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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 Dismisses FDCPA Class Action for Lack of Standing
A District Court judge in Florida has granted a defendant’s motion to dismiss a Fair Debt Collection Practices Act class action case because the court lacked subject matter jurisdiction after the plaintiff attempted a somewhat novel strategy to prove she had standing to pursue her case in federal court. More details here.
WHAT THIS MEANS, FROM MITCH WILLIAMSON OF BARRON & NEWBURGER: Confusion is a state of mind due to a lack of clarity or understanding – it is not however a basis for a cause of action. Court after court is ruling that merely being confused due to receipt of a letter is simply not an injury in fact sufficient to establish Article III Standing.
The Court in Suazo addressed the argument that confusion is closely analogous to fraudulent misrepresentation pointing out that fraud has multiple elements, one of which is detrimental reliance on the “fraudulent” statement or message. As is typical in these cases, the Plaintiff alleged no action taken or withheld due to her “confusion.” Assuming that the Plaintiff was actually confused, so what? Unfortunately, our world becomes more confusing by the week-get used to it.
The real question raised by this case is when are the Courts going to lay down the law (pun intended) and advise Plaintiffs’ counsel that there will be sanctions if they persist in bringing, what are now clearly frivolous cases. Causing confusion is not a tort and a complaint based simply on the allegation that something was confusing without more is actually confusing to me. I wonder what the attorney drafting the complaint was actually thinking. Or is that in and of itself, a baseless assumption; that any thought went into it.
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CFPB to Seek Public Input on New Arbitration Rule Following Petition from Consumer Groups
The Consumer Financial Protection Bureau has announced it will be opening a docket and seeking input from the public on a proposal that was filed last week by a number of consumer advocacy organizations that filed a petition asking the CFPB to issue a rule on mandatory pre-dispute arbitration provisions in contracts between financial services companies and consumers. More details here.
WHAT THIS MEANS, FROM JOHN REDDING OF ALSTON & BIRD: If at first you don’t succeed, try, try again – so goes the mantra with the CFPB’s continuing efforts to impact the ability to creditors to resolve matters through arbitration. In response to a recent petition, and notwithstanding the 2017 Congressional repeal of the CFPB’s proposed arbitration rule under the Congressional Review Act (“CRA”) that would have prohibited class action waivers in arbitration, the CFPB will be seeking input regarding a potential rule giving consumers the right to choose the method of dispute resolution after the dispute arises – effectively prohibiting a contractual mandatory arbitration provision – that would supposedly allow consumers to make informed choices. However, and as noted in numerous studies, consumers actually do better on average in arbitration than in litigation, unlike plaintiffs’ attorneys.
This also raises questions under the Federal Arbitration Act (“FAA”) as well as the CRA’s prohibition against an agency issuing a rule in “substantially the same form” as a previously disapproved rule. The FAA expressly provides that any written provision in a contract involving commerce to resolve later arising disputes by arbitration is “valid, irrevocable, and enforceable” unless grounds exist in law or equity for revocation. Thus, we should expect any such rule – if it survives a CRA challenge – to be subject to challenge in litigation as directly contrary to the provisions of the FAA. More to follow …
Judge Denies Defendant’s MSJ in FDCPA Case, Rules Bank Levy Confers Standing
A District Court judge in New Jersey has denied a defendant’s motion for summary judgment, ruling that the plaintiff has standing to pursue his Fair Debt Collection Practices Act lawsuit — “however slight” that standing is, noted the judge. More details here.
WHAT THIS MEANS, FROM COOPER WALKER OF FROST ECHOLS: We certainly all make mistakes — even federal judges — but this is one I think the Court got wrong. The Judge here held that Plaintiff had Article III standing for an FDCPA claim premised on a bank levy because it involved “monetary harm of a type traditionally recognized by the judicial system.” The defendant apparently obtained a writ of execution for $14,645.36 which was slightly higher than what was actually owed. Thereafter, the defendant levied $278.75 from the plaintiff’s bank account. The Judge found that this was an “improper hold on funds.” However, it seems to me that the $278.75 that was levied would have been due and owing regardless of whether the writ of execution was correct or not. I understand how a person can be harmed by having an amount not owed levied from them. I find it hard to see how a person can be harmed by having an amount owed levied from them.
