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The Attorneys General of 42 states and the District of Columbia (collectively, the States) have entered into an Assurance of Voluntary Compliance/Assurance of Discontinuance  (Agreement) with Encore Capital Group, Inc. and its subsidiaries, Midland Funding, LLC and Midland Credit Management, Inc., (collectively, Midland) to settle allegations relating to Midland’s debt collection practices.  According to a press release from the Illinois AG, which describes Midland as one of the nation’s largest debt buyers, Midland engaged in a “pattern of signing and filing affidavits in state courts against consumers in large volumes without verifying the information printed in them – a practice commonly called robosigning.”

The Agreement requires Midland to pay $6 million to the States which, at the sole discretion of their AGs, shall “be used for reimbursement of attorney’s fees and/or investigative costs, used for future public protection purposes, placed in or applied to the consumer protection enforcement fund, consumer education, litigation, or local consumer aid fund or revolving fund, or similar fund [for consumer protection purposes].”  Midland must also internally set aside $25,000 per State for restitution to consumers and provide a credit of up to $1,850 to the outstanding balance of certain judgments it obtained involving disputed debts.

The Agreement contains various requirements for Midland’s collection practices, including the following:

  • Midland cannot collect or attempt to collect a debt unless it has in its possession the information specified in the Agreement
  • In the circumstances specified in the Agreement (which include the consumer’s dispute of the debt, the debt’s purchase through a purchase agreement without meaningful representations and warranties as to the debt’s accuracy or validity or without meaningful commitments to provide original account-level documentation or in a portfolio known by Midland to contain unsupportable or materially inaccurate information of the debt), Midland cannot represent that a consumer owes a debt or its amount without reviewing certain account-level information
  • For accounts as to which Midland has not yet begun collection activity, Midland cannot begin such activity without determining whether the debt has a special status (i.e., a bankruptcy, a deceased consumer, or a consumer who is an active duty service member) and if the debt is determined to have such a status, Midland must satisfy certain conditions to collect the debt
  • Until September 2020, Midland can only resell debts to anyone other than an entity described in the Agreement  (such as an entity that initially sold the debt to Midland)
  • Midland may not initiate a collection lawsuit unless it has specified documentation in its possession and has provided specified information to the consumer and must provide certain instructions to all of the attorneys it uses to conduct collection litigation on its behalf
  • Midland’s affiants may not sign an affidavit in connection with collection litigation unless the facts stated in the affidavit are based upon the affiant’s review of pertinent records in Midland’s possession and any personal knowledge “gained by those records actually reviewed by and relied upon by the affiant.”
  • Midland may not pay incentives to employees or third-party providers based solely on the volume of affidavits prepared, verified, executed, or notarized.
  • Midland’s procedures for the generation and use of affidavits in collection litigation must require those employees who review and sign affidavits to perform certain tasks, such as confirming that all of the data points in the affidavit accurately reflect Midland’s records prior to executing the affidavit
  • Midland may not knowingly pursue or threaten to pursue collection litigation on any time-barred debts and any communications with consumers about time-barred debts must include specified disclosures

Other provisions require Midland to comply with the FDCPA, the FCRA, and applicable state laws pertaining to its debt collection activities, appropriately staff teams that resolve disputes and address consumer questions, maintain a mandatory training program for its employees, and conduct call monitoring.

In a press release about the settlement, Midland stated that “[t]he issues that were the genesis of the settlement have not been the company’s practice for nearly 10 years” and that while it believes its practices were in accordance with relevant laws, it “chose to agree to a settlement, so we can all move ahead.”  The press release also stated that nearly all of the Agreement’s operational requirements are already part of Midland’s current practice and most requirements were implemented during or prior to Midland’s negotiations with the AGs.

 

Virginia’s Attorney General has announced that “he has secured more than $50 million in debt relief and ordered civil penalties” as a result of his lawsuit filed in state court in March 2018 against Future Income Payments, LLC; FIP, LLC; and their individual owner for allegedly making loans to Virginia consumers, many of whom were military veterans, that were falsely marketed as asset purchases.  As discussed below, the court’s order is a default judgment in favor of the Virginia AG.

Although the AG’s complaint alleged that the interest rates charged on the transactions exceeded Virginia’s usury limits, it did not charge the defendants with violating the state’s usury laws.  Instead, the complaint charged the companies’ with violating the Virginia Consumer Protection Act (VCPA) based on their alleged misrepresentations to consumers and sought to hold the individual defendant personally liable for the companies’ VCPA violations based on his active participation in their business activities.  (The complaint alleged that the affected consumers could have brought private actions under Virginia’s usury laws but that the defendants avoided such potential actions by misrepresenting its transactions as “sales.”)

