District Court Reverses Bankruptcy Court Order Imposing Sanctions on Mortgage Servicer

 

By: Landon G. Van Winkle

 

The U.S. District Court for the Eastern District of North Carolina recently reversed an order of the U.S. Bankruptcy Court for the Eastern District of North Carolina. The bankruptcy court order held mortgage servicer Newrez, LLC (“Newrez”) and the holder of the mortgage note at issue in civil contempt for failing to abide by the terms of the individual debtors’ confirmed chapter 11 plan (the “Plan”). Newrez, LLC v. Beckhart, No. 7:20-cv-00192-BO, 2021 U.S. Dist. LEXIS 125293, at *1 (E.D.N.C. July 6, 2021). The district court found that the nebulous terms of the Plan, coupled with Newrez’s good faith reliance on the advice of counsel in interpreting those terms, was sufficient to establish that Newrez had an objectively reasonable basis for its conduct, thus insulating it from civil contempt sanctions under the rule established in Taggart v. Lorenzen, 139 S. Ct. 1795 (2019).  The court’s reversal emphasizes the benefits to a creditor of securing legal advice when the bankruptcy court orders governing the creditor’s claim are unclear.

 

The controversy centered around the Plan’s treatment of Newrez’s secured claim. At the time the debtors filed their voluntary chapter 11 case in 2009, they owned a beach house subject to a mortgage with a prepetition arrearage in excess of $22,000, arising from ten months of missed payments. The Plan made no provision for the repayment of the prepetition arrearage, or for the post-petition payments that came due prior to confirmation. It was confirmed over the objection of Newrez’s predecessor in late 2010, and the debtors began making payments under the Plan around the same time. Newrez began servicing the mortgage in 2014, and treated the loan as if it were in default from that time through 2019, based on the significant uncured arrearage. The debtors repeatedly contended that the loan was current based on the terms of the Plan, and challenged Newrez’s determination that it was in default.

 

In January 2020, the debtors filed a motion in the bankruptcy court seeking to have Newrez and the holder of the loan held in civil contempt for failing to comply with the terms of the Plan, and sought significant sanctions. Following an evidentiary hearing, the bankruptcy court entered an order finding Newrez and the holder in civil contempt, and assessing monetary sanctions in excess of $110,000, consisting largely of lost wages, a loss of a fresh start, and attorneys’ fees. Newrez appealed and the district court reversed.

 

In analyzing the bankruptcy court’s order, the district court recited the standard for civil contempt clarified by the Supreme Court in Taggart: A creditor may be held in civil contempt for violation of a bankruptcy court’s order if there is no “fair ground of doubt as to whether the order barred the creditor’s conduct.” Taggart, 139 S. Ct. at 1799. Thus, civil contempt is appropriate only where there is “no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” Id.

 

In holding that there was a fair ground of doubt as to whether the Plan required Newrez to treat the mortgage as current and not in default, the Court focused on the multiple questions the Plan left unanswered regarding the mortgage:

 

Nothing in the confirmation order expressly addressed what amount [the debtors] would owe on the loan as of November 25, 2010 or how the $22,836.40 in pre-petition arrearage would be repaid, if at all. Although the order set a due date for the first payment, it offered no guidance on how much that payment would be.

 

Beckhart, 2020 U.S. Dist. LEXIS 125293, at *7. Further, the court observed that the terms of the Plan created additional confusion, because the Plan purported to leave the rights of the holder of the mortgage unmodified except as expressly provided in the Plan, but the Plan did not expressly provide for any treatment of the arrearage or post-petition payments. Id.  Similarly, the court found that because Newrez had repeatedly sought and relied upon the advice of outside counsel in conducting itself under the Plan, it had an objectively reasonable basis to believe that its conduct was lawful. Id. at *8-9 (citing Waller v. Sprint Mid Atl. Tel., 77 F. Supp. 2d 716, 722 (E.D.N.C. 1999)). It also found that the same reliance on outside counsel made clear that Newrez had acted in good faith in adopting a reading of the Plan “that seemed consistent with the contractual terms of the loan.” Id. at *8. Because Newrez established both that there was a fair ground of doubt as to whether the Plan prohibited its conduct, and because it had an objectively reasonable basis for acting as it did, the court concluded that the bankruptcy court’s order finding it in contempt “falls far short of the standard required for a finding of civil contempt,” and reversed the order and remanded the matter to the bankruptcy court for further proceedings.

