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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 Grants MTD in FDCPA Case Over Lack of Interest Disclosure on MVN
We were so close to what I think would have been our first ruling on the safe harbor of using the Model Validation Notice, but a District Court judge in Utah ruled a plaintiff lacked standing to pursue his Fair Debt Collection Practices Act lawsuit because the defendant purchased the plaintiff’s lawsuit during a sale to satisfy a judgment that was obtained in an underlying collection lawsuit. More details here.
WHAT THIS MEANS, FROM CHRIS MORRIS OF BASSFORD REMELE: This case presents a creative way to dispense with pesky FDCPA claims through enforcement of state court judgments – but caution it may not work in all states. After receiving a collection notice that followed CFPB’s model form, and being served with a Utah state court collection suit on that debt, a consumer filed his own federal action alleging that the collection notice violated the FDCPA by failing to explain whether interest would continue to accrue. Meanwhile, the consumer defaulted in state court, resulting in entry of a money judgment, and he then failed to contest a writ of execution. Pursuant to that writ, the collector “purchased” the consumer’s FDCPA claim, then filed motions to dismiss the FDCPA claim for lack of standing as well as for failure to state a claim. Citing Utah law, the federal court agreed that a “chose in action” may be acquired at an execution to satisfy a judgment (even though that has been criticized in some states), and that the consumer had ample opportunity to oppose the relief sought in state court but failed to do so. After a lengthy analysis of “in rem” jurisdiction and Utah precedent, the federal court concluded that it had no authority to interfere with the Utah execution, and dismissed the FDCPA claim for lack of standing (without reaching the merits of whether any claim existed on the pleadings).
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NCLC Report Grades States on Garnishment, Judgment Protections
A report issued last week by the National Consumer Law Center grades each state on its exemption laws, which determine how much consumers can protect from judgments and garnishments, determining that none of the 50 states or other territories meet what the organization defines as the five basic standards. More details here.
WHAT THIS MEANS, FROM CHRISTINE EMELLO OF TROUTMAN PEPPER: Although there are rules and exemptions related to garnishment at the federal level, state garnishment laws vary widely from state to state, as recently noted by the National Consumer Law Center in its report grading states on garnishment protections. State garnishment law has been a topic of interest in recent years among consumer advocates, regulators, and lawmakers and we expect this trend to continue in 2023.
Of particular interest recently is the issue of cross-border garnishment, which relates to how a garnishee processes garnishments received by third-party creditors directed at consumer deposit accounts where either the debtor or account is domiciled in another state. In a May 2022 consent order with a large national bank, the Consumer Financial Protection Bureau (the “CFPB”) identified certain states with geographical restrictions on the territorial reach of garnishments including, but not limited to, Alabama, Arizona (before August 2019), California, Florida (after August 2014) and Oregon. The CFPB found that the bank processed out of state garnishment notices from restriction states without notifying the issuing court that the deposit account was not located in the issuing state, which it concluded is a violation of the Consumer Financial Protection Act.
We expect the CFPB to remain interested in this issue and to investigate the cross-border garnishment practices of other regulated entities, and state regulators may begin investigations of their own as well. Additionally, we may start seeing lawsuits brought by debtors counsel based on this consent order. In light of this, we suggest that banks and other financial institutions begin evaluating the nature and extent of their garnishment practices in restricted states and reviewing applicable state law generally as soon as practicable.
Judge Approves $2.8M Settlement in FDCPA Convenience Fee Class Action
A District Court judge in Florida has granted preliminary approval of a $2.8 million settlement in a Fair Debt Collection Practices Act class-action case involving convenience fees charged when consumers made payments on their mortgages over the phone or online. More details here.
WHAT THIS MEANS, FROM DALE GOLDEN OF GOLDEN SCAZ GAGAIN: What makes this settlement interesting is that the PHH/Ocwen had strong defenses to the “unlawful convenience fees” class claims, yet agreed to pay nearly $3 million to settle on a classwide basis. Several Florida federal court judges had earlier rejected claims that “convenience fees” violated the FDCPA or Florida law. Recognizing perhaps that their class claims were fragile, class counsel negotiated a deal that allowed PHH, which was Ocwen’s successor by merger for the purposes of the case, to keep an overwhelming percentage of the convenience fees collected from class members. And injunctive relief was limited to merely requiring PHH to simply lower—not do away with—the fees it would charge going forward. The settlement therefore seems, on its face, to be a solid result for PHH, since it’s paying back less than half of the money alleged to have been unlawfully collected, while foreclosing thousands of potential claims and retaining its right to impose convenience fees in the future. And class counsel stands to collect somewhere in the range of $900,000 in attorneys’ fees and expenses. Putative class members will likely receive only a small percentage of any convenience fees paid.
NY DFS Releases Amended Debt Collection Rules
The New York Department of Financial Services yesterday issued its long-awaited debt collection rule amendments, which are scheduled to take effect in 180 days, in late June 2023. More details here.
WHAT THIS MEANS, FROM JOHN REDDING OF ALSTON BIRD: Recently, the NY DFS decided to amend its rules and included a number of edits that are noteworthy, including requirements for the debt validation that are largely consistent with the requirements of Regulation F, with the notable exception that the charge off date cannot be used as the itemization date for open end credit and the last payment date must be used as the itemization date if available for other than revolving or open end credit. There are a number of other requirements related to the initial validation notice that will, naturally, result in some differences from the Reg F validation notice, calling into question whether the FDCPA safe harbor is in fact available when sending a validation notice in New York, no doubt leading to more unnecessary litigation and risk.
