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On December 10, the Bureau of Consumer Financial Protection issued proposed revisions to its 2016 Policy on No-Action Letters and proposed a BCFP Product Sandbox.

The proposed new policy has two parts: Part I is a revision of a 2016 policy on No-Action Letters, and Part II is a description of the BCFP Product Sandbox. The revised No-Action policy would eliminate the data-sharing requirement of the 2016 Policy, which required applicants to commit to sharing data about the product or service. The revisions to the 2016 Policy would also speed up the time in which the BCFP would grant or deny an application for a No-Action Letter to 60 days.

The BCFP Product Sandbox would grant companies similar relief under Part I of the proposed rule but would also provide two forms of additional exemption relief: “1. Approvals by order under three statutory safe harbor provisions (approval relief); and 2. Exemptions by order from statutory provisions under statutory exemption-by-order provisions (statutory exemptions), or from regulatory provisions that do not mirror statutory provisions under rulemaking authority or other general authority (regulatory exemptions).” The Product Sandbox approval relief and exemption relief would be for a period of two years; however, to take advantage of the Product Sandbox, applicants are required to commit to sharing data with the BCFP with respect to the products or services offered.

The proposed policy has the following goals: “1. Streamlining the application process; 2. Streamlining the BCFP’s processing of applications; 3. Expanding the types of statutory and regulatory relief available; 4. Specifying procedures for an extension where the relief initially provided is of limited duration; and 5. Providing for coordination with existing or future programs offered by other regulators designed to facilitate innovation.” The Product Sandbox will help foster innovation and gain insight into how regulations may need to adapt to allow pro-consumer innovation.

This proposed policy may be of particular interest to the fintech world in the business-to-consumer context, given the innovation and energy to adapt delivery of products and services over the Internet and the sometimes awkward fit between the remote delivery model and some regulations. Comments on the revised policy are due no later than 60 days after the proposals are published in the Federal Register.

The Bureau of Consumer Financial Protection has continued its series of guidelines specifically addressing servicemembers’ purchases of automobiles.  Recent posts on the Bureau’s blog have provided advice for servicemembers on shopping for auto financing, options for buying new cars versus used cars, as well as recommendations on how to trade in a vehicle.

With regard to auto finance, the BCFP advises servicemembers to shop around for financing terms rather than only considering the financing options offered by dealerships.  Instead, the BCFP suggests that servicemembers contact multiple banks and credit unions, and that they ask about specific military discounts that might be available.  The BCFP also highlights the importance of the annual percentage rate and the length of financing available.

In the new versus used car debate, the BCFP suggests that servicemembers consider buying a used car rather than new.  The BCFP outlined the following factors to consider before buying:

  • How a vehicle responds under varied road conditions;
  • Researching the availability of Certified Pre-Owned (“CPO”) vehicles;
  • The vehicle’s maintenance record;
  • The value of the vehicle based on the Kelley Blue Book, Consumer Reports, and the National Automobile Dealers Association’s guides;
  • Upkeep costs; and
  • Unrepaired recalls.

The BCFP also encourages buyers to rely on the Buyers Guide, required under the FTC’s Used Car Rule.  Notably, the FTC recently updated the Buyers Guide and mandates that all used motor vehicles display the form.  Additionally, the BCFP encourages any servicemember who plans to buy a new car to shop around, negotiate on price, and order a car if a dealership does not have a car that meets their needs.

Finally, for those who intend to trade in their vehicles, the BCFP advises servicemembers to know the value of their cars, noting that dealerships are open to negotiating a trade-in value.  However, the BCFP cautions against trade-ins where a servicemember has negative equity, recommending that they consider postponing purchases until they are in a positive equity position or consider selling their vehicles themselves.  For those members of the military who decide to proceed with a negative equity trade-in, the BCFP suggests that they ask how negative equity would affect their financing and to keep the length of the new financing term as short as possible

On November 14, the Bureau of Consumer Financial Protection filed an amicus brief with the United States Supreme Court, arguing a law firm’s nonjudicial foreclosure actions to enforce a security interest on a mortgage debt fell outside the purview of the Fair Debt Collection Practices Act because the activity did not constitute “debt collection.”

The issue is currently under review before the Supreme Court in Obduskey v. McCarthy & Holthus LLP, No. 17-1307 (2018).