 

Beckhart showcases the dual benefits to a creditor in seeking competent legal advice where there is any question about the interpretation or effect of bankruptcy court orders on the creditor’s claims. First, relying on the advice of counsel can help establish that a creditor was acting in good faith, which is significant since Taggart did not foreclose the permissibility of holding a creditor in contempt when it acts in bad faith. See Taggart, 139 S. Ct. at 1802 (“Our cases suggest, for example, that civil contempt sanctions may be warranted when a party acts in bad faith.”). Second, acting on the good faith advice of counsel can supply the creditor with an objectively reasonable basis for concluding that its conduct is permitted under the order at issue. This is particularly beneficial where, as in Beckhart, the order is unclear and subject to multiple reasonable interpretations.

 

 Landon G. Van Winkle is a member of Smith Debnam's Consumer Financial Services Litigation and Compliance and Bankruptcy teams.

Will Hunstein Require a Reset?

 

By Caren D. Enloe

Last month, the entire ARM industry was caught by surprise when the Eleventh Circuit held that a debt collector’s transmittal of information to a third-party letter vendor violated Section 1692c(b) of the FDCPA.  Hunstein v. Preferred Collection and Management Services, Inc., 2021 U.S. App. LEXIS 11648, 994 F.3d 1341 (11^th Cir. 2021).  While the case will continue to be contested in the Eleventh Circuit, collection agencies and others who rely upon third party vendors have been left to contemplate what comes next.  This article will examine the decision, its immediate impacts, and considerations for the industry as it moves toward implementation of the debt collection rule.

A Quick Summary

In Hunstein, the debt collector engaged a third-party vendor to prepare and send its demand letter.  In doing so, the debt collector electronically transmitted certain information to its letter vendor, including: (1) the consumer’s name and address; (2) the balance owed; (3) the name of the creditor; “(4) that the debt concerned his son’s medical treatment;” and (5) his son’s name.  Id., 2021 U.S. App. LEXIS 11648 at *4.  The consumer sued the debt collector, alleging that the transmittal of that information was a communication in connection with the collection of a debt and violated 15 U.S.C. §1692c(b).  The District Court dismissed the complaint concluding that the transmittal of information did not qualify as a communication ‘in connection with the collection of a[ny] debt.” Id., at *3-4.  On appeal, the Eleventh Circuit reversed and held: (a) that that the plaintiff had standing to sue because the transmittal of the information was an invasion of privacy; and (b) that the transmittal of such information to a letter vendor stated a claim for a violation of Section 1692c(b). In doing so, the Court recognized the impact of its decision, stating

It's not lost on us that our interpretation of § 1692c(b) runs the risk of upsetting the status quo in the debt-collection industry. We presume that, in the ordinary course of business, debt collectors share information about consumers not only with dunning vendors like Compumail, but also with other third-party entities. Our reading of § 1692c(b) may well require debt collectors (at least in the short term) to in-source many of the services that they had previously outsourced, potentially at great cost. We recognize, as well, that those costs may not purchase much in the way of "real" consumer privacy, as we doubt that the Compumails of the world routinely read, care about, or abuse the information that debt collectors transmit to them.

 

 

What are the Immediate Impacts of the Decision?

 

It’s important to note a couple of things regarding Hunstein and its immediate impact.  First and foremost, it’s not over.  While the decision has precedential value in the Eleventh Circuit, the battle rages on.  The debt collector is petitioning for an en banc review which, if granted, will give the industry an opportunity to change the Court’s mind.  Moreover, the collection agency has the support of the industry and several trade associations and other interested parties intend to file amicus briefs in support of the collection agency’s position.  While that petition is pending (it’s due to be filed in late May), lower courts in the Eleventh Circuit will likely encounter copycat suits and will have the choice to follow Hunstein or to stay the case pending the outcome of Hunstein. 

 

Secondly, while the opinion may be binding in the Eleventh Circuit, that’s not the case in other circuits.  In other jurisdictions, the case would only constitute “persuasive” authority, meaning courts may consider it but are not bound by it. Debt collectors need to expect copycat cases to continue popping up in other jurisdictions as the consumer bar tries to leverage this legal theory and the ARM industry pushes back seeking a different result in other jurisdictions.