In September 2018, the CFPB filed a lawsuit against the defendants in a California federal district court in which it alleged that defendants made loans disguised as asset purchases that violated state usury and licensing laws.  More specifically, the CFPB alleged that the defendants had committed deceptive acts in violation of the Consumer Financial Protection Act and failed to make disclosures required by the Truth in Lending Act.  The CFPB also alleged that numerous state and local regulators and agencies, including the Virginia AG, had concluded that the defendants’ transactions were loans for purposes of applicable state laws.  The defendants have not yet filed an answer to the CFPB’s complaint or otherwise responded.

While the CFPB’s complaint provided no explanation for why the defendants’ transactions are in fact extensions of credit, the Virginia AG’s complaint alleged that although the defendants’ agreements had some variations, they have “always been virtually guaranteed repayment by Virginia pensioners, or [the defendants] built-in potential events that would discharge the pensioners’ obligations to repay, knowing those events were unlikely to occur.”

The Virginia court’s docket indicates that the defendants’ counsel withdrew from the case on May 30, 2018 following their filing of a motion to dismiss.  Based on a July 23, 2018 Wall Street Journal article that referred to the individual defendant as a “felon,” the defendant companies have been shut down and investors in the companies are expected to bring lawsuits against the individual defendant.  On September 11, 2018, the court denied the motion to dismiss and ordered the defendants to answer the complaint.

On November 14, the court entered a Permanent Injunction and Final Judgment that provided the defendants were in default due to their failure to answer the complaint.  The Permanent Injunction and Final Judgment includes a finding that the defendants’ transactions were loans disguised as sales and a declaration that the transactions were usurious to the extent they were made at rates exceeding 12% per annum.  However, the Virginia AG’s recharacterization of the transactions as loans was not litigated because the factual allegations against the defendants are deemed admitted for purposes of a default judgment.

The Permanent Injunction and Final Judgment also awards the following relief to the Virginia AG:

  • A civil penalty of $31,740,000
  • A permanent injunction barring the defendants from collecting usurious interest in the amount of $20,098,159.63
  • Restitution to consumers for losses in the amount of $414,473.72
  • Costs and attorneys’ fees in the amount of $198,000
  • A permanent injunction barring the defendants from violating the VCPA

 

 

The New York Attorney General has filed a lawsuit against a group of commonly owned and managed companies headquartered in New York that include companies operating retail jewelry stores in numerous states under the name Harris Jewelry and another company providing financing for sales made at such stores under the name Consumer Adjustment Corp.  One of such stores is located in New York near a military base, as are the defendants’ stores located in other states.  The stores sell lines of military-themed jewelry and other commemorative items.  The defendants also include individuals alleged to have substantial involvement in the companies’ operations.

The complaint alleges that:

  • Harris Jewelry marks up its merchandise between 600 and 1,000% over the wholesale price (comparing that to the standard industry jewelry markup of 200 to 300%) and the “excess purchase price,” together with warranties and protection plans offered by Consumer Adjustment as well as other fees and charges, constitutes disguised interest which is added to the financing agreement’s stated 14.99% interest rate.
  • Consumer Adjustment finances more than 90% of Harris Jewelry’s sales and the relationship between the companies is never disclosed to consumers.
  • Harris Jewelry “professes to accept credit card or cash sales, sales are almost never made in this way.”  Instead, nearly all sales are financed by Consumer Adjustment.
  • Servicemembers are enticed to enter the defendants’ stores through the use of a purported charitable program in which Harris Jewelry sells teddy bears in military uniforms with promises of charitable donations and once in a store, tells servicemembers that Harris Jewelry can provide them with an opportunity to build or improve their credit scores through the “Harris Program,” the name given to the financing provided by Consumer Adjustment.  Only after a servicemember agrees to participate in the ”Harris Program” does Harris Jewelry begin to discuss its merchandise with the servicemember in an effort to maximize the amount of credit extended to him or her.

The complaint includes additional allegations regarding the defendants’ practice of advertising an item’s retail price with its “per payday” payment amount.  The AG alleges that the two amounts “bear little resemblance to the total amount paid by a consumer at the end of the financing contract” and thereby prevents a servicemember from calculating the total cost of a purchase.

