On December 28, 2018, New York Governor Cuomo signed into law amendments to the state’s General Business Law (GBL) that address the collection of family member debts.  The amendments made by Senate Bill 3491A become effective March 29, 2019.

While the legislative history indicates that the amendments are intended to address the collection of a deceased family member’s debts, they are drafted more broadly to prohibit “principal creditors and debt collection agencies” from: (a) making any representation that a person is required to pay the debt of a family member in a way that contravenes the FDCPA; and (b) making any misrepresentation about the family member’s obligation to pay such debts.

The GBL defines a “principal creditor” as “any person, firm, corporation or organization to whom a consumer claim is owed, due or asserted to be due or owed, or any assignee for value of said person, firm, corporation or organization.”  The amendments define a “debt collection agency” as “a person, firm or corporation engaged in business, the principal purpose of which is to regularly collect or attempt to collect debts: (A) owed or due or asserted to be owed or due to another; or (B) obtained by, or assigned to, such person, firm or corporation, that are in default when obtained or acquired by such person, firm or corporation.” 

In 2011, the FTC issued its final Statement of Policy Regarding Communications in Connection With the Collection of Decedents’ Debts to provide guidance on how it would enforce the FDCPA and Section 5 of the FTC Act in connection with the collection of debts of deceased debtors.  The policy statement provides that the FTC will not initiate an enforcement action under the FDCPA against a debt collector who (1) communicates for the purpose of collecting a decedent’s debts with a person who has authority to pay such debts from the assets of the decedent’s estate even if that person does not fall within the FDCPA’s definition of “consumer,” or (2) includes in location communications a statement that it is seeking to identify a person with authority to pay the decedent’s “outstanding bills” from the decedent’s estate.  It also contains a caution that, depending on the circumstances, contacting survivors about a debt too soon after the debtor’s death may violate the FDCPA prohibition against contacting consumers at an “unusual time” or at a time “inconvenient to the consumer.”

 

 

Seventy-four organizations that describe themselves as “consumer, community, civil rights, faith, labor and legal services groups” have sent a letter to CFPB Director Kathy Kraninger to “reiterate our concerns about widespread debt collection abuses that we have raised in the past and the ongoing need for better protection against these abuses.”

In the letter, the groups make recommendations regarding the following:

  • Preventing telephone harassment and increasing consumer privacy.  The groups seek to limit collectors to one live call per week and up to three attempted calls, require collectors to honor a consumer’s verbal request to stop calls, allow text and email communications from collectors only if the consumer has agreed to electronic communications, prohibit collection calls and emails to the consumer’s work phone number and email unless in response to the consumer’s request, and make all collector contacts, including “limited content” calls or messages requesting a call back, subject to the FDCPA.
  • Prohibiting collection of time-barred debt.  The groups seek to entirely prohibit collectors from attempting to collect time-barred debt.  Alternatively, if the Bureau allows collectors to communicate regarding time-barred debts, the groups urge the Bureau to require that such communications be in writing and that a disclosure be provided to inform the consumer he or she cannot be sued on the debt.
  • Improving accuracy and clarity of debt collection notices.  The groups want the CFPB to create a model validation notice and statement of rights.

The issues raised by the groups are likely to be addressed by the Bureau in its anticipated debt collection rulemaking for debt collectors subject to the FDCPA.  In its Fall 2018 rulemaking agenda, the Bureau stated that it “expects to issue [a NPRM] addressing such issues as communication practices and consumer disclosures by spring 2019” and estimated the issuance of a NPRM in March 2019.

 

 

 

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.

 

The CFPB has filed an amicus brief in the U.S. Supreme Court in support of the respondent/law firm defendant in Obduskey v. McCarthy & Holthus LLP, et al., a Tenth Circuit decision that held that a law firm hired to pursue a non-judicial foreclosure under Colorado law was not a debt collector as defined under the Fair Debt Collection Practices Act.  The Supreme Court granted certiorari in June 2018 to review the Tenth Circuit’s decision and resolve a circuit split on whether the FDCPA applies to non-judicial foreclosure proceedings.  Because the Supreme Court’s decision in Obduskey will determine whether the FDCPA’s protections apply in countless non-judicial foreclosure actions, it could have a significant financial impact on the mortgage industry.

