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

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

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

 

 

The CFPB has issued its sixth annual Fair Debt Collection Practices Act report covering the CFPB’s activities in 2016.

On May 24, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar to provide an update on debt collection developments.  Click here to register.

According to the report’s section on complaints, the CFPB handled approximately 88,000 debt collection complaints in 2016, which was 2,900 more than in 2015.  The most common complaint was about attempts to collect a debt that the consumer claimed was not owed.  The second and third most common complaint issues were, respectively, disclosures or providing information sufficient to verify the debt and communication tactics used when collecting debts.

In the report’s section on the CFPB’s supervision of debt collection activities engaged in by banks and nonbanks subject to CFPB supervision under Dodd-Frank and nonbanks that qualify as “larger participants,” the CFPB described the following FDCPA violations found by its examiners:

  • Using unfair acts or practices to collect a debt by selling debts that, as a result of coding errors, did not properly reflect that the account was in bankruptcy, the debt seller had concluded that the account resulted from fraud, or the account had been settled in full
  • Charging of fees not expressly authorized by the agreement creating the debt or permitted by law, such as convenience fees and collection fees prohibited or capped by state law
  • Using false or deceptive means to collect a debt, such as falsely representing that the only option for repayment was using a checking account, misleading consumers by representing that an immediate payment was necessary to prevent a negative impact on the consumer’s credit, and impersonating consumers while using the creditor’s consumer-facing automated telephone system to obtain information about the consumer’s debt
  • Communicating with third parties other than the consumer for a purpose other than to acquire location information, such as by disclosing the debt owed by the consumer to a third party in a telephone conversation due to inadequate identity verification during the call

With regard to rulemaking, Director Cordray, in his introductory message, stated that the CFPB “is considering the feedback it received through the SBREFA panel [which it convened on August 25, 2016] and from other stakeholders subsequent to publication of the Outline [of proposals under consideration.]”  The proposals described in the outline, which the CFPB released in July 2016, only covered “debt collectors” that are subject to the FDCPA.

When it issued the outline, the CFPB stated that it expected to conduct a separate SBREFA proceeding for a rule covering first-party creditors collecting their own debts and others engaged in debt collection not covered by the proposals.  The CFPB’s Fall 2016 rulemaking agenda indicated that the CFPB expected to convene a second SBREFA proceeding in 2017 and gave a February 2017 estimated date for further prerule activities (which would likely include testing of model validation notices and other disclosures.)  Director Cordray did not mention the second SBREFA proceeding in his introductory message to the new report or give a timetable for issuance of a proposed rule covering “debt collectors” subject to the FDCPA.

The report also describes ten debt collection enforcement actions filed by the CFPB in 2016 and three pre-2016 collection actions that continued in 2016.  (Among those actions are the CFPB’s actions against Universal Debt & Payment Solutions, LLCNavy Federal Credit Union, TMX Finance, LLC, Moneytree, Inc., and CashCall, Inc.)  The report indicates that in 2016, public enforcement actions involving debt collection resulted in over $39 million in consumer relief and over $20 million “paid into the civil penalty fund.”

The report incorporates information provided to the CFPB by the FTC in its letter to the CFPB on the FTC’s 2016 debt collection activities.  (The FTC letter is an Appendix to the report.)

 

 

In a new white paper, “An Overview of the Analytical Flaws and Methodological Shortcomings of the CFPB’s Survey of Consumer Experiences with Debt Collection,” ACA International takes aim at the report released by the CFPB in January 2017 that presented the findings of the CFPB’s national debt collection consumer survey.

In our blog post about the survey, we commented that the CFPB’s current leadership would likely attempt to use the survey to justify the CFPB’s current regulatory focus and lay the groundwork for future enforcement and rulemaking priorities.  In its white paper, ACA charges the CFPB with “potentially manipulating inconclusive results to promote the incorrect perception of debt collectors as predatory.”  ACA concludes that because “the data obtained by the CFPB through the consumer survey is insufficient at best and fundamentally flawed at worst,” it “cannot be used as the basis to properly inform the Bureau’s debt collection rulemaking efforts” and the CFPB “must conduct further study and analysis of the debt collection market before it will be positioned to issue evidence-based, comprehensive rules to regulate this complex industry.”

