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7th Circuit: Collector did not violate FCRA by obtaining a “propensity-to-pay score”
On December 22, the U.S. Court of Appeals for the Seventh Circuit affirmed summary judgment in favor of a defendant debt collector in an FCRA action alleging a plaintiff’s credit information was acquired without a permissible purpose. The plaintiff and her husband jointly filed for bankruptcy protection. The bankruptcy court ordered a discharge of their debts, which included a debt incurred by the plaintiff’s husband that was being serviced by the defendant. The defendant was notified of the discharge (which included each of the four former last names used by the plaintiff) and scanned its system for affected accounts; however, by the time it received notice of the bankruptcy, it had already closed the account it had been servicing. Later, another account bearing one of the plaintiff’s former names was placed with the defendant. The defendant sent the account to a third-party vendor to see if the individual had filed for bankruptcy protection and did not received any bankruptcy results. It then ordered a “propensity-to-pay-score” from a credit reporting agency. The plaintiff’s records were eventually updated by the third-party vendor with information about the bankruptcy, and the defendant closed the account. However, the plaintiff noted the soft inquiry on her credit report and sued, alleging the defendant did not have a permissible purpose to make such an inquiry. The district court granted summary judgment to the defendant.
On appeal, the 7th Circuit determined that the plaintiff had suffered a concrete injury, concluding that an “unauthorized inquiry into a consumer’s propensity‐to‐pay score is analogous to the unlawful inspection of one’s mail, wallet, or bank account.” However, after reviewing the merits of the case, the appellate court held that an alleged invasion of privacy was not enough for it to overturn the district court’s ruling. There was no negligent violation of the FCRA “because no reasonable juror could conclude that the inquiry into [the plaintiff’s] propensity‐to‐pay score resulted in actual damages,” the appellate court wrote. Additionally, while the 7th Circuit acknowledged that the plaintiff’s debt was discharged by the time the defendant obtained her propensity-to-pay score, there was no willful violation of the FCRA because the defendant “lacked actual knowledge of the bankruptcy” and “did not recklessly disregard the possibility that debt had been discharged.” The appellate court added that the evidence showed that the defendant “had a reasonable basis for relying on its procedures.”
NYDFS issues proposed amendment to third-party debt collection rules
On December 15, NYDFS announced a proposed amendment to 23 NYCRR 1, which regulates third-party debt collectors and debt buyers. The proposed amendment factored in findings from NYDFS investigations, which revealed instances of abusive and deceptive debt collection practices, as well as consumer debt collection complaint data. According to acting Superintendent Adrienne A. Harris, the “proposed amendment requires clear communication on consumer debt obligations and ensures the consumer has the right information to dispute the validity of the debt.” The proposed regulation will mitigate predatory debt collection by taking measures to ensure consumers only pay debts they owe and only pay them once. Harris added that the proposed amendment will offer enhanced consumer protections by increasing transparency, requiring enhanced disclosures, reducing misleading statements about consumer debt obligations, and limiting harassment by placing stricter limits on debt collection phone calls than those currently imposed under federal regulations. Among other things, the proposed amendment also:
- Defines “communication” as “the conveying of information regarding a debt directly or indirectly to any person through any medium.”
- Defines “creditor” as “any person or such person’s successor in interest by way of merger, acquisition, or otherwise, to whom a debt is owed or allegedly owed.”
- Amends the definition of “debt collector” to include “any creditor that, in collecting its own debts, uses any name other than its own that would suggest or indicate that someone other than such creditor is collecting or attempting to collect such debts.” The definition also includes certain exemptions, such as persons “performing the activity of serving or attempting to serve legal process” in the judicial enforcement of a debt “or serving, filing, or conveying” other specified documents pursuant to rules of civil procedure, but that are “not a party to, or providing legal representation to a party to, the action[.]”
- Requires collectors to clearly and conspicuously send written notification within 5 days after an initial communication with a consumer letting the consumer know specific information about the debt, including (i) validation information; (ii) the type of reference date used to determine the itemization date; (iii) account information associated with the debt; (iv) merchant/affinity/facility brand association; (v) the date the last payment (including any partial payment) was made; and (vi) the statute of limitations, if applicable.
- Requires collectors to inform consumers they have “the right to dispute the validity of the debt, in part or in whole,” and provides instructions on how consumers may dispute the validity of the debt.
