A Texas federal district court has entered a $2 million civil penalty judgment against the former president of a debt collection company for alleged violations of the FDCPA and FTC Act.  The judgment follows the court’s finding in a prior order that $2 million was a “reasonable and appropriate penalty for [the president’s] violations of the Fair Debt Collection Practices Act.”  The company and former president had previously been banned by the court from “participating in debt collection activities”  and “advertising, marketing, promoting, offering for sale, selling, or buying any consumer or commercial debt or any consumer information relating to a debt.” 

In January 2015, the DOJ, on behalf of the FTC, had filed a complaint against the company and its former president and vice president alleging that the defendants had engaged in various practices in violation of the FDCPA and FTC Act, including impersonating attorneys and attorneys’ staff and falsely threatening consumers with litigation or wage garnishment.  In April 2016, the court entered summary judgment against the company and former president, stating “the summary judgment record is clear and uncontroverted that [the company] is a debt collector covered by the FDCPA and that its collectors have committed numerous violations of the FDCPA and Section 5 of the FTC Act.”  With regard to the company’s president, the court found that as president and sole owner of the company, he had actual or implied knowledge of the FDCPA violations because he “not only played a role in formulating the policies and practices that resulted in the violative acts, but in fact actually set the policies of his company.  As President, he had the authority to fire or otherwise discipline his employees for employing deceptive debt collection activities.”   In September 2016, the court entered a stipulated order permanently banning the company’s former vice president from participating in debt collection activities and activities related to the sale or purchase of consumer or commercial debts or debt-related consumer information. The order also imposed a $496,000 civil penalty judgment that was suspended except for $10,000 based on inability to pay.) 

In its order finding $2 million to be an appropriate penalty, the court noted that the FTC Act authorizes a penalty of up to $40,000 for each act that violates the FDCPA “with actual or implied knowledge of the FDCPA” and that the “maximum theoretical penalty for the estimated  109,634 violations exceeds $4 billion.”  The court stated that the FTC had established the defendant’s lack of good faith through his admissions that the company had no formal FDCPA training program and that he had hired “abusive collection managers and refused to fire them if they were effective.”  The court also noted his awareness of consumer complaints and that he “he had the ultimate authority over the collection managers and the collectors.”

 

 

The FTC issued a press release earlier this week in which it stated that it is “moving aggressively to implement Presidential directives aimed at eliminating wasteful, unnecessary regulations and processes.”  The press release does not identify the directives but presumably they are contained in President Trump’s executive orders entitled “Core Principles for Regulating the United States Financial System” and “Presidential Executive Order on a Comprehensive Plan for Reorganizing the Executive Branch.”

The press release listed a series of initiatives that are already underway to implement the directives that include the following:

  • New groups within the FTC’s Bureau of Competition and Bureau of Consumer Protection are working to streamline demands for information in investigations to eliminate unnecessary costs to recipients of such demands.
  • Both Bureaus are reviewing their dockets and closing older investigations, where appropriate.
  • The entire FTC is working to identify unnecessary regulations that are no longer in the public interest.
  • The Bureaus of Consumer Protection and Economics are working together to integrate economic expertise earlier in FTC investigations to better inform agency decisions about the consumer welfare effects of enforcement actions

Last week the Office of the Comptroller of the Currency published a “Retail Lending” booklet, a new addition to the Safety and Soundness Asset Quality category of the Comptroller’s Handbook, which discusses the risks associated with retail lending and provides a framework for OCC examiners to evaluate retail credit risk management activities. Retail lending product types include consumer loans, credit cards, auto loans, student loans, and loans to individuals secured by their personal residences.

The “Retail Lending” booklet describes:

  • the elements of a sound retail lending risk management framework;
  • the criteria examiners should consider when evaluating retail credit originations, account management, collections, and portfolio management activities and processes; and
  • the objectives of control functions commonly used in a retail lending business to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel.