The analytical flaws and methodological shortcomings of the survey described by ACA include the following:

  • The survey was touted by the CFPB as representing “the first comprehensive and nationally representative data on consumers’ experiences and preferences related to debt collection.”  ACA calls the CFPB’s overall sample of individuals with experience with the debt collection industry “remarkably small,” with only 682 (32%) of the 2,132 survey respondents reporting that he or she was contacted by a debt collector.  ACA states that the CFPB’s claims about the representativeness and overall quality of the data are “undermined by an array of caveats found throughout the report.”  For example, the CFPB minimizes the survey data by describing the report as a “descriptive” exercise to “highlight patterns that may be of policy interest” and “to sketch, from consumers’ perspectives, the broad experience of debt collection.”  In addition, ACA observes that the CFPB leaves the reader without any basis for determining the degree to which the findings are representative of the population as a whole by acknowledging that the report “does not present standard errors or statements about the statistical significance of the differences [across groups of consumers.]”
  • The CFPB’s focus on percentages, coupled with a near-total absence of raw numbers or sample sizes for individual questions provides a limited context for interpreting responses or situating them within the larger sample.  For example, the CFPB reported that “almost one-third of consumers (32 percent) reported being contacted over the past year by a creditor or debt collector about a debt.”  ACA points out that “the inclusion of raw numbers enables a reader to clearly see that the percentage represents roughly 682 consumers out of the 2,132 surveyed.”
  • Many of the findings highlighted in the CFPB’s press release about the survey and Director Cordray’s related remarks relied “on the presentation of a percentage that obscures the total number of responses for a given question.”  For example, the CFPB’s press release highlighted the survey’s finding that “three-in-four consumers report that debt collectors did not honor a request to cease contact.”  According to ACA, “a more accurate description of this finding would note that the 75% of consumers who reported repeated contact after a request to cease communication are a subset of the 42% who requested contact cease [(about 215 consumers)]; this 42% is itself a subset of the 32% of the total sample that have been contacted about a debt in collection [(about 286 consumers)].”  Accordingly, ACA calls the “CFPB’s public statement that ‘three-in-four consumers’ were continuously contacted by debt collectors after requesting contact be ceased… an overt exaggeration.”  In ACA’s view, the CFPB has “implied harassing behavior on the part of debt collectors” by using “a tactic that serves to characterize the debt collection industry as problematic.”

In July 2016, in anticipation of convening a SBREFA panel, the CFPB issued an outline of the proposals it was considering for a rule covering “debt collectors” subject to the FDCPA.  At that time, the CFPB stated that it expected to conduct a separate SBREFA proceeding for a rule covering first-party creditors collecting their own debts and others engaged in debt collection not covered by the proposals.  The CFPB’s Fall 2016 rulemaking agenda indicated that the CFPB expected to convene a second SBREFA proceeding in 2017 and gave a February 2017 estimated date for further prerule activities (which would likely include testing of model validation notices and other disclosures.)

 

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The FTC has sent a letter to the CFPB summarizing the FTC’s debt collection activities in 2016.  The letter is intended to provide the CFPB with information for its annual report to Congress on the federal government’s FDCPA activities.

The letter includes a discussion of the FTC’s collaboration with the CFPB on two amicus briefs in cases involving FDCPA issues.  In one such case, the FTC and CFPB argued in the Seventh Circuit that an unpaid parking fee is a “debt” within the meaning of the FDCPA.  In the other such case, the FTC and CFPB argued in the Ninth Circuit that the FDCPA requirement for a debt collector to provide certain information to the consumer “after the initial communication” does not apply only to the first debt collector that contacts a consumer to collect a particular debt but applies to each debt collector that contacts the consumer to collect that debt.