This action originally arose out of a home mortgage loan that petitioner Dennis Obduskey applied for and obtained from Magnus Financial Corporation in 2007, secured by Obduskey’s Colorado home. Wells Fargo Bank subsequently took over as servicer of the loan, on which Obduskey subsequently defaulted in 2009.  Wells Fargo spent the next several years unsuccessfully attempting to foreclose on the home. In 2014, Wells Fargo hired respondent McCarthy & Holthus LLP to initiate non-judicial foreclosure proceedings against Obduskey in accordance with procedures set forth under Colorado state law.

As a part of its foreclosure attempts, McCarthy & Holthus sent Obduskey a letter that contained, among other things, the amount of the outstanding loan, the name of the creditor, and a disclosure regarding the potential imposition of interest and fees, and it stated that McCarthy & Holthus intended to seek non-judicial foreclosure of the home. The letter also included a statement that McCarthy & Holthus “may be considered a debt collector attempting to collect a debt” as well as a disclosure regarding Obduskey’s rights to dispute the debt or seek validation akin to the disclosure required under Section 1692g of the FDCPA.  Although Obduskey disputed the debt, McCarthy & Holthus provided no verification but instead initiated a non-judicial foreclosure proceeding.

Obduskey filed an action against McCarthy & Holthus and Wells Fargo in the United States District Court for the District of Colorado, alleging the defendants violated the FDCPA and Colorado state law. The district court dismissed the FDCPA claims against McCarthy & Holthus and Wells Fargo based on what it perceived as the majority view that foreclosure proceedings do not constitute the collection of a debt. On appeal, the Court of Appeals for the Tenth Circuit affirmed the district court because in Colorado, a non-judicial foreclosure proceeding only allows for the sale of the property but does not automatically entitle the trustee to the collection of the sale proceeds; this must be done through a separate action. In other words, the enforcement of a security interest is not an attempt to collect money from a debtor and in general, the FDCPA only governs entities that attempt to collect money. The Court also found that a contrary decision would create a conflict between the FDCPA and Colorado state law, which requires certain disclosures to borrowers when initiating non-judicial foreclosure proceedings. However, the Court of Appeals noted that there is somewhat of a circuit split with respect to this issue between the Ninth Circuit, along with numerous district courts, and the Fourth, Fifth, and Sixth circuits. Finally, the Court of Appeals found that both defendants were not debt collectors under the FDCPA. Obduskey again appealed and the Supreme Court granted certiorari on June 28, 2018.

In its amicus brief, the BCFP largely echoes the Tenth’s Circuit’s findings. First, the BCFP argues that McCarthy & Holthus’s non-judicial foreclosure action against Obduskey was not “debt collection” under the FDCPA because the FDCPA’s text is clear that enforcement of a security interest, without very specific other prohibited activity mentioned in Section 1692f(6), does not constitute debt collection. Second, the BCFP argues that McCarthy & Holthus’s actions were specifically required by Colorado state law. Therefore, to find its actions in violation of the FDCPA would throw the FDCPA into conflict with state law and would have hindered McCarthy & Holthus from complying with state law. While the BCFP’s argument largely follows the reasoning of the Tenth Circuit, it could also signal the agency taking on an ever-increasing pro-business tilt following Mick Mulvaney’s appointment as acting director of the BCFP one year ago.

Oral arguments have not yet been scheduled. We will continue to monitor this case and provide updates accordingly.

 

Does a debt collector risk violating the Fair Debt Collection Practices Act if it fails to provide an oral disclosure regarding the statute of limitations during an incoming call with a consumer?  In a comprehensive opinion, a district court just issued a resounding “no.” 

In Douglas v. NCC Business Services, Inc., consumer Onesha Douglas claimed that NCC Business Services violated the FDCPA by failing to tell her on the phone that the statute of limitations had expired on her debt.  The court disagreed, holding that the debt collector was not obligated to provide an oral disclosure regarding the statute of limitations.  

Douglas had leased an apartment but failed to pay her rent, resulting in a debt of $4,032.75.  More than five years later, Douglas and Vance Dotson, a so-called “credit doctor,” called the debt collector regarding the status of the debt.  Douglas stated that she had been denied a mortgage application and was calling to get more information regarding her debt.   

On the phone call, the debt collector stated that he was a “professional debt collector” with NCC Business Services and informed Douglas that his communications with her were “an attempt to collect a debt.”  He solicited payment and asked Douglas, “How would you like to get that closed out today?”  Douglas responded by declining to close out the account because she only wanted information.  Following additional discussion, Dotson told the debt collector that he should have disclosed to Douglas that payment would renew the statute of limitations and that the debt collector could not sue Douglas because of the age of the debt.  The debt collector responded that he was not obligated to disclose such information on the phone.  

