Compliance Digest – May 31

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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.

Appeals Court Revives FCRA Case Over Reasonable Investigation Threshold

The Court of Appeals for the Ninth Circuit yesterday reversed a lower court’s summary judgment ruling in favor of a defendant sued for violating the Fair Credit Reporting Act, determining that the “reasonable investigation” it conducted when the plaintiff disputed the accuracy of the information on his credit report needs to be left up to a jury to decide. More details here.

WHAT THIS MEANS, FROM STACY RODRIGUEZ OF ACTUATE LAW: Earlier this month, a Ninth Circuit Court of Appeals panel reversed a district court’s summary judgment in favor of CitiMortgage, Inc. The question prompting reversal is whether CitiMortgage reasonably investigated a consumer’s credit dispute.

So what happened? CitiMortgage allegedly continued to report a junior mortgage as “past due” with accruing interest and fees for years following a foreclosure. The consumer disputed the entry on his credit report with the CRAs, claiming that the Arizona Anti-Deficiency Statute had abolished any personal liability for the mortgage. When CitiMortgage was notified of the dispute, complete with citations to Arizona statutes, it again reported a past due balance but added a “disputed” notation. Only following a second dispute did CitiMortgage change the balance to $0 and mark the account as paid/closed. The lawsuit is based on CitiMortgage’s actions in response to the first dispute. Liability rests not on the fact that CitiMortgage reached a “patently incorrect” conclusion (as determined by the Ninth Circuit), but on the reasonableness of the investigation that resulted in that incorrect conclusion and report.

As the Court noted, reasonableness is evaluated by considering factors such as “the furnisher’s relationship to the debt and to the consumer, the level of detail in the [CRA’s] notice of dispute, and the feasibility of implementing investigatory procedures, including training staff.” The Court did not analyze the factual record in the context of these factors or point to any particular factual dispute, but concluded that “[w]ith these factors at play, there is a genuine factual dispute about the reasonableness of CitiMortgage’s investigation.”

So, what is the genuine dispute about reasonableness that the jury must decide? Piecing together the few facts the Court did recite, and its decision to quote the CFPB (who filed an amicus brief), the Court likely is focused on whether a legal investigation, and not just a factual one, should have been conducted to make this investigation reasonable. The Court pointed out that the dispute included specific citations to Arizona law, but the investigation consisted of consulting an internal transaction history, case notes, and system notes (with no mention of a legal analysis or consideration of the cited law). The Court also quoted the CFPB’s point that the “FCRA does not categorically exempt legal issues from the investigations that furnishers must conduct.”

This is one to follow to see how it all turns out, but here is my takeaway: If a dispute raises legal issues, especially in a specific manner, those issues should be considered as part of the furnisher’s investigation. Furthermore, furnishers should have written policies and procedures that document the process for consideration of legal issues raised within a dispute.

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Judge Grants MTD in FDCPA Case Over Settlement Offer in Letter

A District Court judge in Pennsylvania has granted a defendant’s motion to dismiss after it was sued for violating the Fair Debt Collection Practices Act because settlement offers mentioned in an initial collection notice allegedly violated the 30-day dispute window. More details here.

WHAT THIS MEANS, FROM MITCH WILLIAMSON OF BARRON & NEWBURGER: There’s not much to say about this case other than to ask will it ever stop? The patently weak claims. I was hoping the Court would use some harsh language dismissing this case, like they have started to do in New York and Illinois, but it is was brought in the City of Brotherly Love, so no such luck. The Judge simply pointed out why all of the arguments raised by Plaintiff’s counsel were wrong. 

Even the least unsophisticated attorney is bound to read collection notices in their entirety. The letter offered two options for settlement, offers which remained open for 45 days. It then stated “The preceding information does not affect your rights set forth below” and provided the standard validation notice. And this was confusing? 

Can someone explain – either he disputes the debt or settles – and the letter gives him the time to first resolve any dispute and accept one of the settlement options – so where is the problem? 

Oh yes, I forgot, the obvious course of action — a federal lawsuit. 

Judge Partially Grants MTD in FDCPA Case Over ‘Improper’ Default Judgment Motion in Underlying Collection Suit

A District Court judge in Kentucky has partially granted and partially denied a collection attorney’s motion to dismiss a Fair Debt Collection Practices Act lawsuit, ruling that the attorney’s motion for default judgment in an underlying collection case was “improper” because the plaintiff had filed a response to the suit. More details here.

WHAT THIS MEANS, FROM LAURIE NELSON OF AUTOSCRIBE: This subject matter case, Hrdlicka vs. Bruce, is brought against the creditor Landmark’s attorney, Mr. Bruce, personally, for Mr. Bruce’s actions when representing Landmark in a case to collect a debt owed by Mr. Hrdlika. Mr. Hrdlikca claims Mr. Bruce’s actions while representing Landmark violated the Fair Debt Collection Practices Act. Defining Mr. Bruce as an attorney that regularly collects debts through litigation as a debt collector as held by the Supreme Court’s 1995 decision in Heintz v. Jenkins, 115 S.Ct. 1489,1489 (1995).

