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Judge grants MSJ in class action over disputed debt investigation
On July 28, the U.S. District Court for the Southern District of Alabama granted summary judgment in favor of a defendant third-party debt collector in an FCRA and FDCPA putative class action, holding that the defendant carried out a reasonable investigation following plaintiff’s dispute of the debt it had reported to credit reporting agencies (CRAs) and that the plaintiff failed to establish that the defendant knew or should have known that the debt was inaccurate or invalid. Defendant entered into an asset purchase agreement with another third-party debt collector and reported debts to credit reporting agencies under the name of the non-defendant third-party debt collector, including an account erroneously associated with plaintiff. When defendant received notice that plaintiff disputed the erroneous account information, defendant verified the account information in its system and provided by the CRA, asked the creditor to provide account documentation, and then requested that the CRAs delete their reporting of the account once the creditor failed to provide account documentation within the requested thirty-day period.
In relation to the FCRA claim, the court found that the defendant “did everything required by the FCRA in response to Plaintiff’s dispute” such that the plaintiff “failed to establish how this investigation was not reasonable” or in violation of the FCRA. The court also found that plaintiff “failed to show that any different result would have occurred had [defendant] conducted any part of its investigation differently.” Finally, plaintiff’s claim failed as a matter of law concerning defendant’s initial report of the debt to the CRAs because the defendant was not required under the FCRA to “investigate the validity of a debt before commencing to report on that account to the CRAs.” While the defendant was prohibited from reporting inaccurate consumer information, no private cause of action exists for violations of this initial reporting provision of the FCRA.
For the FDCPA claim, the court held that the plaintiff failed to establish that the defendant had knowledge that the debt it reported was not accurate or was otherwise disputed or invalid. Because the CFPB passed Regulation F in November 2021, after the events at question in this litigation, furnishing information regarding a debt to a CRA before communication with plaintiff was not unlawful at that time. Finally, the court found that plaintiff failed to timely assert that defendant violated the FDCPA provision prohibiting false, deceptive, or misleading representation by using the non-defendant third-party debt collector’s name when reporting the account to the CRAs because this allegation was not present in plaintiff’s complaint.
Supreme Court of New York: FDCPA does not require collectors to explain how debt is acquired
On July 19, the Supreme Court of the State of New York filed an order granting defendants’ motion for summary judgment, ruling that the FDCPA does not require debt collectors to provide debtors with proof of how they came to acquire the debt from the original creditor. One of the defendants purchased plaintiff’s defaulted credit card debt, which was placed with the second defendant for collection. The second defendant sent plaintiff a collection letter that identified the original creditor, along with the last four digits of the account number and identified the current creditor by name. Plaintiff sued, alleging violations of several sections of the FDCPA, claiming the letter was “false, deceptive, and misleading” because he never entered into a transaction with the current creditor and that the defendants reported the alleged debt to the credit reporting agencies. Plaintiff also maintained that prior to filing the lawsuit, he sought to validate the alleged debt but that neither defendant provided information sufficient to establish the current creditor’s ownership of the debt. Defendants filed for summary judgment seeking dismissal of plaintiff’s claims. In granting the motion, the court held that nothing in the FDCPA requires debt collectors “to educate the debtor ‘with proof, or at least a narrative, as to how it came to acquire the debt from [the] original creditor,’” and that the statute does not require plaintiffs to be notified when their debt is sold.
9th Circuit partially reverses FDCPA dismissal
On July 14, the U.S. Court of Appeals for the Ninth Circuit partially affirmed and partially reversed a district court’s dismissal of an FDCPA suit. The district court reviewed plaintiff’s claims under the FDCPA, which alleged that defendants violated the bankruptcy court’s order discharging his debt and knowingly filed a baseless debt collection lawsuit. The district court determined that the claims should be dismissed because (i) debtors do not have a private right of action for violations of the Bankruptcy Code; and (ii) the claim was time-barred due to the FDCPA’s one-year statute of limitations. On appeal, the 9th Circuit affirmed the dismissal of the plaintiff’s claims based on a violation of his bankruptcy discharge order but reversed the dismissal of the plaintiff’s baseless lawsuit claim, holding that it was not barred by the FDCPA’s statute of limitations.
