Compliance Digest – January 3

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Every week, AccountsRecovery.net brings you the most important news in the industry. But, with compliance-related articles, context is king. That’s why the brightest and most knowledgable compliance experts are sought to offer their perspectives and insights into the most important news of the day. Read on to hear what the experts have to say this week.

Judge Denies MTD in Amended CFPB Debt Collection Case

An Appeals Court judge, sitting in the District Court for the District of Delaware by designation, has denied a motion to dismiss filed by 15 defendants who were sued by the Consumer Financial Protection Bureau for engaging in illegal debt collection practices related to student loans, because the defense raised by the defendants is “premature” and needs to be made at the summary judgment stage instead. The case had been dismissed earlier this year, but the CFPB filed an amended complaint, which now is allowed to proceed. More details here.

WHAT THIS MEANS, FROM SHANNON MILLER OF MAURICE WUTSCHER: In Consumer Financial Protection Bureau v. National Collegiate Master Student Loan Trust et al., a District Court Judge sitting by designation in the District of Delaware denied the defendant’s motion to dismiss which argued that the CFPB’s action against it was untimely and that it was not a “covered person” under the Consumer Financial Protection Act (“CFPA”).

By way of background, the CFPB had commenced suit against the National Collegiate Master Student Loan Trust (the “Trust”) in 2017 in relation to certain subservicers who had engaged in unfair and deceptive debt collection practices on the Trust’s behalf. Based upon the CFPB’s structure being in violation of the separation of powers as articulated by Seila Law LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183 (2020), the action was initially dismissed as having not been brought within three years of the date the CFPB discovered the violation pursuant to 12 U.S.C. § 5564(g)(1). This was due to the CFPB’s concession that, post Selia Law, it did not “ratify” the action against the Trust to cure the defect that existed at the action’s initiation within three years of the discovered violations. 

The dismissal was without prejudice and the CFPB filed an amended complaint based upon the same alleged conduct after the Supreme Court’s opinion in Collins v. Yellin, 141 S. Ct. 1761 (2021) held that ratification was unnecessary in an action brought by an improperly structured agency where the agency head was nevertheless properly appointed. In such circumstances, the agency action taken while improperly structured, but by a properly appointed agency head, would not be void, meaning that the statute-of-limitations clock would have stopped upon initiation of the action and would not require ratification within three years from the date the violation was discovered to be considered timely.

The Trust moved again to dismiss based on the statute of limitations, this time also arguing that the CFPB learned of the alleged violation three years and fourteen days before the action was commenced and that, regardless of ratification no longer being required, the action was time barred. The Court rejected this argument as premature, noting that to consider this factual argument would require consideration of extrinsic evidence, improper under the motion to dismiss standard. 

The Trust also argued that it was not a “covered person” and as such, the CFPB cannot bring an enforcement action against it. Specifically, the CFPB can only bring enforcement actions to “prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice.” 12 U.S.C. § 5531(a). The CFPB’s theory in the action was that the Trust was a covered person because the Trust engaged in debt collection activities through its subservicers. The Court agreed, holding that an entity engages in an activity, here the servicing and collection of debt, for purposes of falling within the purview of the CFPA even if it does not personally do so but instead contracts with a third-party to do so on its behalf. 

The take-away for the industry is that, as a good rule of thumb, industry members should always act “as if”. Meaning, although there may be arguments that an entity does not fall into a regulated area, the better practice is to assume that you are regulated and guide yourself accordingly. It is better to be compliant when you may not need to be than it is to be noncompliant and try and argue you are not regulated after the fact. Further take away is, as always, industry members must have appropriate controls in place as it relates to the third parties it engages on its behalf. Ultimately you may be held responsible for their actions, so it is important that you have appropriate guidelines and standards in place and that you are monitoring and vetting your servicers diligently.

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Judge Grants Defendant’s MSJ in FDCPA Case Over Alleged Disputed Debt

A District Court judge in Oregon has granted a defendant’s motion for summary judgment after it was sued for violating the Fair Debt Collection Practices Act because the plaintiff claimed never to have received a demand letter to recover an unpaid credit card debt and because the defendant is allowed to rely on information supplied to it by the creditor. More details here.

WHAT THIS MEANS, FROM AYLIX JENSEN OF MOSS & BARNETT: This decision reestablishes two important points for debt collectors and consumers relating to validation of debts under section 1692g of the FDCPA.

The first point is that under Ninth Circuit law, a debt collector is not required to establish actual receipt of a notice sent to a debtor pursuant section 1692g(a). Rather, the plain language of section 1692g(a) only requires that the notice be sent. There is a presumption that letters sent using ordinary first class mail are received and it is the plaintiff’s burden to refute the fact that the defendant sent the required notice. As courts within the Ninth Circuit have made clear, if Congress wanted to impose an obligation on the debt collector to ensure that the verification was in fact received by the debtor, it could have required the verification to be mailed by certified or registered mail, or via personal service, but it chose not to do so. Thus, as seen in this case, mere denial of receipt of the notice on the part of the plaintiff is not sufficient to defeat a summary judgment motion.

