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Every week, AccountsRecovery.net brings you the most important news in the industry. But, with compliance-related articles, context is king. That’s why the brightest and most knowledgable compliance experts are sought to offer their perspectives and insights into the most important news of the day. Read on to hear what the experts have to say this week.
Appeals Court Overturns Dismissal of Debt Buying Contract Dispute
The Court of Appeals for the Fourth Circuit has overturned a lower court’s dismissal of a lawsuit in which the seller of a portfolio of loans sued the buyer for allegedly violating the terms of their agreement when the buyer turned around and re-sold the loans to someone else, determining that a federally chartered credit union is a citizen of the state in which it has its principal place of business. More details here.
WHAT THIS MEANS, FROM MICHAEL KLUTHO OF BASSFORD REMELE: Here’s a case that only a law school professor could love. Diversity jurisdiction. A federally chartered credit union plaintiff. A breach of contract involving a debt sale and then an alleged contractually prohibited re-sale (followed by alleged “unscrupulous debt-collection practices that defamed the credit union, interfered with its business, and injured its members”). The issue on appeal was whether there was diversity jurisdiction to allow the case to remain in federal court.
The answer turned on one word – “and.” The diversity jurisdiction statute interplay with a federally chartered credit union ended up being a bit of a “round hole/square peg” issue. The statute talks about the state where the entity is incorporated. Federally chartered credit unions are not incorporated in a state. This meant the court needed to do a deeper dive into diversity jurisdiction.
The diversity jurisdiction statute also provides a second way to determine in what state an entity is deemed a citizen – i.e., an entity is deemed a citizen of a state where it has its principal place of business. That’s where the word “and” came into play. It’s both where an entity is incorporated “and” where the entity has its principal place of business. So, for a federally chartered entity (with no state of incorporation), it will be deemed a citizen of the state where it has its principal place of business. And with that the court of appeals reversed and held that the credit union had properly sued in federal court utilizing diversity jurisdiction. And this is what a law school question looks like for those who were smart enough to avoid going to law school.
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Judge Sides With CFPB in CID Case Against Collection Law Firm
A District Court judge in New York has sided with the Consumer Financial Protection Bureau and agreed to enforce a Civil Investigative Demand that was sent to a collection law firm, a decision that the law firm’s lawyer has said will be appealed. More details here.
WHAT THIS MEANS, FROM LAUREN BURNETTE OF MESSER STRICKLER: NCLA hit the nail on the head when it said that this case was “destined for higher court resolution.” The Supreme Court’s decision in Seila was the beginning of the process, not the end. It will be interesting to see how Seila impacts further analysis of the constitutionality of the Bureau’s actions going forward.
NY Lawmakers Propose Bill Banning Sale of Delinquent NYC Debts
Lawmakers in the New York legislature are trying to get a bill passed that would prohibit the city of New York from selling a portfolio of unpaid debts, which is scheduled to occur as soon as next week, until a year after Gov. Andrew Cuomo declares the state of emergency related to the coronavirus pandemic to be over. More details here.
WHAT THIS MEANS, FROM JONATHAN ROBBIN OF J. ROBBIN LAW OFFICE: While the COVID-19 pandemic has created issues throughout various industries, a central consequence to the collections industry is the legislation which has restrained companies’ ability to conduct its normal business. This can be seen both with the various laws limiting the collection industries ability to operate. But also in laws such as this one, which in theory is designed to protect consumers, but in reality merely stymies free trade and provides no actual benefit to the consumer. There are more effective and efficient ways to protect consumers during the pandemic. For example, there are already laws limiting collection lawsuits and the ability to foreclose or collect. But by limiting trade, laws such as the one proposed here are not tailored to solve the problem it seeks to protect. As a result, this proposed law is overreaching and should not pass.
Appeals Court Overturns FDCPA Case That Used BFE Defense
The Ninth Circuit Court of Appeals has overturned a lower court’s ruling that granted summary judgment in favor of a debt collector that was sued for violating the Fair Debt Collection Practices Act because it was entitled to the Bona Fide Error defense, determining that the lower court erred in assessing the BFE test. More details here.
