ruling’s exemption for “certain healthcare calls” but not others was arbitrary and capricious.

 Declaratory Ruling’s Partial Exemption for Healthcare Related Calls

The TCPA contains a prior-consent requirement for calls to wireless numbers, but permits the FCC to exempt from that requirement “calls to a telephone number assigned to a cellular telephone service that are not charged to the called party, subject to such conditions as the [FCC] may prescribe as necessary in the interest of the privacy rights this section is intended to protect.” 47 U.S.C. § 227(b)(2)(C).

During the rulemaking process which resulted in the Declaratory Ruling, the FCC was petitioned to exempt from the prior-consent requirement “certain non-telemarketing, healthcare calls” alleged to “provide vital, time-sensitive information patients welcome, expect, and often rely on to make informed decisions.” While the FCC found that calls “regarding post-discharge follow-up intended to prevent readmission, or prescription notifications” were in the public interest – and chose to exempt them from the prior-consent requirement – the FCC “fail[ed] to see the same exigency and public interest in calls regarding account communications and payment notifications.” It therefore did not exempt those calls from the TCPA’s prior-consent requirement. It was this partial exemption, which did not include exemptions for billing and payment notifications, that was challenged and ultimately upheld by the Court.

Conflict between Declaratory Ruling and HIPPA

In ACA International, Rite Aid first contended that by “restricting otherwise permissible HIPPA communications,” the Declaratory Ruling conflicts with another federal law. Under HIPAA regulations, covered entities and their business associates presumptively “may not use or disclose protected health information,” 45 C.F.R. § 164.502(a), but they are generally permitted to use or disclose that information “for treatment, payment, or health care operations.” Id. § 164.506(a).

At the DC Circuit, Rite Aid argued that that the partial exemption conflicts with HIPAA because it stops short of exempting billing- and account-related communications—i.e., ones “for . . . payment” and therefore conflicted with 45 C.F.R. § 164.506(a). The Court did not agree, and reasoned that while § 164.506(a)’s exclusion carves out an exception to civil and criminal liability for using or disclosing protected health information, it says nothing about the FCC’s “authority to exempt (or refrain from exempting) certain kinds of calls from the TCPA’s consent requirement.” Therefore, the Court held, “the [FCC] did not restrict communications that HIPAA requires be permitted to flow freely. It simply declined to make certain exchanges even less burdensome than they would have been by default.”

Whether the Partial Exemption is Arbitrary and Capricious

Rite Aid also contended that the Declaratory Ruling’s partial exemption for certain healthcare related calls, but not others, was arbitrary and capricious. Rite Aid made two arbitrary and capricious arguments.

First, Rite Aid argued that the FCC had failed to explain the reason for its departure from its earlier practice of exempting all HIPPA-protected communications to landlines from TCPA’s regulations. The Court recognized that in a 2012 Order, the FCC exempted all “health care message[s]” to residential numbers – including messages related to billing – from the TCPA’s requirements because such messages were “already regulated by” HIPPA. The Court also acknowledged that the 2012 Order “swept more broadly than” the 2015 Declaratory Ruling’s partial exemption.

However, the Court refused to find the differing treatment regarding residential and wireless numbers to be arbitrary and capricious, holding that “[e]ven if one might hypothesize important reasons for treating residential and wireless telephone lines the same, the TCPA itself presupposes the contrary—that calls to residential and wireless numbers warrant differential treatment.”

Rite Aid also challenged the partial exemption as arbitrary and capricious because it failed to “recognize that all healthcare-related calls satisfy the TCPA’s ‘emergency purposes’ exception to the consent requirement.” As used in the TCPA, “[t]he term emergency purposes means calls made necessary in any situation affecting the health and safety of consumers.” 47 C.F.R. § 64.1200(f)(4). Rejecting this challenge, the Court held that Rite Aid had identified “no calls satisfying that exception that were not already subject to the 2015 exemption.” The Court also found that it would be “implausible” to conclude that calls concerning telemarking, solicitation, or advertising content, or which include accounting, billing, debt-collection, or other financial content are made for emergency purposes.

Zachary Dunn is a member of Smith Debnam's Consumer Financial Services Litigation and Compliance practice.

