Compliance Digest – October 17

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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.

Legal Challenges to Student Loan Cancellation Plan Launched

The legal challenges to the federal government’s plan to cancel student loan debt for individuals making less than $125,000 a year have started, with a pair of suits claiming the administration failed to take the proper steps before announcing the plan. More details here.

WHAT THIS MEANS, FROM CARLOS ORTIZ OF POLSINELLI: Two lawsuits that attempt to block the Biden administration from canceling large amounts of outstanding federal student debt for tens of millions of Americans may result in chilling the pocketbook of those who stand to benefit from the loan forgiveness as uncertainty over income tax consequences looms. According to one lawsuit, borrowers in at least six states “will actually be worse off” as a result of the loan forgiveness, as local laws require tax payments on canceled loans because they’re treated as income. Tax liability on loan forgiveness of up to $20,000 in the same tax year could be significant for some. The Biden administration has clarified that any individual who qualifies for automatic relief under the one-time forgiveness plan will have an opportunity to opt out from participating.

Under the Biden administration’s loan forgiveness plan, borrowers who have student loans owned by the U.S. Department of Education and whose annual income during the pandemic was less than $125,000 (or $250,000 for married borrowers who file jointly) are eligible for loan forgiveness of up to $20,000.

In one lawsuit, attorneys general from six Republican led states, including Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina, claim that the loan forgiveness plan will harm local loan servicers who face loss of revenue. In response, the Biden administration maintains that the plan will not authorize forgiveness for some borrowers with privately held loans such that any loss of revenue would not be material to loan servicers. In the other lawsuit, a libertarian attorney is claiming that borrowers in at least six states will be worse off from the plan because under state law the loan forgiveness is subject to tax. Whether speculation over loss of revenue in one case or tax on loan forgiveness under a plan that is optional to a borrower in the other case are enough to establish a concrete injury will be interesting to see.

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Multiple ‘Misleading’ Disputes Leads Judge to Grant MSJ for Defendant in FDCPA, FCRA Case

In a case that demonstrates the importance of having solid policies and procedures, a District Court judge in New York has granted a defendant’s motion for summary judgment after it was accused of violating the Fair Credit Reporting Act and the Fair Debt Collection Practices Act by allegedly furnishing inaccurate information to the credit reporting agencies and then failing to conduct a reasonable investigation, and using false or deceptive means in connection with the collection of the debt. More details here.

WHAT THIS MEANS, FROM DAVID SCHULTZ OF HINSHAW CULBERTSON: The facts and claims in Hart v Simon’s Agency, Inc. are fairly common. Plaintiff had a debt, he claimed a part of it was not proper, but he ultimately paid it. He then sought to remove it from his credit report. He disputed the tradeline five times but in each instance he used a different reason/code. The tradeline was verified as accurate. He then sued. The analysis and holdings are helpful for compliance departments and defense lawyers.

As to the FCRA claim, the court discussed that the reasonableness of a furnisher’s investigation depends upon the nature and scope of the consumer’s dispute.  Plaintiff’s problem was that he used various misleading descriptions, such that the debt was not his or that he was not liable for it. However, he admitted incurring the debt and paying it. Those are bad facts for plaintiff and put in perspective the circumstances the agency was facing when determining how to respond to the disputes. The court was persuaded by the agency’s conduct. An employee testified on the investigation and reporting procedures that she followed. The tradeline was accurately reported and the investigation was reasonable as a matter of law, the court decided.

As to the FDCPA claim, plaintiff claimed false statements were made in connection with the collection of the account. The court rejected the claim. It ruled that even if the information was false or inaccurate,there is no evidence that it was communicated in connection with the collection of a debt. The debt had been paid. The agency was simply fulfilling its furnisher obligations. 

Credit reporting and responding to disputes are common sources of FDCPA and FCRA claims. Hart v Simon’s Agency, Inc. is a good defense case on these issues, especially because it was decided at the summary judgment phase.