Based on these allegations and other conduct by the defendants alleged in the complaint, the NY AG makes the following claims:

  • The “inflated retail prices and add-ons included in the ‘principal’ amount of the loan” result in an effective rate that violates New York’s civil and criminal usury laws
  • The interest charged by the defendants violates the 36% rate limit New York’s General Military Law
  •  Defendants’ business practices constitute fraudulent conduct under New York’s Executive Law (which defines “fraud” or “fraudulent”  to include any device, scheme, or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, or unconscionable contract provisions.)  Their business practices also constitute common law fraud because they involved intentional fraudulent conduct by the defendants.
  • Defendants’ business practices constitute deceptive acts or practices under New York’s General Business Law (GBL)
  • Defendants’ business practices caused the defendants to be a “credit services business” under the GBL and constitute deceptive acts under the GBL provisions that regulate such  businesses.
  • Defendants’ practices in connection with the purported charitable program violated provisions of New York’s Executive Law relating to for-profit companies that partner with a charity to sell products for the charity’s benefit.

 

 

 

 

The New York Attorney General, on October 12, 2018, filed a notice of an appeal to the Second Circuit from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

On September 14, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.  That was followed on September 25 by RD Legal Funding’s filing of a cross-appeal with the Second Circuit from Judge Preska’s June 21 decision, as subsequently amended, in which Judge Preska had ruled that the NYAG had stated federal and state law claims against RD Legal Funding.  (Although Judge Preska’s various orders resulted in the dismissal of all of the CFPB’s and NYAG’s claims, RD Legal Funding may have filed the cross-appeal to preserve its ability to challenge Judge Preska’s June 21 ruling that the NYAG had stated claims against RD Legal Funding should the Second Circuit conclude that the CFPB’s structure is constitutional or that the structure is unconstitutional but that the proper remedy is to sever the Dodd-Frank for-cause removal provision rather than strike all of Title X.)

The Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

 

 

Last week, the Connecticut Fair Housing Center, Inc. filed a complaint against Liberty Bank in Connecticut federal district court alleging that the Bank engaged in discriminatory mortgage lending in violation of the federal Fair Housing Act.  The complaint describes the Bank as “the eighth-largest conventional home purchase lender and eleventh-largest refinancer in Connecticut.”

The complaint alleges that the Bank violated the FHA by engaging in the following conduct:

  • According to the complaint, the Bank deliberately drew its CRA assessment area so as to exclude and thereby avoid CRA scrutiny of its banking and lending activities in certain towns with racially diverse populations and generates a disproportionately low number of mortgage loans within its assessment area from non-white applicants, making “significantly fewer than expected loans than nearly all its peers in majority-non-white census tracks, even when controlling for underwriting criteria like income and whether the borrower will live in the property.”  The Bank is also alleged to over-concentrate its branches in white census tracts and, compared to its leading competitors, to have an insufficient number of branches in majority-non-white and racially diverse census tracts.  The complaint alleges that to test for redlining, the plaintiff “used a statistical measure called a shortfall.”   This measure “assumes that the number of loans is constant across the region and then estimates what the distribution of loans would be if they were made solely according to the income of loan applicants rather than some other factor like composition of neighborhood or race of the applicant.”  It then “allows a comparison between expected lending patterns and actual lending patterns for a single mortgage lender, and tests whether differences in origination volume are a result of applicant characteristics or variables such as discrimination against a protected class.”
  • Discrimination in extending credit.  The complaint alleges that the bank denies African-American and Latino loan applicants at a substantially higher rate than substantially similar white applicants after controlling for income and other neighborhood features.
  • Discouraging applications.  The complaint alleges that Bank representatives made statements that would discourage African-American and Latino applicants from applying for loans, provided significantly less information about the home-buying process to African-American and Latino applicants than white applicants, and offered loan terms to African-American and Latino applicants that were inferior to those offered to white applicants.  In support of these allegations, the complaint describes six different tests in which African-American, Latino, and white testers were allegedly sent by the plaintiff to various Bank locations to meet with a loan officer or obtain copies of advertising materials for mortgages.

The complaint serves as a reminder that while fair lending enforcement may appear to no longer be emphasized by the CFPB under Acting Director Mulvaney, lenders should keep fair lending issues front of mind.  In addition to private plaintiffs, state regulators continue to pursue initiatives to enforce fair lending laws.