Also, as somewhat of an aside, be careful making Article III standing arguments in New Jersey. I think the defendant made the right arguments here, but New Jersey is very plaintiff friendly when it comes to re-filing claims that were kicked due to lack of standing. Recently, I handled a case that was originally filed in federal court in New Jersey. The Court sua sponte (on its own) dismissed the case for lack of Article III standing. Then, Plaintiff turned around and re-filed in state court. At this point, the claim was well beyond the statute of limitations. The New Jersey state court allowed Plaintiff’s claim to proceed, despite it being past the applicable statute of limitations, pursuant to the doctrines of equitable tolling and substantial compliance.
Judge Awards Summary Judgment for Defendant in FDCPA Case Over Applicable Interest Rate
Sometimes you win without even trying. A District Court judge in Minnesota has awarded summary judgment to a defendant in a Fair Debt Collection Practices Act case, even though he was addressing a partial motion for summary judgment filed by the plaintiff. More details here.
WHAT THIS MEANS, FROM CHRIS MORRIS OF BASSFORD REMELE: FDCPA claims are often based on a theory that the collector sought interest in an amount not justified by state law or the underlying contract. These claims are often complicated by the fact that states sometimes have contradictory, vague or antiquated interest statutes on the books, but are nevertheless ripe for a decision by the judge rather than a jury, because they center around application of law. Here, the debate was whether to apply a state statute that would impose 4% interest, vs. a different statute that could apply 6% interest (the amount sought in the collection notice at issue). The federal court deciding the FDCPA claim interpreted various state appellate decisions to apply the 6% statute under comparable circumstances. As such, the collector sought the appropriate interest rate, and there was no remaining basis for any FDCPA claim.
Judge Dismisses Most Counts in FDCPA Case Over Disputed Debt
A District Court judge in Connecticut has dismissed a laundry list of Fair Debt Collection Practices Act claims made by a plaintiff against a collection law firm, but denied the defendant’s motion to dismiss on one of the claims, which can be used to serve as a reminder to collectors to make sure you include information from the right account when sending debt verification information to a consumer. More details here.
WHAT THIS MEANS, FROM MONICA LITTMAN OF KAUFMAN DOLOWICH: The judge here dismissed almost all of the plaintiff’s claims on a motion to dismiss. The one claim that survived was due to the collector attaching a statement for an incorrect account in response to the request for validation. The collection agency argued that the plaintiff’s request for validation was outside of the thirty-day validation period. However, since the case was at the motion to dismiss stage, the judge had to assume the allegations in the complaint were true, and he could not consider extrinsic evidence regarding the timing of the request for validation. It will take discovery to establish when the plaintiff’s request was sent. Discovery also might show that there is a bona fide affirmative defense regarding the agency’s procedures for sending out account statements. The judge also noted that even though the plaintiff only requested validation of the accounts, his request at this stage of the case should also be treated as a dispute. The judge found that the requests for validation were premised on his dispute of the debts. An agency should treat any written communication from a debtor that indicates that a debt is disputed as both a dispute and a request for validation, even if the words “I dispute this debt” are not used.
CFPB Announces Rulemaking to Remove Medical Debt From Credit Reports
The Consumer Financial Protection Bureau today announced it was beginning the rulemaking process to remove medical debts from consumers’ credit reports, removing the “leverage” that debt collectors use to “pressure” consumers into repaying unpaid medical debts. More details here.
WHAT THIS MEANS, FROM JOANN NEEDLEMAN OF CLARK HILL: The Consumer Financial Protection Bureau’s (“CFPB” or “Bureau”) Outline of Proposal and Alternatives for Credit Reporting (the “Outline”) is thin on details but extraordinarily broad in its scope. While the apparent casualty maybe the elimination of credit reporting for medical debt, the Bureau is seeking to expand its authority over any entity that may be gathering data, resulting in the expansion of the Fair Credit Reporting Act (“FCRA” or the “Act”) to entities that never anticipated such regulatory reach.