 

Finally, it’s important to keep in mind that the Court’s ruling simply means that the complaint’s allegations were enough to state a claim.  It does not mean that the consumer is entitled to a judgment for damages or will ultimately prevail.

 

 

What Does this Mean Regarding Collection Agencies’ Current Use of Third Party Vendors?

 

For now, Hunstein calls into question the sharing of certain consumer specific communications with third-party vendors.  But are all third-party vendors created equal for purposes of Hunstein?  The answer is likely no. Compliance teams therefore will need to assess their third-party vendor relationships and assess each one under the microscope of Hunstein.  In doing so, it’s important to remember that the Court in Hunstein was concerned that the information transmitted to the letter vendor rose to the level of being a communication “in connection with the collection of a debt.”  That information included not only the consumer’s name and address but also the amount of the debt, the name of the creditor and the nature of the debt. 

 

Moving forward, compliance teams will need to review and assess the specific information shared with each of their third party vendors and ascertain whether it rises to the same level as Hunstein such that it would be considered a communication in connection with the collection of a debt.  Communications with, for instance, a third-party company scrubbing for location information may not require the sharing of the same level of information as that provided to a letter vendor and therefore may carry a lesser risk.  Similarly, working with a letter vendor to set up a form letter does not require the conveyance of any information specific to a consumer and likely would not meet the same scrutiny.  For now, compliance departments will have to assess the risk associated with each of its third-party vendors by reviewing the information shared with each and ascertain whether it rises to the level of a communication. Depending upon their level of risk tolerance and the amount of information conveyed, debt collectors may consider bringing some backroom services back inhouse for the time being.

 

How Does Hunstein Align With or Impact the Debt Collection Rule?

 

Interestingly, the CFPB’s views do not appear to align with those of the Eleventh Circuit.  The CFPB has always understood and contemplated the use of third-party vendors.  As early as 2012, the CFPB recognized that the use of service providers “is often an appropriate business decision.”  CFPB Bulletin 2012-03; see also CFPB Bulletin 2016-02.  The CFPB went as far as to say that “[s]upervised…nonbanks may outsource certain functions to service providers due to resource constraints… or relay on expertise from service providers that would not otherwise be available without significant investment.”  Id.  Consistent with this, the CFPB set forth guidelines for vendor risk management to protect consumers from harm and ensure vendors are complying with federal consumer financial law.  In setting out these guidelines, the CFPB, however, was quick to point out that “the mere fact that a supervised… [entity] enters into a business relationship with a service provider does not absolve the supervised…[entity] of responsibility for complying with Federal consumer financial law to avoid consumer harm.”  Id. at p. 3. 

 

All of this aligns with the CFPB’s views of third-party vendors in the context of the Debt Collection Rule (the “Rule”).  The CFPB expressly contemplated and seemingly endorsed the use of third-party vendors in the final version of the Rule. 

 

The Rule in fact discusses and contemplates the use of data vendors for skip tracing, as well as for letters.  With respect to letter vendors, the CFPB is aware of the prevalence of the practice.  Its Operations Study undertaken during the formulation of the Rule noted that 85% of debt collectors surveyed used letter vendors.  In its in its Section by Section Analysis of the debt validation provisions, the CFPB contemplated this practice continuing when it stated that the costs associated with reformatting validation notices and understanding the requirements could reasonably be borne by debt collectors and their vendors.  Carrying this further, the Rule expressly allows debt collectors to include a vendor’s mailing address if that is an address at which the debt collector accepts disputed and requests for original-creditor information. See Section 1006.34(c)(2)(i) and Comment 34(c)(2)(i)-2. 

 

How Hunstein will impact the Debt Collection Rule remains to be seen.  When it published the Rule, the CFPB clearly did not see the use of letter vendors as violating Section 1692c and it will be interesting to see (although unlikely) if they submit an amicus brief taking a position either way.  While the CFPB has already proposed pushing back the Rule’s effective date until January 2022, there is nothing thus far that would indicate they will push it back further.

 

Conclusion

 

Hunstein has opened Pandora’s box and the industry’s use of third-party vendors will now have be defended through the courts.  In the interim, compliance departments should be discussing their tolerance for risk and reviewing their use of other third- party vendors and the amount of information shared to ascertain whether they run similar risks.

