The FTC has announced a settlement of its first enforcement action targeting the practice of “debt parking.” As described in the FTC’s complaint filed in a Missouri federal district court against Midwest Recovery Systems, LLC and its owners, this practice, also referred to as “passive debt collection,” involves the placing of purported debts on consumers’ credit reports without first attempting to communicate with consumers about the debts.
In its lawsuit, the FTC alleged that since 2015, Midwest reported more than $98 million in purported debts to credit reporting agencies. Such debts allegedly included debts for unauthorized or counterfeit payday loans, debts subject to unresolved fraud claims, debts in bankruptcy, debts in the process of being rebilled to consumers’ medical insurance, and debts already paid to the defendants. According to the complaint, the defendants continued to attempt to collect such debts despite various red flags about their validity, including numerous consumer complaints and disputes and an inability to validate numerous debts.
The FTC alleged that based on their “debt parking” practice, the defendants’ engaged in the following unlawful conduct:
- Deceptive conduct in violation of Section 5 of the FTC Act as a result of having made false or unsubstantiated claims that consumers were delinquent on the reported debts or had a legal obligation to pay the defendants
- False or misleading representations in violation of the FDCPA as a result of falsely representing the character, amount, or legal status of debts, communicating credit information which is known or should be known to be false, and using false representations or deceptive means to collect debts
- Unfair collection practices in violation of the FDCPA as a result of using unfair means to collect debts, including by furnishing information to a consumer reporting agency before communicating with the consumer about the debt
- Not providing validation notices in violation of the FDCPA
- Furnishing inaccurate information to consumer reporting agencies in violation of the FCRA because the defendants knew or had reasonable cause to believe such information was inaccurate
- Failing to conduct reasonable investigations of direct disputes in violation of the FCRA and the FCRA Furnisher Rule
- Failing to report the results of investigations to consumers in violation of the FCRA and the FCRA Furnisher Rule
In addition to prohibiting the defendants from engaging in the conduct targeted by the lawsuit, the Stipulated Order for Permanent Injunction and Monetary Judgment requires the defendants, when a consumer disputes that a debt is owed or the amount, to (1) report the debt as disputed or request its deletion within 30 days, and (2) promptly cease collection and not transfer or sell the debt or conduct an investigation in accordance with the Stipulated Order. The settlement imposes a monetary judgment of $24.3 million, which is partially suspended based on the defendants’ inability to pay. Also, Midwest and one of its owners must pay $56,748, such owner must sell his ownership interest in another debt collection company and transfer the sale proceeds to the FTC, and Midwest Recovery must transfer any remaining funds to the FTC.
In a blog post about the settlement, the FTC highlights “some takeaway tips for others in the collections ecosystem.” It notes that the settlement is among the first FTC matters to address medical debt and that accuracy issues related to medical debt “are a particular concern.” The FTC also cautions debt collectors to “exercise caution at the intersection of debt collection and credit reports” in order to avoid “a steaming alphabet soup of FDCPA and FCRA violations.” It observes that prudent debt collectors “scrutinize questionable categories of debt and debts to questionable creditors” and “also contact consumers and listen to what they have to say before furnishing information to credit reporting agencies.”
Commissioners Rohit Chopra and Rebecca Slaughter issued statements about the settlement in which they urged the FTC to more closely cooperate with the CFPB in debt collection enforcement actions. Both commissioners commented that the CFPB’s authority to obtain civil penalties would allow victims to qualify for monetary redress from the CFPB’s Civil Penalty Fund, even if the penalty in a case were only $1. Commissioner Chopra observed in his statement that the FTC has not put various legal authorities granted to it by Congress since 2010 “to use in a meaningful way.” Such authorities include the FTC’s rulemaking authority over certain auto financing and sales practices and the FTC’s enforcement authority under the Military Lending Act and Congress’s related directive for the FTC to coordinate with the Federal Reserve Board and the CFPB to address abuses against military families in the auto sector. It is likely that the CFPB, under a new Director appointed by Joe Biden, will be receptive to greater cooperation with the FTC. In addition, in a Biden Administration, the FTC could become more aggressive in its use of the authorities cited by Commissioner Chopra.
Finally, debt collectors should likewise note that the CFPB’s proposed debt collection rule deemed “debt parking” to be an “other prohibited practice” under the FDCPA, with the sending of the validation notice satisfying the requirement for communication with the consumer prior to reporting to the Bureau. While that topic was not addressed in the final rule adopted by the CFPB in October 2020 and recently published in the Federal Register, it is expected to be addressed in the disclosure-focused final rule that the CFPB has said it will issue this month, and the prohibition on debt parking is likely to be adopted as proposed.