The most striking aspect of the Outline is its deficiencies in providing any sort of detail about what the Bureau is proposing. If anything, the CFPB’s Outline is an utopian wish list of how the credit reporting market should operate, or cease to operate. The CFPB envisions an endgame, but has failed to lay out any well-articulated proposals that can possibly get them to the finish line. As industry remembers during the Regulation F rulemaking process, the CFPB’s Outline of Proposal for Debt Collection provided actual proposals and processes for ensuring compliance with the FDCPA. The Model Validation Notice is one such example. In fact there were so many actual proposals, many did not make the cut to either the debt collection NPRM or the Final Rule.
Here, it is very unclear what the Small Business Review Panel (SBRP) will discuss when they convene next month. The Bureau is subject to the Small Business Regulatory Enforcement Fairness Act (SBREFA) which requires the Bureau to describe the proposals it is considering and allow Small Entity Representatives (SERs) an opportunity to provide comment, advice and recommendations regarding the effect and compliance with these proposals if they were adopted. Since the Bureau is proposing the elimination of credit reporting of medical debt, small entities will need to show that medical debt information is necessary for credit eligibility determinations. It is unknown at this point what lenders have been invited to the SBRP, but if what has been stated in the Outline were to come to fruition, underwriting will be challenging especially for larger lenders who are subject to the safety and soundness principles of prudential regulators. However, large lenders will not be invited to the SBRP, but it is those lenders who require a true and accurate snap shot of a borrowers credit availability and their ability to repay. Thus the CFPB’s proposals may suggest a potential tightening of credit. Ironically, just a few years ago, the CFPB was laser focused on the “ability to repay” when it came to payday lending. That mandate seems to have disappeared.
Although we are at least 12-18 months from a potential final rule, the ARM industry must pay attention during the course of this rulemaking process. It is believed that the Outline, for the time being, will be used as a road map for supervision and enforcement for what the Bureau sees as compliance under the FCRA, as well as who is subject to the Act.. The CFPB will be using these proposals as a guide to further interpret the FCRA in a manner than will be a compliance challenge for those that collect and credit report medical debt.
CFPB Publishes Guidance on Use of AI in Credit Decisions
The Consumer Financial Protection Bureau is trying to build more guardrails around how companies in the financial services industry use artificial intelligence, issuing a warning that when sending credit denial letters to consumers, lenders must receive accurate and specific reasons and not just a checklist detailing why a credit request was denied. More details here.
WHAT THIS MEANS, FROM HEATH MORGAN OF MARTIN GOLDEN LYONS WATTS MORGAN: The CFPB continues its efforts to stay visible in the regulations of all things branded artificial intelligence. This most recent publication relates to the Equal Credit Opportunity ACT (“ECOA”) and Regulation B when dealing with credit applications, and the requirement to provide a detailed statement as to the reasons for a denial. In the publication, the CFPB does not define what artificial intelligence means, but they use the terms “complex credit models,” “predictive decision-making technologies,” “complex algorithms,” and “black-box algorithmic models” as synonymous with AI.
While there has been no enforcement actions against the collections industry for violations of ECOA or Regulation B, it is an important reminder that ECOA remains one of the seven modules the CFPB uses as guidance in its oversight of debt collection. While the requirement outlined in this particular publication, a disclosure of the actual reasons for denial of credit, are not truly applicable to the industry, the publication does state that “the requirements under ECOA extend to adverse actions taken in connection with existing credit accounts” including “an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts.” That language could be extended into the decisions made by debt buyers and collection agencies when collecting on accounts and reinforces the idea of incorporating ECOA compliance into activities that would touch on different collection strategies for different types of accounts.
CFPB Denies Petition in Student Loan BK Collection Discharge Investigation
The Consumer Financial Protection Bureau has denied a petition from the Pennsylvania Higher Education Assistance Agency to set aside a civll investigative demand into whether the servicer maintained adequate policies and procedures to determine whether loans were dischargeable in bankruptcy and if attempts were made to collect on loans that had been discharged in bankruptcy, saying that it is investigating potential violations of the Consumer Financial Protection Act and not the Bankruptcy Code. More details here.
WHAT THIS MEANS, FROM LAURIE NELSON OF AUTOSCRIBE: While authorities can overlap, such authorities can still coexist and apply. The holding in this Case follows this analysis as it rejected the Servicer’s argument that the CFPB could not proceed in an investigation as the loans in question fell under the Bankruptcy Code. The CFPB has stood firm with this analysis and can be found in CFPB’s documentation frequently; in 2022, I could quickly locate three consecutive circulars that exemplify this fact.
