InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB Finalizes Rule to Supervise "Larger Participant" Consumer Reporting Agencies
On July 16, the CFPB finalized a rule that will allow it to begin supervising certain consumer reporting agencies (CRAs). Under the Dodd-Frank Act, the CFPB has authority to supervise, regardless of size, nonbanks offering (i) certain mortgage-related products and services, (ii) private education loans, and (iii) payday loans. The CFPB also has the power to supervise “larger participants” in any other market for consumer financial products or services, provided that it first conducts a rulemaking to define “larger participants.” Under this first “larger participant” rule, the CFPB will have supervisory authority over CRAs with more than $7 million in annual receipts from consumer reporting activities, effective September 30, 2012. The CFPB believes that the $7 million threshold will cover 30 companies that account for 94% of total industry receipts. The final rule is divided into two parts: (i) Subpart A sets the definitions and other terms applicable to the CFPB’s supervision of “larger participants” in general, and (ii) Subpart B identifies the market, terms, and “larger participant” test for the CRA industry. This latter part will be expanded for each new market the CFPB opts to supervise under its “larger participant” authority. While the rule as proposed also included a threshold for use in identifying “larger participants” in the debt collection market, the CFPB has postponed issuance of the final debt collection “larger participant” rule until the fall. The CFPB described the final rule as “the first in a series of rules to define larger participants of other markets.”
West Virginia AG Reaches Settlement with Debt Collection Firm
On July 3, West Virginia Attorney General (AG) Darrell McGraw announced that his office had reached an agreement with a debt collection firm for allegedly engaging in unlawful and threatening debt collection practices and attempting to collect debts without being properly licensed. Under the terms of the settlement, the company will be required to pay $1.7 million in refunds and cancelled debts to 124 West Virginians. The AGs Consumer Protection Division started investigating the company in January 2012 after receiving a complaint about its debt collection practices. According to the AGs investigation, the debt collection firm engaged in a pattern of abusive collection methods which included threatening to arrest consumers for non-payment of debts.
Ninth Circuit Holds Debt Validation Notice That Implicitly Requires Debtor to Dispute Debt in Writing Does Not Violate FDCPA
On June 8, the U.S. Court of Appeals for the Ninth Circuit held that a debt validation notice does not violate the FDCPA if it only implicitly, rather than expressly, requires a debtor to dispute his or her debt in writing. Riggs v. Prober & Raphael, No. 10-17220, 2012 WL 2054640 (9th Cir. June 8, 2012). In Riggs, a debt collection law firm, in seeking to collect a debt owed to one of its clients, sent a debt validation notice to a debtor which implied that if the debtor wanted to dispute the debt, she would need to do so in writing. The debtor failed to contact the firm and made no payment towards her debt. Instead, after settling an action brought against her by the firm in state court, the debtor filed suit against the firm in federal court, alleging that the firm violated the FDCPA and its California equivalent because it required her to dispute her debt in writing and therefore misrepresented her right to dispute the debt. In affirming the ruling of the district court, the Ninth Circuit acknowledged that the least sophisticated consumer could interpret the firms debt validation notice to imply that any dispute of the debt must be in writing. Nevertheless, recognizing that the FDCPA itself can be read to imply that a debtor must dispute a debt in writing, the Ninth Circuit held that there is a violation of the FDCPA only where the debt validation notice expressly requires the dispute be in writing.
State Courts Requiring More Proof to Obtain Affidavit Judgments in Debt Collection Cases
On April 30, the Tennessee Court of Appeals ruled that affidavits submitted as evidence of a debt were inadmissible under the business records exception to the hearsay rule and judgment against the debtor was thus reversed because, absent such evidence, the creditor could not establish the existence or amount of debt. LVNV Funding, LLC v. Mastaw, M2011-00990-COA-R3-CV, 2012 WL 1534785 (Tenn. Ct. App. Apr. 30, 2012). The court found that the affidavits, which had been prepared specifically for the litigation in order to show existence and ownership of debt, did not incorporate by reference or otherwise summarize or interpret documents that are prepared in the normal course of regularly conducted business activity and therefore did not qualify for the business records exception to the hearsay rule. As another example of increased documentation requirements for debt collectors, new rules went into effect earlier this year in Maryland, where its Court of Appeals adopted rule changes that, effective January 1, 2012, similarly require debt buyers to provide more proof before being allowed to obtain affidavit judgments against consumers to recover debts. The new rules require additional information from debt buyers, including better proof of an existing debt or interest owed on a debt, and proof from the debt buyer that they own the debt they are trying to collect.
State Law Update: Recent Changes in Maryland, Minnesota, and Mississippi
Maryland Adds Foreclosure Registration Requirement, Authorizes Pre-file Mediation, Amends Mortgage Licensing. On May 2, Maryland Governor O’Malley signed House Bill 1373, which establishes a state foreclosed property registry. Foreclosure purchasers are required to (i) file an initial registration and pay a $50 registration fee for each foreclosed property within 30 days after a foreclosure sale, and (ii) file a final registration, with no additional fee, within 30 days after a deed transferring the title has been recorded. The law allows local jurisdictions to (i) enact laws that impose a civil penalty for failure to register under the new state requirement and (ii) collect from the foreclosure purchaser, as a charge on the property’s property tax bill, any costs associated with abating a nuisance on a registered property. The Governor also signed on May 2, House Bill 1374, which authorizes a secured party to offer to participate in pre-file mediation with a mortgagor or grantor to whom the secured party has delivered a notice of intent to foreclose. If the mortgagor or granter elects to participate, an order to docket or complaint to foreclose cannot be filed until the completion of the mediation. The bill also establishes a process through which a person with a secured interest in residential property that is in default can seek from a local jurisdiction a certificate of vacancy. If a certificate is not challenged by the record owner or occupant of the property the secured party can expedite the foreclosure process.