‘Vague’ BK Reference Kills Hunstein Class Action

It’s not an option open to every defendant, but a defendant has found one way to defeat a Hunstein copycat case — a vague disclosure made during a bankruptcy filing. More details here.

WHAT THIS MEANS, FROM HEATH MORGAN OF MARTIN LYON WATTS MORGAN: This is a good decision that can hopefully help others in the industry, especially with cases that have been open for a year or longer. While Hunstein litigation hopefully continues to move to state courts and their eventual death, this decision represents a good defense tactic that is open to any FDCPA, FCRA, or TCPA litigation, especially if the litigation is filed by an FDCPA attorney who also happens to do bankruptcies. If you are in a long litigation cycle where an FDCPA or other case has gone on a while, or been stayed for any reason, it is a good practice to check your plaintiff’s records regularly and see if they have filed bankruptcy. If they have filed for bankruptcy it is absolutely worth it to make sure they have listed your lawsuit as an asset in their disclosures and filings.  If they haven’t, which shockingly this failure to disclose has happened more than once, you may be able to have your own litigation dismissed because of the lack of disclosure to the bankruptcy court.

Hunstein Ruling Pushing More Cases Back to State Court

In a ruling that is emblematic of what is happening in Hunstein cases across the country, a District Court judge in North Carolina has used the Eleventh Circuit’s en banc ruling to determine that a plaintiff does not have standing to sue in federal court and remanded the case back to state court where it was originally filed. More details here.

WHAT THIS MEANS, FROM MICHAEL KLUTHO OF BASSFORD REMELE: A true Ace in the hole. 

Defense attorneys love having a judge’s order that pre-determines that the plaintiff lacks any real injury.  Defending a state court case with this order in back pocket is pure gold. The case in state court is going nowhere. It fails to state a claim and fails on the merits. Frankly, this federal judge’s decision has already decided that the case lacks merit, even in state court. A deposition of the plaintiff, if that’s even necessary, will be a blast. Winning this case in state court will help put one more nail in the “Hunstein theory’s” coffin. 

Collector Not Obligated to Notify Creditor of Dispute, Judge Rules

A District Court judge in Oklahoma has granted a defendant’s motion to dismiss a Fair Debt Collection Practices Act case, ruling the defendant did not violate the statute because it failed to notify the original creditor that the debt had been disputed by the plaintiff. More details here.

WHAT THIS MEANS, FROM CHUCK DODGE OF HUDSON COOK: This is a case we were glad the court and the defendant got right. The consumer alleged that the FDCPA requires a debt collector to convey that a debt is disputed in any communication with anyone, based on the provision that says specifically that a debt collector has to convey that a debt is disputed when the debt collector communicates “to any person credit information.” In the past, courts have made clear that that provision does not compel a debt collector to communicate outside its ordinary course of communication, especially in the context of furnishing data to the consumer reporting agencies, to let the consumer reporting agencies know about the dispute. Rather, the courts have held that a debt collector simply has to note the dispute the next time the debt collector furnishes information about the disputing consumer’s debt (i.e., “credit information”) to the consumer reporting agencies. In this case the consumer argued that when the debt collector communicated with its creditor client, the debt collector had an obligation to tell the creditor that the consumer disputed the debt assigned to the debt collector. But the debt collector challenged that premise early in a motion to dismiss, and the court looked at the very plain language of the FDCPA to dismiss the consumer’s claim. The court found that the consumer failed to demonstrate that the debt collector had communicated “credit information” about the consumer’s debt back to the creditor client after the consumer’s dispute, which would have triggered the requirement to also share that the consumer disputed the debt. As a side note, the opinion indicates that the debt collector did notify the consumer reporting agencies about the consumer’s dispute, so the debt collector evidently understood the FDCPA requirement and complied with it. This was a good, and appropriate, outcome for the debt collector.

