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DFPI says debt collection licenses “unavoidably delayed”
On May 23, the California Department of Financial Protection and Innovation (DFPI) sent a notice to applicants and prospective applicants announcing unforeseen delays in the issuance of licenses under the Debt Collection Licensing Act. The FBI informed DFPI that new changes are needed to state agency protocols for requesting federal background checks. Prospective licensees are encouraged to continue submitting applications through the Nationwide Multistate Licensing System. DFPI stated that during this delay (which “is necessary to enable the Department to effectuate the licensing background check required under the Debt Collection Licensing Act”), “applicants may continue to engage in business, and the Department will not take action for unlicensed activity against applicants who filed their applications after December 31, 2021.” DFPI will reach out to applicants with instructions for submitting fingerprints for background checks when the process becomes available, and advised licensees that “[f]or purposes of including California debt collector license numbers when contacting or communicating with debtors as required under Civil Code section 1788.11, an applicant who has filed its application through NMLS may indicate “license number pending” or similar verbiage until a license is issued.” DFPI will notify applicants when it begins issuing licenses and encourages applicants to check the Department’s website for updates.
7th Circuit reverses dismissal of FDCPA case involving misleading letters
On May 20, the U.S. Court of Appeals for the Seventh Circuit reversed a district court’s order dismissing a suit against a debt collection firm that allegedly sent misleading letters to a debtor. According to the order, the plaintiff defaulted on a credit card debt owed to a bank, which hired the defendant for collection services. The defendant filed a collection action on behalf of the bank and obtained a judgment against the plaintiff. The defendant then sent the plaintiff a letter, referencing the plaintiff’s credit card “account,” describing the amount of the judgment as the “balance due,” and offering to settle that debt for 40 cents on the dollar if the plaintiff made the payment within a specified time frame. The plaintiff did not pay the offered settlement amount by that deadline and ultimately learned that interest on the judgment was increasing daily. The plaintiff then filed suit against the debt collector, alleging that it violated the FDCPA by sending a misleading letter that: (i) described the debt as an “account” even though it was a judgment; (ii) listed two different amounts as the “balance due” (the amount of the judgment and the offered settlement amount); and (iii) did not disclose that the debt was increasing daily. The district court dismissed the case, finding that the plaintiff had failed to allege a concrete injury because he did not allege “that he had the ability to pay the debt owed, that he actually paid other debts instead, or that he took any detrimental step as a result of the alleged confusion.”
On the appeal, the 7th Circuit held that the plaintiff had sufficiently alleged an injury, finding that his allegation that he would have prioritized paying the judgment over other debts “supports the reasonable inference that he had the ability to pay the settlement and that he used his available funds on other debts.” The appellate court also rejected the defendant’s argument that the plaintiff lacked standing because he was insolvent at all relevant times and could not have paid his credit card debt, finding that this argument raised a factual dispute that should have been resolved with an evidentiary hearing.
5th Circuit reverses decision that a portion of a contract was indefinite and unenforceable
On May 18, the U.S. Court of Appeals for the 5th Circuit reversed a district court’s decision to dismiss a suit 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.
According to the opinion, the defendant sold portfolios of delinquent accounts to the plaintiff. The plaintiff and the defendant entered a “forward flow” agreement, where the defendant agreed to continue to send the plaintiff accounts during a specific timeline. Under the agreement, the defendant agreed to deliver “additional accounts,” which would be the same quality as the other accounts that had been sold. The parties could not settle on an agreement regarding the pricing for accounts that were submitted under the forward flow agreement, and the defendant sued the plaintiff for breach of contract. A district court granted the defendant’s motion to dismiss, which the plaintiff appealed.
The appellate court found that the district court erred on its decision that the term “additional accounts” was indefinite and therefore unenforceable. The court stated that “[t]aken together, the plain meaning of the word ‘additional,’ the contract’s clear architecture, and various settled principles of interpretation reveal that ‘additional accounts’ refers to all qualifying accounts that accrue quarterly.” The appellate court also noted that it “cannot ignore that this argument was not presented to the district court,” and that it will not speculate on why [the defendant-appellee did not] reached for this low-hanging factual fruit.”