 

On September 21, 2018, the Attorney General for the State of Washington filed a lawsuit (see complaint) against several companies engaged in purchasing charged-off consumer debts, for operating as “collection agencies” without a license, in violation of the Washington Collection Agency Act (WCAA).  The lawsuit names EGP Investments, LLC, JPRD Investments, LLC, and The Collection Group LLC (the Debt Buyers) as defendants, along with Fair Resolutions, Inc. (FRI) – a licensed collection agency hired to collect debts on their behalf – and Brian Fair (Fair) of Wenatchee, Washington, who formed and owns/controls each company.  While all of the named entities are currently licensed “collection agencies” under Washington law, the lawsuit relates to conduct between May 2004 and September 2009, when the Debt Buyers allegedly filed thousands of collection complaints against Washington consumers without a license.  The lawsuit charges FRI and Fair with aiding and abetting the Debt Buyers’ alleged violation of the WCAA.

Notably, the Debt Buyers (like many of their peers operating in Washington State) obtained licenses prior to October 1, 2013, when the WCAA was amended to clarify that it applied to debt buyers, “whether [they] collect[]  the claims [themselves] or hire[] a third party for collection or an attorney for litigation in order to collect such claims.”  Prior to the amendment, and as relevant here, the WCAA defined a “collection agency” to include entities “directly or indirectly engaged in soliciting claims for collection, or collecting or attempting to collect claims owed or due or asserted to be owed or due another.”  (emphasis added).  Thus, prior to the amendment, many “passive debt buyers” operated under the presumption that the WCAA did not require them to be licensed – an interpretation adopted by the Washington Collection Agency Board, which regulates collection agencies within the state.

However, Washington’s Supreme Court rejected this interpretation in 2014, after the Eastern District of Washington certified the issue during a lawsuit brought by a consumer against a large national debt buyer (see opinion).  Like the Debt Buyers, the defendant in that case became licensed immediately before the 2013 amendment took effect, prior to which it allegedly violated the WCAA by operating without a license – notwithstanding the fact that it hired licensed collection agencies and/or attorneys to actively pursue collection.  While the Washington Supreme Court acknowledged that the pre-amendment definition was “ambiguous,” it found “the most reasonable interpretation [to be] that debt buyers fall within it when they solicit claims for collection[,]” regardless of whether they “outsource[d] the collection [or the filing of collection lawsuits].”  The court noted that the amendment supported this interpretation, as it served to clarify (rather than change) the statute.  Following the Supreme Court’s holding, the defendant raised a good faith defense, and argued that it should not be held liable for violating the WCAA where the statute was ambiguous, and it acted in good faith reliance on the state regulator’s interpretation of the statute. The District Court rejected this argument, however, finding that the legislature’s decision to define the violation as a “per se” unfair practice meant the defendant was liable, even if it acted in good faith.

The Washington AG’s lawsuit highlights the risk created by ambiguous laws and regulations, along with the need for a company to stay current on and consult with legal counsel about potentially applicable laws and regulations – at the federal, state, and local level – in any market in which the company does business.  This is particularly true for laws and regulations pertaining to consumer protection, which (like the WCAA) often allow for enforcement through either private litigation or government enforcement actions.

We have been following very closely the lawsuit filed by the CFPB and the New York Attorney General against RD Legal Funding.  We earlier reported that on June 21 Judge Preska dismissed the CFPB’s claims based on the unconstitutionality of the CFPA. We subsequently reported that on September 12 Judge Preska dismissed the claims brought by the New York Attorney General under Section 1042 of Dodd -Frank (i. e., the provision authorizing state attorneys general to initiate lawsuits based on UDAAP violations) and also dismissed the Attorney General’s state law claims for lack of subject matter jurisdiction as a result of there being no remaining federal questions in the case.

The most recent development is that yesterday Judge Preska amended her September 12 order to provide that her dismissal of the New York Attorney General’s 1042 claims are “with prejudice”. That means that the New York Attorney General should not be able to re-file her 1042 claims in state court unless and until a higher court reverses Judge Preska’s order. The CFPB has already filed an appeal with the Second Circuit and it seems likely that the New York Attorney General will do the same.

As expected, following Judge Preska’s dismissal on September 12 of all of the New York Attorney General’s federal and state law claims, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21 ruling in the RD Legal Funding case in which she held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.

In its Notice of Appeal filed on September 14, the CFPB gives notice that it “appeals to the United States Court of Appeals for the Second Circuit from this Court’s June 21, 2018 Order (ECF No. 80), as amended by its September 12, 2018 Order (ECF No. 105), dismissing the Bureau’s claims against Defendants, and this Court’s Judgment (ECF No. 106) entered on September 12, 2018.”

