In Echlin v. PeaceHealth, the U.S. Court of Appeals for the Ninth Circuit held that a debt collection agency meaningfully participated in collection efforts even if it did not have authority to settle the account, did not receive payments, and was not involved in collection beyond sending two collection letters.  Accordingly, the collection agency did not violate the Fair Debt Collection Practices Act by sending the letters on its own letterhead. 

Michelle Echlin incurred a debt in the form of medical bills owed to PeaceHealth.  After Echlin ignored multiple requests for payment, PeaceHealth referred her account to ComputerCredit, Inc. (CCI).  CCI sent Echlin two collection letters on its letterhead but Echlin did not respond.  In accordance with its agreement with PeaceHealth, CCI returned the account back to PeaceHealth.  Echlin later filed a purported class action alleging that CCI’s letters created a false or misleading belief that CCI was meaningfully involved in the collection of her debt—a practice known as flat-rating.  CCI and PeaceHealth moved for summary judgment.  The district court granted PeaceHealth’s and CCI’s motions for summary judgment, and Echlin appealed. 

The Ninth Circuit found that CCI had meaningfully participated in collection of Echlin’s debt because it controlled the content of collection letters it sent and did not seek PeaceHealth’s approval prior to mailing.  While CCI did not have authority to process or negotiate payments from PeaceHealth, CCI handled correspondence and phone inquiries from debtors.  In addition, CCI personnel returned consumers’ calls if requested.  In rejecting Echlin’s claims that CCI could not have meaningfully participated if it had not handled payments or taken further action in collecting on the account, the Court noted that “[m]eaningful participation in the debt-collection process may take a variety of forms,” as shown by a long, non-exhaustive list of factors considered by courts across the country.   

Notably, the Ninth Circuit distinguished cases that addressed the meaningful involvement by attorneys because those cases reflect concerns regarding the “unique sort of participation that is implied by letters that indicate the creditor has retained an attorney to collect its debts.”  The higher standard of involvement required of attorneys and law firms collecting a debt did not apply to non-attorneys.  

In a short, straightforward opinion, the Eighth Circuit Court of Appeals joined its sister circuits that have applied a materiality standard to consumer claims of falsity and deception under the Fair Debt Collection Practices Act.

Consumer Paul Hill incurred a medical debt, and the creditor hired Accounts Receivable Services, LLC to collect the debt.  In the collections process, Accounts Receivable unsuccessfully filed a lawsuit against Hill to recover the debt.  The state court ruled that Accounts Receivable was not entitled to prevail in the collection lawsuit because it had not established that the documents purporting to show the assignment of debt were authentic.  Hill then sued Accounts Receivable under the FDCPA, claiming false and misleading representations in violation of 15 U.S.C. § 1692e, including threats “to take any action that cannot legally be taken … .”  15 U.S.C. § 1692e(5).  The United States District Court for the District of Minnesota dismissed Hill’s claims and he appealed, arguing that the Court erred in applying a materiality standard to these provisions.

To decide whether a materiality threshold applies, the Eighth Circuit Court of Appeals examined decisions from its sister circuits on the issue, found their reasoning persuasive, and adopted the view that a violation requires a showing of materiality.  The FDCPA was enacted to require that debt collectors provide information which helps consumers choose intelligently their actions with respect to their debts.  As the Seventh Circuit had explained, “immaterial information neither contributes to that objective (if the statement is correct) nor undermines it (if the statement is incorrect).”  An immaterial statement cannot mislead and, therefore, even if technically false, it is not actionable.

Applying the materiality requirement, the Eighth Circuit concluded that, even if Accounts Receivable had misrepresented authenticity of the debt assignment documents, such misrepresentations were immaterial because Hill did not deny that he incurred the debt and owed it.  Just because the debt collection lawsuit was unsuccessful does not automatically establish a violation of the FDCPA, as the Court previously held in Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814, 820 (8th Cir. 2012).  “Accounts Receivable’s inadequate documentation of the assignment did not constitute a materially false representation, and the other alleged inaccuracies in the exhibits are not material.”

The Eighth Circuit’s decision is a welcome addition to the growing line of cases adopting the materiality threshold.

In a recent ruling, the Seventh Circuit Court of Appeals held that plaintiffs stated a viable claim under the Fair Debt Collection Practices Act by alleging that a collection letter which included the safe harbor language set forth in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, & Clark, LLC, 214 F.3d 872 (7th Cir. 2000), was false and misleading.  In reversing the lower’s court decision on which we previously reported, the Court of Appeals concluded that the letter’s reference to late and other charges was inaccurate, even though it came directly from the Miller safe harbor language, since the defendant could not lawfully impose such charges.  A link to the Seventh Circuit’s decision can be found here.