The Supreme Court Weighs in on the Telephone Consumer Protection Act

 

By: Caren D. Enloe

On April 1, 2021, the United States Supreme Court unanimously held that in order to qualify as an automated telephone dialing system under the Telephone Consumer Protection Act (the “TCPA”), a device must have the capacity either to store a telephone number using a random or sequential number generator or to produce a telephone number using a telephone number using a random or sequential number generator.  Facebook, Inc. v. Duguid, 592 U.S. __, 41 S. Ct. 1163, 2021 U.S. LEXIS 1742 (Apr. 1, 2021).  The decision will have significant ramifications on TCPA litigation nationwide.

Historical Background

The TCPA was passed in 1991 to address the “proliferation of intrusive, nuisance calls” from telemarketers. In doing so, the TCPA prohibited, with limited exceptions, calls made using an automated telephone dialing system (“ATDS”) or “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.” Id. §227(a)(1).   For years, parties have debated what constitutes an ATDS.  In 2015, a split FCC issued an Omnibus Declaratory Ruling and Order in which it broadly interpreted an ATDS to include dialing equipment that generally has the capacity to store or produce, and dial random or sequential numbers (and thus meets the TCPA’s definition of “autodialer”) even if it is not presently used for that purpose, including when the caller is calling a set list of consumers.  In the Matter of Rules & Regulations Implementing the Telephone Consumer Protection Act of 1991, Declaratory Ruling & Order, 30 FCC Rcd, 7961 (2015).  The FCC 2015 Order rejected any “present use” or current capacity test and 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.” FCC 2015 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.  In 2018, the D.C. Circuit set aside the FCC’s interpretation, calling it an “eye-popping sweep.”  ACA International v. Federal Communications Commission, 885 F.3d 687, 697 (D.C. Cir. 2018).  Since then, the definition of an ATDS has been rigorously debated in the courts, creating a split.  See Dominguez v. Yahoo, Inc., 894 F.3d 116 (3^rd Cir. 2018) (SMS Service did not qualify as an ATDS because it did not have the present capacity to function as an ATDS); but see Marks v. Crunch San Diego, 904 F.3d 1041 (9^th Cir. 2019) (holding that the statutory definition of ATDS includes a device that stores telephone numbers to be called, whether or not those numbers have been generated by a random or sequential number generator).

Factual Background

Enter Noah Duguid who received several text messages from Facebook notifying him that someone was attempting to access his Facebook account from an unknown device or browser.  Duguid, who did not have an account with Facebook and had not provided his phone number or consent to be contacted by Facebook, brought a putative class action alleging violations of the TCPA.  Facebook moved to dismiss arguing that Duguid had failed to allege that the numbers were randomly or sequentially generated.  The trial court agreed and dismissed.  On appeal, the Ninth Circuit reversed and in keeping with its prior decision in Marks, held that an ATDS does not have to use a random or sequential generator to store numbers – it only has to have the capacity to “store numbers to be called” and “to dial such numbers automatically.” Duguid v. Facebook, Inc., 926 F. 3d 1146, 1151 (2019).  The Supreme Court granted Facebook’s petition for certiorari on a single issue: whether the definition of ATDS in the TCPA encompasses any device that can “store” and “automatically dial” telephone numbers, even if the device does not “us[e] a random or sequential number generator.”

The Court’s Holding

In a unanimous decision by Justice Sotamayor, the Court  reversed.  In doing so, the Court first examined the text of the statute in the context  of conventional rules of grammar and punctuation.  The Court concluded that the qualifying phrase “using a random or sequential number generator” applies to both verbs – store and produce.  Slip Op. at 5. Simply put, “Congress’ definition of an autodialer requires that in all cases, whether storing or producing numbers to be called, the equipment in question must use a random or sequential number generator.”  Id. at 7. 

The Court went on to examine the definition in the statutory context and likewise concluded that it likewise affirmed their conclusion.  The Court noted that the other prohibitions within the TCPA target a unique type of telemarketing equipment that risks dialing emergency lines or tying up all sequentially numbered lines of a single entity.  “[E]xpanding the definition of an autodialer to encompass any equipment that merely stores and dials telephone numbers would take a chainsaw to these nuanced problems when Congress meant to use a scalpel.” Id. at 8.  The Court additionally found problematic a definition which would encompass all modern-day cell phones as autodialers. Id. at 9.