Because the Tenth Circuit had not yet ruled on a debt collector’s obligations regarding disclosure of the effect of payment on time-barred debt, the District Court surveyed circuit court opinions from across the United States.  The court looked at cases finding in favor of debt collectors, such as Mahmoud v. De Moss Owners Association, Inc., 865 F.3d 322, 333-34 (5th Cir. 2017); Huertas v. Galaxy Asset Management, 641 F.3d 28, 32-33 (3d Cir. 2011); and Freyermuth v. Credit Bureau Services, Inc., 248 F.3d 767, 771 (8th Cir. 2001).  It contrasted these cases with other cases holding in favor of consumers, such as Tatis v. Allied Interstate, LLC, 882 F.3d 422, 425, 428-30 (3d Cir. 2018); Pantoja v. Portfolio Recovery Associates, LLC, 852 F.3d 679, 684, 687 (7th Cir. 2017); Daugherty v. Convergent Outsourcing, Inc., 836 F.3d 507, 509 (5th Cir. 2016); Buchanan v. Northland Group, Inc., 776 F.3d 393, 395, 399-400 (6th Cir. 2015); and McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1020 (7th Cir. 2014).  

Having surveyed the evolving state of the law, the court distinguished the Douglas case because (1) Douglas contacted the debt collector, instead of the other way around; (2) there was no explicit or implicit threat of litigation; (3) the running of the statute of limitations under the applicable state law did not extinguish Douglas’ legal obligation on the debt; and (4) the debt collector could sue on the time-barred debt because the statute of limitations is an affirmative defense that must be raised by the debtor or it is waived.  Consequently, the court held that the debt collector said nothing that was actionably misleading under the FDCPA. 

This is an important case in the developing law regarding a debt collector’s obligation (or lack thereof) to affirmatively warn debtors regarding partial payment on time-barred debt.  This case provides a comprehensive overview of how the various circuit courts have held on this issue.  It also makes the critical distinction that the statute of limitations is an affirmative defense, meaning that it must be raised by the debtor or it is waived.  As such, it cannot prohibit a debt collector from suing on a time-barred debt because there is nothing inherently improper about such a suit—the debt is a legal obligation, which allows the debt collector to sue on it, but the debt collector may be unable to recover based upon the debtor raising the statute of limitations as an affirmative defense.  This distinction has been overlooked by some courts, resulting in one court describing it as “illegal” for a debt collector to sue on time-barred debt instead of the statute of limitations merely providing a defense against recovery on such a suit.  See Pantoja, 852 F.3d at 685.  Douglas refreshingly returns to the well-established understanding that, as a procedural rule, the statute of limitations is an affirmative defense that the debtor (defendant)—not the debt collector (plaintiff)—must raise in an action to recover for debt.

On November 16, the United States District Court for the Southern District of California granted final approval of a $1.2 million Fair Credit Reporting Act class action settlement against Petco Animal Supplies, Inc.

As we previously reported, a putative class action was filed against Petco in June 2016, challenging the company’s form of disclosure for employment background checks.  The complaint alleged that the background check disclosure was “hidden” among other pages of “fine print” and did not constitute the “stand alone” disclosure required by law.  After more than two years of litigation, including discovery and motions practice, the parties reached a class settlement.

The key terms of the settlement are as follows:

  • Total Settlement Fund: $1.2 million
  • Settlement Class Definition: “All persons regarding whom Defendant procured or caused to be procured a consumer report for employment purposes during the period from May 1, 2014 through December 31, 2015.  Included in the Settlement Class is a subclass consisting of those against whom Petco took an adverse action subsequent to procuring a consumer report and did not receive a pre-adverse action notification letter.”
  • Settlement Class Sizes: The Disclosure Class consists of 37,279 class members.  The Adverse Action Subclass consists of 52 class members.
  • Settlement Class Member Benefits: Members of the Disclosure Class will receive approximately $20 each.  Members of the Adverse Action Subclass will receive an additional $150 each, for a total settlement of approximately $170 each.
  • Attorneys’ Fees: $300,000.
  • Total Incentive Award for the Two Named Plaintiffs: $10,000.

A copy of the Court’s Order granting final approval of the class settlement can be found here.

 

The Minnesota Department of Commerce recently entered into a consent order with collection agency Range Credit Bureau, Inc. regarding its compliance practices.