The amicus brief represents the second CFPB amicus brief filed under Acting Director Mulvaney’s leadership (the first was filed in the Seventh Circuit) and the first CFPB amicus brief filed in the Supreme Court under his leadership.  Most significantly, the amicus brief appears to be the first amicus brief filed by the CFPB in which it has supported the industry position.

In its amicus brief, the CFPB points to FDCPA Section 1692a(6) which defines the term “debt collector” to include, for purposes of Section 1692f(6), someone whose business is principally the “enforcement of security interests.”  Section 1692f(6) provides that it is an unfair or unconscionable collection practice to take or threaten to take nonjudicial action to effect dispossession of property under specified circumstances.  The CFPB argues that it follows from this ‘limited-purpose definition of debt collector” that, except for purposes of Section 1692f(6), enforcing a security interest, is not, by itself debt collection and to read the provision differently would render the “limited-purpose definition…superfluous.”

Based on these provisions, the CFPB contends that because enforcement of a security interest by itself is generally not debt collection under the FDCPA, a person cannot violate the FDCPA by taking actions that are legally required to enforce a security interest.  According to the CFPB, “[t]hat is dispositive here because the initiation of a Colorado nonjudicial-foreclosure proceeding undisputedly was a required step in enforcing a security interest.”  (The CFPB observes in a footnote that, although not implicated in Obduskey, actions clearly incidental to the enforcement of a security interest, even if not strictly required by state law, also would not constitute debt collection.)  The CFPB asserts that deeming the initiation of a non-judicial foreclosure proceeding to be debt collection “could bring the FDCPA into conflict with state law and effectively preclude compliance with state foreclosure procedures.  No sound basis exists to assume Congress intended that result.”

 

 

Debt collection continues to be one of the most active areas in consumer finance law.  In this week’s podcast, Ballard Spahr attorneys will discuss the challenges facing the debt collection industry in private litigation and how to address them.  We’ll talk about how new technology is changing the industry, assess the effect of the CFPB’s new leadership on debt collection enforcement, and offer thoughts on whether the Bureau’s expected rulemaking will provide relief from current legal uncertainties.

To listen and subscribe to the podcast, click here.

 

The CFPB’s newly-released Summer 2018 edition of Supervisory Highlights represents the CFPB’s first Supervisory Highlights report covering supervisory activities conducted under Acting Director Mick Mulvaney’s leadership.  The Bureau’s most recent prior Supervisory Highlights report was its Summer 2017 edition, which was issued in September 2017.

On October 10, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Key Takeaways from the CFPB’s Summer 2018 Supervisory Highlights.”  The webinar registration form is available here.

Noticeably absent from the new report’s introduction and the Bureau’s press release about the report are statements touting the amount of restitution payments that resulted from supervisory resolutions or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities.  (The report does, however, include summaries of the terms of two consent orders entered into by the Bureau, including its settlement with Triton Management Group, Inc., a small-dollar lender, regarding the Bureau’s allegations that Triton had violated the Truth in Lending Act and the CFPA’s UDAAP prohibition by underdisclosing the finance charge on auto title pledges entered into with consumers.)

The report confirms that the Bureau’s supervisory activities have continued without significant change under its new leadership.  It includes the following information:

Automobile loan servicing.  The report indicates that in examinations of auto loan servicing activities, Bureau examiners focus primarily on whether servicers have engaged in unfair, deceptive, or abusive acts or practices prohibited by the CFPA.  It discusses instances observed by examiners in which servicers had sent billing statements to consumers who had experienced a total vehicle loss showing that the insurance proceeds had been applied to the loan so that the loan was paid ahead and the next payment was due months or years in the future.  The CFPB found the due dates in these statements to be inconsistent with the terms of the consumers’ notes which required the insurance proceeds to be applied to the loans as a one-time payment and any remaining balance to be collected according to the consumers’ regular payment schedules.  According to the CFPB, sending such statements was a deceptive practice.  The CFPB indicates that in response to the examination findings, servicers are sending billing statements that accurately reflect the account status after applying insurance proceeds.