The Decision’s Impact

The impact of the decision remains to be seen, but it will not eliminate TCPA litigation which has proven itself to be a profitable business for the consumer bar.  A number of cases were stayed pending the outcome of Facebook. While many of the cases may be resolved by the Court’s decision.  Others will not be.  See, e.g., McEwen v. National Rifle Assoc., 2021 U.S. Dist. LEXIS 72133 (D. Me. Apr. 14, 2021) (dismissing four of six claims and allowing the remaining two to proceed forward).  Cases involving automated messages, automated voices and the Do Not Call List will continue forward as they are not impacted by the Court’s decision.  Additionally, it is likely that consumer litigants will continue to poke holes in the definition of an ATDS by examining the boundaries of capacity and the role of human intervention. Finally, with a Democratic majority, it would not be surprising to see Congress revisit the TCPA in response to the Court’s decision.

District Court Judge Expresses “Judicial Displeasure” with Language in Validation Notice, Finds Plausible Claim for § 1692g(a)(2) Violation, but not § 1692g(a)(1)

 

By: Landon G. Van Winkle

 

The U.S. District Court for the District of New Jersey recently expressed “judicial displeasure” with the language in a collection letter when it granted in part and denied in part a debt collector’s motion to dismiss a putative FDCPA class action for failure to state a claim. Hopkins v. Advanced Call Ctr. Techs., LLC, No. Civ. No. 20-06733 (KM)(ESK), 2021 WL 1291736, 2021 U.S. Dist. LEXIS 67732, at *18 (D.N.J. Apr. 7, 2021).  The plaintiff received a collection letter from the defendant Advanced Call Center Technologies, LLC (“ACCT”), seeking to collect a credit card debt owed to Synchrony Bank for a JCPenney store card. Id. at *1–2.

The letter disclosed that the “total account balance” was $347.48, and that the “amount now due” was $175.00. Id. at *1. It further advised:

“If the Amount Now Due is paid to Synchrony Bank and your account is brought up to date, we will stop our collection activity. All payments should be made directly to Synchrony Bank using the enclosed envelope. Do not send payments to this office.”

 Id. at *2. Finally, it contained a detachable payment slip instructing the plaintiff to mail his payment to “Synchrony Bank/JCPenney Credit Services.” Id.

The plaintiff alleged that the letter was “confusing” as it purportedly failed to contain the amount of the debt owed and the name of the creditor to whom the debt was owed in violation of 15 U.S.C. § 1692g(a)(1) and (2), respectively. Id. at *2. The plaintiff also claimed that the letter’s purported failure to identify the creditor was both a false, deceptive, or misleading representation and an unfair or unconscionable means to attempt to collect a debt, and thus violated § 1692e and § 1692f, respectively. Id. at *15–16. The plaintiff sought to represent a class of similarly situated consumers, and also sought relief against two officers of ACCT personally. Id. at *1.

ACCT moved to dismiss all four claims, as well as the claim against the officers personally, for failure to state a claim pursuant to Rule 12(b)(6). Id. Judge McNulty began with the first § 1692g(a)(1) claim, that the letter allegedly failed to inform the plaintiff of the amount of the debt. Id. at *4. In rejecting the plaintiff’s argument that the “amount now due” was ambiguous, the Court reasoned that “[t]he phrase ‘Now Due,’ even to an unsophisticated consumer, simply means that the debt collector is willing to accept less than the total balance of the debt to bring the account to a current status.” Id. at *4–5 (quoting Reynolds v. Encore Receivable Management, Civ. No. 17-2207, 2018 U.S. Dist. LEXIS 83902, at*14 (D.N.J. May 18, 2018)). The Court reinforced its conclusion that the amount due now was not ambiguous because the letter contained an explanation of the action ACCT would take if the “amount due now” was paid to Synchrony (the account would be current and it would stop collection activity). Id. at *5. While Judge McNulty felt “constrained by the case law to grant the motion to dismiss” as to the § 1692g(a)(1) claim, he nevertheless could not “close this discussion . . . without expressing some judicial displeasure at the creditor’s seeming reluctance to just come out and say what it means . . . .” Id. at *6. The Court suggested that the following language would have made the letter more straightforward:

“The total balance is $347.48. If you pay $175 now, we’ll stop collection activities, but you will still owe us the remaining balance of $172.48. ($347.48 minus $175 equals $172.48.) We’ll bill you for that remaining balance later.”

