While directed at third party debt collectors, the CFPB’s proposed rules, if adopted, would significantly impact creditors and their first party collection partners.  In this podcast, we look at the actions the proposal would require creditors to take before assigning a debt for collection, what the proposal would mean for third party oversight, and how the CFPB or state regulators might apply the proposal directly to first party collections.

Click here to listen to the podcast.

In a decision issued on Wednesday, the U.S. Supreme Court, in Kisor v. Wilkie, declined to overrule a line of cases instructing courts to defer to an agency’s interpretation of its own regulation, a doctrine sometimes referred to as “Auer deference.”  The name derives from Auer v. Robbins, a 1997 U.S. Supreme Court decision in which the Court ruled that the Department of Labor’s interpretation of its own regulation controlled unless it was plainly erroneous or inconsistent with the regulation.

James Kisor, the plaintiff in Kisor v. Wilkie, is a Vietnam War veteran who filed for benefits for post-traumatic-stress disorder.  In 2006, the Department of Veterans Affairs agreed with Mr. Kisor that he suffered from PTSD, but refused to give him benefits dating back to 1983 as he had sought.  In denying his claim, the VA relied on its interpretation of the term “relevant” in a VA regulation that addresses the VA’s reconsideration of a claim.  The regulation provides for reconsideration “if VA receives or associates with the claims file relevant official service department records that existed and had not been associated with the claims file when the VA first decided the claim.” (emphasis added).  The VA concluded that certain documents offered by Mr. Kisor in support of his claim were not “relevant” because they were not “outcome determinative.”  The VA’s decision was affirmed by the Court of Appeals for Veterans Claims.  Mr. Kisor then appealed to the U.S. Court of Appeals for the Federal Circuit, which deferred to the VA’s interpretation in affirming the lower court’s decision.

The opinion of the Court was written by Justice Kagan and joined in full by Justices Ginsburg, Breyer, and Sotomayor and joined in part by Chief Justice Roberts.  All of the Justices concurred in the judgment vacating the judgment and remanding the case.  Justice Gorsuch wrote a separate opinion joined in full by Justice Thomas and in part by Justices Kavanaugh and Alito, in which he concluded that the Court should have “abandon[ed] Auer.”  Justice Kavanaugh also wrote his own separate opinion joined by Justice Alito in which he expressed agreement with a separate opinion written by Chief Justice Roberts.  In that opinion, the Chief Justice “suggest[ed] that the distance between the majority and Justice Gorsuch is not as great as it may initially appear [because of] the prerequisites for, and the limitations on, Auer deference [established by the majority].”

It is important to note that all three of the separate opinions distinguished Auer deference from Chevron deference.  Chevron addresses the deference a court should give to an agency’s regulation.  In his separate opinion, Chief Justice Roberts, citing Chevron, stated that “issues surrounding judicial deference to agency interpretations of their own regulations are distinct from those raised in connection with judicial deference to agency interpretations of statutes enacted by Congress” and that he does not “regard the Court’s decision today to touch upon the latter question.”  Justice Kavanaugh indicated that he agreed with the Chief Justice’s statement regarding Chevron and Justice Gorsuch, in addition to distinguishing Chevron from Auer, indicated that “there are serious questions, too, about whether [Chevron deference] comports with the [Administrative Procedure Act] and the Constitution.”

In the opinion of the Court, Justice Kagan stated that a court should only apply Auer deference after a “significant analysis of the underlying regulation.”  First, deference should not be given unless a regulation is “genuinely ambiguous.”  If there is no uncertainty, there is no reason for deference and “[t]he regulation then just means what it means—and the court must give it effect, as the court would any law.”  Second, if a regulation is genuinely ambiguous, the agency’s interpretation must also be reasonable for it to be given deference, which she called “a requirement an agency can fail.”  Third, even if reasonable, to receive deference, the interpretation “must be one actually made by the agency,” meaning that “it must be the agency’s ‘authoritative’ or ‘official position,’ rather than any more ad hoc statement not reflecting the agency’s views.”  In addition, the interpretation (1) “must in some way implicate [the agency’s] substantive expertise,”  (2) “must reflect ‘fair and considered judgment’ (meaning that it is not a “merely ‘convenient litigation position’ or ‘post hoc rationalizatio[n]’ advanced’ to ‘defend past agency action against attack’”),  and (3) cannot be “a new interpretation, whether or not introduced in litigation, that creates ‘unfair surprise’ to regulated parties.”