The Commissioner found numerous regulatory and compliance infractions, including the company’s ongoing failure to file an Unclaimed Property report with the state for funds owed to a customer whom the company could not locate; failure to implement an appropriate compliance management system; failure to establish background check procedures for the company’s individual collectors; and the company’s unlicensed collection activity in Minnesota and other states.

The order emphasizes the importance of strong internal compliance policies and systems.  Significantly, the Department of Commerce found violations not only for Range Credit’s collection activities, but also for its practices with respect to non-collections laws, such as background checks and state escheat obligations.

In addition to a monetary penalty of $50,000 (with $10,000 stayed, reducing the actual penalty to $40,000), the Consent Order requires Range Credit to take specific, compliance-oriented actions, including:

  • Developing and implementing a Compliance Management System (“CMS”), which includes a written Compliance Program.  The Compliance Program is required to address obligations for debt collection activities under state and federal law and include policies to prevent violations of consumer protection laws, a training program, a CMS monitoring system, and a complaint monitoring system.
  • Developing and implementing a background check policy; and
  • Completing an internal audit of all unclaimed funds and reporting the funds to the state.

This consent order highlights that regulators are considering not only whether a company or a collector holds a proper license, but also head-to-toe compliance practices.

Recently, the Consumer Financial Protection Bureau issued revised versions of the small entity compliance guides for the Loan Originator Rule and the Home Ownership and Equity Protection Act (“HOEPA”) Rule.  

Revisions to the Loan Originator Rule Compliance Guide 

The CFPB revised the compliance guide for the Loan Originator Rule in three notable respects. First, the revised guide includes a process for contacting the CFPB with informal inquiries about the rule. Second, the revised guide puts into effect the TILA/RESPA Disclosure rule. Third, and pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was adopted earlier this year, the revised guide includes an exemption from certain rules applicable to loan originators for retailers of manufactured and modular homes and their employees. 

Revisions to the HOEPA Rule Compliance Guide 

The CFPB made two notable revisions to the compliance guide for the HOEPA Rule. First, the revised guide broadens the exemption from the concept of a loan originator. This broader exemption should be taken into account when considering the requirement to include loan originator compensation in points and fees for purposes of the points and fees threshold under the rule. Second, the revised guide includes a process for contacting the CFPB with informal inquiries about the rule.  

The revised compliance guides can be found here.

 

In an ominous sign, Americans’ total debt hit another record high, rising to $13.5 trillion in the last quarter, as student loan delinquencies jumped, according to Reuters. Specifically, flows of student debt into serious delinquency – of 90 or more days – rose to 9.1 percent in the third quarter from 8.6 percent in the previous quarter, reported the Federal Reserve Bank of New York, propelling the biggest jump in the overall U.S. delinquency rate in seven years.  

Total household debt, driven by $9.1 trillion in mortgages, now stands $837 billion higher than its previous peak in 2008, just as the Great Recession took hold and induced massive deleveraging across the United States. In fact, indebtedness has risen steadily for more than four years and sits more than 21% above its 2013 low point, and the $219 billion rise in total debt in the quarter that ended on September 30 amounts to the biggest jump since 2016. 

“The new charts in our report help to better understand how the debt and repayment landscape have shifted in the years following the Great Recession,” Donghoon Lee, research officer at the New York Fed, announced in a press release published on November 16. “Older borrowers now hold a larger share of total outstanding debt balances, while the shares held by younger borrowers have contracted and shifted toward auto loans and student loans.”

As Congress’ emboldened majority has sought to lessen the federal government’s regulatory footprint, the states have not always been quiet, as one summertime example amply shows.

In 2017, two congressmen introduced two bills which, if enacted, would expand the scope of federal preemption to include non-bank entities. Introduced by Rep. Patrick McHenry (R-N.C.), the first of these two bills – the Protecting Consumers’ Access to Credit Act of 2017 (HR 3299) – states that bank loans with a valid rate when made will remain valid with respect to that rate, regardless of whether a bank has subsequently sold or assigned the loan to a third party. A second bill known as the Modernizing Credit Opportunities Act of 2017 (HR 4439), championed by Rep. Trey Hollingsworth (R-Ind.), strives “to clarify that the role of the insured depository institution as lender and the location of an insured depository institution under applicable law are not affected by any contract between the institution and a third-party service provider.” Perhaps most significantly, it would establish federal preemption of state usury laws as to any loan to which an insured depository institution is the party, regardless of any subsequent assignments. In so doing, both bills amend provisions of the Home Owners’ Loan Act, Federal Credit Union Act, and/or Federal Deposit Insurance Act. Such an amendment would invalidate a long-line of judicial precedent barring a non-bank buyer’s ability to purchase a national bank’s right to preempt state usury law, which culminated in the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, and thereby provide non-originating creditors with a potent – and until now nonexistent – shield against liability under certain state consumer laws.