In the Landmark vs. Hrdlikca, Mr. Bruce made a motion for a default judgment that incorrectly stated that Mr. Hrdlikca did not respond to Landmark’s complaint and then failed to serve this motion on Mr. Hrdlikca. The Court negligently granted the default order, which permitted Mr. Bruce to proceed with collection efforts, including a garnishment order. Mr. Hrdlikca is now seeking damages due to the time and money it costs him to defend the garnishment order and vacate the judgment due to Mr. Bruce’s incorrect motion and failure to service. He claims such actions amount to unfair and deceptive practices under the FDCPA.

While the Court did dismiss the claims based on Mr. Bruce’s motions for a request for attorney fees or his motion to oppose Mr. Hrdlikca’s garnishment challenge, the Court did not dismiss the claims based on the incorrect motion for default filling and the failure to serve such filing on Mr. Hrdlikca. These claims were not dismissed as it has been held that even acts caused by negligence can impose liability under the FDCPA.

This type of case is not commonly seen, but the idea of an attorney’s liability under the FDCPA for negligent pleading is not new. Previously Courts have found liability when a complaint is filed that overstates a debt amount or other factual information that a Debtor could reasonably rely upon. Attorneys cannot claim good faith to dismiss an act of negligence under the FDCPA and must ensure that each correspondence and pleading is accurate and clear.

Appeals Court Upholds Ruling in Favor of Defendant in Call Center Age Discrimination Case

The Court of Appeals for the Fifth Circuit has upheld a lower court’s summary judgment ruling in favor of a defendant that was sued for violating the Age Discrimination in Employment Act and state law in Texas after the plaintiff accused the call center he worked for of passing him over for promotion based on his age. More details here.

WHAT THIS MEANS, FROM JACQUELYN DICICCO OF J. ROBBIN LAW FIRM: An age-based employment discrimination action was commenced in the United States District Court, Southern District of Texas, and on appeal before the United States Court of Appeals for the Fifth Circuit, for claims that the plaintiff suffered discrimination after multiple failed attempts to secure a promotion with a call-center defendant. In Smith v. AT&T Mobility Services, L.L.C., plaintiff asserted claims against AT&T for age discrimination under the Age Discrimination in Employment Act (ADEA), 29 U.S.C. § 621, et seq. and Texas Commission on Human Rights (TCHRA), Tex. Lab. Code § 21.001, et seq., on the basis that plaintiff applied for, and was denied for, multiple promotions due to his age of sixty-three years. The Southern District of Texas held that plaintiff failed to exhaust his administrative remedies as to one claim and failed to establish his prima facie case as to the remaining two claims. The Fifth Circuit affirmed the decision and held that one of plaintiff’s claims is time-barred by plaintiff’s failure to exhaust his administrative remedies under the Equal Employment Opportunity Commission. Regarding the remaining two claims, the Fifth Circuti analyzed whether the word “tenure” was a euphemism “age” when an employee of AT&T made a comment express a refusal to hire “tenured employees.” The Court held that “tenured” is not synonymous with age and, without any evidence that “tenured” has been used in the workplace as “age,” plaintiff failed to set forth any direct evidence of employment discrimination based on age. Thus, the Fifth Circuit affirmed the District Court’s grant of summary judgment.

Appeals Court Affirms Ruling for Legal Collector Sued for Age Discrimination

The Court of Appeals for the Sixth Circuit has affirmed a lower court’s ruling in favor of a collection law firm that was sued for allegedly discriminating against a woman for not hiring her back for a collector’s position because of her age, when in fact she had been notified of poor performance as a collector before transferring to a different role within the company. More details here.

WHAT THIS MEANS, FROM STEFANIE JACKMAN OF TROUTMAN PEPPER: This is another example of where maintaining records that can validate and substantiate how a company resolved an issue or declined to take certain actions can be useful in the event of future claims relating to such actions. Here, having a clear HR record provided sufficient evidence to rebut a claim of age discrimination by a former employee. Taking the same approach in other areas may similarly help rebut other types of claims relating to how disputes and complaints were resolved, validate the exercise of discretion in lending or servicing, and reduce fair treatment claims. Absent documentation of why a company did or did not do certain things, courts and regulators are left with only one side of the story. Additionally, potential power imbalances between individuals and larger companies can also make courts and regulators more inclined to accept the individual’s story and label the lack of a rebuttable reason a policy or process gap for which the company is responsible to address.

This case shows that there are many issues and types of claims besides the standard FDCPA and consumer class claims that plague our industry and we must be aware of and fight each claim vigorously.

Appeals Court Revives Case for Debt Buyer Suing Creditor for Breach of Contract

The Court of Appeals for the Fifth Circuit has reversed a lower court’s dismissal of a lawsuit filed by a debt buyer against a creditor that sold portfolios of delinquent and defaulted debt, ruling that the disputed portion of the contract between the two parties was enforceable. More details here.