The Bureau also found instances where servicers, due to incorrect account coding or the failure of their representatives to timely cancel the repossession, had repossessed vehicles after the repossession should have been cancelled because the consumer had entered into an extension agreement or made a payment.  This was found to be an unfair practice.  The CFPB indicates that in response to the examination findings, servicers are stopping the practice, reviewing the accounts of affected consumers, and removing or remediating all repossession-related fees.

Credit cards.  The report indicates that in examinations of the credit card account management operations of supervised entities, Bureau examiners typically assess advertising and marketing, account origination, account servicing, payments and periodic statements, dispute resolution, and the marketing, sale and servicing of add-on products.  The Bureau found instances where entities failed to properly re-evaluate credit card accounts for APR reductions in accordance with Regulation Z requirements where the APRs on the accounts had previously been increased. The report indicates that the issuers have undertaken, or developed plans to undertake, remedial and corrective actions in response to the examination findings.

Debt collection.  In examinations of larger participants, Bureau examiners found instances where debt collectors, before engaging in further collection activities as to consumers from whom they had received written debt validation disputes, had routinely failed to mail debt verifications to such consumers. The Bureau indicates that in response to the examination findings, the collectors are revising their debt validation procedures and practices to ensure that they obtain appropriate verifications when requested and mail them to consumers before engaging in further collection activities.

Mortgage servicing.  The report indicates that in examinations of servicers, Bureau examiners focus on the loss mitigation process and, in particular, on how servicers handle trial modifications where consumers are paying as agreed. In such examinations, the Bureau found unfair acts or practices relating to the conversion of trial modifications to permanent status and the initiation of foreclosures after consumers accepted loss mitigation offers.  In reviewing the practices of servicers with policies providing for permanent modifications of loans if consumers made four timely trial modification payments, the Bureau found that for nearly 300 consumers who successfully completed the trial modification, the servicers delayed processing the permanent modification for more than 30 days.  During these delays, consumers accrued interest and fees that would not have been accrued if the permanent modification had been processed.  The servicers did not remediate all of the affected consumers ,did not have policies or procedures for remediating consumers in such circumstances, and attributed the modification delays to insufficient staffing.  The Bureau indicates that in response to the examination findings, the servicers are fully remediating affected consumers and developing and implementing policies and procedures to timely convert trial modifications to permanent modifications where the consumers have met the trial modification conditions.

The Bureau also identified instances in which servicers, due to errors in their systems, had engaged in unfair acts or practices by charging consumers amounts not authorized by modification agreements or mortgage notes.  The Bureau indicates that in response to the examination findings, the servicers are remediating affected consumers (presumably by refunding or credit the unauthorized amounts) and correcting loan modification terms in their systems.

With regard to foreclosure practices, Bureau examiners found instances where mortgage servicers had approved borrowers for a loss mitigation option on a non-primary residence and, despite representing to borrowers that they would not initiate foreclosure if the borrower accepted loss mitigation offers in writing or by phone by a specified date, initiated foreclosures even if the borrowers had called or written to accept the loss mitigation offers by that date.  The Bureau identified this as a deceptive act or practice. The Bureau also found instances where borrowers who had submitted complete loss mitigation applications less than 37 days from a scheduled foreclosure sale date were sent a notice by their servicer indicating that their application was complete and stating that the servicer would notify the borrowers of their decision on the applications in writing within 30 days.  However, after sending these notices, the servicers conducted the scheduled foreclosure sales without making a decision on the borrowers’ loss mitigation application.  Interestingly, while the Bureau did not find that this conduct amounted to a “legal violation,” it did find that it could pose a risk of a deceptive practice.