- States that certain disclosures may not be sent exclusively through an electronic communication, and prohibits treating a formal pleading in a civil action as an initial communication.
- Provides that, if a collector “has reason to know or has determined” that the statute of limitations on a debt it seeks to collect has expired, the collector is required to provide clear and conspicuous notice in all communications that, among other items, it believes the statute of limitations has expired. For debts not subject to a statute of limitations, collectors must notify consumers that they are “not required to provide the debt collector with an admission, affirmation, or acknowledgment of the debt, a promise to pay the debt, or a waiver of the statute of limitations.”
- Prohibits collectors from communicating by telephone or other means of oral communication when attempting to collect on debts for which the statute of limitations has expired, without certain consent or permission.
- Requires collectors to provide consumers written substantiation of a debt (no longer specified as a “charged-off” debt) in hard copy by mail within 30 days of receiving a request for substantiation of a debt (unless a consumer has consented to receiving electronic communications). The written substantiation must include, among other information, (i) a statement describing the complete chain of title from the creditor “to which the debt was originally owed or alleged to be owed” to the present creditor “or owner of the debt”; and (ii) notice that a consumer may request additional documentation and instructions on how to make such a request. Collectors are also required to provide within 30 days after the consumer makes such a request for substantiation, documents sufficient to establish the complete chain of title, including documents sufficient to establish the specific dates on which the debt was assigned, sold or transferred and names of each previous owner of the account to the current owner.
- Requires collectors to retain certain information on a debt “until the debt is discharged, sold, or transferred, or for 7 years, whichever is longer.”
- Requires collectors to provide written confirmation of the satisfaction of a debt to a consumer within 20 business days of receiving receipt of the satisfaction of a debt. The confirmation must include the name of the creditor to which the debt was originally owed and the account number unless stipulated otherwise.
- Limits collectors to 1 telephone call and 3 attempted telephone calls in a 7-day period per alleged debt, without certain consents or permission, “except that telephone calls in excess of one time per seven day period are permitted when” a consumer requests to be contacted or when the communication is required under the proposed amendment or other federal or state law.
- Permits collectors to communicate with persons through electronic channels to collect a debt only if (i) the person has voluntarily provided certain contact information to the debt collector; and (ii) the person has given certain revocable consent in writing directly to the debt collector. The proposed amendment also provides (i) certain disclosure requirements for electronic communications “initiated by” a collector; (ii) privacy requirements that incorporate 15 U.S. Code § 1692c(b); and (iii) outlines compliance requirements for collectors should a consumer revoke consent.
CFPB publishes fall 2021 rulemaking agenda
On December 13, the Office of Information And Regulatory Affairs released the CFPB’s fall 2021 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters the Bureau plans to pursue during the period from November 2, 2021 to October 31, 2022. Additionally, the Bureau stated that the latest agenda reflects continued rulemakings intended to further its consumer financial protection mission and help advance the country’s economic recovery from the Covid-19 pandemic. Promoting racial and economic equity and supporting underserved and marginalized communities’ access to fair and affordable credit continue to be Bureau priorities.
Key rulemaking initiatives include:
- Small Business Rulemaking. This fall, the Bureau issued its long-awaited proposed rule (NPRM) for Section 1071 regulations, which would require a broad swath of lenders to collect data on loans they make to small businesses, including information about the loans themselves, the characteristics of the borrower, and demographic information regarding the borrower’s principal owners. (Covered by a Buckley Special Alert.) The NPRM comment period goes through January 6, 2022, after which point the Bureau will review comments as it moves to develop a final rule. Find continuing Section 1071 coverage here.
- Consumer Access to Financial Records. The Bureau noted that it is working on rulemaking to implement Section 1033 of Dodd-Frank in order to address the availability of electronic consumer financial account data. The Bureau is currently reviewing comments received in response to an Advance Notice of Proposed Rulemaking (ANPR) issued fall 2020 regarding consumer data access (covered by InfoBytes here). Additionally, the Bureau stated it is monitoring the market to consider potential next steps, “including whether a Small Business Review Panel is required pursuant to the Regulatory Flexibility Act.”