Finally, on the same date, Maryland enacted Senate Bill 546, which (i) requires a mortgage lender licensee to provide the commissioner with proof satisfying specified minimum net worth requirements within 90 days after the last day of the licensee’s most recent fiscal year and (ii) establishes a nonactive license status and process for licensees that cease to be employed by an approved financial institution.
Minnesota Amends Debt Collector Requirements. On April 23, Minnesota enacted House Bill 2335, which amends requirements for individual debt collectors and collection agencies. The bill (i) provides individual collectors additional time to report a change of contact information, (ii) sets requirements for a personnel screening process that a debt collection agency must follow in hiring and retaining individual collectors, and (iii) revises the list of past events that disqualify a person from registration as a debt collector. The final bill did not include a proposed revision that would have allowed individual debt collectors to remedy violations of the statute.
Mississippi Adds Protections for Bank Self-Assessments. On April 19, Mississippi enacted House Bill 1460 to grant privileged treatment to certain bank reports. The law takes effect July 1, 2012. Under the new law, reports reflecting voluntary self-assessments by banks, which are submitted to a bank regulator but not otherwise provided to third parties, will be considered privileged and not admissible in any legal or investigative action and are not subject to discovery in such actions. The law sets forth exceptions and circumstances under which the protections do not apply, including if a court determines that a report shows that a bank was not in compliance with a material provision of banking law, the bank did not initiate good-faith efforts to achieve substantial compliance within a reasonable time after the noncompliance was discovered, and the bank's failure to comply caused material harm to a bank customer or consumer.
Federal Appeals Court Finds Plaintiff States FDCPA Claim Against Servicer, Creditor When Acquiring Debt Purportedly in Default
On April 30, the U.S. Court of Appeals for the Sixth Circuit held that a mortgage servicer and a creditor can be sued as a debt collector under the Fair Debt Collection Practices Act (FDCPA) when acquiring a debt in default at the time of acquisition. The plaintiffs, a borrower and her non-borrower husband, alleged that the servicer and creditor violated the FDCPA in attempting to collect from the borrower and her husband, notwithstanding that the mortgage was not in default and despite plaintiffs’ repeated requests the servicer cease further communication. The servicer argued that it could not be liable under the FDCPA based upon its status as a mortgage loan servicer and because the debt was not actually in default. Similarly, the creditor argued that as the purchaser of the debt it could not be a debt collector and that it was neither a debt collector nor a creditor under the circumstances of the case. The district court, assuming plaintiff’s allegations that the servicer was not a servicer and that the creditor was not a creditor for purposes of the motion to dismiss, granted the motion on the basis that neither the servicer nor owner was a debt collector under the FDCPA. On appeal, the court, relying on congressional intent and previous decisions from the Third and Seventh Circuits, held that an entity that acquires a debt it seeks to collect must be either a creditor or a debt collector, depending on the status of the debt at the time it was acquired. Similarly, the court held the servicer may be either a servicer or debt collector when acting on behalf of the debt-acquiring entity. To hold otherwise, the court reasoned, would frustrate the purpose of the FDCPA’s broad consumer protections. Further, the court held that after years of attempting to collect on the debt and acting as a debt collector, the servicer could not now attempt to defeat the broad protections of the FDCPA by relying on the borrower’s assertion that the loan was not actually in default. Finally, the court rejected the defendants’ claims that the plaintiff-husband failed to state a claim since he was not actually obligated on the debt in light of the FDCPA’s application to debt collectors when attempting to collect a debt “owed or due or asserted to be owed or due another.” The appellate court reversed and remanded the case for further proceedings.
Fourth Circuit Holds State Debt Collection Law Not Preempted by National Banking Act
On April 5, the Fourth Circuit held that the National Bank Act (NBA) did not preempt the Maryland Credit Grantor Closed End Credit Provisions (CLEC). Epps v. JP Morgan Chase Bank, No. 10-2444, 2012 WL 1134065 (4th Cir. Apr. 5, 2012). In Epps, the plaintiff purchased a car through a retail sales installment contract subject to the CLEC. The contract was later assigned to Chase which repossessed the vehicle after the plaintiff defaulted. The plaintiff brought a putative class action alleging in part that Chases notices regarding the sale of the vehicle failed to comply with the CLEC. Relying on OCC regulations implementing the NBA, 12 C.F.R. § 7.4008(d)-(e), the Fourth Circuit reversed the District Court for the District of Maryland and held that the CLEC was not preempted. The court explained that because the CLEC provisions at issue related exclusively to repossession and not to the extension of credit, they were not preempted by the NBA and excluded from preemption by the OCCs regulations. The court further found that the notices required under CLEC, which only related to debt collection upon default under an existing loan, were not disclosures within the meaning of the NBA and OCC regulations.