Payday/title lending.  Bureau examiners identified instances of payday lenders engaging in deceptive acts or practices by representing in collection letters that “they will, or may have no choice but to, repossess consumers’ vehicles if the consumers fail to make payments or contact the entities.”  The CFPB observed that such representations were made “despite the fact that these entities did not have business relationships with any party to repossess vehicles and, as a general matter, did not repossess vehicles.”  The Bureau indicates that in response to the examination findings, these entities are ensuring that their collection letters do not contain deceptive content.  Bureau examiners also observed instances where lenders had used debit card numbers or Automated Clearing House (ACH) credentials that consumers had not validly authorized them to use to debit funds in connection with a defaulted single-payment or installment loan.  According to the Bureau, when lenders’ attempts to initiate electronic fund transfers (EFTs) using debit card numbers or ACH credentials that a borrower had identified on authorization forms executed in connection with the defaulted loan were unsuccessful, the lenders would then seek to collect the entire loan balance via EFTs using debit card numbers or ACH credentials that the borrower had supplied to the lenders for other purposes, such as when obtaining other loans or making one-time payments on other loans or the loan at issue.  The Bureau found this to be an unfair act or practice.  With regard to loans for which the consumer had entered into preauthorized EFTs to recur at substantially regular intervals, the Bureau found this conduct to also violate the Regulation E requirement that preauthorized EFTs from a consumer’s account be authorized by a writing signed or similarly authenticated by the consumer.  The Bureau indicates that in response to the examination findings, the lenders are ceasing the violations, remediating borrowers impacted by the invalid EFTs, and revising loan agreement templates and ACH authorization forms.

Small business lending. The Bureau states that in 2016 and 2017, it “began conducting supervision work to assess ECOA compliance in institutions’ small business lending product lines, focusing in particular on the risks of an ECOA violation in underwriting, pricing, and redlining.”  It also states that it “anticipates an ongoing dialogue with supervised institutions and other stakeholders as the Bureau moves forward with supervision work in small business lending.”  In the course of conducting ECOA small business lending reviews, Bureau examiners found instances where financial institutions had “effectively managed the risks of an ECOA violation in their small business lending programs,” with the examiners observing that “the board of directors and management maintained active oversight over the institutions’ compliance management system (CMS) framework.  Institutions developed and implemented comprehensive risk-focused policies and procedures for small business lending originations and actively addressed the risks of an ECOA violation by conducting periodic reviews of small business lending policies and procedures and by revising those policies and procedures as necessary.”  The Bureau adds that “[e]xaminations also observed that one or more institutions maintained a record of policy and procedure updates to ensure that they were kept current.”  With regard to self-monitoring, Bureau examiners found that institutions had “implemented small business lending monitoring programs and conducted semi-annual ECOA risk assessments that include assessments of small business lending.  In addition, one or more institutions actively monitored pricing-exception practices and volume through a committee.”  When the examinations included file reviews of manual underwriting overrides at one or more institutions, Bureau examiners “found that credit decisions made by the institutions were consistent with the requirements of ECOA, and thus the examinations did not find any violations of ECOA.”  The only negative findings made by Bureau examiners involved instances where institutions had collected and maintained (in useable form) only limited data on small business lending decisions.  The Bureau states that “[l]imited availability of data could impede an institution’s ability to monitor and test for the risks of ECOA violations through statistical analyses.”

Supervision program developments.  The report discusses the March 2018 mortgage servicing final rule and the May 2018 amendments to the TILA-RESPA integrated disclosure rule.  With regard to fair lending developments, it discusses recent HMDA-related developments and small business lending review procedures.  With regard to small business lending, the Bureau highlights that its reviews include a fair lending assessment of an institution’s compliance management system (CMS) related to small business lending and that CMS reviews include assessments of the institution’s board and management oversight, compliance program (policies and procedures, training, monitoring and/or audit, and complaint response), and service provider oversight.  The CFPB indicates that in some ECOA small business lending reviews, examiners may look at an institution’s fair lending risks and controls related to origination or pricing of small business lending products, including a geographic distribution analysis of small business loan applications, originations, loan officers, or marketing and outreach, in order to assess potential redlining risk.  It further indicates that such reviews may include statistical analysis of lending data in order to identify fair lending risks and appropriate areas of focus during the examination.  The Bureau states that “[n]otably, statistical analysis is only one factor taken into account by examination teams that review small business lending for ECOA compliance. Reviews typically include other methodologies to assess compliance, including policy and procedure reviews, interviews with management and staff, and reviews of individual loan files.”