The 9th Circuit reasoned that the plaintiff “correctly asserts that some litigation acts can constitute independent FDCPA violations and that each such violation triggers its own one-year statute of limitations under the FDCPA.” In making its decision “to determine whether a litigation act constitutes an independent violation of the FDCPA and thus has its own statute of limitations,” the appellate court derived a test, stating: “Under this test, if a debt collector decides to take a certain action during litigation, courts must assess whether that act was the debt collector’s ‘last opportunity to comply’ with the FDCPA.” Because the appellate court determined that service and filing are separate FDCPA violations and plaintiff brought suit within one year of defendants’ state law claim, the 9th Circuit held that plaintiff’s action was timely.
CFPB, states sue company over deceptive student lending and collection
On July 13, the CFPB joined state attorneys general from Washington, Oregon, Delaware, Minnesota, Illinois, Wisconsin, Massachusetts, North Carolina, South Carolina, and Virginia in taking action against an education firm accused of engaging in deceptive marketing and unfair debt collection practices. California’s Department of Financial Protection and Innovation is participating in the action as well. Prior to filing for bankruptcy, the Delaware-based defendant operated a private, for-profit vocational training program for software sales representatives. The joint complaint, filed as an adversary proceeding in the firm’s bankruptcy case, alleges that the defendant charged consumers up to $30,000 for its programs. The complaint further alleges that the defendant encouraged consumers who could not pay upfront to enter into income share agreements, which required minimum payments equal to between 12.5 and 16 percent of their gross income for 4 to 8 years or until they had paid a total of $30,000, whichever came first.
The complaint asserts that the defendant engaged in deceptive practices by misrepresenting its income share agreement as not a loan and not debt, and mislead borrowers into believing that no payments would need to be made until they received a job offer from a technology company with a minimum annual income of $60,000. The defendant is also accused of failing to disclose important financing terms, such as the amount financed, finance charges, and annual percentage rates, as required by TILA and Regulation Z. The complaint also claims that the defendant hired two debt collection companies to pursue collection activities on defaulted income share loans. One of the defendant debt collectors is accused of engaging in unfair practices by filing debt collection lawsuits in remote jurisdictions where consumers neither resided nor were physically present when the financing agreements were executed. The complaint further alleges the two defendant debt collectors violated the FDCPA and the CFPA by deceptively inducing consumers into settlement agreements and falsely claiming they owed more than they did.
According to the Bureau and the states, after the Delaware Department of Justice and Delaware courts began scrutinizing the debt collection lawsuits, the defendant unilaterally changed the terms of its contracts with consumers to force them into arbitration even though none of them had agreed to arbitrate their claims. Additionally, the complaint contends that settlement agreements marketed as being “beneficial” to consumers actually released consumers’ claims against the defendant and converted income share loans into revised “settlement agreements” that obligated them to make recurring monthly payments for several years and contained burdensome dispute resolution and collection terms.
The complaint seeks permanent injunctive relief, monetary relief, consumer redress, and civil money penalties. The CFPB and states are also seeking to void the income share loans.
District Court orders individual to pay $148 million in student debt-relief scam
On July 7, the U.S. District Court for the Central District of California entered a final judgment and order against an individual defendant accused of operating and controlling a deceptive student loan debt relief operation. As previously covered by InfoBytes, in 2019, the CFPB, along with the Minnesota and North Carolina attorneys general and the Los Angeles City Attorney (together, the “states”), announced an action against the student loan debt relief operation for allegedly deceiving thousands of student loan borrowers. The Bureau and the states alleged that since at least 2015, the debt relief operation violated the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), FDCPA, and various state laws by charging and collecting over $95 million in illegal advance fees from student loan borrowers. In addition, the Bureau and the states claimed that the debt relief operation engaged in deceptive practices by misrepresenting the purpose and application of the fees they charged and the nature and benefits of their services. Specifically, the debt relief operation allegedly failed to inform borrowers that, among other things, (i) they would request that the loans be placed in forbearance and interest would continue to accrue during the forbearance period, thereby increasing the borrowers’ overall loan balances; and (ii) it was their practice to submit false information about the borrowers to student loan servicers to try to qualify borrowers for lower monthly payments. The individual defendant was accused of owning, controlling, and managing the student loan debt relief operation, materially participating in the operation’s affairs, and providing substantial assistance or support while knowing or consciously avoiding knowledge that the operation was engaging in illegal conduct.
The individual defendant was held liable, jointly and severally, in the amount of approximately $95,057,757, for the purpose of providing redress to affected borrowers. Because the individual defendant was found to have recklessly violated the TSR and the CFPA, the court also imposed second-tier civil monetary penalties of $147,985,000 to the Bureau, of which $5,000 will be paid to each state. The final judgment also imposes various forms of injunctive relief, including permanent bans on engaging in consumer financial products or services and violating the TSR, CFPA, and similar laws in Minnesota, North Carolina, and California. The individual defendant is also prohibited from disclosing, using, or benefiting from customer information obtained in connection with the offering or providing of the debt relief services, and may not “attempt to collect, sell, assign, or otherwise transfer any right to collect payment from any consumer who purchased or agreed to purchase” a debt relief service from any of the defendants.