WHAT THIS MEANS, FROM DENNIS BARTON OF THE BARTON LAW GROUP: Urbina v. National Business Factors, Inc. (NBF) addresses the bona fide error defense. This defense explains if a debt collector unintentionally violates the FDCPA, but the violation resulted from a bona fide error and there was a procedure in place to prevent the problem, then the collector is not liable for the violation. This case emphasized the procedure must be more than just a boilerplate agreement between the creditor and collector. In Urbina, the contract between the creditor and NBF stated the creditor would only provide accurate information. It also allowed NBF to add interest. When the interest was incorrect resulting in an FDCPA violation, NBF employed the bona fide error defense arguing the violation occurred, but it had a procedure in place, which was having a contract stating the creditor would only place accurate information.
The Ninth Circuit Court of Appeals ruled that a contract between the two parties is, alone, an insufficient procedure to qualify for the bona fide error defense. In this instance, the court stated agencies are permitted to rely upon information given by the creditor, but that reliance must be reasonable. If there’s information provided to them to suggest the amount of the debt is correct, collectors cannot rely upon an incorrect calculation of the debt by the creditor. In addition, NBF had an option to calculate interest. If it did so based upon a principal it should have known was incorrect, the bona fide error defense of “reasonable reliance” would not be proper.
The biggest take away is the bona fide error defense can be beneficial, but collectors must have and maintain procedures beyond an agreement with the creditor. The court emphasized NBF’s agreement at issue was executed four years prior to the alleged violation. In addition, the court said a history of accurate information is not a reasonable procedure when relying upon the accuracy of future placements. In other words, a creditor’s consistent track record of providing correct information in the past will not be sufficient grounds for a bona fide error defense for a current or future mistake if the collector’s reliance is based solely on that creditor’s prior conduct of placing only accurate accounts.
The biggest question this case begs is how far must a collector go to establish “reasonable” reliance? For example, a collection attorney must review documentation to substantiate the debt before attempting to collect a debt. Traditionally, collection agencies have such no duty, and their reasonable reliance rests with only with reviewing the documentation (if any) they received upon placement. Does Urbina change this standard? What happens when placement is simply a list of names, contact information, and the amount of the debt with not invoices, ledger’s, or other documents that would otherwise verify the debt? Collectors have been permitted to rely upon the information given without seeking additional documentation. This case and some recent consent orders with government regulators suggest a greater duty may be around the corner. Given the amount of debts collected by agencies, such a change could pose a significant if not cost-prohibitive obligation upon collectors. This trend in the law is certainly worthy of concern.
Judge Denies MTD in FDCPA Case Over Statement in Letter
A District Court judge in Wisconsin has denied a defendant’s motion to dismiss after it was sued for allegedly violating the Fair Debt Collection Practices Act because of a statement included in a collection letter, saying he can not dismiss the suit if it is “at least plausible that a significant fraction of debtors would be misled by the communication.” More details here.
WHAT THIS MEANS, FROM BRIT SUTTELL OF BARRON & NEWBURGER: It is difficult to get a motion to dismiss granted in the Seventh Circuit when the FDCPA claim is based on an allegedly confusing or misleading letter. The case of Reitz v. Credit Sys. of the Fox Valley is an example of the stringent standard the Seventh Circuit has imposed. Unlike other circuits, the Seventh Circuit sees the determination of whether a letter is false, deceptive, or misleading as one of fact, not law. That means that in order for a defendant to prevail, there must be some factual record to support the debt collector’s argument; and there is simply no factual record (other than Complaint) on a motion to dismiss. From a purely compliance perspective, this is a cautionary tale for debt collectors to make sure everything that is said in their letters is truthful and benign, meaning that language could not be perceived as a threat and the debt collector does not make any statements that could allude to something they are not actually doing or intend to do.
California Lawmakers Still Pushing to Create Own CFPB
Things are moving fast and furious in California as state lawmakers are attempting to create their own version of the Consumer Financial Protection Bureau. While much of the details are still in the air, it does appear as though there is enough momentum to get something done by the end of the month. Some of those details that are still in the air, though, are major details, such as whom the new regulator will actually have the ability to regulate. More details here.