Loss of Appetite, Sleep Enough for Plaintiff to Have Standing in FDCPA Suit, Judge Rules

This is one of those “I’m not a lawyer, so I may be completely off-base, but if I’m not, then this might be a ruling worth paying attention to” type of cases, so please bear that in mind if you have chosen to continue reading and did not close this tab and move on to doom scrolling through TikToks or making sure your fantasy football roster is set for this weekend. More details here.

WHAT THIS MEANS, FROM MITCH WILLIAMSON OF BARRON & NEWBURGER: My initial thought after reading this decision was I need to get an FDCPA Plaintiff’s lawyer to sue Teddy W. Over the past several months Teddy has caused both my wife and myself to lose sleep, and often times an inability for me to focus on my work. I now know that these, according to Judge Rowland, are “concrete injuries.”

Who’s Teddy? you ask. He’s my four month old bernadoodle puppy.

As ridiculous as my premise may be, it’s no more ridiculous for a Federal Court to find that “loss of sleep and appetite fall within this category of injury, which while slight, rises to the level of concrete injury.” People are getting shot and beaten every day in this country, its time to stop giving legitimacy to nonsense such as this and my feeling is when arguing against allegations such as these, one might be well served by trying to put these claims in perspective in addition to arguing case law.

As for Teddy, I guess he’ll get a pass for now.

Groups Want Medical Debts Deleted From Credit Reports

A group of more than 90 state and national consumer organizations have submitted a petition to the Consumer Financial Protection Bureau, asking it to issue a rule that would prohibit medical debts from appearing on consumers’ credit reports, if the debts resulted from medically necessary services. More details here.

WHAT THIS MEANS, FROM JOANN NEEDLEMAN OF CLARK HILL: The right to petition an agency for rulemaking is codified within the Administrative Procedures Act at Section 553(e). How and when an agency decides to engage in rulemaking can depend on directives from Congress or decisions within the agency. Traditionally, agencies are lobbied by associations and collective groups. Their requests for a particular rulemaking were usually never publicized.

Ironically it was when Mick Mulvaney took over as Director of the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) in 2017 that petitions for rulemaking became “more public”. If you look on the CFPB’s website, petitions for rulemaking were made in 2018 by various industry groups. (Director Kraninger ultimately denied those few petitions during her tenure).

In February of this year, Director Chopra issued a press release which not only reinforced the Bureau’s ability to accept rulemaking petitions but encouraging and making it easier for the general public to do so. It should come as no surprise that once this announcement was made,10 individuals have filed various petitions on a variety of topics.  This past summer, various banking groups have filed more substantive petitions on topics that the CFPB has yet to address, including the American Bankers Association’s petition for rulemaking defining larger market participants in the aggregate services market.

Give the Bureau’s strategic efforts (and its very public disdain) of the credit reporting of medical debt, the NCLC’s petition, along with 91 other public interest groups, to outright ban the credit reporting of medical debt fits nicely into Director Chopra’s medical debt playbook.  

The NCLC provides two reasons to support its petition. First, that the  Bureau has broad general rulemaking authority to “prescribe regulations as may be necessary or appropriate to administer and carry out the purposes and objectives of [the FCRA].” One of the objectives of the FCRA is that credit reporting “meet[] the needs of commerce … in a manner which is fair and equitable to the consumer,…” . The NCLC suggests that removing medical debts from appearing in credit reports furthers the objective of treating consumers fairly and equitably. This of course ignores the fairness of those consumers who do not have medical debt but who may be denied credit for other reasons.  Second, the NCLC suggests that the CFPB has the authority to rewrite portions of Regulation V, 12 C.F.R. § 1022.30(d) and prohibit the inclusion of medical debt in credit reports, given that it is not necessary for credit underwriting. This conclusion is taken straight from the CFPB’s medical debt report issued last March. The impact of medical debt on underwriting is not clear and certainly depends on the lender.  

This will not be the last of the petitions for rulemaking that you see from the “public”. Expect similar petitions about BNPL, mortgage appraisals, maybe even amendments and revisions to Reg F, especially around electronic communications. Industry needs to consider whether it needs to be more proactive rather than let advocates drive the agenda.

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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