The letter’s centerpiece is the FTC’s description of its enforcement activities.  The FTC stated that in 2016, it brought or resolved 12 debt collection cases that included the following:

  • Three actions involving “phantom debt collection” in which the defendants were charged with such activities as selling portfolios of fake payday loans used by debt collectors to get people to pay on debts they did not owe, threatening consumers to collect debts they did not owe, and attempting to collect on debts known to be bogus.
  • Three actions against debt collectors for allegedly using text messages, emails and phone calls to falsely threaten consumers with arrest or and lawsuits.
  • An action against debt collectors for allegedly sending letters in connection with the collection of utility bills and government debts that contained threats of arrest appearing to come from a court

The letter also discussed the FTC’s education and public outreach initiatives, such as its work with community-based organizations and national groups that order and distribute FTC information, its development of a series of fotonovelas in Spanish, and its development and distribution of business education materials.  The FTC also described its research and policy development activities, which consisted of holding conferences and workshops and coordination with the CFPB.

Early this morning, the CFPB released the findings of its national debt collection consumer survey.  Both the headline of the CFPB’s press release and Director Cordray’s remarks highlight the survey’s finding that “over one-in-four consumers contacted by debt collectors feel threatened” during the collections process.  The press release also highlights likely areas of on-going CFPB focus with respect to collections: failing to honor cease-and-desist requests, collecting on debt impacted by incorrect information (e.g., wrong amount, do not owe, different family member), failing to abide by call-time limitations, excessive contact, and default judgment rates in debt collection litigation.

The press release announcing the survey also includes links to “consumer debt collection stories” and a new white paper on online debt sales.  That is no coincidence.  Debt sales continue to be a significant area of regulatory focus at both the federal and state level, and debt sale consent orders typically address debt collection issues.  The CFPB also uses consumer experience stories to put a personal touch on its key areas of focus.

Both the survey and the press release likely serve the dual function of justifying the CFPB’s current regulatory focus and laying the groundwork for current leadership’s future enforcement and rulemaking priorities.  They may also signal to the FTC and state regulators areas for potential focus, particularly if the incoming administration replaces key CFPB leadership.

It also bears note that the survey concluded that “[c]onsumers are most often contacted about medical and credit card debts.”  Credit card debt remaining a potential regulatory focus is no surprise.  However, the mention of medical debt struck us as interesting, especially when combined with the consent order announced by the CFPB earlier this week against medical debt collection law firms.  Both seem to suggest potential for increased (or at least continued) regulatory attention on medical collections.  And if the efforts of the new administration and Congress to shift healthcare insurance towards a self-pay model succeed, medical collection activity also stands to increase nationwide.  As a result, perceived compliance gaps or issues in collection efforts on such accounts present areas for ongoing oversight and compliance investments for healthcare providers and their outside collection agencies and law firms for the foreseeable future.

The CFPB announced that it has entered into a consent order with two law firms specializing in the collection of medical debts and their president for alleged FDCPA violations.  The consent order also settles allegations that the respondents violated Regulation V (which implements the Fair Credit Reporting Act).  The consent order requires the respondents to pay $577,135.20 in consumer redress and a $78,800 civil money penalty to the CFPB.

According to the consent order (whose findings of fact and conclusions of law are neither admitted nor denied by the respondents), the respondents violated the FDCPA by engaging in the following conduct:

  • Sending collection letters on formal law firm letterhead containing a signature block with the computerized signature of an individual attorney, underneath which the words “Attorney at Law” were printed, and making collection calls in which the non-attorneys making the calls identified themselves as calling from a law firm.  According to the CFPB, these letters and calls constituted deceptive acts or practices in violation of the FDCPA because the respondents thereby “represented, directly or indirectly, expressly or impliedly” that the collection letters were from an attorney or that an attorney was  meaningfully involved in reviewing the consumer’s case or had made a professional judgment that sending a collection letter or making a collection call was warranted.
  • Having affidavits signed by clients notarized by law firm employees who did not take any steps to verify the truth of the signatures and filed the affidavits in collection lawsuits.  According to the CFPB, the filing of the affidavits constituted deceptive acts or practices in violation of the FDCPA because the respondents thereby “represented, directly or indirectly, expressly or by implication” that the affidavits were verified and notarized in accordance to Oklahoma law which requires notaries to take steps to verify that a signature is true.
  • Failing to maintain any policies or procedures regarding the accuracy and integrity of the information the respondents furnished to consumer reporting agencies as required by Regulation V.

