Bureau Sheds Light on its Abusive Acts or Practices Standard in New Statement of Policy

The CFPB has issued a Statement of Policy which seeks to “convey and foster greater certainty above the meaning of abusiveness”  and provide a framework for its exercise of supervisory and enforcement authority as to abusive acts or practices.  Under Dodd Frank, the CFPB has supervisory and enforcement authority over abusive acts or practices in connection with consumer financial products or services. The Policy reflects an effort by the CFPB to resolve uncertainty as to the scope and meaning of abusiveness in the content of its enforcement actions.

Here’s what you need to know:

·        Historically, the Bureau has included in its enforcement actions an abusiveness claim with its unfair and deceptive claims, but not alleged any specific course of action distinguishing the two claims.  Because of this dual pleading, little clarification has been provided by the Bureau previously as to the abusiveness standard.

·         The Policy sets forth three pillars:

o   First, in its supervision of covered entities and enforcement actions, the Bureau will only challenge conduct as being abusive if it concludes the harm to consumers outweighs the conduct’s benefit.  The Bureau further makes clear that the balancing test will consider not only quantitative analysis but also qualitative analysis.

o   Second, the Bureau will generally avoid challenging conduct as abusive that relies upon the same set of facts as claims for unfair or deceptive.  In other words, it will not “pile on.”  Instead, where it pleads stand-alone abusiveness, it intends to clearly plead such claims in a manner which will clearly demonstrate the nexus between alleged facts and the Bureau’s analysis of the claim. 

o   Finally, the Bureau sets out what may be termed as a sort of “safe harbor” for those who are in good faith attempting to comply with the abusive standard.  In those instances, the Bureau indicates it will not seek certain monetary relief based upon abusiveness where the good faith can be demonstrated.  The Bureau makes clear, however, that this is not an affirmative defense.  What this means, in essence, is that it will be imperative for covered entities to demonstrate through their compliance management system their good faith attempt to adhere to the standard and if that can be demonstrated, the Bureau will be less likely to seek certain civil monetary penalties.  What it does not mean is that the Bureau will not seek relief – the Statement of Policy makes clear that the Bureau still intends to seek legal and/or equitable remedies, including damages and restitution.

·         While the Statement of Policy should be viewed positively by the consumer finance industry, readers should be aware that it is simply that -a statement of policy and does not carry the legal import of a published rule.  Moreover, as a Statement of Policy it is subject to amendment or revocation at any time, particularly in times of political change.

CFPB’s Rulemaking Agenda Provides Glimpse into 2020

Photo by Michael Longmire on Unsplash

The CFPB’s 2020 Rulemaking Agenda provides a preview of the Bureau’s intended rulemaking activities for 2020.  Here are the highlights of what we can look forward to in 2020:


Business Lending Data (Pre-rule Stage):  Under Dodd Frank and the Equal Credit Opportunity Act, the CFPB has rulemaking authority to require lenders to collect and submit data concerning credit applications made by women-owned, minority-owned and small businesses.  The Bureau intends to hold a symposium on small business data collection in 2020. 


Higher-Priced Mortgage Loan Escrow Exemption (Pre-rule Stage): The Bureau is conducting preliminary analysis for rulemaking which would exempt certain lenders and higher priced mortgage loans from the FRB rule requiring the establishment of escrow accounts for payment of property taxes and insurance payments.


Debt Collection Rule (Proposed Rule Stage): The Agenda does not provide any further hints as to when a final rule will be published but does acknowledge that the Bureau is conducting consumer testing of disclosures related to time-barred debt.  Proposed Section 1006.26(c) was reserved for that purpose.  The Agenda indicates that, after testing, the Bureau will assess whether to publish a supplemental Notice of Proposed Rulemaking related to time-barred debt disclosures.  No anticipated date for a final rule is included in the Agenda which may suggest a delay to allow the Bureau to include the time-barred debt provisions before publication of the final rule.


Home Mortgage Disclosure Act Data (Proposed Rule Stage):  The Bureau has indicated new proposed rules will be forthcoming as to the publication of HMDA data, as well as the collection and reporting of data points.  The anticipated date for the NPRM is mid-summer.


Payday Lending (Final Rule):  As many recall, the CFPB rolled back the final rule issued in 2017 after a change in leadership.  The CFPB now anticipates publishing its new rule in the Spring of 2020.

