A New York federal district court has denied a motion to dismiss the lawsuit filed in January 2022 by the CFPB against three companies that purchase portfolios of defaulted debts (Corporate Defendants) and three individuals who are owners and/or officers of the Corporate Defendants (Individual Defendants). 

The lawsuit alleges that the Corporate Defendants contracted with debt collectors to collect consumer debts on their behalf either directly or through other debt collectors or sold consumer debts to debt collectors, some of whom were contractually required to make ongoing payments to the Corporate Defendants.  The CFPB alleges that both debt collectors who collected debts on the Corporate Defendants’ behalf and debt collectors to whom the Corporate Defendants sold debts used deceptive collection tactics, including false threats of lawsuits, arrest, and jail, and false statements about credit reporting.  The CFPB also alleges that the Corporate Defendants received complaints from consumers about the debt collectors’ unlawful practices but took no meaningful action to prevent or preclude it.  The CFPB’s claims against the Corporate and Individual Defendants consist of claims for Consumer Financial Protection Act (CFPA) and Fair Debt Collection Practices Act (FDCPA) violations based on vicarious liability for the debt collectors’ CFPA and FDCPA violations and claims for substantially assisting CFPA and FDCPA violations by the debt collectors.

In denying the motion to dismiss filed by the Corporate and Individual Defendants, the rulings made by the court include the following:

  • The defendants can be “covered persons” or “related persons” under the CFPA even if only the third-party debt collectors actually collected the debts. Under the CFPA, a “covered person” includes “any person that engages in offering or providing a consumer financial product or service.”  A “consumer financial product or service” includes “collecting debt related to any consumer financial product or service.”  A “related person” includes “any director, officer or employee charged with managerial responsibility” for a covered person.
  • CFPA liability can be based on vicarious liability and is not precluded by the existence of “substantial assistance” liability in the CFPA.  Therefore, the CFPB can proceed under both a vicarious liability and a substantial assistance liability theory.  The Corporate Defendants can be vicariously liable for unlawful acts taken by the debt collectors with actual authority to act on their behalf.
  • The Individual Defendants can be liable for the debt collectors’ unfair or deceptive acts or practices if they had actual knowledge of the unlawful conduct and the authority to control it.
  • Federal Rule of Civil Procedure 9(b), which requires a party alleging fraud or mistake to state with particularity the circumstances constituting fraud or mistake, does not apply to the CFPB’s substantial assistance claims.  A claim of deceptive acts or practices under the CFPA does not require proof of the same essential elements as common-law fraud and the knowledge or recklessness standard required for substantial assistance liability under the CFPA does not transform a substantial assistance claim into the sort of fraud-based claim that would trigger Rule 9(b).
  • The CFPB’s allegations that the Corporate and Individual Defendants placed debts for collection with or sold debts to the debt collectors who engaged in CFPA violations, helped those debt collectors succeed in violating the CFPA by taking steps to conceal the violations, and profited from their business relationships with the debt collectors is sufficient to allege that the Corporate and Individual Defendants substantially assisted the underlying CFPA violations.
  • FDCPA claims brought by the CFPB are governed by the CFPA’s three-year statute of limitations and not the FDCPA’s one–year statute of limitations.
  • A company that is a “debt collector” under the FDCPA can be vicariously liable for FDCPA violations committed by other debt collectors in connection with collecting debts on the company’s behalf.  A company that purchases portfolios of defaulted consumer debt and derives the majority of its revenues from debt collection can be a debt collector under the FDCPA because the principal purpose of its business is the collection of debts.

When it was filed, we observed that the CFPB’s claims in this enforcement action seemed particularly aggressive because rather than taking action against the debt collectors used by the Corporate Defendants or the debt buyers to whom they sold debts, the CFPB was seeking to hold the Corporate and Individual Defendants directly and separately responsible for the violations committed by these third parties.  While the CFPB will ultimately have to produce evidence to support its theories of liability and prove its claims to win on the merits of its lawsuit, the denial of the motion to dismiss means that the Corporate and Individual Defendants will be required to invest additional time and resources to defend the lawsuit.  As such, the takeaway for debt sellers (including first-party creditors) is that they should consider taking steps to reduce the risk of similar claims of vicarious liability or substantial assistance.  Such steps include performing appropriate due diligence when selecting debt collectors or debt buyers, monitoring debt collectors and debt buyers for compliance with applicable consumer protection laws and regulations, and promptly taking appropriate action when compliance issues arise to ensure full remediation of any issues.