On June 27, 2018, the attorneys general of twenty states[1] and the District of Columbia stated their opposition to both bills in a letter to Congressional leadership. Beginning with an historically accurate observation – “[t]he states have long held primary responsibility for protecting American consumers from abuse in the marketplace” – the A.G.s attacked these legislative efforts as likely to “allow non-bank lenders to sidestep state usury laws and charge excessive interest that would otherwise be illegal under state law.” The cudgel of preemption, they warned, would “undermine” their ability to enforce their own consumer protection laws. The A.G.s went on to argue many non-bank lenders “contract with banks to use the banks’ names on loan documents in an attempt to cloak themselves with the banks’ right to preempt state usury limits”; indeed, “[t]he loans provided pursuant to these agreements are typically funded and immediately purchased by the non-bank lenders, which conduct all marketing, underwriting, and servicing of the loans.” For their small role, the banks “receive only a small fee,” with the “lion’s share of profits belong[ing] to the non-bank entities.” In support of this position, the A.G.s cite to a 2002 press release by the Office of the Comptroller of the Currency (“OCC”) and the more recent OCC Bulletin 2018-14 on small dollar lending, the latter announcing the OCC’s “unfavorabl[e]” view of “an[y] entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).

The A.G.s concluded by arguing that the proposed legislation would erode an “important sphere of state regulation,” state usury laws having “long served an important consumer protection function in America.”

We will continue to monitor this legislation and other developments in the preemption arena, and will report on any further developments.

[1] The signatories come from California, Colorado, Hawaii, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Washington.

On November 16, Sen. John Thune (R-S.D.), the current chairman of the Senate Commerce Committee, and Ed Markey (D-Mass.), a member of the committee and the author of the Telephone Consumer Protection Act, unveiled the Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (“TRACED Act”). Among other things, this bill would require carriers to eventually implement “an appropriate and effective call authentication framework” and instructs the Federal Communications Commission to engage in rulemaking to protect consumers from receiving unwanted calls and text messages from unauthenticated phone numbers.

According to its proponents, an “ever increasing number … of robocall scams” prompted this bill. Indeed, one report touted by Markey estimated the number of spam calls will grow from 29% of all phone calls this year to 45% of all calls next year.

In its current form, the TRACED Act gives regulators more time to find scammers, increases civil forfeiture penalties for those caught, promotes call authentication and blocking adoption, and brings relevant federal agencies and state attorneys general together to address impediments to criminal prosecution of robocallers who intentionally flout laws.

More specifically, this act makes the following changes to the existing federal regulatory scheme:

  • Broadens the authority of the FCC to levy civil penalties of up to $10,000 per call for those who intentionally violate telemarketing restrictions.
  • Extends the window for the FCC to catch and take civil enforcement action against intentional violations to three years after a robocall is placed. Under current law, the FCC has only one year to do so. The FCC has told the committee that “even a one-year longer statute of limitations for enforcement” would improve enforcement against willful violators.
  • Brings together the Department of Justice, FCC, Federal Trade Commission, Department of Commerce, Department of State, Department of Homeland Security, the Consumer Financial Protection Bureau, and other relevant federal agencies, as well as state attorneys general and other non-federal entities, to identify and report to Congress on improving deterrence and criminal prosecution at the federal and state level of robocall scams.
  • Requires providers of voice services to adopt call authentication technologies, enabling a telephone carrier to authenticate consumers’ phone numbers prior to initiating any call.
  • Directs the FCC to initiate a rulemaking to help protect subscribers from receiving unwanted calls or texts from callers using unauthenticated numbers.

Announcing the TRACED Act, neither senator minced their words. “The TRACED Act targets robocall scams and other intentional violations of telemarketing laws so that when authorities do catch violators, they can be held accountable,” Thune said in a statement. He continued: “Existing civil penalty rules were designed to impose penalties on lawful telemarketers who make mistakes. This enforcement regime is totally inadequate for scam artists and we need do more to separate enforcement of carelessness and other mistakes from more sinister actors.” Markey added: “As the scourge of spoofed calls and robocalls reaches epidemic levels, the bipartisan TRACED Act will provide every person with a phone much needed relief. It’s a simple formula: call authentication, blocking, and enforcement, and this bill achieves all three.”

Troutman Sanders will continue to monitor this and related legislative proposals.