Fifth Circuit Pumps The Brakes On Arbitration

In a recent appeal directly to the Fifth Circuit from a Southern District of Texas Bankruptcy Court, the court affirmed the bankruptcy court’s denial of a motion to compel arbitration. In Henry v. Educational Financial Service, the Chapter 13 debtor initiated an adversary proceeding against her creditor asserting the creditor violated the discharge injunction by attempting to collect a discharged debt.  Relying upon an arbitration provision in the underlying credit application that stated that “[a]ny controversy or claim arising out of or related to this Note or an alleged breach of this Note, shall be settled by arbitration,” the creditor moved to compel arbitration,  The bankruptcy court denied the motion and certified its order for an interlocutory appeal directly to the Fifth Circuit in light of the US Supreme Court’s recent ruling in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018).


While the Federal Arbitration Act (the “FAA”) requires courts to enforce arbitration provisions in accordance with their terms, the Court addressed the question of what happens when there are two competing federal statutes – in this case, the FAA and the Bankruptcy Code. In those instances, where the statutes cannot be harmonized and one must displace the other, the court looks to congressional intent.  Relying upon its prior decisions in the context of discharge injunctions, the Court noted that bankruptcy courts have discretion to decline to enforce arbitration agreements when: (a) the proceeding adjudicates statutory rights provided by the Bankruptcy Code; and (b) if requiring arbitration would conflict with the purposes of the Bankruptcy Code.  Because a debtor’s right to be free from collection efforts after discharge is a creature of the Bankruptcy Code and an action to enforce that right implicates an important bankruptcy policy - specifically, the ability of the bankruptcy court to enforce its own orders, the Court concluded that based upon its prior precedent, the bankruptcy court had discretion to deny the motion to compel arbitration.  


The Court further looked at what impact, if any, the Supreme Court’s 2018 decision in Epic Systems v. Lewis, 138 S. Ct. 1612 (2018) might cast upon the existing Fifth Circuit precedent and determined that in this instance, there was none.  In Epic Systems, the Court stated that

When confronted with two Acts of Congress allegedly touching on the same topic, this Court is not at liberty to pick and choose among congressional enactments and must instead strive to give effect to both.  A party seeking to suggest that two statutes cannot be harmonized, and that one displaces the other, bears the heavy burden of showing a clearly expressed congressional intention that such a result should follow.  The intention must be clear and manifest.

Epic Sys., 138 S. Ct. at 1623-24.   The Fifth Circuit determined that Epic did not change the existing Fifth Circuit precedent and affirmed the bankruptcy court’s denial of the motion to compel.  The case serves as a reminder for creditors attorneys that at least in the bankruptcy setting, arbitration provisions are not necessarily a trump card.

House Financial Services Committee Considers Amendments to the FDCPA

On November 14, 2019, the House Committee on Financial Services passed the following bills which would amend the federal Fair Debt Collection Practices Act and tighten consumer protections. The bills will now make their way to full House for further consideration.

• The Ending Debt Collection Harassment Act of 2019 (H.R. 5021) is a response to the proposed Debt Collection Rules and proposes to prohibit a debt collector from contacting a consumer by email or text message without a consumer’s consent to be contacted electronically. The bill also prohibits the CFPB from issuing any rules implementing the FDCPA that allow a debt collector to send unlimited email and text messages to a consumer.
  
• The Small Business Fair Debt Collection Protection Act (H.R. 5013) proposes to expand the FDCPA’s protections to certain small business debt.
• The Fair Debt Collection Practices for Servicemembers Act (H.R. 5003) seeks to add additional prohibitions to the FDCPA concerning servicemembers and their families.
• The Stop Debt Collection Abuse Act (H.R. 4403) proposes to extend the FDCPA’s protections as it relates to debt owed to a federal agency, limits the fees debt collectors can charge, and clarifies that debt buyers are subject to FDCPA.
• The Debt Collection Practices Harmonization Act (H.R. 3948) proposes to expand the scope of the FDCPA to include municipal utility bills, tolls, traffic tickets, and court debts.
• The Small Business Lending Fairness Act (H.R. 3490) proposes to restrict the use of confessions of judgment embedded in certain contracts.

Congress Continues To Examine Forced Arbitration

By Anna Claire Turpin


An historic piece of legislation was passed in the U.S. House of Representatives on September 20, 2019. The Forced Arbitration Injustice Repeal (FAIR) Act, (HR 1423) was introduced by Rep. Johnson (D-GA-4). The FAIR Act applies to individual actions as well as joint, class, or collective actions and proposes to end forced arbitration of employment, consumer, civil rights, and antitrust disputes.  Pre-dispute arbitration agreements in the above-mentioned types of cases will not be valid or enforceable.