The second point is that when it comes to the verification standard under section 1692g, a debt collector may rely upon information provided by the creditor that the debt has been verified and is owed, without conducting an independent investigation. Unlike other circuit courts, the Ninth Circuit has refused to establish a high threshold under section 1692g for debt collectors to investigate the validity of a debt. Rather, the Ninth Circuit adopted a more lenient standard, which requires debt collectors to verify a debt by confirming in writing that the amount being demanded is what the creditor is claiming is owed. However, while the verification standard in the Ninth Circuit may be less demanding, it may be worth going beyond the standard verification requirement and sending itemized statements to the debtors.

CFPB Opens Inquiry into Buy Now Pay Later Offerings

The Consumer Financial Protection Bureau announced yesterday that it is shining its regulatory spotlight on a growing form of credit in the financial services industry — Buy Now Pay Later (BNPL) companies — and sent inquiries to five of the major providers asking for information “to illuminate the range of these consumer credit products and their underlying business practices,” according to the CFPB. More details here.

WHAT THIS MEANS, FROM VIRGINIA BELL FLYNN OF TROUTMAN PEPPER: Under its new director, Rohit Chopra, the Consumer Financial Protection Bureau (“CFPB”) continues to expand its consumer watchdog efforts. Most recently, the CFPB announced that it is opening an investigation into “Buy Now, Pay Later” (“BNPL”) companies, which enable consumers to purchase goods from retailers on an installment plan basis. The investigation was launched in response to concerns that less-transparent BNPL products may injure consumers through hidden fees, lack of ability-to-repay protections, and credit reporting implications. Senate Democrats wrote to the CFPB in mid-December, urging regulators to expand their oversight of the BNPL industry.

As the first step in its investigation, the CFPB has ordered five of the largest BNPL providers, including Afterpay, Klarna, and PayPal, to provide information regarding their products, protections, and use of consumer data. It plans to use this information to publish a report on industry practices and risks and identify potential compliance and regulatory gaps.

NY DFS Issues Proposed Amendments to Debt Collection Regulation

The New York Department of Financial Services yesterday released its proposed amendment to the state’s debt collection regulation, which adopts some of what is included in Regulation F, while also introducing some new wrinkles that seek to protect consumers by putting them on “a path to financial well-being,” according to the DFS’s Acting Superintendent. More details here.

WHAT THIS MEANS, FROM LAUREN VALENZUELA OF ACTUATE LAW: Before the dust has settled on Regulation F, New York announced a proposed new amendment to 23 NYCRR 1. While some aspects of the proposed regulation parrot Regulation F, there are many aspects of the proposed regulation that are remarkably different: For example:

  • The definition of “debt” is expanded to include all consumer “transactions” (as opposed to just consumer credit transactions).
  • Validation information required by Regulation F, 12 CFR 1006.34(c), must be listed on a validation notice, “except that a debt collector shall not use charge-off date as a reference date for the itemization date of the alleged debt.”
  • A validation notice must include a “statement indicating the type of reference date relied on by the debt collector in determining the itemization date.” Regulation F has no such requirement.
  • A validation notice must state “the applicable statute of limitations” for debts that have not been reduced to a judgement. Regulation F has no such requirement.
  • If there is a merchant branch, affinity brand, or facility name pertaining to the debt, it must be listed. These items are elective under Regulation F, whereas New York will make them required if they exist.
  • Use of electronic communications without the consumer’s express and revocable consent is prohibited. To compare, Regulation F does not prohibit the use of electronic communications without the consumer’s express and revocable consent. Regulation F simply provides a bona fide error defense (i.e., a procedure) that may be followed to protect against third party disclosures when using electronic communications.
  • Debt collectors are limited to making three attempted phone calls, and limited to one telephone call, to any one consumer in a seven-day period. This is more strict than Regulation F.
  • When responding to request for substantiation of the debt, in addition to the existing requirements, a debt collector will be required to provide “a statement describing the complete chain of title from the creditor to which the debt was originally owed or alleged to be owed to the present creditor or owner of the debt, and notice to the consumer alleged to owe the debt that the consumer may request further documentation and describing how to make such a request; or, if the debt collector is acting on behalf of the creditor to whom the debt was originally owed or alleged to be owed, such a statement shall so indicate.”

There are more nuances to the proposed amendment than highlighted above.