In the CFPB’s RFI on its supervision program, one of the topics on which the CFPB sought comment is the usefulness of Supervisory Highlights to share findings and promote transparency.  The new report indicates that the Bureau “expects the publication of Supervisory Highlights will continue to aid Bureau-supervised entities in their efforts to comply with Federal consumer financial law.”  Presumably, this means that we will now again be seeing new editions of Supervisory Highlights on a regular basis.

 

The CFPB, in a decision and order signed by Acting Director Mulvaney, has denied the petition filed by Firstsource Advantage, LLC (Firstsource) to modify or set aside a civil investigative demand (CID) (Petition) that was issued under the leadership of former Director Cordray.  The CFPB did, however, grant Firstsource’s request to redact portions of the Petition that contained confidential supervisory information.  Acting Director Mulvaney’s decision demonstrates that despite the protestations of consumer advocates and some politicians, the CFPB under Mr. Mulvaney’s leadership is continuing to pursue investigations launched under former Director Cordray.

According to the Petition, there was “full compliance” by Firstsource  with the first CID issued by the Bureau to Firstsource in April 2017. A second CID was issued in September 2017 and contained a Notification of Purpose which stated that the CID had been issued “to determine whether debt collectors, depository institutions, or other persons have engaged or are engaging in unlawful acts and practices in connection with the collection of debt in violation of [the CFPA, the FDCPA] or any other Federal consumer financial law.”

In its Petition, Firstsource argued that the second CID should be set aside for reasons that included: (1) the FDCPA violations asserted by the Bureau are not actionable under the bona fide error rule, (2) the issuance of the CID was outside the Bureau’s Dodd-Frank authority because it had not identified (and cannot identify) any legally cognizable reason to believe Firstsource violated the FDCPA, (3) the Notification of Purpose was written in a vague and formulaic fashion, and (3) Firstsource had already produced data and documents to the Bureau.

The Bureau refused to set aside the CID, stating that “an entity’s fact-based arguments about whether it has complied with substantive provisions of the CFPA or any other enumerated consumer law, such as the FDCPA, are not valid defenses to the enforcement of a CID.”  With regard to Firstsource’s argument that the CID’s issuance was outside the Bureau’s Dodd-Frank authority, the Bureau stated that, even if Firstsource’s assertion were true, the applicable standard only requires a CID “to state the nature of the conduct constituting the alleged violation under investigation and the provision of law applicable to such violation.”  It also found that the CID’s Notification of Purpose was adequate despite its use of broad terms because it identified the conduct at issue (debt collection) and made clear that this was the conduct being investigated.

In rejecting Firstsource’s argument that it had already produced data and documents to the Bureau, the Bureau stated that Firstsource had identified “no authority that precludes a law enforcement agency from making follow-up requests for information.”

Firstsource also argued that as an alternative to setting aside the CID in its entirety, the CID should be modified for reasons that included: (1) the CID was disproportionate because it was unlikely to serve an investigatory purpose and imposed an unnecessary burden on Firstsource because the Bureau could have requested a sampling approach to the recordings of calls it requested, and (2) the requested recordings were time-barred under the FDCPA.  The CFPB rejected both of Firstsource’s arguments for why the CID was disproportionate, stating that Firstsource’s belief that it had not violated the law did not make the Bureau’s investigation improper and that Firstsource’s request for a sampling approach was untimely because it had not been made during the meet-and-confer process.