- Property Assessed Clean Energy (PACE) Financing. As previously covered by InfoBytes, the Bureau published an ANPR in March 2019 seeking feedback on the unique features of PACE financing and the general implications of regulating PACE financing under TILA (as required by Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amended TILA to mandate that the Bureau issue certain regulations relating to PACE financing). The Bureau noted that it continues “to engage with stakeholders and collect information for the rulemaking, including by pursuing quantitative data on the effect of PACE on consumers’ financial outcomes.”
- Automated Valuation Models (AVM). Interagency rulemaking is currently being pursued by the Bureau, Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to develop regulations for AVM quality control standards as required by Dodd-Frank amendments to FIRREA. The standards are designed to, among other things, “ensure a high level of confidence in the estimates produced by the valuation models, protect against the manipulation of data, seek to avoid conflicts of interest, require random sample testing and reviews,” and account for any other appropriate factors. An NPRM is anticipated for June 2022.
- Amendments to Regulation Z to Facilitate LIBOR Transition. As previously covered by InfoBytes, the Bureau issued a final rule on December 7 to facilitate the transition from LIBOR for consumer financial products, including “adjustable-rate mortgages, credit cards, student loans, reverse mortgages, [and] home equity lines of credit,” among others. The final rule amended Regulation Z, which implements TILA, to generally address LIBOR’s eventual cessation for most U.S. dollar settings in June 2023, and establish requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans. The final rule generally takes effect April 1, 2022.
- Reviewing Existing Regulations. The Bureau noted in its announcement that it decided to conduct an assessment of a rule implementing HMDA (most of which took effect January 2018), and referred to a notice and request for comments issued last month (covered by InfoBytes here), which solicited public comments on its plans to assess the effectiveness of the HMDA Rule. Additionally, the Bureau stated that it finished a review of Regulation Z rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009, and that “[a]fter considering the statutory review factors and public comments,” it “determined that the CARD Act rules should continue without change.”
Notably, there are 14 rulemaking activities that are listed as inactive on the fall 2021 agenda, including rulemakings on overdraft services, consumer reporting, student loan servicing, Regulation E modernization, abusive acts and practices, loan originator compensation, and TILA/RESPA mortgage disclosure integration.
FTC settles with debt collectors
On December 13, the FTC announced a settlement with several South Carolina-based debt collection companies and an individual (collectively, "defendants") for allegedly engaging in fraudulent debt collection practices. The FTC filed a complaint against the defendants alleging that they violated the FTC Act and the FDCPA by, among other things: (i) using robocalls to leave deceptive messages; (ii) falsely representing that an individual is an attorney or is in communication with an attorney; (iii) “falsely claiming or implying that nonpayment of a debt will result in the arrest or imprisonment of a person”; (iv) threatening to take unlawful legal action; and (v) making false representations or using deceptive means to collect or attempt to collect a debt. The action was taken as part of the FTC’s “Operation Corrupt Collector”—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). The effort previously resulted in settlements with two other debt collectors, which included permanent bars from the industry.
Under the terms of the settlement, in addition to being permanently banned from participating in debt collection and debt brokering activities, the defendants will also be prohibited from making misrepresentations to consumers, including (i) whether consumers are legally obligated to pay defendants; (ii) whether defendants are attorneys or affiliated with a law firm; (iii) the terms of any refund policy; and (iv) any material facts concerning products or services. The order also requires the defendants to surrender the contents of numerous bank and investment accounts, including property and the value of certain assets. An approximately $12 million monetary judgment will be partially suspended upon completion of asset transfers from all financial institutions holding accounts in the defendants’ names.
District Court: Debt collectors may rely on information supplied by credit card issuer
On December 2, the U.S. District Court for the District of Oregon granted defendants’ motion for summary judgment in an FDCPA action over an alleged disputed debt, ruling that defendants are allowed to rely on information supplied by a credit card issuer that a “debt owned has been verified and is owed.” The plaintiff opened a credit card in 2015 and stopped making payments on the card in June 2018. After she stopped making payments, the plaintiff sent notices of dispute to the credit card issuer contesting, among other things, whether the issuer owned the account, and received correspondence back from the issuer with information about where disputes about the debt should be directed. The issuer also explained that based on an investigation into her account, the issuer believed the account to be valid. Several months later, the defendants sent a demand letter on behalf of the issuer to the plaintiff using the address associated with the account, and later filed a collection lawsuit in state court seeking judgment to recover the unpaid balance.