Note that for OCC supervision purposes for both banks supervised by the CFPB and banks with less than $10B in assets, compliance risk from violations of federal consumer protection laws presents a safety and soundness risk to earnings or capital. The OCC notes that “[b]ecause of the number of consumer protection laws and regulations, banks engaged in retail lending are highly vulnerable to compliance risk.”

Banks supervised by the OCC should review and consider this booklet, particularly the examination procedures and Internal Control Questionnaire, to help evaluate the bank’s retail lending controls in advance of an OCC examiner’s use of these materials to evaluate your institution.

The second presentation of the 22nd Annual Consumer Financial Services Institute, sponsored by the Practising Law Institute, will take place in Chicago on May 4-5, 2017.  I am co-chairing the event, as I have for the past 21 years.  Hundreds of people attended the first presentation in NYC, live and on the web, on April 27-28, 2017.  The upcoming Chicago presentation is nearly sold out.

As it did in New York, the Institute will feature a 2-hour program at the beginning of the first day titled “The CFPB Speaks: Recent and Upcoming Initiatives.”  (Read our blog post recapping the NYC presentation here.)  I will moderate a panel discussion of three senior CFPB lawyers and two industry lawyers (one of whom will be my partner Chris Willis) who have extensive experience in dealing with the CFPB.

The CFPB panelists in Chicago will be:

  • Kristen Donoghue, Principal Deputy for Enforcement
  • Kelly T. Cochran, Assistant Director, Office of Regulations
  • Peggy L. Twohig, Assistant Director for Supervision Policy

The Institute will focus on a variety of cutting-edge issues and developments, including:

  • Impact of the election on the CFPB, other federal and state agencies
  • Privacy and data security
  • Fair lending
  • Mortgages
  • Emerging payments
  • State regulatory initiatives and developments
  • Class action developments and settlements
  • Debt collection
  • TCPA and FCRA

We hope you can join us for this informative and valuable program.  PLI has made a special 25 percent discounted registration fee available to those who register using the link that follows.  To register and view a complete description of PLI’s 22nd Annual Consumer Financial Services Institute, click here.

For more information, contact Danielle Cohen at 212.824.5857 or dcohen@pli.edu.

We have expanded CFPB Monitor. This new blog—Consumer Finance Monitor—includes all the news in the CFPB Monitor. It also features a Federal CFS Monitor for analysis on the many other federal agencies that regulate our industry and a State CFS Monitor,  which covers state agency and attorney general developments. News is segmented by topic and agency on the right. A full compilation is below. Thank you for visiting and we hope you enjoy our new blog.

The FTC has announced that to study the effectiveness of various class action settlement notice programs, it has issued orders to eight claims administrators requiring them to provide information on their procedures for notifying class members about settlements and the response rates for various methods of notification.

It is anticipated that such information will demonstrate that only a very small fraction of class members who must file claims to participate in a settlement fund actually do so.  Such information would provide support for critics of the CFPB’s proposed arbitration rule and serve as further evidence that the CFPB’s premise that consumers obtain more meaningful relief through class actions than in arbitration is incorrect.

The CFPB’s own arbitration study included data showing that even class members entitled to benefits frequently fail to obtain them.  The study found that in “claims made” class action settlements, the unweighted average claims rate was 21 percent and median was 8 percent.  The weighted average claim rate was only 4 percent.  Moreover, claims rates fell nearly 90 percent if documentary proof was required.  Presumably, the funds not distributed to the class members either reverted to the company or were used for a cy pres distribution

For more information on the FTC’s announcement, see our legal alert.

As observers ponder the CFPB’s future in a Trump Administration, the Federal Trade Commission’s continuing role as an enforcer of federal consumer financial protection laws should not be overlooked.  Over the approximately five years the CFPB has been operational, the FTC has demonstrated its intention to vigorously use its enforcement authority as to nonbanks even where it shares that authority with the CFPB.

On January 4, 2017, from 12 p.m. to 1 p.m., Ballard Spahr attorneys will conduct a webinar, “Beyond the CFPB: The Enforcement Role of the FTC and Other Federal Regulators Post-Election.”  A link to register is available here.