Applying these principles, the Court concluded that “a redo is necessary” in Mr. Kisor’s case because the Federal Circuit “jumped the gun in declaring the regulation ambiguous” and “assumed too fast that Auer deference should apply in the event of genuine ambiguity.”

The issuance of guidance by an agency without use of the APA’s notice-and-comment procedures has also met with criticism.  A notable example is the CFPB’s indirect auto finance guidance which set forth the CFPB’s disparate impact theory of assignee liability for so-called auto dealer “markup” disparities.  After the Government Accountability Office determined that the guidance was a “rule” within the scope of the Congressional Review Act (CRA), Congress used the CRA to override the guidance.

 

 

The CFPB has filed an amicus brief in Bender v. Elmore & Throop, P.C., an appeal before the Fourth Circuit involving the application of the FDCPA’s one-year statute of limitations.  The brief supports the position of the plaintiff-appellant that the one-year period runs separately for each discrete FDCPA violation.  It represents the first CFPB amicus brief filed under Director Kraninger’s leadership,

In February 2016, a debt collection law firm retained by the Benders’ homeowners’ association sent a letter to the Benders stating that they owed unpaid assessment charges plus additional amounts for fees, costs, and attorneys’ fees.  After the Benders disputed the outstanding balance and provided proof of timely payment, the law firm acknowledged receipt of the payment but claimed a balance was still owed.  The Benders wrote to the law firm in May 2016 asking them to cease communications about the alleged debt but the law firm continued collection efforts, sending demand letters in February and March 2017.  In January 2018, during an unrelated phone conversation about a homeowners’ association meeting, the law firm raised the alleged debt and warned that a lien had been placed on the Benders’ home.  In February 2018, the law firm sent a letter purporting to verify the debt and demanding payment.

The Benders filed a lawsuit in April 2018 alleging that the law firm had violated 15 USC section 1692c(c) by continuing to contact them about the debt via the January 2018 phone call and February 2018 letter after they had properly requested that the law firm cease such communications.  They also alleged that the February 2018 letter violated the FDCPA prohibitions on deceptive and unfair practices in 15 USC sections 1692e and 1692f because it attempted to collect amounts that were not owed and that were not authorized by law or the agreement creating the debt.

The district court granted the law firm’s motion to dismiss on the basis that the lawsuit was filed beyond the FDCPA’s one-year SOL.  The FDCPA authorizes private enforcement actions “within one year from the date on which the violation occurs.”  The district court interpreted the provision to mean that the one-year period begins from the date of the first violation, and is not restarted by subsequent violations.  Accordingly, the district court held that the SOL for the Benders section 1692(c) claim expired no later than March 2018, or one year after the law firm sent the March 2017 letter in disregard of the Benders’ cease communications request. It held that the SOL for the Benders’ sections 1692e and 1692f claims expired in February 2017, or one year after the law firm’s initial demand letter.  The district court did not view the January 2018 phone conversation or February 2018 letter as independent FDCPA violations but instead viewed them as “merely subsequent iterations of the same allegedly unlawful debt collection practice initiated at a date preceding the actionable window.”

In its amicus brief, the CFPB argues that the FDCPA’s one-year SOL “means what it says: A plaintiff may sue to challenge violations that occurred in the previous year.  There is no exception for violations that are similar to earlier time-barred limitations.”  The CFPB asserts that the district court’s interpretation “is inconsistent with the statutory text, the great majority of case law, and Congress’s express purpose in enacting the FDCPA.”  With regard to case law, the CFPB argues that all four circuit courts that have considered this question have held that the FDCPA’s SOL runs separately for each discrete violation.  (The CFPB cites cases from the Sixth, Eighth, Ninth, and Tenth Circuits.)  With regard to the congressional purpose, the CFPB asserts that the district court’s reading would “thwart the purposes of the Act [to eliminate abusive debt collection practices] because it would ‘immunize debt collectors from later wrongdoing.’”

The CFPB argues that because the defendants have alleged discrete violations of the FDCPA that occurred in January and February 2018 and filed their lawsuit in April 2018, their lawsuit was timely and the judgment of the district court should be reversed.

 

 

On July 25, 2019, from 2:00 p.m. to 3:00 p.m. ET, the FDIC and CFPB will co-host a webinar to outline strategies to address and prevent elder financial abuse.