With respect to Firstsource’s argument that the requested recordings were time-barred, the Bureau stated that even assuming potential FDCPA claims were time-barred, the Notification of Purpose made clear that the Bureau was also investigating whether there had been CFPA violations which are subject to a 3-year statute of limitations that runs from discovery of the violation. Thus, the CFPA statute of limitations would not have begun to run if a CFPA violation had not yet been discovered and the Bureau was seeking the recordings to determine whether there had been a violation.

On September 11, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The CFPB Under Mulvaney: What Has Really Changed?”  The webinar registration form is available here.

 

After a four-day trial, the Ohio federal district court hearing the CFPB’s lawsuit against a law firm, Weltman, Weinberg & Reis Co., L.P.A., found that the CFPB had failed to prove its FDCPA and CFPA claims by a preponderance of the evidence.  By injecting some much needed logic in the approach to these types of claims, the decision should serve as helpful precedent.

The CFPB’s complaint alleged that the debt collection letters sent by Weltman, which were printed on the law firm’s letterhead, violated the FDCPA and CFPA because they falsely implied that attorneys were “meaningfully involved” in the collection of the debts.  Having found that the letters could be interpreted to imply meaningful involvement by an attorney, the court concluded that there was “meaningful[] and substantial[] involve[ment by Weltman attorneys] in the debt collection process both before and after the issuance of the demand letters.”

The court reached this conclusion despite its finding that Weltman did not require an attorney to review every individual account before a demand letter was sent and Weltman attorneys did not “form a professional judgment about the validity of a debt or the appropriateness of sending a demand letter before the letters are sent.”  It also concluded that even if the letters had misrepresented the level of attorney involvement, the CFPB still could not prevail “because there is no evidence that any consumer’s decision on when and whether to pay a debt was influenced by the inclusion of the attorney identifiers in Weltman’s demand letters.”

The findings on which the court based its legal conclusion that “Weltman attorneys were meaningfully and substantially involved” included the following:

  • Weltman’s demand letters accurately conveyed the fact that Weltman was a law firm that had been retained to collect the debt in question but did not state that an attorney had reviewed the particular circumstances of the account, mention any potential legal action, and were not signed by an attorney.
  • Before demand letters were sent, attorneys were involved in: drafting client contracts; checking clients’ reputations; discussing certain information with clients, including the available data and documentation, the history of clients’ portfolios and types of accounts, which consumers were represented by attorneys, any asset reviews that had occurred, and bankruptcy information; reviewing clients’ policies and procedures; evaluating clients’ trustworthiness and legal compliance; obtaining warranties as to the validity of the debts to be collected; sampling documentation and terms of accounts (including reviewing statutes of limitation and determining when arbitration is required); and creating data “scrubbing” procedures and criteria to identify consumers who should not receive collection letters.
  • Weltman had a formal compliance program that was developed and approved by attorneys (including attorney Board members) and conducted routine audits.
  • Attorneys drafted the demand letter templates, oversaw all departments, and were responsible for the training and oversight of non-attorney staff.
  • Weltman collected debts for the State of Ohio using demand letters that were substantially similar to the ones at issue and followed the same processes and procedures used for other clients.  Such letters were approved by the then Ohio Attorney General, Richard Cordray, who nevertheless authorized the CFPB’s lawsuit against Weltman.

 

The CFPB announced last Friday that it had entered into a consent order with National Credit Adjusters, LLC (NCA), a privately-held company that owns several debt collection companies, and NCA’s former CEO and part-owner (CEO).  The consent order enters a $3.0 million judgment for civil money penalties against NCA and the CEO but suspends $2.2 million of the judgment based on the financial condition of NCA and the CEO. (NCA must pay $500,000 and the CEO must pay $300,000.)

According to the consent order, the CFPB found that NCA purchased consumer debts and used a group of debt collection companies (Agencies) to collect such debts.  Some of those companies engaged in frequent unlawful debt collection practices that harmed consumers, including by representing that consumers owed more than they were legally required to pay or by threatening consumers and their family members with various legal actions that NCA did not have the intention or legal authority to take.