Companies have had to endure a lot of compliance changes – from Regulation F to the slew of other state laws and regulations that recently went into effect, or that are going into effect in 2022. Add New York to the list, and I anticipate many companies may be experiencing compliance fatigue. Nonetheless, it is critical that our industry submit comments to the proposed regulations in order to help New York understand how their proposed regulations may help, or not help, New York consumers. Comments may be submitted to New York’s Department of Financial Services’ contact, Meredith Weill, at Meredith.Weill@dfs.ny.gov, until February 14, 2022.

CFPB Publishes Supervisory Highlights, Details Potential Issue with Misleading Credit Reporting Statements

The Consumer Financial Protection Bureau has published its latest Supervisory Highlights report, which “shines a light on legal violations” identified during CFPB examinations that were conducted during the first half of 2021 as well as publicizing prior supervisory findings that led to public enforcement actions during that timeframe. By and large, debt collection received less ink and attention than other sectors of the financial services industry, as the CFPB continues to focus its enforcement attention in other areas. More details here.

WHAT THIS MEANS, FROM LESLIE BENDER OF CLARK HILL: It is notable that the CFPB’s final published Supervisory Highlights in calendar year 2021 focused little attention on the debt collection industry and data furnishing, and as important to observe that it like the Bureau’s “Fall 2021” Rulemaking Agenda were largely compiled before new CFPB director Rohit Chopra migrated from the Federal Trade Commission to the CFPB. In the short time since Director Chopra assumed CFPB leadership responsibility he has directly or indirectly expressed interest in various aspects of credit, consumers’ hardships, diversity/equity/inclusion and credit, and has noted he expects to continue the work of active Acting Director David Uejio. As COVID numbers surge again in the United States, new Director Chopra’s commitment to focus attention on how and whether those entities over which the CFPB has authority are truly helping consumers weather the storm of the economic fall out from the pandemic may be redoubled. We can and should expect the Bureau to focus regulatory attention on the use of consumer data, the use of consumer credit information, and the whole business of data furnishing and receiving and responding to consumer disputes. Although it is difficult to predict how the Bureau under its new leadership will address a regulatory elephant in the room – just how accurate and complete are consumers’ credit files – debt collectors who are also data furnishers should be mindful of all their credit reporting internal controls (including but not limited to, tracking and trending complaints and disputes associated with data furnishing). Concurrently, although it has not received a lot of press, the Bureau’s litigation against credit repair giant Lexington Law continues in the federal district court in Utah – and on December 27, 2021, Judge Bruce Jenkins denied another Lexington Law motion for protective order. The Bureau’s litigation continues over what is the scope of appropriate “credit repair” services a responsible organization can and should offer consumers (including marketing and methods for identifying potential consumer clients)? Meanwhile, we should expect the Bureau’s interest over the past few years on the internal workings and controls of data furnishers to continue. Practical pointer here – if a data furnisher, include in your New Year’s Resolutions this task: review and if needed update your compliance management systems to assure you are properly staffed and resourced to detect, investigate (reasonably, as per the FCRA and Reg V) and resolve consumer disputes. Finally, we should remain attentive for signs of the Bureau’s supervisory and enforcement oversight on newly effective Regulation F. Best wishes for the New Year! 

FDCPA Suit Over Text Messages Includes Reference to Reg F

Before uncovering what is believed to be the first lawsuit alleging a debt collector violated Regulation F, I came across another complaint which references the debt collection rule, but, in this case, the alleged illegal activity took place before the rule went into effect. More details here.

WHAT THIS MEANS, FROM MICHAEL KLUTHO OF BASSFORD REMELE: “Communicating with a consumer/debtor 101.” If the consumer says to stop texting, stop. This complaint alleges texts continued after revocation of consent. At this point all we have to review is the Complaint. I’m sure there is an explanation that will come out in the Answer that will counter these allegations.

In any event, perhaps a more interesting aspect of the Complaint is that it incorporates some of Reg F’s verbiage to support the alleged claim. While the alleged violations in this case occurred before Reg F was effective, the Complaint nonetheless played off of Reg F’s treatment of texts to a cell as a “time or place” communication issue. In particular, the Complaint references the consumer’s right to “cease” texts and similar communications. Here, the allegation was that the consumer did inform the Agency to stop, but the texts continued. It would not be surprising for this type of claim – and reliance on Reg F to support it – to become a typical claim going forward. 

So, back to the beginning of this summary. If a consumer says stop, then you should stop. Don’t fight it and instead move onto the next account.

Collector Accused of Violating Reg F in FDCPA Lawsuit

It only took 10 days after going into effect, but it appears as though one of the first lawsuits referencing Regulation F has been filed against a company in the accounts receivable management industry. The complaint, which was filed on December 10, accuses the company of not adhering “to the requirements” of the rule by sending a text message to an individual without “additional noticed information to be disclosed to the Plaintiff supplementing the requirements” of Section 1692g of the Fair Debt Collection Practices Act. More details here.