WHAT THIS MEANS, FROM CARLOS ORTIZ OF HINSHAW CULBERTSON: The California legislature is considering starting the Department of Financial Protection and Innovation, “DFPI.” The new state agency would be fashioned after the federal Consumer Financial Protection Bureau (“CFPB”) that was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The proposal to create a “mini-CFPB” in the state was added to a pending budget bill after being dropped in June. The purpose of the DFPI would be, in part, to address “abusive” acts and practices, while also working to prevent unfair and deceptive acts and practices (collectively, “UDAAP”)
There appears to be inconsistencies between California and federal regulations regarding UDAAP. While federal regulations currently define “abusive” practices, the California bill would include that term, but not define it. California already has UDAAP authority over current licensees under the Dodd-Frank Act, and under some state licensing laws. The bill would adopt a UDAAP standard specific to California, which would apply to those licensees, as well as to a new subset of companies that would have to get registered under the bill. The legislation would result in an estimated 9,000 new registrants.
Several states including New York, Pennsylvania, New Jersey, Delaware and Maryland have enacted their own mini-CFPB’s. The most recent version of the bill that includes the DFPI can be found here: https://esd.dof.ca.gov/dofpublic/public/trailerBill/pdf/35. Lawmakers must act on the bill by August 31. It will be interesting to see what happens.
Judge Dismisses MTD in FDCPA Case Over Creditor Name in Letter
A District Court judge in Illinois has ruled that including references to the “original creditor,” a “sender,” and a “current owner of the unpaid account,” is not enough to identify the current creditor to whom a debt is owed and denied a defendant’s motion to dismiss, also ruling that the defendant failed to notify the plaintiff that she had only 30 days to request that information. More details here.
WHAT THIS MEANS, FROM BRENT YARBOROUGH OF MAURICE WUTSCHER: The letter at issue in this case was technically correct and it is difficult to see how it would be confusing to an unsophisticated consumer. Unfortunately, this was not enough to avoid litigation or to end that litigation at the pleadings stage. As part of your letter review, you should evaluate each letter from the perspective of the consumer, the consumer’s attorney, and a judge. You want the consumer to understand the letter, but very few FDCPA suits are filed because a consumer was actually misled or confused. Therefore, you also want to ask whether a consumer attorney could, in good faith, make a claim that the letter is confusing. Then you want to ask whether a judge could find that the letter might be confusing to an unsophisticated consumer. If the answer to either question is “yes,” you should continue to improve the letter. Lawsuits avoided or dismissed early will be the reward for your additional work.
Penn. AG Announces Enforcement Action Over ‘Aggressive’ Collection Practices
The Attorney General of Pennsylvania announced yesterday that it had entered into a voluntary agreement with a financial institution which will require the institution to stop engaging in what the AG described as “aggressive” debt collection practices. More details here.
WHAT THIS MEANS, FROM LAURIE NELSON OF PAYMENT VISION: Remember, it’s just not debt collectors that can be unethical. In this case, the actions of the bank itself drew the attention of regulators. In most situations, actions are reviewed under the Fair Debt Collection Practices Act (15 U.S.C. 1692), which prohibits debt collectors from using abusive, unfair, or deceptive practices to collect debts. The FDCPA, however, defines a debt collector as someone who regularly collects debts owed to others, such as a collection agency. A bank collecting its debt in its own name is not considered a debt collector and therefore is not subject to the FDCPA. Thankfully there are other laws in place that do cover these actions such as the law applied in this case, the Fair Credit Extension Uniformity Act (73 P.S. § 2270.1); a Pennsylvania law that came into effect as of June 2020 which gives protections similar to the FDCPA but applies to original creditors, like banks and lenders, in addition to debt collectors, like collection agencies, law firms, and debt buyers. A violation of FCEUA would also be a violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (73 P.S. § 201-9.2).
In this case, Northwest Bank was accused of threatening legal action that it never intended to pursue and filing lawsuits against debtors in counties that were located far from the debtor. While Northwest did not admit to the violation of the law, the bank agreed to amend collection efforts and agreed that all judgments obtained from Jan. 1, 2013, to the date of settlement, would be canceled and payments towards any to be credited back to the borrowers. The amount of money lost as a result of this settlement could be quite substantial, and creditors should take note.
The takeaway, regardless of a creditor’s consumers’ ability to pay, a creditors decision to collect on its own debt, may not be as simple as one might think. The everyday practices of creditors are not as highly scrutinized as those of debt collectors, which could relax some creditor’s oversight on the day to day practices. This result being not ok, as lack of oversight could result in the risk of unethical practices such as the accused actions in this case. All creditors should be prudent to review collection procedures in place ongoing to avoid the risk of having to defend a lawsuit.