Id. at *6. The Court expressed further frustration at what it perceived was debt collectors’ “insistence on going right up to the line,” which it saw as producing “seemingly endless litigation, flyspecking the precise wording of collection letters, in cases which have come to take up a disproportionate share of the federal docket.” Id.

The Court then turned to the plaintiff’s § 1692g(a)(2) claim, which is based on the statutory requirement that a validation notice contain “the name of the creditor to whom the debt is owed.” 15 U.S.C. § 1692g(a)(2). The Court declined to dismiss this claim because “the [l]etter mentions ACCT, JCPenney, JCPenney Credit Services, and Synchrony Bank, but does not specify which entity is owed the money.” Id. at *7. As the Court explained:

“[W]hen the Letter gets to payment, it says that the amount due must be paid to Synchrony Bank. But who is Synchrony Bank and what do they have to do with my JCPenney card? Finally, the detachable payment slip is addressed to ‘Synchrony Bank/JCPenney Credit Services’ with one PO Box number. Are Synchrony and JCPenney Credit Services the same thing? Related? A joint venture? Just PO Box buddies? The Letter does not say, which means that a consumer cannot discern who owns the debt.”

 

Id. at *8-9. The Court similarly declined to dismiss the § 1692e and § 1692f claims, reasoning that the failure to identify the creditor to whom the debt was owed could also constitute a violation of one or both of those statutes, and that it was too early in the case to rule out the apparently plausible claims. Id. at 15–16. Finally, the Court held that the complaint plausibly alleged that the two officers named individually as defendants had exercised control over the actions of ACCT and thus could be held liable, relying on Police v. Nat’l Tax Funding, L.P., 255 F.3d 379, 405 n.29 (3d Cir. 2000) for the proposition that general partners of a partnership can be liable for the partnership’s FDCPA violations, and noting that other courts in the Third Circuit had expanded the notion to other entities beyond general partnerships. Id. at *16–17.

While it may be true, as observed by Judge McNulty, that there are a disproportionate number of FDCPA cases occupying the federal docket, it is not clear that this deluge of litigation is solely attributable to debt collectors “going right up to the line.” Id. at 6. In fact, it bears observing that the language suggested by the Court as the appropriate language for ACCT to “say what it means” and avoid any confusion under § 1692g(a)(1) might have actually created a separate violation of the FDCPA under § 1692g(a)(2). Specifically, using the pronoun “we” in lieu of the identity of the debt collector or the original creditor raises ambiguity about who will “stop collection activities” and to whom the “remaining balance” would still be owed. Perhaps ironically, this same ambiguity was sharply at issue in the Court’s analysis of the plaintiff’s § 1692g(a)(2) claim, which it declined to dismiss. Under the Court’s preferred verbiage, the language would be ambiguous because the letter was sent by ACCT, but instructed the plaintiff to remit payment to Synchrony Bank (thus under these facts, if the plaintiff made the payment, ACCT would have stopped collection activities, but the remaining balance would have been owed to Synchrony Bank, not to ACCT). One thing appears likely, however: As long as consumers can maintain federal lawsuits with a prospective recovery of $1,000 in statutory damages plus attorneys’ fees simply because they were “confused” by a collection letter, the “seemingly endless litigation” over the FDCPA is not likely to abate in the foreseeable future, particularly where, as here “flyspecking the precise wording of collection letters” reveals the practical difficulties in drafting collection letter language that both adequately informs the consumer of his or her rights without running afoul of the FDCPA.

Landon Van Winkle is an attorney in the firm's Consumer Financial Services Litigation and Compliance group.

Finding Shelter in the Storm: Using the Bona Fide Error Defense with the Final Debt Collection Rule

 By Caren D. Enloe

The FDCPA provides a bona fide error defense for debt collectors who can show by a preponderance of the evidence that their violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.  15 U.S.C. §1692k(c).  Historically, debt collectors have been judicious in its use.  While it is a powerful tool, it shines a bright light on a debt collector’s policies and procedures and therefore, the stakes are high.  If a debt collector’s policies are adjudicated to be lacking, it can expose the debt collector to liability not only in the present action, but potentially to a swarm of further litigation. On the other hand, if the debt collector can safely navigate the defense with robust policies and procedures, it may fend off the present action, as well as future litigation. 