Should this Bill pass in the Senate, the landscape of litigation in antitrust, consumer, employment, and civil rights disputes will drastically change.  The potential ramifications include more rights and opportunities for individuals to bring actions against corporations as well as a potentially dramatic increase in the caseloads of court systems as more actions are brought within the judicial process.


The Senate received this Bill on September 24, 2019 and referred it to the Committee on the Judiciary.


Anna Claire Turpin practices in Smith Debnam’s Consumer Financial Services Litigation and Compliance Group.

Eleventh Circuit Refuses to Impose a ‘Least Sophisticated Consumer’ Standard to Discharge Violations

The Eleventh Circuit recently affirmed a Florida bankruptcy court’s denial of plaintiff’s motion for sanctions. In doing so, the Court rejected the consumer’s attempt to import the FDCPA’s “least sophisticated consumer” standard to its discharge violation analysis. Roth v. Nationstar Mortg., LLC, (In Re Roth) 935 F.3d 1270 (11th Cir. 2019). 

In Roth, the consumer filed a Chapter 13 and indicated in her petition that she was surrendering certain non-homestead property which was subject to the mortgage of Nationstar’s assignor. The consumer’s Chapter 13 Plan was confirmed and after she completed her payments under the Plan, a discharge order was entered. As such, the mortgage on the surrendered property was discharged. The order stated that “a creditor may have the right to enforce a valid lien such as a mortgage or security interest. . . Also, a debtor may voluntarily pay any debt that has been discharged.” Id. at 1273. Post-discharge, Nationstar, instead of foreclosing, sent Ms. Roth an Informational Statement which contained an amount due, due date and instructions as to how to pay Nationstar. Importantly, the Informational Statement also included a lengthy disclaimer which provided as follows:

This statement is sent for informational purposes only and is not intended as an attempt to collect, assess, or recover a discharged debt from you, or as a demand for payment from any individual protected by the United States Bankruptcy Code. If this account is active or has been discharged in a bankruptcy proceeding, be advised this communication is for informational purposes only and is not an attempt to collect a debt. Please note, however Nationstar reserves the right to exercise its legal rights, including but not limited to foreclosure of its lien interest, only against the property securing the original obligation.

Id.

Based upon the Informational Statement, the consumer filed a Motion for Sanctions asserting that Nationstar’s Informational Statement was an impermissible attempt to collect a discharged debt and, therefore, violated 11 U.S.C. §524’s discharge injunction. The Bankruptcy Court denied the motion and on appeal, the district court agreed. The consumer then appealed the decision to the Eleventh Circuit.
On the appeal to the Eleventh Circuit, the issue before the Court was whether the Informational Statement was a prohibited debt collection communication under 11 U.S.C. §524. The Court held that it was not. In doing so, the Court rejected the consumer’s argument that the Court should apply the FDCPA’s “least sophisticated consumer“ standard to its §524 analysis, noting that “what counts as ‘debt collection’ under one statutory scheme is not necessarily ‘debt collection’ under the other.” Id. at 1277.
Instead, the Court looked at whether the objective effect of the Informational Statement was to pressure the consumer to repay a discharged debt. Looking at the plain language of the Informational Statement and in particular, the disclaimer language, the Court concluded the Informational Statement did not constitute an impermissible debt collection in violation of §524. The Court noted that there was a disclaimer on the face of the statement in bold print. Id. Additionally, the statement was labeled as an “Informational Statement” and did not demand payment. Instead, the statement repeatedly stated that it was for informational purposes only and was not an attempt to collect a debt. Moreover, in large letters the Statement noted that any payments would be “voluntary.” The court found that “including an ‘amount due,’ ‘due date,’ and statements about the negative escrow balance does not diminish the effect of the prominent, clear and broadly worded disclaimer.” Id. Further, the court reasoned that if it were to consider the Informational Statement a violation of the discharge injunction, “there would be little daylight between (1) a legitimate attempt by Nationstar to inform Roth how she could regain the property and (2) an unlawful attempt at debt collection in violation of §524.” Id.

Creditors should take note of the Court’s adherence to an objective standard under 11 U.S.C. §524 and its refusal to impose the FDCPA’s “least sophisticated consumer” standard upon the Bankruptcy Code. Creditors should be aware, however, that nothing in the opinion undermines the application of the “least sophisticated consumer” standard in the context of an adversary proceeding seeking damages for violations of the FDCPA.