The webinar will focus on the benefits of collaboration between financial institutions and law enforcement and the challenges involved in detecting and preventing elder financial abuse, including the use of Suspicious Activity Reports (SARs) to combat it.

In March 2019, the CFPB’s Office of Financial Protection for Older Americans issued a report on combating elder abuse.  Titled “Suspicious Activity Reports on Elder Financial Exploitation: Issues and Trends,” the report examined non-public data derived from SARs filed with federal regulators from 2013 to 2017.

 

 

The FTC has issued a final rule to implement a 2018 amendment to the FCRA made by the Economic Growth, Regulatory Relief, and Consumer Protection Act that requires nationwide consumer reporting agencies  (CRAs) to provide free electronic credit monitoring service for active duty military consumers.  The rule will be effective 30 days after its publication in the Federal Register, with mandatory compliance required three months after the effective date.  For a period of up to one year from the final rule’s effective date, CRAs will be able to comply with the requirement to provide free monitoring service by offering their existing commercial credit monitoring service for free to active duty military consumers.

The FCRA amendment requires a CRA to provide electronic notice of any “material additions or modifications” to the credit file of an active duty military consumer that provides the requisite information to the CRA.  A CRA can condition electronic credit monitoring on the consumer providing appropriate proof of identity, contact information, and appropriate proof that the consumer is an “active duty military consumer.”

The FTC’s final rule defines “active duty military consumer” as (1) (i) a consumer in military service who is on active duty or a reservist performing duty under a call or order to active duty, and (ii) who is assigned to service away from the consumer’s usual duty station, or (2) a member of the National Guard.  In response to recommendations from commenters that the FTC eliminate the requirement that a military consumer be assigned to service away from his or her usual duty station, the FTC stated in the final rule’s supplementary information that the statutory language limited its discretion to do so.  Also, because the statutory language does not expressly require a National Guard member to be deployed away from his or her usual duty station to be eligible for free credit monitoring, the FTC’s final rule gives the benefit of free credit monitoring to members of the National Guard regardless of whether they are assigned away from their usual duty station.

The “material additions or modifications” to the file of a consumer that trigger the electronic notice requirement include new accounts opened in the consumer’s name and inquiries or requests for a credit report (other than for a prescreened list).   A CRA must provide notice of a material change or modification within 48 hours.  A consumer who receives such a notice is entitled to free access to his or her credit file.

 

 

This week, Congress will be holding a hearing focused on fintech and two hearings at which artificial intelligence (AI) will be the focus.

Fintech:

Tomorrow, June 25, the House Financial Services Committee’s Task Force on Financial Technology will hold a hearing titled, “Overseeing the Fintech Revolution: Domestic and International Perspectives on Fintech Regulation.”

AI:

Tomorrow, June 25, the Senate Commerce Committee’s Subcommittee on Communications, Technology, Innovation, and the Internet, will hold a hearing titled, “Optimizing for Engagement: Understanding the Use of Persuasive Technology on Internet Platforms.”  The hearing will examine “how algorithmic decision-making and machine learning on internet platforms might be influencing the public.”

On June 26, the House Financial Services Committee’s Task Force on Artificial Intelligence will hold a hearing titled, “Perspectives on Artificial Intelligence: Where We Are and the Next Frontier in Financial Services.”

Earlier this month, we released a podcast titled, “Using artificial intelligence for consumer finance: a look at the opportunities and challenges.”   In the podcast, we discussed the opportunities and challenges created by the use of AI models in consumer financial services, including the benefits of explainable AI and its implications for the consumer financial services industry, especially for applications where understanding the model’s reasons for returning a score or decision are necessary.  Click here to listen to the podcast.

 

On June 14, 2019, Texas Governor Greg Abbott signed HB 996, which amends Chapter 392 of the Texas Finance Code dealing with debt collection.  The amendments are effective September 1, 2019.

The bill defines a “debt buyer” as “a person who purchases or otherwise acquires a consumer debt from a creditor or other subsequent owner of the consumer debt, regardless of whether the person collects the consumer debt, hires a third party to collect the consumer debt, or hires an attorney to pursue collection litigation in connection with the consumer debt.”  Excluded from this definition is “a person who acquires in-default or charged-off debt that is incidental to the purchase of a portfolio that predominantly consists of consumer debt that has not been charged off.”  “Charged-off debt” is defined as “a consumer debt that a creditor has determined to be a loss or expense to the creditor instead of an asset.”  Thus, it appears that the “debt buyer” definition is intended only to cover purchasers of portfolios of charged-off debt rather than purchasers of portfolios consisting primarily of current debts.