With the enactment of the Debt Collection Rule, debt collectors now have a map as to certain best practices which can help them better inform their policies and procedures. Assuming they mold their actions to comply with the same, the Rule may now provide a more effective shield in actions under the FDCPA.  Scattered throughout the Rule like little nuggets of gold, the CFPB has provided safe harbors which, when coupled with the bona fide error defense, should allow savvy debt collectors to better take advantage of the bona fide error defense. This article examines these nuggets which, if incorporated into a debt collector’s policies and procedures, may provide an effective bona fide error defense.

Limited Content Messages.  “Limited Content Messages” are a new concept introduced by the Rule in its definitional section (1006.1) and are intended to provide a safe way for debt collectors to leave non-substantive messages for a consumer requesting a return call while not inadvertently disclosing the debt to third parties.  The Rule and its Comments make clear that Limited Content Messages are not communications regarding a debt.  To qualify as a Limited Content Message, the message must be left by voice mail and only contain the specified limited content set forth explicitly in Section 1006.1(j). A Limited Content Message can only include: (a) a business name for the debt collector that does not indicate that the debt collector is in the debt collection business; (b) a request that the consumer reply to the message; (c) the name or names of one or more natural persons whom the consumer can contact; (d) a telephone number or numbers the consumer can use to reply to the debt collector; and (e) certain very limited and specified optional content.  Communications are distinguished as they convey information regarding a debt.

While not a per se safe harbor, the Rule’s Official Comments contain sample scripts which, if used, would comply with the Rule.  Using those scripts, therefore, may provide an implied safe harbor. Debt collectors should consider incorporating these scripts into their best practices to help mitigate risk with respect to 15 U.S.C. §§1692c and 1692e(11).    See, e.g., Comment 2(j)(1)-1; Comment 2(j)(2)-2.

Electronic Communications. As a general notion, the Rule provides a general road map for compliance with the FDCPA with respect to electronic communications in Section 1006.6.  Specifically, the Rule sets forth specific procedures which, if followed (including provisions for consumer opt outs), provide the debt collector with a safe harbor with respect to electronic communications and unintentional third party electronic communications. 

The Rule allows for the use of email and text message communications and sets forth procedures which provide the debt collector with a safe harbor if followed.  Specifically, Section 1006(d)(4) allows for email communications to the consumer: first, by allowing the use of an email address the consumer has either used to communicate with the debt collector (and has not subsequently opted out) or the consumer has provided prior express consent to use and second, by allowing an email address used previously by the creditor or a prior debt collector subject to certain limitations and conditions.  Section 1006(d)(5) allows for text messaging subject to similar conditions.  Additionally, the Official Comments contain sample language for opt out notices where, if used, are likely to provide an implied safe harbor.  See, e.g., Comment 6(d)(4)(ii)(C)-2)(i) – (ii); Comment 6(e)-1(i)-(ii). Debt collectors contemplating the use of electronic communications should incorporate these into their policies and procedures to mitigate risk.

Unintentional Third Party Communications. On a related note, what happens when the communication is received by an impermissible third party? Section 1006.6(d)(3) provides a bona fide error defense in those instances where the debt collector can satisfy two conditions.  First, there must be procedures in place to reasonably confirm and document that the communications complied with 1006.6(d)(4) or (5) (see above discussion).  Secondly, the debt collector’s procedures must include steps to reasonably confirm and document that the debt collector did not communicate with the consumer at an email address or telephone number that the debt collectors knows has led to an impermissible third party communication. Moreover, Section 1006.22(g) provides a safe harbor under 15 U.S.C. §1692f for emails and text messages which are sent in accordance  with 1006.6(d)(3) that reveal the debt collector’s name or other information indicating the communication relates to the collection of a debt.

Time and Place. With the advent of new technologies, preventing communications at a time and place which is known or should be known to be inconvenient has become challenging for debt collectors.  The Rule attempts to address these challenges in Section 1006.6 and its Official Comments.  Section 1006.6 provides that an inconvenient time for communication with the consumer is before 8:00 AM and 9:00 PM local time at the consumer’s location.  The Official Comments then provides a safe harbor and guidance as to how to handle conflicting or ambiguous information regarding a consumer’s location.  In those instances and in the absence of knowledge to the contrary, Comment 6(b)(1)-2 provides that the debtor collector complies with the Rule (specifically, 1006.6(b)(1)(i)) if the debt collector communicates or attempts to communicate with the consumer at a time that would be convenient in all of the locations at which the debt collector’s information indicates the consumer might be located. 