WHAT THIS MEANS, FROM PATRICK NEWMAN OF BASSFORD REMELE: Time for Contract Principles Review (*cue intense flashbacks to bar exam prep*)! The agreement in any venture is the playbook for the relationship. This includes calling the plays after the venture goes downhill. A few things any contracting party should keep top of mind when drafting or reviewing contract drafts:

• USE PLAIN, UNDERSTANDABLE LANGUAGE;

• Do not treat the representations and warranties sections as merely perfunctory or an afterthought (more on this in a minute);

• Look out for disguised terms or obligations, especially when presented within a boilerplate, take-it-or-leave-it agreement;

• Remember that there are safety valves available to protect the parties’ interest in when, where, and how (and for how much) any breach situation is litigated;

• USE PLAIN, UNDERSTANDABLE LANGUAGE.

As you may have gleaned from my emphasis (subtlety is one of my many endearing qualities), these points are all important, but the first and last bullets are the most critical considerations. An argument about the language of the contract has put the case discussed above through motion practice in a federal district court, up to the Fifth Circuit Court of Appeals, and back down to the district court again. Breach of contract suits in federal court can turn into real slugfests. Plain language is best way to avoid the slugging (which doesn’t come cheap!) in the first place.

Regarding the second bullet, ARM industry folks should consider what their counterpart in contract is promising about information that will be provided. For example, will a creditor be confirming the account is actually owed at time of placement, promptly notify its collection agent that a bankruptcy has been filed, that a complaint has been lodged with the creditor directly, etc.? What about consent to receive communications? The representations and warranties in contract can help substantially in the defense of consumer protection cases, particularly where an error is alleged. Read them with care and simplify, simplify, simplify wherever and whenever possible.

CFPB Launches Program to Promote ‘Consistent’ Enforcement of Consumer Protection Laws, Including the FDCPA

Looking to keep its fellow regulators on the same page, the Consumer Financial Protection Bureau has announced a plan to provide guidance to other federal agencies charged with enforcing consumer protection laws like the Fair Debt Collection Practices Act, while also helping companies complying with those laws to have them applied consistently. More details here.

CFPB Issues Rule Giving States More Authority to Enforce Federal Laws, Including FDCPA

The Consumer Financial Protection Bureau yesterday opened the door for states to take more regulatory and enforcement actions against financial services companies, including those in the accounts receivable management industry, issuing an interpretive rule that certifies that states can enforce the Consumer Financial Protection Act. More details here.

WHAT THIS MEANS, FROM LESLIE BENDER OF CLARK HILL: Noting that it is the “principal federal regulator responsible for administering federal consumer financial law,” the Consumer Financial Protection Bureau (CFPB) explained that it would be issuing “Consumer Financial Protection Circulars” to “promote consistency in approach across the various enforcement agencies and parties.” Just over a week later, the CFPB has issued three circulars. 2022-01 explains the Bureau’s new “circulars” approach. Circular 2022-02 explains the CFPB’s position that any covered persons or service providers misusing the name or logo of the FDIC will likely be deemed to have violated the Consumer Financial Protection Act’s prohibition on deception. Most interesting is circular 2022-03, issued on the eve of the Memorial Day weekend regarding whether adverse action notification requirements are triggered in connection with credit decisions based upon “complex algorithms.” In this latest circular the CFPB has answered with an emphatic yes – noting that both the Equal Credit Opportunity Act (“ECOA”) and Regulation B require creditors to provide statements of specific reasons to applicants “against whom adverse action is taken.” The CFPB goes on to explain that if creditors make their credit decisions based on “certain complex algorithms” or “black box” models – they must be mindful that regardless of the modern technology or resources used, creditors must abide by ECOA and Reg B.  It is important to note the CFPB’s broad reach into not only complex algorithms – but also artificial intelligence and machine learning. It is notable that a week earlier the CFPB published an ECOA advisory opinion in the May 18, 2022, edition of the Federal Register opining that the ECOA and Reg B not only protect those “actively seeking credit but also those who sought and have received credit.”  

Meanwhile, last week the CFPB announced it was opening a new office of innovation now to be called the “Office of Competition and Innovation” replacing the old Office of Innovation. Per the CFPB its new Office will “support a broader initiative by the CFPB to analyze obstacles to open markets, better understand how big players are squeezing out smaller players … and in general, make it easier for people to switch financial providers.”

Finally, last week the CFPB announced a collaboration with New York’s attorney general to “shut down a debt collection ring” and permanently ban them from debt collection immediately after announcing an “interpretive rule” that describes the breadth of states’ authorities to “pursue lawbreaking companies and individuals that violate the provisions of federal consumer financial protection law.” Interestingly this announcement was not made using the CFPB’s “Circulars” process – but instead was among the CFPB’s “rulemaking” activities.

What do these actions mean for the credit and collections industries? First, it is important to understand the uses and implications of algorithms, “black boxes,” machine learning, and artificial intelligence at all stages of the credit ecosystem relative to ECOA and Regulation B. While there may be no discriminatory intent or objective – it is important to be mindful of the potential for a disparate impact. Second, the CFPB and FTC have historically collaborated with state law enforcers and the recent action with New York’s attorney general confirms the credit and collections industries should expect the trend to continue.

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.