Since Judge Preska dismissed all of its claims, the NYAG can also appeal to the Second Circuit.  Alternatively, the NYAG can refile its CFPA and state law claims in New York state court (although a state court might stay the case pending a decision by the Second Circuit in the CFPB’s appeal, particularly if the NY AG decides to appeal the dismissal of its claim brought under Dodd-Frank Section 1042.  If the NYAG appeals the jurisdictional dismissal of its state law claims, then RD Legal should be able to file a cross-appeal of Judge Preska’s June 21 decision ruling on the merits of the state law claims and denying RD Legal’s motion to dismiss.

The CFPB’s appeal means that the Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

 

On September 12, Judge Preska entered an order and judgment dismissing all of the New York Attorney General’s federal and state law claims against RD Legal Funding.  The NYAG had filed the case jointly with the CFPB and in a June 21 ruling, Judge Preska held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, dismissed the CFPB from the case, and allowed the NYAG to proceed with its CFPA and state law claims.

Judge Preska had initially rejected RD Legal’s argument that her dismissal of the CFPB from the case and striking of Dodd-Frank Title X necessitated her dismissal of the NYAG’s CFPA claims against RD Legal.  In an August 23 order, Judge Preska ruled that she would enter a Rule 54(b) judgment against the CFPB so it could immediately appeal her constitutionality ruling to the Second Circuit.  She also denied RD Legal’s request that she certify the remainder of her June 21 ruling for interlocutory appeal but granted RD Legal’s request to stay the district court proceedings pending the outcome of the CFPB’s appeal.  The NYAG thereafter sought clarification of the effect of her August 23 ruling on its federal and state law claims and the CFPB filed a proposed Rule 54(b) judgment.

In her September 12 order and judgment, Judge Preska “amends” her June 21 order to provide as follows with respect to the NYAG’s claims:

  • Having determined that invalidating Title X in its entirety is the proper remedy for the constitutional violation resulting from the CFPB’s for-cause removal provision, there is no longer a statutory basis for the NYAG to bring its CFPA claims and therefore such claims are dismissed without prejudice for lack of federal jurisdiction
  • There was no substantial federal question embedded in the NYAG’s state law claims that provided federal question jurisdiction over the state law claims. (The NYAG had argued that its state law claims raised issues involving the federal Anti-Assignment Act.)
  • The court will decline to exercise supplemental jurisdiction over the state law claims.
  • The NYAG’s state law claims are dismissed without prejudice.

Judge Preska also closed the case in her September 12 order and judgment.  Since Judge Preska has now dismissed the district court case in its entirety, a Rule 54(b) judgment is no longer necessary for the CFPB to appeal her constitutionality ruling to the Second Circuit and both the CFPB and NYAG can appeal as of right.  Alternatively, the NYAG can refile its CFPA and state law claims in New York state court (although a state court might stay the case pending the outcome of an appeal by the CFPB of the constitutionality issue.)

Judge Preska states in her September 12 order that the conclusions of law in the order “supersede and replace any legal conclusions to the contrary in the June 11, 2018 order.”  In her June 11 order, Judge Preska also concluded that under New York law, the transactions at issue were disguised loans.  As discussed in a prior blog post, we believe the court’s logic was erroneous on the loan recharacterization question.  It would seem that Judge Preska’s ruling that the court did not have jurisdiction to hear the NYAG’s state law claims means that she could not properly rule on the merits of such claims and her recharacterization of the transactions as loans is effectively nullified.

RD Legal has sent a letter to Judge Preska “to clarify a potential clerical error” in her September 12 order.  It notes that she dismissed both the NYAG’s federal and state law claims “without prejudice.”  RD Legal suggests that the court intended to dismiss the NYAG’s federal claims “with prejudice.”

The CFPB’s constitutionality is also at issue in two other pending cases.  A petition for certiorari was filed in the U.S. Supreme Court late last week by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.

 

 

 

The CFPB has filed a proposed Rule 54(b) judgment in the RD Legal Funding case.  The proposed judgment provides that “for the reasons stated in the Court’s June 21, 2018 Order, (ECF No. 80), final judgment is hereby entered pursuant to Rule 54(b) against the Consumer Financial Protection Bureau and in favor of Defendants [RD Legal Funding et al.]”

In her June 21 order, Judge Preska ruled that the CFPB’s structure is unconstitutional and struck all of Title X of Dodd-Frank.  Since Judge Preska, on August 23, entered an order granting the CFPB’s request for entry of a Rule 54(b) judgment so that it could appeal her June 21 ruling, she can be expected to sign the proposed order.  In a letter accompanying the proposed order, the CFPB states that “the parties have conferred” and the NYAG and all of the defendants “do not object to the proposed judgment.”