Call Frequency. Section 1692d(5) of the FDCPA prohibits a debt collector from causing a telephone to ring and from engaging a person in telephone conversations repeatedly or continuously with the intent to annoy, abuse, or harass. Section 1006.14 establishes a bright line by placing numeric limitations on the placing of telephone calls.  In doing so, the Rule creates presumptions of compliance and violation. While not a safe harbor per se, Section 1006.14 creates a presumption of compliance with 15 U.S.C. §1692d(5) where the debt collector complies with the call limitations set forth in §1006.14(b)(2).  Of course, this will require documentation of policies and procedures which set forth frequencies consistent with the Rule’s requirements.

Debt Validation Notice. Section 1692g of the FDCPA requires debt collectors provide consumers with a validation notice which includes the name of the creditor, the amount of the debt and the disclosure of certain statutorily prescribed consumer protection rights. Section 1006.34 of the Rule reinvents the Debt Validation Notice by requiring significantly more robust disclosures. These disclosures fall roughly into three categories: (a) information to help consumers identify the debt; (b) information about consumer protections; and (c) information to help consumers exercise their rights, including a tear off dispute form with prescribed prompts.

The Rule provides safe harbors for compliance with the information and form requirements set forth in Section 1006.34(c) and (d)(1) for debt collectors who use the model validation notice, specified variations of the same, or a substantially similar notice.  Additionally, debt collectors using the model validation notice are provided with a safe harbor as to 15 USC §1692g(b)’s overshadowing prohibition.  See 1006.38(b).  Further, assuming the debt collector does not receive a notice of undeliverability, Comment 42(a)(1)-3 makes clear that a debt collector has sent the required disclosures for purposes of the Rule if the debt collector mails a printed copy of any required disclosures to a consumer’s last known address unless the debt collector, at the time of mailing, knows or should know that the consumer does not currently reside at, or receive mail at, that location.

Credit Reporting.  While Section 1692d(3) of the FDCPA allows for credit reporting, the Rule now limits the circumstances and timing for credit reporting and prohibits the practice of passive debt collection through credit reporting. Section 1006.30(a) prohibits debt collectors from furnishing information to a consumer reporting agency about a debt before the debt collector either speaks to the consumer about the debt in person or by telephone or sends its validation notice and then waits for a reasonable period of time to receive a notice of undeliverability.  Comment 30(a)(1)-2 provides a safe harbor for debt collectors as to what constitutes a “reasonable period of time.”  Specifically, Comment 30(a)(1)-2 provides a safe harbor by construing a “reasonable period of time” to mean a period of 14 consecutive days after the date that the debt collector places a letter in the mail or sends an electronic message.

While the CFPB intends to push back the effective date of the Rule sixty (60) days, compliance teams should be reviewing the Rule and Comments to assess what changes will need to be made to the agency’s practice and procedures.  As part of this process, debt collectors should be considering incorporating the safe harbors, implied and express, set forth within the Rule to allow for future mitigation of risk.

CFPB Proposes Delaying Effective Date of the Debt Collection Rule

By Caren D. Enloe

On April 6th, the CFPB announced its proposal to postpone the effective date of the Debt Collection Rule.  Originally scheduled to take effect November 30, 2021, the CFPB now proposes that the Rule become effective on January 29, 2022.  According to the CFPB, the "proposed delay would allow stakeholders affected by the pandemic additional time to review and implement the rules."   A thirty day comment period will open once the Notice of Proposed Rulemaking (the "NPRM") is published in the Federal Register.  A couple of quick takeaways:

• While the CFPB notes that debt collectors can choose to implement the Rule prior to the effective date, as of now, the safe harbors and presumptions will not be in effect until the effective date; 

• No other proposed changes to the Debt Collection Rule are suggested in the NPRM; however, that does not mean proposed substantive changes won't be forthcoming after confirmation is completed as to the new Director of the CFPB; and 

• Debt Collectors should keep an eye on this development but continue forward with their assessment of their policy, procedures and practices to ensure timely compliance with the Rule whenever the effective date.