Second Circuit Seeks to Provide Clarity as to Interest Disclosure

Last week, the Second Circuit attempted to clarify its position emanating from its decisions in Avila v. Riexinger & Assocs, 817 F.3d 72 (2^nd Cir. 2016) and Carlin v. Davidson Fink LLP, 852 F.3d 207 (2^nd Cir. 2017).  Taylor v. Financial Recovery Services, Inc., No. 17-1650 (2^nd Cir. Mar. 29, 2017).  In Taylor, the issue before the court was whether a collection notice violates 15 U.S.C. §1692e when it fails to disclose that interest or fees are not currently accruing on a debt.  The court held that it did not.

In Taylor, the creditor instructed the debt collector not to accrue interest of fees on the debts at issue.  Each letter the debt collector sent, therefore, disclosed the same static balance.  None of the notices provided a statement disclosing whether those balances were accruing fees or interest and unrebutted evidence reflected that neither debt accrued interest or fees while placed with the debt collector. 

The consumers filed suit alleging that the debt collection letters violated §1692e and were false, deceptive or misleading and arguing that the court’s prior holding in Avila should be expanded. In Avila, the collection letter disclosed the “current balance” of the debt, but did not disclose that after the date of the collection letter, the account was continuing to accrue interest and late fees.  Avila, 817 F.3d at 75-76.  The Second Circuit held that because the collection notice “did not disclose that the balance might increase due to interest and fees,” it was a “deceptive [or] misleading representation” of the amount due under the general prohibition of 15 U.S.C. § 1692e.  Id.

Dismissing the consumers’ argument that a debt collector commits a per se violation of §1692e when it fails to disclose if interest or fees are accruing on a debt, the court declined to expand its holding in Avila and explained that, quite simply, the cases were factually dissimilar.  

In Avila, the collection notice was misleading because “’[a] reasonable consumer could read the notice and be misled into believing that she could pay her debt in full by paying the amount listed on the notice,’ whereas, in reality, such a payment would not settle the debt.  The debt collector could still seek the interest and fees that accumulated after the notice was sent but before the balance was paid.”  Taylor, Slip Op. at 5.  Moreover, in Avila, the damage was not theoretical, but in fact, one of the consumers had paid the stated balance of the debt only to find herself still obligated to pay a remaining balance with accruing interest.   In contrast, in Taylor, no interest or fees accrued while the account was assigned to the debt collector and had the consumers paid the balance reflected on the collection notices (which they didn’t), it would have paid the account in full.  In short, the statements were accurate and no harm befell the consumer.  “The difference is that, while the message was prejudicially misleading on the facts of Avila, on the facts of this case it was accurate: prompt payment of the amounts stated in Taylor’s … [notice] would have satisfied their debts.”  Id. at p. 6.

The court also went on to make the practical observation that had the debt collector informed the consumer that interest or fees were not accruing, the consumer would have been alerted to the fact that they could delay payment without their debt increasing.  “It is hard to see how or where the FDCPA imposes a duty on debt collectors to encourage consumers to delay repayment of their debts.”  Id.

The court also reconciled its decision in Avila, which reviewed collection notices under Section 1692e, with Carlin which reviewed a collection notice under Section 1692g.  Importantly, the court stated:

[I]f a collection notice correctly states a consumer’s balance without mentioning interest or fees, and no such interest or fees are accruing, then the notice will neither be misleading within the meaning of Section 1692e, nor fail to state accurately the amount of the debt under Section 1692g.  If instead the notice contains no mention of interest or fees, and they are accruing, then the notice will run afoul of the requirements of both Sections 1692e and Section 1692g.

Id. at pp. 7-8. 

The decision is good news for debt collectors. Since the Second Circuit’s opinion in Avila, numerous suits have been filed seeking to use Avila to support the proposition that it is a violation of the FDCPA to fail to disclose interest is not accruing.  The Court’s decision in Taylor should help quell those suits, as well as reflecting a pragmatic approach to interest disclosures which should prove helpful to debt collectors litigating this issue in other circuits.

Seventh Circuit Joins Others on Debt Validation Requirements

The Seventh Circuit recently joined the Fourth and Ninth Circuits in holding that a debt collection discharges its obligation as to debt validation by verifying that its letters accurately conveyed the information received from the creditor.  Walton v. EOS CCA, 2018 U.S. App. LEXIS 7075 (7^th Cir. Mar. 21, 2018).  In Walton, AT&T forwarded the consumer’s account to EOS CCA for collection.  In doing so, AT&T inadvertently transposed the account number.  As a result, when EOS CCA sent its collection letter to the consumer and reported it to the credit reporting agencies, it likewise misstated the account number. Ms. Walton disputed the debt as a result and EOS CCA responded, stating that “based on ‘a review of our records,’ it had verified her name, address and the last four digits of her social security number matched the debt report it had received from AT&T.”  Id. at *2-3.