Under the Consumer Financial Protection Act, the FTC retained its authority to enforce Section 5 of the FTC Act against all nonbanks within its jurisdiction.  Section 5 prohibits unfair or deceptive acts or practices.  It also retained its enforcement authority for nonbanks under the “enumerated consumer financial laws.”  Such laws include the TILA, CLA, EFTA, ECOA, FDCPA, FCRA and Gramm-Leach-Bliley.

Other laws that can be enforced by the FTC as to nonbanks include the Military Loan Act, the Telemarketing and Consumer Fraud and Abuse Protection Act, and the Credit Repair Organizations Act.

In addition to its implications for CFPB rulemaking, the D.C. Circuit’s decision in PHH Corporation v. CFPB has significant implications for the CFPB’s authority to enforce federal consumer financial protection laws as well as the Consumer Financial Protection Act (CFPA) prohibition of unfair, deceptive, or abusive acts or practices (UDAAP).

In its decision, the D.C. Circuit ruled not only that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional but also ruled that RESPA’s three-year statute of limitations (SOL) applies to CFPB administrative enforcement actions.  According to the court, when using it authority under Section 5563 of the CFPA to conduct hearings and adjudication proceedings to enforce a federal consumer financial protection law as to which it has enforcement authority, the CFPB is subject to any limits in such law, such as a SOL.  It stated that “[b]y its terms, then, Section 5563 ties the CFPB’s administrative adjudications to the statutes of limitations of the various federal consumer protection laws it is charged with enforcing.”

RESPA’s SOL provides that “actions brought by the Bureau, the Secretary [of HUD], the Attorney General of any State, or the insurance commissioner of any State may be brought within 3 years from the date of the occurrence of the violation.”  Not only did the court reject the CFPB’s argument that RESPA’s SOL did not apply to administrative enforcement actions, it also rejected the CFPB’s argument that by its terms, RESPA’s three-year SOL was limited to court actions.  The court concluded that the reference to “actions” in RESPA’s SOL includes both CFPB RESPA enforcement actions brought administratively and those brought  in court.

The court’s statement that Section 5563 “ties the CFPB’s administrative adjudications to the statutes of limitations of the various federal consumer protection laws it is charged with enforcing” has implications for attempts by the CFPB to avoid the SOLs of federal consumer financial protection laws other than RESPA.  Indeed, the court specifically noted that the CFPB’s argument that it was not bound by RESPA’s SOL “would extend to all 19 of the consumer protection laws that Congress empowered the CFPB to enforce” and cited to the CFPB’s administrative enforcement action against Integrity Advance, LLC in which the CFPB’s Administrative Law Judge (ALJ) found that the CFPB was not bound by the TILA or EFTA SOLs.  The respondents in that case filed a motion to stay their appeal of the ALJ’s decision and for their case to be remanded to the ALJ for reconsideration in light of the D.C. Circuit’s PHH decision.  The motion was denied by Director Cordray who, in an order issued on October 31, 2016, stated that he “was fully able to address [the respondents’] arguments about the appropriate statute of limitations in this appeal” and that he had “extended the briefing schedule sua sponte to ensure that the parties would have a full opportunity to present arguments on the impact (if any) of the D.C. Circuit’s decision in PHH v. CFPB.”

In addition to the ALJ’s finding in Integrity Advance that the CFPB was not bound by the TILA and EFTA SOLs, the ALJ found that the three-year SOL in Section 5564(g)(1) for actions to enforce the CFPA did not apply to the CFPB’s UDAAP claims. Section 5564(g)(1) provides that “[e]xcept as otherwise permitted by law or equity, no action may be brought under this title more than 3 years after the date of discovery of the violation to which an action relates.”  In rejecting the CFPB’s reading of “actions” in RESPA’s SOL, the D.C. Circuit observed that “[t]he Dodd-Frank Act repeatedly uses the term “action” to encompass court actions and administrative proceedings” and cited to various Dodd-Frank sections as examples.  Assuming the term “action” in Section 5564(g)(1) would similarly be read to encompass court actions and administrative proceedings, the CFPB would be bound by the provision’s three-year SOL, including its discovery rule, when bringing administrative actions to enforce its UDAAP authority.