The consumers to receive redress under the consent order are those who made a payment within 90 days of receiving a demand letter from the respondents during a specified period that threatened litigation.  In addition to paying consumer redress and a civil money penalty, the consent order prohibits the respondents from continuing to engage in the alleged unlawful conduct that was the subject of the enforcement action and requires them to disclose certain information in all written and oral collection communications where an attorney “has not been meaningfully involved” in reviewing the consumer’s account and “has not made a professional assessment” of the debt.  For example, all such communications must include a clear and prominent disclosure that no attorney has reviewed the account at issue and demand letters must omit the name of any attorney and the phrase “Attorney at Law” from the signature block.

The order also prohibits the respondents from referring to the potential filing of a collection lawsuit or commencing a collection lawsuit unless an attorney has reviewed specified account-level information, made a professional assessment of the delinquency, and obtained client permission to file the lawsuit.  In addition, the respondents must include a statement in all demand letters and collection phone calls regarding the consumer’s right to request such account-level documentation and revise and enhance their written policies and procedures regarding the accuracy and integrity of information furnished to consumer reporting agencies.

In April 2016, the CFPB announced that it had entered into a consent order with a debt collection law firm and two of its partners to settle allegations that the firm’s litigation practices violated the FDCPA.

The CFPB has issued its December 2016 complaint report which highlights complaints about debt collection.  The report also highlights complaints from consumers in Arizona and the Phoenix metro area.

General findings include the following:

  • As of December 1, 2016, the CFPB handled approximately 1,058,100 complaints nationally, including approximately 23,100 complaints in November 2016.
  • Debt collection continued to be the most-complained-about financial product or service in November 2016, representing about 29 percent of complaints submitted.  Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 64 percent of the complaints submitted in November 2016.
  • Complaints about student loans showed the greatest percentage increase based on a three-month average, increasing about 120 percent from the same time last year (September to November 2015 compared with September to November 2016).  In February 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.  As we have noted in blog posts about prior complaint reports issued beginning in April 2016, rather than reflecting an increase in the number of borrowers making student loan complaints, the increase most likely reflects the change in where such complaints are sent.
  • Prepaid card complaints showed the greatest percentage decrease based on a three-month average, decreasing about 59 percent from the same time last year (September to November 2015 compared with September to November 2016).  Complaints during those periods decreased from 444 complaints in 2015 to 183 complaints in 2016.  Prepaid cards also showed the greatest decrease based on a three-month average in the November 2016 complaint report.
  • Iowa, Georgia, and Alaska experienced the greatest complaint volume increases from the same time last year (September to November 2015 compared with September to November 2016) with increases of, respectively, 39, 37, and 35 percent.
  • Vermont, Rhode Island, and Idaho experienced the greatest complaint volume decreases from the same time last year (September to November 2015 compared with September to November 2016) with decreases of, respectively, 23, 20, and 17 percent.

Findings regarding other financial services complaints include the following:

  • The CFPB has handled approximately 285,000 debt collection complaints.
  • The most common type of debt collection complaint (39 percent) involved consumers reporting they were contacted about debts that they no longer owed and were not provided documentation to verify the debt, even after submitting requests for verification.  Consumers complained that their accounts were forwarded to third-party collectors without any prior contact from the original creditors about an outstanding balance or that their accounts were not in delinquent status prior to being contacted by third-party collectors.  A frequent complaint involved reported attempts by third-party collectors to collect incorrect balances on medical debt.
  • Consumers complained about frequent and repeated calls, including calls to their places of employment after having informed collectors that contact at work was prohibited by their employers.

Findings regarding complaints from Arizona consumers include the following:

  • As of December 1, 2016, approximately 23,300 complaints were submitted by Arizona consumers of which approximately 64 percent (about 15,000) were from Phoenix consumers.
  • Debt collection was the most-complained-about product, representing 30 percent of all complaints submitted by Arizona consumers and, on a national basis, 27 percent of all complaints submitted by consumers.
  • Average monthly complaints received from Arizona consumers increased 14 percent from the same time last year (September to November 2015 to September to November 2016), higher than the increase of 13 percent nationally.