The bill prohibits a debt buyer from commencing an action against or initiating arbitration with a consumer for the purpose of collecting a consumer debt after the statute of limitations has expired.  It provides that if a collection action is barred by this prohibition, the cause of action is not revived by a payment or oral or written affirmation of the consumer debt.

If a debt buyer is attempting to collect a debt for which a collection action is barred, the debt buyer or a debt collector acting on the debt buyer’s behalf must provide a specified notice in the initial written communication with the consumer.  The content of the notice varies depending on whether the FCRA time period for reporting the debt at issue has expired and whether the debt buyer furnishes information about the debt to a consumer reporting agency.

 

In this week’s podcast, we take a close look at the CFPB payday loan rule’s payment provisions that could become effective as early as this August if the current court stay is lifted.  After reviewing the limits and disclosures mandated by the payment provisions, we explain why the provisions are deeply flawed and discuss the court stay’s status and impact on lenders’ implementation of the provisions.

Click here to listen to the podcast.   To read our letters to the CFPB critiquing the payment provisions, click here.

 

A new (and perhaps final) chapter was added to the tale of ITT Educational Services, Inc. last week with the CFPB’s announcement that it had settled the lawsuit it filed against Student CU Connect CUSO, LLC (CU Connect), a special purpose entity company set up to fund, purchase, manage, and hold private student loans (CU Connect Loans) made to students enrolled in an ITT school.

In February 2014, the CFPB filed a lawsuit against ITT in which it alleged that ITT had engaged in unfair and abusive acts or practices through conduct that included strong-arming students into high-interest loans that ITT knew students would be unable to repay.  After failing in its attempt to obtain a dismissal of the lawsuit based on a challenge to the CFPB’s constitutionality, ITT closed all of its campuses and filed for bankruptcy protection.

In its lawsuit against CU Connect, which was filed in an Indiana federal district court simultaneously with a proposed stipulated final judgment and order, the Bureau alleged that CU Connect provided substantial assistance to ITT’s unlawful conduct through its involvement in the creation of the CU Connect Loan program, by facilitating access to funding for the loans, by overseeing loan originations, and by actively servicing and managing the loan portfolio.  The Bureau alleged that when providing this assistance, CU Connect knew, or was reckless in not knowing, that ITT was strong-arming students into the CU Connect Loans, that ITT’s financial aid practices left many students “unaware of the terms, conditions, risks, or even existence of their CU Connect Loans,” and that students were defaulting on the CU Connect Loans at high rates.

The proposed stipulated judgment and order requires CU Connect to (1) stop all activities to collect outstanding CU Connect Loans and stop accepting payments on such loans, (2) discharge and cancel all outstanding balances on CU Connect Loans, and (3) request that all consumer reporting agencies to which CU Connect furnished information about outstanding CU Connect Loans delete the trade lines associated with such loans by updating the trade lines with the appropriate codes to reflect that each trade line has been deleted and, if an explanation is required, with the codes referencing a negotiated court settlement.  According to the CFPB’s press release, the total amount of loan forgiveness is estimated to be $168 million.

It bears noting that the proposed stipulated judgment and order does not require CU Connect to refund any prior loan payments and does not assess a civil money penalty.  In addition, it recites that because CU Connect plans to cease its business operations once it completes its obligations under the settlement, the Bureau agreed to the limited injunctive relief and compliance and reporting requirements set forth in the proposed stipulated judgment and order.

44 states and the District of Columbia entered into a settlement with CU Connect on similar terms.  The state settlement is contingent on the district court’s approval of the Bureau’s settlement with CU Connect.

 

 

The California Senate’s Banking and Financial Institutions Committee will hold a hearing on AB 539 on June 26, 2019.  The hearing was previously scheduled for today.

AB 539 was cleared by the California Assembly on May 23.  The bill would change several aspects of the California Financing Law (CFL), including by setting new interest rate caps, imposing new rules governing loan duration, and prohibiting prepayment penalties.  For example, while the CFL does not set a maximum interest rate on loans of $2,500 or more, AB 539 would cap the interest rate at 36% plus the federal funds rate on loans of $2,500 or more but less than $10,000.

Observers believe that the June 26 hearing will play a key role in determining the bill’s future.