Appeals Court Upholds Summary Judgment in FDCPA Case Over Summons Sent to Old Address
For the second time, the Third Circuit Court of Appeals has weighed in on the same debt collection case, but this time, it sided with the defendants and affirmed a summary judgment award, ruling that sending a collection letter to an incorrect address was not a material violation of the Fair Debt Collection Practices Act because it could not have impacted the plaintiff’s decision-making process because he never received notice that a lawsuit had been filed against him. More details here.
WHAT THIS MEANS, FROM RICK PERR OF KAUFMAN DOLOWICH VOLUCK: Every collection action that does not go as intended is not a violation of the FDCPA. An agency can make a telephone call to the wrong number. A letter can be mailed to the wrong address. And a collection lawsuit can be served on a party at their last known address if the attorney believed the person still lived there without running afoul of the FDCPA.
The collection law firm was supplied a last known address by the creditor. It may or may not have been the current address of the borrower. It served the complaint at that address and eventually obtained a default judgment. When the borrower learned of the judgment, he moved to vacate the default but accused the law firm of fraud. The evidence was undisputed that it was the only address provided by the creditor and it was an address used by borrower at one point in time. The fact that it was allegedly incorrect at the time of service did not turn the law firm’s service into an unfair or abusive act.
Appeals Court Overturns Dismissal of FDCPA Case
The Fifth Circuit Court of Appeals has overturned a lower court’s dismissal of a lawsuit which ruled that an attempt to recover money that was overpaid as part of a grant program related to recovery efforts following Hurricanes Katrina and Rita do not classify as debts under the Fair Debt Collection Practices Act and given the plaintiff’s suit a second chance. More details here.
WHAT THIS MEANS, FROM LORAINE LYONS OF MALONE FROST MARTIN: What is a “debt” under the FDCPA? Following Hurricanes Katrina and Rita, Louisiana received federal grant funds to provide grants for home repairs. Plaintiff applied for grant funds from Louisiana and once approved, Plaintiff entered into an agreement and agreed to several terms, including a promise to repay excess grant money. The Defendant sought to collect an alleged grant overpayment per the grant agreement. At issue was whether the grant overpayment was an FDCPA debt. Defendant maintained the grant money was a form of disaster compensation and not a “debt” as defined under 15 U.S.C. 1692a(5). The district court agreed and entered defendant’s motion to dismiss. On appeal, the 5th Circuit reversed and remanded.
The 5th Circuit applied the 3rd Circuit’s three-part test to determine whether an obligation constitutes a “debt” under the FDCPA.” See, St. Pierre v. Retrieval-Masters Creditors Bureau, Inc., 898 F.3d 351, 360 (3d Cir. 2018). Under the St. Pierre test, all three steps must be met for the obligation of repayment to be an FDCPA debt.
The first step is whether the underlying obligation arises out a “transaction,” which was the crux of the appeal. The term “transaction” is not defined under the FDCPA and Court looked to the ordinary meaning of the term at the time Congress enacted the statute. The Court found there was a consensual exchange because the Plaintiff received grant money in exchange for contractual obligations and the first step was met.
Moving to the second step the Court looked to what is being rendered in exchange for the monetary payment. Defendant argued that the FDCPA was limited to transactions involving the normal creditor/debtor relationship, but the Court rejected this argument finding no such limitations in the FDCPA’s statutory language. The Court found the Plaintiff satisfied the second step by voluntarily accepting grant money in exchange for her consent to the grant program’s covenants and subrogation agreements.
The third step is to consider the characteristics of the money to determine whether it is primarily for personal, family, our household purposes. The third step was easily met as the parties did not dispute this prong of the test.
If you are in the 5th or 3rd Circuits, look to the St. Pierre three-part test to determine if the underlying obligation of repayment is a “debt” under the FDCPA.
I’m thrilled to announce that Bedard Law Group is the new sponsor for the Compliance Digest. Bedard Law Group, P.C. – Compliance Support – Defense Litigation – Nationwide Complaint Management – Turnkey Speech Analytics. And Our New BLG360 Program – Your Low Monthly Retainer Compliance Solution. Visit www.bedardlawgroup.com, email John H. Bedard, Jr., or call (678) 253-1871.