District Court says defendant’s request for default judgment was more than "procedural mishap"
On May 11, the U.S. District Court for the Eastern District of Kentucky partially granted and partially denied a defendant collection attorney’s (defendant’s) motion to dismiss a FDCPA suit. According to the memorandum opinion and order, the plaintiff defaulted on a loan and the defendant was hired to file a collection lawsuit on behalf of the creditor. Though the plaintiff responded to the suit, the defendant filed a motion for default judgment and motion for attorney’s fees, which was not served for the plaintiff. The defendant attempted to have the plaintiff’s employer garnish his wages, but the plaintiff challenged the garnishment. After reviewing the case, the state court vacated the default judgment and ordered the sides to arbitration. The collection suit was ultimately dismissed with prejudice. The current stage of the suit involves the plaintiff suing the defendant, alleging he violated the FDCPA by improperly seeking default judgment, failing to serve the motion for default judgment, opposing his wage garnishment challenge, and requesting disingenuous attorney’s fees. The district court granted the defendant’s motion to dismiss on the attorney’s fees and the provisions related to the wage garnishment. However, in respect to the allegations related to the filing for default judgment and failure to serve, the district court denied the motion to dismiss. The district court noted that the defendant’s “request for default judgment was more than ‘procedural mishap’—it was a ‘false, deceptive, or misleading representation [] in connection with the collection of any debt’ that seemingly caused faulty default judgment to be entered.”
Arizona obtains $1.6 million in restitution from debt collection operation
On May 10, the Arizona attorney general announced it filed a stipulated consent judgment in the Superior Court of Arizona against a defendant, the owner and manager of a debt collection operation. The AG’s original action was part of the FTC’s “Operation Corrupt Collection”—a nationwide enforcement and outreach effort established by the FTC, CFPB, and more than 50 federal and state law enforcement partners to target illegal debt collection practices (covered by InfoBytes here).
According to the AG’s press release announcing the consent judgment, the defendant’s debt collection operation allegedly called consumers and made false claims and threats to convince people to pay debts the operation had no authority to collect. The complaint contended that employees frequently used spoofing software to reinforce claims that they were law enforcement officers, government officials, process servers, and law firm personnel to intimidate consumers into paying the alleged debts, and told consumers to immediately respond or be held in contempt of court. Employees also allegedly threatened to file lawsuits, garnish wages and tax returns, place liens on homes and car titles, freeze bank accounts, send law enforcement to consumers’ homes and/or places of employment, and arrest consumers.
Under the terms of the consent judgment, the defendant is required to pay more than $1.6 million in consumer restitution and up to $900,000 in civil penalties, and is permanently enjoined, restrained and prohibited from participating in the debt collection industry. Court approval of the stipulated judgment is pending.
District Court: Emotional distress did not cause injury-in-fact
On May 10, the U.S. District Court for the Western District of New York granted a defendant’s motion for summary judgment in a FDCPA class action suit. According to the order, the defendant sent the plaintiff a letter seeking to collect $9,700. The collections letter identified the name of the original creditor and the name of the current creditor to whom the debt was owed. The plaintiff filed suit, claiming he suffered emotional distress, and alleging that the debt was not owed to the defendants, and that the letter “erroneously” claimed that the current creditor to whom the debt was owed was not the owner of the debt, in violation of the FDCPA. The court granted the defendant’s summary judgment, dismissing the claims and finding that the case “is at the summary judgment stage,” which “requires proof of injury-in-fact beyond the sufficiency of Plaintiff’s allegations of an injury.” The court further stated that the “[p]laintiff states in his responding Declaration that his stress came from not knowing how his personal information was learned by Defendant,” but that the “[p]laintiff did not seek medical attention for the emotional distress he suffered.” The court continued that “failure to seek medical treatment is material in establishing the extent of Plaintiff’s injury (in [sic] any) from the emotional distress.” The court found that the plaintiff did “not establish[] that he suffered an injury-in-fact from his emotional distress arising from the dunning letter.”