Ms. Walton filed suit alleging, among other things, that EOS CCA had violated 15 U.S.C. 1692g by not verifying the debt with the creditor.  The district court granted summary judgment in favor of EOS CCA.  The Seventh Circuit affirmed.  In doing so, the court noted that the purpose of the FDCPA is “to eliminate abusive debt collection practices by debt collectors.”  Id. at * 5 (emphasis supplied).  The court determined that consistent with that purpose, it as sensible to construe §1692g(b) as requiring “a debt collector to verify that its letters accurately convey the information received from the creditor.”  Id. at *6.  The court was dismissive of the additional requirement advocated by the consumer, that the debt collector should be required to undertake an investigation of whether the creditor is actually entitled to the money it seeks.  The court concluded that such a requirement would be unduly burdensome and beyond the Act’s purpose.  Because section 1692g(b) serves as a check on the debt-collection agency and not the creditor, the court determined that EOS CCA satisfied the statute when “[i]t checked its records and confirmed that the Deborah Walton to whom it had set a debt-collection letter was the same Deborah Walton identified by AT&T.”  Id. at *6-7.  The court likewise approved the communication by EOS CCA validating the debt, noting that EOS CCA sent Walton a notice that confirmed it had sent the demand to the person AT&T identified and for the amount AT&T sought and provided AT&T’s address. 

The decision is good news for the debt collection industry and confirms the narrow obligations provided by section 1692g(b).  The court’s decision joins decisions from the Fourth and Ninth Circuit which held similarly.  See Chaundry v. Gallerizzo, 174 F.3d 394 (4^th Cir. 1999); Clark v. Capital Credit & Collection Servs., Inc., 460 F.3d 1162 (9^th Cir. 2006).

House Committee Okays Bill to Amend FDCPA to Exclude Law Firms from Definition of “Debt Collector”

By: Zachary K. Dunn

The House Financial Services Committee voted 35-25 on March 21, 2018 to advance H.R. 5082, officially known as the “Practice of Law Technical Clarification Act of 2018,” to the full House of Representatives. The bill, if enacted, would amend the Fair Debt Collection Practices Act to exclude from the definition of “debt collector” all law firms or licensed attorneys working in connection with “a legal action in a court of law to collect a debt on behalf of a client,” including: 

• Serving, filing, or conveying formal legal pleadings, discovery requests, or other documents pursuant to the applicable rules of civil procedure; or
• Communicating in, or at the direction of, a court of law, or in the enforcement of a judgment; or
• any other activities engaged in as part of the practice of law, under the laws of a State in which the attorney is licensed, that relate to the legal action.

The bill would also amend the Consumer Financial Protection Act of 2010 to clarify that the CFPB may not exercise supervisory or enforcement authority with respect to attorneys engaged in the practice of law and not offering or providing consumer financial products or services.

 

The bill will now advance to the full House. We will keep you updated as H.R. 5082 proceeds through the lawmaking process.

Zachary K. Dunn practices in Smith Debnam's Consumer Financial Services Litigation and Compliance Group.

D.C. Circuit’s Ruling May Provide Some Potential Relief for the Consumer Financial Services Industry

The D.C. Circuit has issued its long-awaited decision on the FCC’s 2015 TCPA Declaratory Ruling.  ACA International v. Federal Communications Commission, No. 15-1211 (Mar. 16, 2018).  The ruling invalidates the FCC’s definition of an automated telephone dialing system (“ATDS”) and sets aside the FCC’s ruling on reassigned numbers.  The ruling, however, upholds the FCC’s determination that consent can be revoked through any reasonable means.

The 2015 Declaratory Ruling.