In Consumer Financial Protection Circular 2022-04, the CFPB makes it clear that “(i)addition to other federal laws governing data security for financial institutions, including the Safeguards Rules issued under the Gramm-Leach-Bliley Act (GLBA), “covered persons” and “service providers” must comply with the prohibition on unfair acts or practices in the CFPA.” In the Consumer Financial Protection Circular 2022-05, the CFPB clarifies that certain practices related to collecting nursing home debts invalid under the Nursing Home Reform Act can also violate the FDCPA and FCRA. Then again, the Consumer Financial Protection Circular 2022-06 confirms that Overdraft fee practices must comply with TILA, EFTA, Regulation Z, Regulation E, and the CFPA.
As Courts consistently apply this authority, companies mustn’t rely on the idea that the CFPB should not have authority over matters covered under different areas of law. In the CFPA, Congress granted authority over unfair or deceptive acts or practices to the CFPB. This authority was not limited to area not covered by existing regulations but rather put in place to combat abuse it found occurring despite the existing laws.
Judge Denies MTD in Case Against Owners of Payday Lending Company Accused of Hiding Millions to Avoid Fines
A District Court judge in Kansas has denied a motion to dismiss filed by a husband and wife who are being sued by the Consumer Financial Protection Bureau for fraudulently trying to hide $13 million in assets as a means of avoiding having to use them to settle $40 million in fines and penalties that were assessed in an earlier enforcement order. More details here.
WHAT THIS MEANS, FROM CHANTEL WONDER OF MCGLINCHEY STAFFORD: In 2015, the CFPB sued payday lender Integrity Advance and owner James Carnes for violations of TILA, the CFPA, and the EFTA for their use of remotely created checks, even after borrowers revoked their consent for the automatic debit transactions. In a final order dated April 7, 2021, the CFPB ordered Integrity and Carnes to pay restitution of more than $38,000,000, Integrity to pay a civil penalty of $7,500,000 and Carnes to pay a civil penalty of $5,000,000. Carnes refused to pay the penalties, and the CFPB obtained an order from the District of Kansas Court for the payment of the restitution. Carnes appealed, and the order was affirmed by the Tenth Circuit Court of Appeals on September 15, 2022. Carnes then filed a petition for certiorari with the Supreme Court on March 1, 2023, which was denied on June 12, 2023.
In April 2023, the CFPB filed a new Complaint against Carnes and his wife, individually and each as trustees of two trusts, the MCC Trust and the JRC Trust, claiming violations of the Fair Debt Collection Procedures Act (“FDCPA”- a statue created for United States civil collections of Debts). This Complaint alleges that Carnes fraudulently transferred more than $12 million upon learning of the CFPB investigation in January 2013, in an attempt to avoid payment of any resulting penalties. The Complaint also alleged that Carnes concealed some of the transfers through cash, vehicles, art, jewelry, stock, and real property held in the name of a trust entitled MCC Trust that was for the sole benefit of his wife.
The Defendants moved to dismiss the fraudulent transfer Complaint, claiming that Carnes was removed from the trust and that he had transferred the property out of the JRC trust, so he was no longer subject to the FDCPA as he was not a “transferee.” The Court denied the motion to dismiss, stating that it did not find any of the Defendants arguments persuasive and could not consider unauthenticated exhibits attached to the Motion to Dismiss. Further, the court dismissed the Defendants’ arguments based on the Uniform Fraudulent Transfer Act (UFTA) and the bankruptcy code, finding that the cases they were relying on were based on constructive fraud, not the actual fraud the CFPB alleges against the Defendants in this case. Finally, the court refused to grant a stay requested by Defendants due to a concern that any stay would help Carnes in “his efforts to thwart or delay the Bureau’s efforts to collect a valid judgment.”
Although most companies in the industry would not attempt to avoid a CFPB judgment (or go to these great lengths to provoke an industry regulator), this case shows the enforcement process if a CFPB judgment is not voluntarily paid. Stay tuned for the continuing drama in the Carnes’ 10 year encounter with the CFPB…although, spoiler alter: the court stated in its order denying Defendants’ Motion to Dismiss that Carnes could end this lawsuit by just paying the judgment.
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.