1st Circuit: Bankruptcy Code “unequivocally strips tribes” of their sovereign immunity to sue
On May 6, the U.S. Court of Appeals for the First Circuit reversed a district court’s decision, ruling that American tribes are not exempt from federal law barring suits against debtors once they file for bankruptcy. The debtor (plaintiff) in 2019 took out a $1,100 payday loan from a creditor (appellee), who is a subsidiary of a tribe. He voluntarily filed a Chapter 13 bankruptcy petition, listing his debt to the appellee, which had increased to approximately $1,600, as a nonpriority unsecured claim. He also listed the appellee on the petition’s creditor matrix, and his attorney mailed the appellee a copy of the proposed Chapter 13 plan. When the plaintiff filed the petition, the Bankruptcy Code imposed an automatic stay enjoining “debt-collection efforts outside the umbrella of the bankruptcy case.” The appellee continued to attempt to contact the plaintiff regarding the debt, but the plaintiff had allegedly previously notified the appellee’s representatives that he had filed for bankruptcy. Two months after the plaintiff filed the petition, he claimed that his “mental and financial agony would never end,” and blamed his agony on the appellee’s “regular and incessant telephone calls, emails and voicemails.” To stop the appellee’s collection efforts, the plaintiff relocated to enforce the automatic stay against the appellee and its corporate parents and sought an order prohibiting future collection efforts, as well as damages, attorney's fees, and expenses. In response, the tribe and its affiliates asserted tribal sovereign immunity and moved to dismiss the enforcement proceeding. The bankruptcy court agreed with the tribe and granted the motions to dismiss.
On the appeal, the tribe argued that the Bankruptcy Code cannot abrogate tribal sovereign immunity because it never uses the word “tribe.” The appellate court noted that the argument “boils down to a magic-words requirement” that tribes must be mentioned in order to be covered by a law, but U.S. Supreme Court precedent “forbids us from adopting a magic-words test.” However, the appellate court further noted that Congress did not determine that tribes were subject to the Code, stating that “[e]ven if Congress need not use magic words to make clear that its abrogation provision applies to Indian tribes, it must at least use words that clearly and unequivocally refer to Indian tribes if it wishes to make that abrogation provision apply to them.” The appellate court ruled that Congress took away tribes' sovereign immunity as “domestic governments” covered by the Bankruptcy Code, stating that even though tribes are not explicitly named in the Code, “we have no doubt that Congress understood tribes to be domestic dependent nations,” and since those “are a form of domestic government, it follows that Congress understood tribes to be domestic governments.”
Washington Court of Appeals affirms dismissal of suit accusing bank of collecting debt under a different name
On May 3, the Washington Court of Appeals, Division Three, affirmed the dismissal of an action accusing a defendant bank of violating the FDCPA by attempting to collect a debt in a name that differed from its own. The plaintiff obtained a credit card from the bank in 2006. Following a merger between the bank holding company (a separate legal entity at the time) and a card services company, the defendant bank merged with and under the charter of the card services company and notified credit card customers that the new issuer and administrator of their accounts would be the card services company. In 2014, the card services company merged into and under the charter of the national bank of the same name, who subsequently became issuer and administrator of the credit card portfolio and the named creditor of the plaintiff’s account. By 2012, the plaintiff had stopped making payments on his credit card and was sued by the card services company. While this action was pending, the 2014 merger occurred but the collection action was not updated to reflect this development. Eventually, the collection action was dismissed without prejudice, and the plaintiff sued the defendant in Washington state court, claiming the defendant violated the FDCPA because it continued its collection suit under the name of the card services company after the merger had taken place. The state court dismissed the case, and the plaintiff appealed. At issue was whether the national bank “falls under the FDCPA despite its status as a creditor because it used a name other than its own ‘which would indicate that a third person is collecting or attempting to collect’ the debt owed by” the plaintiff.