The CFPB’s Fall 2016 rulemaking agenda has been published as part of the Fall 2016 Unified Agenda of Federal Regulatory and Deregulatory Actions.  The preamble indicates that the information in the agenda is current as of October 19, 2016.  Accordingly, given the results of the Presidential election, including its potential impact on the CFPB’s leadership, there is likely to be a post-election reevaluation by the CFPB of its agenda.  The agenda sets the following timetables for key rulemaking initiatives:

Arbitration.  The CFPB released its proposed arbitration rule in May 2016 and the comment period ended on August 22, 2016.  The Fall 2016 agenda indicates that the CFPB “is reviewing and considering comments on the proposed rule” as it “considers development of a final rule for early 2017.”  The agenda gives a February 2017 estimated date for a final rule.  In recent days, we have heard speculation that the CFPB will issue a final rule before Donald Trump’s inauguration as President on January 20.  As we discussed in a recent blog post, a final arbitration rule or other new final rules issued by the CFPB (and potentially any final rules issued since late May 2016) could be nullified by Congress under the Congressional Review Act (CRA).  The CRA establishes a special set of procedures that allow Congress to pass a joint resolution disapproving a rule which cannot be filibustered in the Senate and can be passed by only a simple majority vote.

Payday, title, and deposit advance loans.  The CFPB released its proposed rule on payday, title, and high-cost installment loans in June 2016 and the comment period ended on October 22, 2016.  While there has also been speculation that the CFPB will attempt to finalize a rule by January 20, that possibility seems more remote given the unprecedented level of comments (approximately one million) received by the CFPB and the complexity of the proposed rule.  The Fall 2016 agenda does not give an estimated date for a final rule.

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  In July 2016, it issued an outline of the proposals it is considering in anticipation of convening a SBREFA panel.  It has been reported that the SBREFA panel for the CFPB’s debt collection rulemaking met with small entity representatives (SER) at the end of August 2016.  Within 60 days from the date it is considered to have “convened,” the panel must submit a report to the CFPB on the input received from the SERs.  However, the report will not become public until the CFPB issues its proposed rule.

The CFPB’s proposals only cover “debt collectors” that are subject to the FDCPA.  They are not intended to apply to a first-party creditor collecting its own debts or to a servicer when collecting debts that were current when servicing began to the extent the creditor or servicer would not be a “debt collector” under the FDCPA.  When it issued the proposals, the CFPB stated that it “expects to convene a second proceeding in the next several months” for creditors and others engaged in debt collection not covered by the proposals, noting that it believes a separate SBREFA process “is the most efficient way to proceed, particularly because it will allow participants to provide more focused and specific insights.”

In the Fall 2016 agenda, the CFPB states that it “expects to convene a separate SBREFA proceeding focusing on companies that collect their own debts in 2017.”  The agenda gives a February 2017 estimated date for further prerule activities.

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the Fall 2016 agenda, as it did in its Fall 2015 and Spring 2016 agendas, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  Although the Spring 2016 agenda estimated an August 2016 date for further prerule activities, the new agenda moves that date to January 2017.  As we have previously noted, the extended timeline may reflect that the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process electronic debits because most of the banks subject to its supervisory jurisdiction have already changed their processing order.

Larger participants.  As it did in its Fall 2015 and Spring 2015 agendas, the CFPB states in the Fall 2016 agenda that it is considering “larger participant” rules “in markets for consumer installment loans and vehicle title loans for purposes of supervision.”  It also repeats its previous statement that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  While the Spring 2016 agenda estimated a December 2016 date for prerule activities, the new agenda estimates a May 2017 date.

Small business lending data.  Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.  While the Spring 2016 agenda estimated a December 2016 date for prerule activities, the new agenda estimates a March 2017 date.  The CFPB states in the Fall 2016 agenda that it “is focusing on outreach and research to develop its understanding of the players, products, and practices in business lending markets and of the potential ways to implement section 1071.  The CFPB then expects to begin developing proposed regulations concerning the data to be collected and determining the appropriate procedures and privacy protections needed for information-gathering and public disclosure under this section.”