In July of 2015, the FCC issued its highly controversial ruling on 21 petitions seeking review of various aspects of the Telephone Consumer Protection Act (the “TCPA”).  In the Matter of Rules & Regulations Implementing the Telephone Consumer Protection Act of 1991, Declaratory Ruling & Order, 30 FCC Rcd, 7961 (2015) (“Order”).  Two commissioners issued impassioned dissents, noting that the Order “expands the TCPA’s reach” and “twists the law’s words…to target useful communications between legitimate businesses and their customers.”  Dissenting Statement of Commissioner Ajit Pai.  Immediately following the ruling, ACA International, a major trade group for the collection industry, filed suit against the FCC in the United States Court of Appeals for the D.C.  Circuit seeking a judicial review of the Order. 

While the D.C. Circuit’s review focused on four aspects of the FCC Ruling, this post will limit itself to an examination of the three aspects most relevant to the consumer financial services industry.  Before discussing the D.C. Circuit’s holding, here is a reminder of the FCC’s Ruling on the relevant issues:

• The Definition of an ATDS.  The FCC Ruling rejected any “present use” or current capacity test.  The FCC held that capacity of an autodialer is not limited to its current configuration and includes its potential functionalities even if it currently lacks the requisite software. Thus, the FCC affirmed that “dialing equipment that has the capacity to store or produce, and dial random or sequential numbers… [is an autodialer] even if it is not presently used for that purpose.” Order at ¶ 10 (emphasis supplied).  The Order further confirmed the majority’s focus on whether the equipment can dial without human intervention and whether it can “dial thousands of numbers in a short period of time”.  Id. at ¶ 17.  The dissent was highly critical of the majority’s holding, particularly as it related to capacity, its statutory interpretation of capacity, and the TCPA’s potential application to smart phones.  As noted by the dissent, if a system cannot store or produce telephone numbers to be called using a random or sequential number generator and it if cannot dial such numbers, it should not be included.  Commissioner (and now chair of the FCC) Pai described the majority’s test as being “whether there is “more than a theoretical potential that the equipment could be modified to satisfy the ‘autodialer’ definition.  Pai Dissent.
   

• Reassigned Numbers. The FCC Ruling addressed the question of where and when, a caller violates the TCPA by placing a call to a wireless number which has been reassigned from a consenting party to a third party without the caller’s consent.  The FCC refused to put any burden on the wrong number consumer to inform the caller that it is the wrong party or opt out of the calls.  Instead, the FCC established a one-call safe harbor stating that “where a caller believes he has consent to make a call and does not discover that a wireless number has been reassigned prior to making or initiating a call to that number for the first time after reassignment, liability should not attach for that first call, but the caller is liable for any calls thereafter.”  Id. at ¶85.
   

• Revocation of Consent. The FCC Ruling also clarified the ways in which a consenting party may revoke his consent to receive auto dialed calls.  Pursuant to the Ruling consent generally may be revoked through any reasonable means and the caller may not dictate how revocation may be made.  The FCC therefore held that “the consumer may revoke his or her consent in any reasonable manner that clearly expresses his or her desire not to receive further calls, and that the consumer is not limited to using only a revocation method that the caller has established as one that it will accept.”  Id. at ¶ 70.  Consent must be given by either the current subscriber or the non-subscriber customary user of the phone.

The D.C. Circuit’s Ruling.

The Definition of an ATDS.

Under the TCPA, an ATDS is defined as “equipment which has the capacity- (A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.”  47 U.S.C. §227(a)(1).   Breaking down the definition, the Court looked at two questions.  First, when does a device have the “capacity” to perform the two enumerated functions (to store and dial numbers) and second, what precisely are those functions.  ACA International, Slip Op. at 12. The Court held that the FCC’s efforts to clarify what equipment qualifies as an ATDS provided an “eyepopping sweep” and the Court set it aside. ACA International, Slip Op. at 16. 

Regarding when a device has capacity to store and dial numbers, the court was highly critical of the FCC’s expansive interpretation of “capacity”, noting that it was incompatible with the statute’s original concern – telemarketing calls.  The Court was particularly troubled by the Order’s inescapable conclusion that “all smartphones, under the Commission’s approach, meet the statutory definition of an autodialer.” The Court concluded that the TCPA cannot be reasonably read to render every smartphone an ATDS subject to the TCPA’s restrictions. Id. At 15-17.    Applying a Chevron analysis, the court held that the FCC’s definition was arbitrary and capricious and lay beyond the FCC’s zone of delegated authority.  The Court concluded that “[n]othing in the TCPA countenances concluding that Congress could have contemplated the applicability of the statute’s restrictions to the most commonplace phone device used every day by the overwhelming majority of Americans.”  Id. at 19.