The Court of Appeals disagreed and held that even a least sophisticated consumer would not be confused and think that the debt had been transferred to a third-party collection agency. “Instead, a least sophisticated consumer (and even average-level consumer) might be led to believe that nothing had changed and [the card services company] was still collecting its credit card debt in its own right,” the Court of Appeals wrote. “There is no reason to think a least sophisticated consumer would be led to believe that [the bank] had acquired [the card services company’s] debt and then contracted with [it] to collect the debt.”
Special Alert: Federal court says state bank, fintech partner must face Maryland’s allegation of unlicensed lending before state ALJ
A federal court late last month told a state-chartered bank and its fintech partner that they must return to a state administrative law proceeding to fight a Maryland enforcement action alleging that their failure to obtain a license to lend and collect on loans violated state law — potentially rendering the terms of certain loans unenforceable.
The Missouri-chartered bank and its partners attempted to remove an action brought by the Office of the Maryland Commissioner of Financial Regulation to the U.S. District Court for the District of Maryland, but the district court determined that removal was not proper and that Maryland’s Office of Administrative Hearings was the appropriate venue.
OCFR initially filed charges in January 2021 in Maryland’s Office of Administrative Hearings against the bank and its partner asserting the bank made installment and consumer loans and extended open-ended or revolving credit in the state without being licensed or qualifying for an exception to licensure. As a result, OCFR said they “‘may not receive or retain any principal, interest, or other compensation with respect to any loan that is unenforceable under this subsection.’” It said that not only are the bank’s loans to all Maryland consumers possibly unenforceable, but also that the bank, or its agents or assigns, could in the alternative be “prohibited from collecting the principal amount of those loans from any of these consumers or from collecting any other money related to those loans.”
The OCFR’s charge letter also said the fintech company that provided services to the bank violated the Maryland Credit Services Business Act by providing advice and/or assistance to consumers in the state “with regard to obtaining an extension of credit for the consumer when accepting and/or processing credit applications on behalf of the Bank without a credit services business license.” Additionally, the OCFR alleged violations of the Maryland Collection Agency Licensing Act related to whether the fintech company engaged in unlicensed collection activities, thus subjecting it to the imposition of fines, restitutions, and other non-monetary remedial action.
The defendants filed a notice of removal to federal court last year while the enforcement action was still pending before the OAH; OCFR moved to remand the case back to the agency.
In granting the OCFR’s motion to remand, the court concluded that the OCFR persuasively argued that the defendants have not properly removed this case from the OAH for several reasons, including that the OAH does not function as a state court. “Pursuant to 28 U.S.C. § 1441, a defendant may remove to federal court ‘any civil action brought in a State court of which the district courts of the United States have original jurisdiction.’” However, the court determined that, while defendants correctly observed that the OAH possesses certain “court-like” attributes, its limitations clearly showed that it does not function as a state court.
In reaching this conclusion, the court considered several undisputed facts, including that the OCFR is a unit of the Maryland Department of Labor “responsible for, among other things, issuing licenses to entities wishing to issue loans to consumers in Maryland and investigating violations of Maryland’s consumer loan laws.” The court also said that, while OCFR has authority under Maryland law to investigate potential violations of law or regulation and has the ability to issue cease and desist orders, revoke an individual’s license, or issue fines, it cannot enforce its own subpoenas or orders — and that its decisions are not final and may be appealed to a state circuit court.
The defendants had argued that the case involved a federal question as a result of the complete preemption of state usury laws by Section 27 of the FDI Act. The court said licensure, not state usury law claims, was the issue at hand.
During a status conference held last month to discuss OCFR’s motion to remand, defendants requested an opportunity to file a motion certifying the case for appeal. The court will hold in abeyance its remand order pending resolution of that motion. Parties’ briefings are due by the end of May.
If you have any questions regarding the ruling or its ramifications, please contact a Buckley attorney with whom you have worked in the past.