Mortgage rules.  In July 2016, the CFPB issued a proposed rule containing both substantive amendments and technical corrections to the final TILA-RESPA Integrated Disclosure rule.  The comment period on the proposal ended on October 18, 2016 and the Fall 2016 agenda gives a March 2017 estimated date for issuance of a final rule.  The Fall 2016 agenda gives a March 2017 estimated date for a proposed rule “to amend certain provisions of Regulation C to make technical corrections and to clarify certain requirements under Regulation C” and a proposed rule “to amend Regulation B to reconcile how creditors may collect information about the ethnicity and race of applicants to clarify how financial institutions and creditors subject to Regulation C and Regulation B may comply with both regulations.”

Student Loan Servicing and Consumer Reporting.  As they were in the Fall 2015 and Spring 2016 agendas, both of these topics continue to be listed in the Fall 2016 agenda as “long-term action” items with no estimated dates for further action.  The Office of Management and Budget defines “long-term action” items as “items under development but for which an agency does not expect to have a regulatory action within 12 months after publication of this edition of the Unified Agenda.”

The CFPB has filed an amicus brief in support of the plaintiff in Arias v. Gutman, Mintz, Baker & Sonnenfeldt, PC and 1700 Development Co., a FDCPA case on appeal to the U. S. Court of Appeals for the Second Circuit.  In its brief, the CFPB states that its interest in the case stems from its FDCPA enforcement authority and its special mandate to protect older Americans from unfair, deceptive or abusive practices.

The defendants in the case are a landlord and a debt collection law firm seeking to collect a default judgment against the plaintiff for unpaid rent obtained by the landlord.  The law firm issued a restraining notice to the plaintiff’s bank  which restrained a portion of the plaintiff’s funds on deposit after establishing that the remaining funds were automatically protected as deposits of Social Security benefits.  The plaintiff subsequently claimed an exemption for all of the funds in his account on the basis that  the only deposits to the account were monthly Social Security benefits.  The law firm objected to the exemption claim by commencing a special proceeding in state court supported by an affirmation.   In its supporting affirmation, the law firm claimed that (1) it was not possible to determine the amount of exempt funds because the plaintiff did not provide any records starting from a zero balance, and (2) the Social Security benefits would lose their exempt status if commingled with non-exempt funds and the plaintiff failed to provide documents showing there had been no commingling.  The law firm eventually stipulated to the release of the restrained funds.

The plaintiff thereafter filed an action in federal district court in which he alleged that the law firm’s objection was false, misleading, and deceptive in violation of the FDCPA and was also unfair and unconscionable in violation of the FDCPA.  The district court assumed the claims made by the law firm in the objection were false but determined they were not actionable because they were not material.

The court found that the misrepresentations would not have impeded the ability of the “least sophisticated consumer” to respond to or dispute collection because the objection sought a prompt hearing and, even though he appeared pro se, the plaintiff had received an exemption notice that included information about how to obtain free legal representation.  The court also determined that the least sophisticated consumer would realize that the law firm’s misstatement about commingling funds would not have been a sufficient ground to allow the law firm to garnish the funds.

In addition, the court concluded that the law firm could not have engaged in unfair or unconscionable conduct because it had objectively complied with New York process, whether or not it had acted in bad faith.  The court also found that the existence of a separate remedy under New York law made it  unnecessary to impose liability under the FDCPA.  Accordingly, the court granted judgment on the pleadings to the defendants.

In its brief, the CFPB argues that the district court erred in rejecting the consumer’s claims and asks the Second Circuit to vacate the judgment on the pleadings and remand the case to the district court.  According to the CFPB, under the objective least sophisticated consumer standard, the district court should have considered the effect of the law firm’s misstatement about commingling on a hypothetical consumer, rather than on a plaintiff who claimed never to have commingled his account.  It also asserts that the law firm’s misrepresentations were material because the information would have been important to the least sophisticated consumer in deciding how (and whether to) respond to the law firm’s objection.

The CFPB also calls the district court’s reliance on the law firm’s compliance with New York procedures “fundamentally misplaced,” arguing that the plaintiff’s allegation that the law firm filed a baseless pleading in the hopes of recovering exempt funds stated a FDCPA claim.  It also argues that the plaintiff’s claim “is no less viable because he could have also pursued relief under New York law.”

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

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

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

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

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