WHAT THIS MEANS, FROM CHUCK DODGE OF HUDSON COOK: So it begins. This complaint filed in California makes FDCPA and Rosenthal Act claims about collection practices over a period that straddled the November 30 effective date of the CFPB’s Regulation F. But the Regulation F claim in this Complaint does not have legs. The claim comes in among allegations that the defendant texted the consumer attempting to collect a debt both before and after the November 30 effective date of Regulation F. Specifically, the plaintiff alleges that in its text message sent after November 30 the defendant failed to account for the Regulation’s new and more robust debt validation requirements. Assuming the facts as true, the plaintiff appears to overlook the fact that any debt validation notice would have been required with or within 5 days after the text the defendant allegedly sent on November 3 (a fact stated in the complaint), well before the alleged text message sent after November 30. That debt validation claim should obviously fail, and it may be a while before we see a plausible claim made under the new debt validation notice requirements in Regulation F.

FDCPA Class Action Accuses Collector of Making Deceptive Settlement Offer

A class-action lawsuit has been filed in Florida against a company for allegedly violating the Fair Debt Collection Practices Act by offering a settlement to an individual in a collection letter without being specific enough even though the letter disclosed “if your account is settled for less than the full original balance it will cause future collection efforts to cease.” More details here.

WHAT THIS MEANS, FROM BRIT SUTTELL OF BARRON & NEWBURGER: While I believe this is the kind of hyper-technical lawsuit that only a consumer’s attorney would bring, the wording of the letter is not as clear as it could have been. Based on the Complaint and letter that was sent, it appears that the letter was really meant as the initial notice. The only purpose of the initial notice should be to provide the consumer with their rights under the FDCPA. While I believe Reg. F’s Model Validation Notice helps this type of situation, it is surely a reminder to agencies and law firms to have their letters reviewed, not just for compliance with the FDCPA or Reg. F, but for clarity and readability.

Judge Applies FN7 to Dismiss TCPA Claim Against Collector, But Denies MTD on FDCPA Claim

A District Court judge in California has granted a defendant’s motion to dismiss claims it violated the Telephone Consumer Protection Act when it contacted an individual on his cell phone to attempt to collect on an unpaid debt because the defendant did not use an automated telephone dialing system, but denied the defendant’s motion to dismiss claims that it violated the Fair Debt Collection Practices Act because it does not meet the definition of debt collector under the statute. More details here.

WHAT THIS MEANS, FROM DAVID KAMINSKI OF CARLSON & MESSER: Much has been said about footnote #7 of the Supreme Court’s decision in Facebook v. Duguid. The plaintiff’s bar has seized upon the Supreme Court language in that footnote to claim that telephone equipment which uses “a random number generator to determine the order in which to pick phone numbers from a preproduced list” may constitute an ATDS within the meaning of the TCPA. Consumer attorneys have used the language in footnote #7 to argue that using a dialing system that can sequentially arrange a preproduced list of phone numbers is sufficient to constitute an ATDS-call under the TCPA.   

These arguments that have been advanced by the plaintiff’s bar based on footnote #7 from the Facebook decision have been shot down as of the last 7-12 months by so many federal district courts throughout the US that the argument is now losing traction and credibility.  Thankfully, we now add another decision from the Federal Court in Los Angeles in Austria v. Alorica, Inc. to buttress the defense arsenal. Judge Wright went the extra mile and examined the amicus brief upon which footnote #7 was based, and found, correctly, that the preproduced list of telephone numbers referenced in footnote #7 was itself produced by a random or sequential number generator. That is the KEY. Merely dialing numbers in a sequential or random order by a predictive dialer does not constitute, in and of itself, that an ATDS was used to make the call.  The list of numbers called must themselves have been produced by a random or sequential number generator in order to advance an argument that the dialing system stored random or sequentially generated numbers and then dialed said numbers. Absent that proof, plaintiffs will have a hard time pushing the ATDS agenda. The case was dismissed without giving the plaintiff the opportunity to amend the complaint to attempt to state a valid claim. 

The more common-sense rulings that are issued like this further assist to shut down the over-technical and increasingly ludicrous attempts by the plaintiffs’ bar to circumvent the consequences of Facebook v. Duguid.    

Happy new year to all.  

I’m thrilled to announce that Bedard Law Group is the new sponsor for the Compliance Digest. Bedard Law Group, P.C. – Compliance Support – Defense Litigation – Nationwide Complaint Management – Turnkey Speech Analytics. And Our New BLG360 Program – Your Low Monthly Retainer Compliance Solution. Visit www.bedardlawgroup.com, email John H. Bedard, Jr., or call (678) 253-1871.

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