Split 9th Circuit: Nevada’s medical debt collection law is not preempted
The U.S. Court of Appeals for the Ninth Circuit recently issued a split decision upholding a Nevada medical debt collection law after concluding the statute was neither preempted by the FDCPA or the FCRA, nor a violation of the First Amendment. SB 248 took effect July 1, 2021, in the wake of the Covid-19 pandemic, and requires debt collection agencies to provide written notification to consumers 60 days “before taking any action to collect a medical debt.” Debt collection agencies are also barred from taking any action to collect a medical debt during the 60-day period, including reporting a debt to a consumer reporting agency.
Plaintiffs, a group of debt collectors, sued the Commissioner of the Financial Institutions Division of Nevada’s Department of Business and Industry after the bill was enacted, seeking a temporary restraining order and a preliminary injunction. In addition to claiming alleged preemption by the FDCPA and the FCRA, plaintiffs maintained that SB 248 is unconstitutionally vague and violates the First Amendment. The district court denied the motion, ruling that none of the arguments were likely to succeed on the merits.
In agreeing with the district court’s decision, the majority concluded that SB 248 is not unconstitutionally vague with respect to the term “before taking any action to collect a medical debt” and that any questions about what constitute actions to collect a medical debt were addressed by the statute’s implementing regulations. With respect to whether SB 248 violates the First Amendment, the majority held that debt collection communications are commercial speech and thus not subject to strict scrutiny. As to questions of preemption, the majority determined that SB 248 is not preempted by either the FDCPA or the FCRA. The majority explained that furnishers’ reporting obligations under the FCRA do not include a deadline for when furnishers must report a debt to a CRA and that the 60-day notice is not an attempt to collect a debt and therefore does not trigger the “mini-Miranda warning” required in a debt collector’s initial communication stating that “the debt collector is attempting to collect a debt.”
The third judge disagreed, arguing, among other things, that the majority’s “position requires setting aside common sense” in believing that the FDCPA does not preempt SB 248 because the 60-day notice is not an action in connection with the collection of a debt. “The only reason that a debt collector sends a Section 7 Notice is so that he can later start collecting a debt,” the dissenting judge wrote. “It is impossible to imagine a situation where a debt collector would send such a notice except in pursuit of his goal of ultimately obtaining payment for (i.e., collecting) the debt.” The dissenting judge further argued that by delaying the reporting of unpaid debts, SB 248 conflicts with the FCRA’s intention of ensuring credit information is accurately reported.
7th Circuit: Time and money in responding to second verification request confers standing under FDCPA
On June 7, the U.S. Court of Appeals for the Seventh Circuit held that spending time and money to send a second verification request is enough to confer standing under the FDCPA. Plaintiff’s defaulted credit card debt was purchased by one of the defendants and placed with a collection agency. A letter providing details about the debt, including the original creditor, current creditor, and a validation notice, was sent to the plaintiff. Within the required 30-day timeframe, plaintiff sent a letter to the collection agency requesting validation of the debt. However, instead of receiving a response from the agency, plaintiff received another letter from one of the defendants that provided information on the debt and informed her that it had initiated a review of the inquiry it had received. The second letter also included a validation notice, which confused the plaintiff and resulted in her spending time and money ($3.95) to request validation again. Plaintiff filed suit accusing the defendants of violating the FDCPA and asserting that the second letter would lead a consumer to believe that they must re-dispute the debt. According to the plaintiff, the letter, among other things, used false, deceptive, misleading, and unfair or unconscionable means to collect or attempt to collect a debt. The defendants moved to dismiss for lack of standing, arguing that while the letter may have confused and alarmed the plaintiff, it did not cause her to initiate “any action to her detriment on account of her confusion.” The district court granted defendants’ motion to dismiss, ruling that the time and money spent on sending the second validation request did not rise to the level of detriment required for standing under the FDCPA, and that, moreover, it provided plaintiff with another opportunity to dispute the debt if she failed to properly do so the first time.