The consent order also finds that the CEO determined which of the Agencies NCA would place debt with, which accounts the Agencies would collect on, and the terms under which the Agencies would collect.  NCA and the CEO continued to place debt with the Agencies for collection after NCA’s compliance personnel had recommended terminating the Agencies because of their illegal debt collection practices.  NCA also sold consumer debt to one of the Agencies as a means of convincing original creditors to approve NCA’s business practices and NCA and the CEO defended the Agencies when original creditors raised concerns about their collection practices.

The consent order makes the legal conclusions that NCA and the CEO, either through their actions or through the Agencies, directly violated the CFPA’s prohibition of unfair and deceptive acts or practices by inflating account amounts, making false threats to take legal action, and placing debts with the Agencies despite their illegal collection practices.  It also concludes that the inflation of account amounts and making of false threats by NCA, through the Agencies, constituted deceptive practices or the use of unfair or unconscionable means to collect debt in violation of the FDCPA and that such FDCPA violations also constituted violations of the CFPA.  The consent order finds further that NCA and the CEO not only directly violated the CFPA and FDCPA but also violated the CFPA by knowingly or recklessly providing substantial assistance to the unfair and deceptive collection acts and practices of the Agency to which NCA sold debts.

In addition to requiring payment of $800,000 of the judgment, the consent order prohibits NCA and the CEO from engaging in the illegal collection practices addressed by the consent order, permanently bars the CEO from working in any business that collects, buys, or sells consumer debt, and requires NCA to submit a comprehensive compliance plan to the CFPB that includes, at a minimum, certain specified elements.

It is noteworthy that, like the consent order announced last month by the CFPB that also involved alleged unlawful debt collection practices, the consent order with NCA and the CEO does not require refunds to be made to consumers.  In its Spring 2018 rulemaking agenda, the CFPB stated that it “is preparing a proposed rule focused on FDCPA collectors that may address such issues as communication practices and consumer disclosures.”  It estimated the issuance of a NPRM in March 2019.

 

 

On June 26, 2018, the Federal Trade Commission and New York Attorney General’s Office filed a lawsuit against a debt broker, debt collector and their principals to shut down a phantom debt collection scheme.  According to the complaint, debt broker Hylan Asset Management LLC and its owner, Andrew Shaevel, purchased, placed for collection, and sold phantom debts.  The complaint alleges that Hylan knew that the debts were fabricated because they were purchased from Hirsch Mohindra and Joel Tucker, two individuals who were previously sued by the FTC.  As a result of those actions, Mohindra was banned from the debt collection business and from selling debt portfolios and Tucker was banned from handling sensitive financial information about consumer debts.

The lawsuit also charges a debt collector, Worldwide Processing Group, LLC and its owner Frank Ungaro, Jr. for their role in collecting these phantom debts. The complaint alleges that Worldwide and Ungaro engaged in illegal collection practices and similarly knew that the debts were fabricated.

Hylan and Shaevel are charged with violating the FTC Act by marketing and distributing counterfeit and unauthorized debts.  Worldwide and Ungaro are charged with violating the FTC Act by making false or misleading representations that the consumers owe debts.  Worldwide and Ungaro are additionally charged with violating the Fair Debt Collection Practices Act by making false, deceptive, or misleading representations to consumers, engaging in unlawful communications with third parties, and failing to provide statutorily-required notices.

All of the defendants, including those individually named, are charged with violations of New York General Business Law § 349 by engaging in deceptive acts or practices in connection with conducting their debt sales and collection businesses, along with violations of New York State Debt Collection Law by engaging in prohibited debt collection practices under the statute, including, disclosing or threatening to disclose information affecting the debtor’s reputation for credit worthiness with knowledge or reason to know that the information is false and claiming, or attempting to enforce a right with knowledge or reason to know that the right does not exist.

This lawsuit is part of the FTC’s and State Attorneys General continuing efforts to crackdown on phantom debt schemes.