The implications of the SOL issues for the CFPB’s exercise of its enforcement authority could include the fast-tracking of enforcement matters and greater use of its UDAAP authority for conduct that violates a federal consumer financial protection law with a SOL that is less than 3 years.  We will be watching to see how Director Cordray addresses the respondent’s TILA, EFTA and UDAAP SOL arguments when he rules on Integrity Advance’s appeal.

 

The CFPB announced that, jointly with the New York Attorney General, it has filed a lawsuit in a New York federal court against three companies that purchased consumer debts and two of the companies’ individual principals alleging that the defendants engaged in a “massive illegal debt-collection scheme.”

The complaint alleges that the defendants’ conduct violated the FDCPA, the UDAAP prohibition of the Consumer Financial Protection Act, and various New York laws, including New York’s debt collection and UDAP laws.  The FDCPA and NY state law claims are asserted by only, respectively, the CFPB and NY AG, while the UDAAP claims are asserted by both the CFPB and NY AG.  Under CFPA Section 1042, a state AG is authorized to bring a civil action for a violation of the CFPA UDAAP prohibition. While Section 1042 is not cited in the complaint, presumably the UDAAP claims rely on Section 1042 for the NY AG’s authority.  Although the NY Department of Financial Services has previously relied on Section 1042 to file a lawsuit alleging UDAAP violations, this is the first time we are aware of that the NY AG has relied on Section 1042 to assert UDAAP claims in court.  Several other state AGs have also used Section 1042 to assert UDAAP claims.

Each of the claims alleged in the complaint are asserted against one or more of the defendant companies and both individual principals.  The UDAAP claims allege that the individuals are liable for the companies’ UDAAP violations because they knew or should have known of the companies’ alleged illegal practices.  According to the complaint, the individuals directed the companies’ operations, were aware of a debt seller’s audit that identified illegal practices by the companies, and the companies had received numerous complaints and inquiries from consumers, government agencies and consumer organizations about their collection practices.  With regard to the FDCPA claims, the CFPB alleges that the individuals’ involvement in the companies’ debt collection activities, including their management of staff and approval of the companies’ collection policies and practices, made them “debt collectors” under the FDCPA.

The complaint alleges that the defendants engaged in unlawful conduct that included:

  • Adding $200 to each consumer debt account the companies acquired without regard to whether the addition of such amount was permitted by applicable state law or the underlying contract between the consumer and the original creditor
  • Falsely threatening consumers with legal action they had no intention of taking and impersonating law enforcement officials, government agencies, and court officers, including using call-spoofing technologies to make it appear that collectors were calling from government agencies.

 

The CFPB has posted on its TILA-RESPA implementation webpage updated versions of its Small Entity Compliance Guide and Guide to Loan Estimate and Closing Disclosure Forms.  The updates focus on various guidance provided in recent TILA/RESPA Integrated Disclosure (TRID) rule webinars provided by the Bureau.  We have previously addressed the content of the March 1, 2016 and April 12, 2016 webinars.

Among the changes, the CFPB added the following language to the second Guide, apparently to address the issue in the industry regarding whether same payment range must be disclosed in multiple columns for an adjustable rate loan when a rate change can move the payment within the disclosed range, even though the payment range remains the same:

Adjustable Rate loans – the Projected Payments table will have a new column, up to a maximum of four columns, for each scheduled rate adjustment. Because the Principal & Interest amount may change each time the rate is scheduled to adjust, a new column is required, up to a maximum of four columns. There is a new column, up to a maximum of four columns, even if the range of payments will stay the same. For example, there is a new column, up to a maximum of four columns, even when the range will stay the same because the range is the minimum and maximum interest rate caps listed in the contract. (Comment 37(c)(1)(i)(A)-1).”