Disagreeing with the dismissal, the 7th Circuit wrote that the second postage fee (albeit modest in size) is the type of harm that Congress intended to protect consumers from when it enacted the FDCPA. “Money damages caused by misleading communications from the debt collector are certainly included in the sphere of interests that Congress sought to protect,” the appellate court stated, explaining that the second letter caused the plaintiff “to suffer a concrete detriment to her debt-management choices in the form of the expenditure of additional money to preserve rights she had already preserved.”
7th Circuit: Time and money spent responding to second verification request is sufficient for standing
On June 7, the U.S. Court of Appeals for the Seventh Circuit held that spending time and money to send a second verification request is enough to confer standing under the FDCPA. Plaintiff’s defaulted credit card debt was purchased by one of the defendants and placed with a collection agency. A letter providing details about the debt, including the original creditor, current creditor, and a validation notice, was sent to the plaintiff. Within the required 30-day timeframe, plaintiff sent a letter to the collection agency requesting validation of the debt. However, instead of receiving a response from the agency, plaintiff received another letter from one of the defendants that provided information on the debt and informed her that it had initiated a review of the inquiry it had received. The second letter also included a validation notice, which confused the plaintiff and resulted in her spending time and money ($3.95) to request validation again. Plaintiff filed suit accusing the defendants of violating the FDCPA and asserting that the second letter would lead a consumer to believe that they must re-dispute the debt. According to the plaintiff, the letter, among other things, used false, deceptive, misleading, and unfair or unconscionable means to collect or attempt to collect a debt. The defendants moved to dismiss for lack of standing, arguing that while the letter may have confused and alarmed the plaintiff, it did not cause her to initiate “any action to her detriment on account of her confusion.” The district court granted defendants’ motion to dismiss, ruling that the time and money spent on sending the second validation request did not rise to the level of detriment required for standing under the FDCPA, and that, moreover, it provided plaintiff with another opportunity to dispute the debt if she failed to properly do so the first time.
Disagreeing with the dismissal, the 7th Circuit wrote that the second postage fee (albeit modest in size) is the type of harm that Congress intended to protect consumers from when it enacted the FDCPA. “Money damages caused by misleading communications from the debt collector are certainly included in the sphere of interests that Congress sought to protect,” the appellate court stated, explaining that the second letter caused the plaintiff “to suffer a concrete detriment to her debt-management choices in the form of the expenditure of additional money to preserve rights she had already preserved.”
Pennsylvania reaches $11 million settlement with rent-to-own company
On May 15, the Pennsylvania attorney general announced a $11.4 million settlement with a rent-to-own lender and its subsidiaries accused of engaging in predatory practices targeting low-income borrowers and employing deceptive collection practices. According to the AG, the lender disguised one-year rent-to-own agreements as “100-Day Cash Payoffs” and then concealed the balances owed. The AG maintained that consumers were locked into binding 12-month agreements that included high leasing fees (equal to 152 percent APR interest). The AG explained that consumers entitled to restitution and relief “had already satisfied the cash price, the sales tax on the cash price, and the processing fees associated with their purchase – yet still owed [the lender] a balance.” Additionally, the AG accused the lender of using a web-based portal for creating and signing contracts, which made it easy for persons other than the consumer to sign the agreements.
The order requires the lender to pay $7.3 million in restitution that will be distributed to affected consumers, $200,000 in civil penalties, and $750,000 in costs to be paid to the AG to be used for public protection and education purposes. Additionally, the lender is required to reduce the balances of delinquent lease-to-own accounts for certain rental purchase agreements, resulting in a $3.15 million aggregate reduction in balances. The lender has also agreed to, among other things, not represent or imply that failure to pay a debt owed or alleged to be owed “will result in the seizure, attachment or sale of any property that is the subject of the debt unless such action is lawful” or that the lender’s subsidiary intends to take such actions. The lender is also prohibited from collecting any amount, including interest, fees, charges, or expenses incidental to the principal obligation, unless the amount is expressly authorized by the agreement creating the obligation or permitted by law. Furthermore, the lender’s subsidiaries must clearly and conspicuously disclose customer balances during servicing calls and through a customer portal.
Maryland eliminates separate licensing requirement for branches
On May 8, the Maryland governor signed HB 686 to eliminate a requirement that collection agencies and certain non-depository financial institutions must maintain separate licenses for branch locations. The Act now allows such entities to conduct business at multiple licensed locations under a single license. The Act also amends and clarifies other provisions relating to application requirements, licensee information listed in the Nationwide Multi-State Licensing System and Registry, requirements when using trade names, examinations, Commissioner of Financial Regulation assessments, and surety bond requirements. The Act is effective July 1.