The rules also address the need to include a notice regarding the actual or potential expiration of the applicable statute of limitations in all communications with the consumer, perhaps most notably when the period “may be or has expired.” The rules include updated required disclosure language regarding this fact.
The rules also address the ability of consumers to request substantiation of the debt, the manner in which the collector must provide that substantiation, and information that must be included. While these types of requirements existed prior to the amendment, the amendments have added additional clarification, including information that must be provided depending upon whether the account is an open end or closed end account.
Ultimately, these additional requirements continue to impose meaningful obligations on collectors and call into question the availability of the Reg F safe harbor when collecting in New York. They also present enhanced litigation risk, such that special care should be exercised.
Appeals Court Affirms Ruling Holding Individual Liable for Violations of CFPA, TSR
The Court of Appeals for the Ninth Circuit has affirmed a lower court’s ruling holding an individual liable for violations of the Fair Credit Reporting Act, the Telemarketing Sales Rule, and the Consumer Financial Protection Act after he — and other defendants — were sued by the Consumer Financial Protection Bureau for allegedly obtaining individuals’ credit reports illegally and charging advance fees for debt relief services. More details here.
WHAT THIS MEANS, FROM LAURIE NELSON OF AUTOSCRIBE: As illustrated in the subject case, the CFPB under the Biden administration’s actions continue to emphasize that no individual is too small beyond the CFPA’s enforcement authority. As we all know, under the CFPA, the CFPB has the authority to file actions against three different types of “persons.” In this case, as in many cases over the recent years of the Biden administration, the CFPB action includes the type known as the related person. Under the CFPA, the related person is defined as “any director, officer, or employee charged with managerial responsibility for, or controlling shareholder of, or agent for, such covered person;(ii) any shareholder, consultant, joint venture partner, or other person, as determined by the Bureau (by rule or on a case-by-case basis) who materially participates in the conduct of the affairs of such covered person; and(iii) any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in any—(I) violation of any provision of law or regulation; or(II) breach of a fiduciary duty.”
Here the individual was a limited partner in multiple debt-relief businesses. While he chose to plead the Fifth Amendment and not answer direct questioning, his position within the companies was used as material proof to the court that he would have direct knowledge of the activities taking place within the companies. As he did not stop such practices nor verify the information used by the companies, such disregard amounted to gross negligence, so therefore the appellate court confirmed he was liable.
The takeaway from this case is the reminder that all types of “persons” subject to the CFPB’s oversight should ensure it is accurately represented, the covered “person,” the related, “and the service provider. Consideration should be given if separate counsel is necessary to ensure adequate representation for the various types when a covered person becomes a subject of a CFPB enforcement action. And most importantly, a party’s nonaction can be used to find liability with all three types when the party should have known.
Appeals Court Affirms Ruling Remanding FDCPA Class Action Back to State Court
The Court of Appeals for the Fourth Circuit has upheld a lower court’s ruling that granted a plaintiff’s motion to remand a case back to state court, agreeing with the District Court judge that the defendant showed an intent to defend the case in state court before remanding it to federal court and thus waived its right to have the case moved. More details here.
WHAT THIS MEANS, FROM VIRGINIA BELL FLYNN OF TROUTMAN PEPPER: Thinking about filing a motion to dismiss in state court before removing a case to federal court? Think again, the Fourth Circuit recently told the defendant-appellant in Redman v. Javitch Block. In a per curiam decision, the Fourth Circuit explained that Javitch Block had waived its right to remove by continuing to litigate and raising dispositive arguments after notice that the case was eligible for removal.
The case was the second lawsuit between the parties. The first case, presided over by Judge Redding, involved a convoluted debt collection action in which a credit card company obtained a default judgment against Redman, Javitch Block attempted to collect on the company’s behalf, the court granted Redman’s request to set aside the default judgment and assert counterclaims and third-party claims against both the original plaintiff and Javitch Block, and the parties ultimately reached a settlement. In the second case, Redman filed a class action complaint on state law grounds against Javitch Block, which was originally assigned to a different judge. Redman then amended the complaint to bring Fair Debt Collection Practices Act claims. Javitch Block moved to dismiss the complaint, including the federal claims, and later filed a notice of supplemental authority in support and moved to stay discovery. Subsequently, the presiding judge recused himself, handing the case to Judge Redding. A few hours later, Javitch Block removed the case to federal court, and Redman moved to remand.
The district court granted Redman’s remand motion, and the Fourth Circuit affirmed the remand, holding that where a defendant takes “substantial defensive action in state court,” he has demonstrated “clear and unequivocal intent to remain in state court.” The Fourth Circuit noted that under West Virginia law, a ruling on a motion to dismiss is considered a ruling on the merits, so Javitch Block had raised substantive arguments to the state court. The Court also observed that the motion to dismiss was not filed until two weeks after the federal claims were filed, and that Javitch Block had subsequently defended its motion by filing the notice of supplemental authority, in addition to filing the motion to stay discovery. The Court held that this was sufficient to find waiver. The Court also held that this case constituted an “extreme situation” justifying remand in light of the partial litigation below, the delay in removal, and the odd timing of the removal immediately after Judge Redding was assigned to the case.
The ruling serves as a cautionary tale for defendants weighing the possibility of removal. While the Court stopped short of holding that some delay and procedural motions alone could waive removal rights, both facts were relevant to the Court’s ultimate determination. Ultimately, though, defendants will want to think twice before filing motions that could be construed as going to the merits.
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.