The Court next reviewed the FCC’s treatment of what functions must be present to constitute an ATDS.  Looking to the TCPA, the Court noted that to constitute an ATDS, a device must have capacity to perform two functions: (a) to store or produce numbers to be called using a random or sequential number generator; and (b) to dial such numbers.  The Court determined that the FCC’s efforts fell short of reasoned decision making, offering no meaningful guidance to affected parties.  As examples of why the FCC Ruling failed to satisfy the requirement of reasoned decision making, the Court noted the two conflicting positions taken by the FCC as to what functionalities are necessary for a device to qualify as an ATDS noting that at certain places in the Order, the FCC takes the position that a device qualifies as an ATDS only if it can generate random or sequential numbers to be dialed while in others, the FCC stated that a device qualifies as an ATDS even if it lacks that capacity.  The Court also noted that the FCC Order was unclear as to whether other certain referenced capabilities (for instance, dialing without human intervention) are necessary for a dialer to qualify as an ATDS.   

What Next? The Court’s refusal to sustain Order’s definition of an ATDS invalidates one of the most disturbing aspects of the 2015 Order but what does it mean for collection agencies and others who use ATDS to make non-telemarketing calls? Absent further rulemaking from the FCC, it will leave the issue open for judicial interpretation and we are likely to see additional litigation seeking to examine equipment on a device by device basis.  The Court’s decision contains some language which may prove helpful to the industry on the issue of what constitutes an ATDS - particularly its parsing of the issue as to functionality and the distinction drawn between the ability to generate random or sequential numbers and the ability to call from a database of numbers generated elsewhere.  It is likely that we will see this definition delved into in litigation to a further degree than previously seen.

Reassigned Numbers.

Regarding reassigned numbers, the court determined the FCC’s one call safe harbor was arbitrary and set it aside. The Court’s ruling was premised in large part upon the FCC’s own interpretation of the TCPA as allowing a caller’s reasonable reliance on prior express consent.  Recognizing that a caller’s reasonable reliance might not cease after one call or text message (for instance, when the recipient does not answer or provide any indication of reassignment), the Court held that there was no reasonable basis for the FCC to conclude that reasonable reliance would cease after the first call.  “Having embraced an interpretation of the statutory phrase ‘prior express consent’ grounded in conceptions of reasonable reliance, the Commission needed to give some reasoned (and reasonable) explanation of why the safe harbor stopped at the seemingly arbitrary point of a single call or message.” Id. at 38.  Importantly, the Court further held that the FCC’s failure regarding the one call safe harbor requires that the Court set aside its treatment of reassigned numbers generally.  As a result, the Court also set aside the FCC’s interpretation of a “called party” as referring to a new subscriber because to leave it in place would in turn “mean that a caller is strictly liable for all calls made to the reassigned number, even if she has no knowledge of the reassignment.”  Id. at 39.

What Next? While setting aside the FCC Ruling, the Court also signaled its agreement with other circuits (notably the Seventh and Eleventh) that the “called party” for purpose of the TCPA is intended to be the current subscriber.  The Court also seemingly embraced the reasonable reliance on prior express consent position espoused by the FCC.  As a result, it is likely we can anticipate a ramp up in reassigned number litigation centering around who is the “called party” and what constitutes reasonable reliance on prior express consent provided by the previous subscriber.  At the same time, the FCC (under new leadership) is already seeking to address the issue of reassigned numbers by looking at mechanisms to address the issue, including a repository of reassigned numbers.  In re Advanced Methods to Target and Eliminate Unlawful Robocalls, Second Notice of Inquiry, 32 FCC Rcd. 6007. 6010 (2017). 

 Revocation of Consent. 

As noted above, the Court sustained the FCC’s ruling that consent can be revoked through any reasonable means that clearly expresses a desire not to receive further messages.  Of note, the Court made clear that the FCC Ruling did not address revocation rules mutually adopted by contracting parties.  “Nothing in the Commission’s order thus should be understood to speak to parties’ ability to agree upon revocation procedures.” Id. at 43.

What Next?  Based upon the court’s clarification as to mutually adopted revocation rules, affected parties may wish to consider incorporating revocation procedures in their contracts with specific mechanisms for consumers to indicate their consent.  Based upon the Court’s ruling, affected parties should also continue to implement policies and procedures for recording revocations of consent.