The plaintiff sued, accusing the defendants of violating Sections 1692e(2)(A), 1692e(5), and 1692e(10) of the FDCPA when they initiated the collections action. Among other claims, the plaintiff argued that she never received the demand letter. She also contended that the defendants should have known about the disputes. The court, however, agreed with the magistrate judge’s final orders and judgment, which ruled that it is not a requirement of the FDCPA for the defendants to confirm that a notice was received as a condition of filing the state court action. According to the court, the plaintiff identified no evidence that mail sent to the address used by the defendants was returned as undeliverable. The court also agreed that the plaintiff’s notices of dispute “did not challenge that she opened the account or was responsible for the charges,” and that the defendants submitted bank statements showing that the plaintiff made payments on the account.
DFPI reminds debt collectors and buyers of December 31 application deadline
Recently, the California Department of Financial Protection and Innovation (DFPI) reminded debt buyers and debt collectors operating in the state of California that applications must be submitted on or before December 31, 2021 through the Nationwide Multistate Licensing System & Registry (NMLS). The Debt Collection Licensing Act, which takes effect January 1, 2022, requires all persons engaging in the business of debt collection to be licensed by DFPI. Debt collectors that have submitted applications may continue operating in the state while the applications are pending. However, debt collectors that miss the December 31 deadline will be required to wait for the issuance of a license before operating in the state. Application materials and a checklist of requirements are available on NMLS. DFPI noted it will review applications and issue licenses in 2022 and 2023, and stated that once a debt collector is licensed it will not need to register under the California Consumer Financial Protection Law.
CFPB supervisory highlights cover wide range of violations
On December 8, the CFPB released its fall 2021 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of credit card account management, debt collection, deposits, fair lending, mortgage servicing, payday lending, prepaid accounts, and remittance transfers. The report’s findings cover examinations that were completed between January and June of 2021 in addition to prior supervisory findings that led to public enforcement actions in the first half of 2021. Highlights of the examination findings include:
- 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 late fees after determining a missed payment was not credited to a consumer’s account; and (iii) conduct reasonable investigations into billing error notices concerning missed payments and unauthorized transactions. Examiners also identified deceptive acts or practices related to credit card issuers’ advertising practices.
- Debt Collection. The Bureau found instances of FDCPA violations where debt collectors represented to consumers that their creditworthiness would improve upon final payment under a repayment plan and the deletion of the tradeline. Because credit worthiness is impacted by numerous factors, examiners found “that such representations could lead the least sophisticated consumer to conclude that deleting derogatory information would result in improved creditworthiness, thereby creating the risk of a false representation or deceptive means to collect or attempt to collect a debt in violation of Section 807(10).”
- Deposits. The Bureau discussed violations related to Regulation E, including error resolution violations related to misdirected payment transfers and failure to investigate error notices where consumers alleged funds were sent via a person-to-person payment network but the intended recipient did not receive the funds.
- Fair Lending. The report noted instances where examiners cited violations of ECOA and Regulation B by lenders "discriminating against African American and female borrowers in the granting of pricing exceptions based upon competitive offers from other institutions,” which led to observed pricing disparities, specifically as compared to similarly situated non-Hispanic white and male borrowers. Among other things, examiners also observed that lenders’ policies and procedures contributed to pricing discrimination, and that lenders improperly inquired about small business applicants’ religion and considered religion in the credit decision process.
- Mortgage Servicing. The Bureau noted that it is prioritizing mortgage servicing supervision attributed to the increase in borrowers needing loss mitigation assistance due to the Covid-19 pandemic. Examiners found violations of Regulations Z and X, as well as unfair and deceptive acts and practices. Unfair acts or practices included those related to (i) charging delinquency-related fees to borrowers in CARES Act forbearances; (ii) failing to terminate preauthorized EFTs; and (iii) assessing fees for services exceeding the actual cost of the performed services. Deceptive acts or practices found by examiners related to mortgage servicers included incorrectly disclosed transaction and payment information in a borrower’s online mortgage loan account. Mortgage servicers also allegedly failed to evaluate complete loss mitigation applications within 30 days, incorrectly handled partial payments, and failed to automatically terminate PMI in a timely manner. The Bureau noted in its press release that it is “actively working to support an inclusive and equitable economic recovery, which means ensuring all mortgage servicers meet their homeowner protection obligations under applicable consumer protection laws,” and will continue to work with the Federal Reserve Board, FDIC, NCUA, OCC, and state financial regulators to address any compliance failures (covered by InfoBytes here).