CFPB issues spring supervisory highlights
On May 2, the CFPB released its spring 2022 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of auto servicing, consumer reporting, credit card account management, debt collection, deposits, mortgage origination, prepaid accounts, remittances, and student loan servicing. The report’s findings cover examinations completed between July and December 2021. Highlights of the examination findings include:
- Auto Servicing. Bureau examiners identified instances of servicers engaging in unfair, deceptive, or abusive acts or practices connected to wrongful repossessions, misleading final loan payment amounts, and overcharges for add-on products.
- Consumer Reporting. The Bureau found deficiencies in credit reporting companies’ (CRCs) compliance with FCRA dispute investigation requirements and furnishers’ compliance with FCRA and Regulation V accuracy and dispute investigation requirements. Examples include (i) both CRCs and furnishers failed to provide written notice to consumers providing the results of reinvestigations and direct dispute investigations; (ii) furnishers failed to send updated information to CRCs following a determination that the information reported was not complete or accurate; and (iii) furnishers’ policies and procedures contained deficiencies related to the accuracy and integrity of furnished information.
- Credit Card Account Management. Bureau examiners identified violations of Regulation Z related to billing error resolution, including instances where creditors failed to (i) resolve disputes within two complete billing cycles after receiving a billing error notice; (ii) reimburse consumers after determining a billing error had occurred; (iii) conduct reasonable investigations into billing error notices due to human errors and system weaknesses; and (iv) provide consumers with the evidence relied upon to determine a billing error had not occurred. Examiners also identified Regulation Z violations connected to creditors’ acquisitions of pre-existing credit card accounts from other creditors, and identified deceptive acts or practices related to credit card issuers’ advertising practices.
- Debt Collection. The Bureau found instances of FDCPA and CFPA violations where debt collectors used false or misleading representations in connection with identity theft debt collection. Report findings also discussed instances where debt collectors engaged in unfair practices by failing to timely refund overpayments or credit balances.
- Deposits. The Bureau discussed violations related to Regulation E, which implements the EFTA, including occurrences where institutions (i) placed duplicate holds on certain mobile check deposits that were deemed suspicious instead of a single hold as intended; (ii) failed to honor a timely stop payment request; (iii) failed to complete error investigations following a consumer’s notice of error because the consumer did not submit an affidavit; and (iv) failed to provide consumers with notices of revocation of provisional credit connected with error investigations regarding check deposits at ATMs.
- Mortgage Origination. Bureau examiners identified Regulation Z violations concerning occurrences where loan originators were compensated differently based on the terms of the transaction. Under the Bureau’s 2013 Loan Originator Final Rule, “it is not permissible to differentiate compensation based on credit product type, since products are simply a bundle of particular terms.” Examiners also found that certain lenders failed to retain sufficient documentation to establish the validity for revisions made to credit terms.
- Prepaid Accounts. The Bureau found violations of Regulation E and EFTA related to institutions’ failure to submit prepaid account agreements to the Bureau within the required time frame. Examiners also identified instances where institutions failed to honor oral stop payment requests related to payments originating through certain bill pay systems. The report cited additional findings where institutions failed to properly conduct error investigations.
- Remittances. Bureau examiners identified violations of the EFTA, Regulation E, and deceptive acts and practices. Remittance transfer providers allegedly made false and misleading representations concerning the speed of transfers, and in multiple instances, entered into service agreements with consumers that violated the “prohibition on waivers of rights conferred or causes of action created by EFTA.” Examiners also identified several issues related to the Remittance Rule’s disclosure, timing, and recordkeeping requirements.
- Student Loan Servicing. Bureau examiners identified several unfair acts or practices connected to private student loan servicing, including that servicers failed to make advertised incentive payments (which caused consumers to not receive payments to which they were entitled), and failed to issue timely refund payments in accordance with loan modification payment schedules.
The report also highlights recent supervisory program developments and enforcement actions, including the Bureau’s recent decision to invoke a dormant authority to examine nonbanks (covered by InfoBytes here).