- Payday Lending. The report identified unfair and deceptive acts or practices related to payday lenders erroneously debiting consumers’ loan balances after a consumer applied and received confirmation for a loan extension, misrepresenting that consumers would only pay extension fees on the original due dates of their loans, and failing to honor loan extensions. Examiners also found instances where lenders debited or attempted one or more duplicate unauthorized debits from a consumer’s bank account. Lenders also violated Regulation E by failing “to retain, for a period of not less than two years, evidence of compliance with the requirements imposed by EFTA.”
- Prepaid Accounts. Bureau examiners found violations of Regulation E and EFTA related to stop-payment waivers at financial institutions, which, among other things, failed to honor stop-payment requests received at least three business days before the scheduled date of the transfer. Examiners also observed instances where service providers improperly required consumers to contact the merchant before processing a stop-payment request or failed to process stop-payment requests due to system limitations even if a consumer had contacted the merchant. The report cited additional findings where financial institutions failed to properly conduct error investigations.
- Remittance Transfers. Bureau examiners identified violations of Regulation E related to the Remittance Rule, in which providers “received notices of errors alleging that remitted funds had not been made available to the designated recipient by the disclosed date of availability” and then failed to “investigate whether a deduction imposed by a foreign recipient bank constituted a fee that the institutions were required to refund to the sender, and subsequently did not refund that fee to the sender.”
The report also highlights recent supervisory program developments and enforcement actions.
New York reaches $1.2 million settlement with debt collectors
On November 16, the New York attorney general announced a settlement with an illegal debt collection scheme operation and its operator (collectively, “respondents”) to resolve allegations that the respondents used illegal tactics to collect consumer debt, which included false threats of criminal action, wage garnishment, driver’s license suspension, and lawsuits. According to the AG, the operator started his debt collection career collecting debts with a network of New York-based debt collectors that settled with the CFPB and New York AG in 2019 to resolve allegations that the defendants engaged in improper debt collection tactics in violation of the CFPA, the FDCPA, and various New York laws. (Covered by InfoBytes here.) Using different names, the operator allegedly continued to use deceptive and illegal threats to collect on consumer debts. In addition, the AG claimed the operator was a debt broker, “selling debts to and placing debts for collection with other collectors that engaged in egregious violations of the law.”
Under the terms of the settlement agreement, the respondents, among other things, must pay $1.2 million to the office of the AG in restitution and penalties and must dissolve all of the associated debt collection companies. The respondents are also permanently banned from engaging in consumer debt collection, consumer debt brokering, consumer lending, debt settlement, credit repair services, and payment processing.
CFPB issues FDCPA reminder on text messaging
On November 18, the CFPB issued a reminder that “debt collectors who adopt and follow certain procedures can obtain a bona fide error defense from civil liability for unintentional violations of the prohibition against third-party communications when communicating by email or text message,” as determined by the Bureau’s debt collection rule. As previously covered by InfoBytes, in October 2020 the CFPB issued its final rule amending Regulation F, which implements the FDCPA, addressing debt collection communications and prohibitions on harassment or abuse, false or misleading representations, and unfair practices. The reminder emphasizes that for text message communications, a provision in the rule includes utilizing a “complete and accurate database” to ensure that a consumer’s telephone number has not been re-assigned. Additionally, the reminder notes that the rule’s commentary identifies the FCC’s Reassigned Numbers Database as a “complete and accurate database,” which the FCC has published.
11th Circuit to rehear Hunstein v. Preferred Collection & Management Services
On November 17, the U.S. Court of Appeals for the Eleventh Circuit vacated an opinion in Hunstein v. Preferred Collection & Management Services, ordering an en banc rehearing of the case. The order vacates an 11th Circuit decision to revive claims that the defendant’s use of a third-party mail vendor to write, print, and send requests for medical debt repayment violated privacy rights established in the FDCPA. As previously covered by InfoBytes, in April, the 11th Circuit held that transmitting a consumer’s private data to a commercial mail vendor to generate debt collection letters violates Section 1692c(b) of the FDCPA because it is considered transmitting a consumer’s private data “in connection with the collection of any debt.” According to the order issued sua sponte by the 11th Circuit, an en banc panel of appellate judges will convene at a later date to rehear the case.