The letter at issue was an attempt to collect medical debts.  It recited verbatim the safe harbor language, including the statement of the amount of debt and a disclosure that “interest, late charges, and other charges … may vary from day to day … .”  The plaintiffs filed a class action asserting that the letter was misleading because the collector could not lawfully or contractually impose “late charges or other charges.”  In response, the collector argued that it was permitted to charge interest and that reference to late and other charges was not materially misleading.  The trial court agreed because “the central purpose of Miller’s safe harbor formula is to provide debt collectors with a way to notify debtors that the amounts they owe may ultimately vary.”  On appeal, the Seventh Circuit reversed dismissal of the plaintiffs’ claims.

In performing materiality analysis, the Court explained that, while debtors always have some incentive to pay variable debts quickly, the source of variability matters.  The letter did not specify how much the “late charges” are or what “other charge” may apply, “so consumers are left to guess about the economic consequences of failing to pay immediately.”  Because these additional fees and charges may be “a factor in [plaintiffs’] decision-making process,” the plaintiffs plausibly alleged that the letter was materially false or misleading.

The Court also found that the collector was not entitled to safe harbor protection because the Miller language was inaccurate under the circumstances in that the collector could not lawfully impose “late charges and other charges.”  The Court rejected the collector’s reliance on the Court’s earlier decision in Chuway v. Nat’l Action Fin. Servs., 362 F.3d 944 (7th Cir. 2004), wherein the Court instructed collectors to use the safe harbor language if “the debt collector is trying to collect the listed balance plus the interest running on it or other charges.”  Despite the apparent applicability of Chuway, the Court found that it was not persuasive because Chuway dealt with a fixed debt; therefore, the statement was arguably made in dicta.  The Court further stated that “in any event, our judicial interpretations cannot override the statute itself, which clearly prohibits debt collectors from [making] false or misleading misrepresentations.”  In support, the Court cited its recent controversial decision in Oliva v. Blatt, Hasenmiller, Leibsker & Moore LLC, 864 F.3d 492 (7th Cir. 2017), that effectively rejected the collector’s reliance on controlling law and found that the bona fide error defense did not apply.

Boucher highlights the need for customized compliance review of collection letters within the context of specific debts.  Such review must take into account not only whether the amount of debt is static or variable but also the sources of variability to help avoid claims of confusion and deception.

Under prior director Richard Cordray, the Consumer Financial Protection Bureau earned a reputation as an extremely aggressive regulator. However, since acting director Mick Mulvaney took office more than four months ago, the agency has not brought a single enforcement action.

Mulvaney has said that, in general, the CFPB will only go after egregious cases of consumer abuses. “Good cases are being brought. The bad cases are not,” he said at an event in Washington this month.

To that end, Reuters is reporting that the CFPB has decided not to file a lawsuit against a collection agency that collects on payday loans, despite the agency apparently getting the green light to move forward from former director Richard Cordray before he resigned. Cases against three other payday lending operations for engaging in illegal collection activities are also reportedly on the chopping block.

The CFPB’s new direction regarding enforcement actions was foreshadowed in January when Mulvaney, in a letter to Fed Chairwoman Janet Yellen, requested no funding for the CFPB’s second fiscal quarter budget. Mulvaney noted that the agency already had $177.1 million in its coffers — more than enough funds to cover the agency’s expenses. “Simply put, I have been assured that the funds currently in the bureau fund are sufficient for the bureau to carry out its statutory mandates for the next fiscal quarter while striving to be efficient, effective and accountable,” Mulvaney wrote in the letter. The excess funds were part of a “reserve fund” formerly maintained by Cordray. Mulvaney said he did not see a reason for the fund since the Federal Reserve has regularly supplied the money the agency needs.

Troutman Sanders LLP will continue to monitor developments regarding CFPB funding and enforcement activity.

State in the House: Bill Passed Committee, but Vote Not Scheduled

Introduced by Rep. Virginia Foxx (R-N.C.), the Promoting Real Opportunity, Success, and Prosperity through Education Reform (PROSPER) Act cleared the Committee on Education and the Workforce of the United States House of Representatives on December 13, 2017. It did so despite claims by Democrats—and the Association of Public and Land-grant Universities—that they had been shut out of the process.

Among other pertinent provisions, the PROSPER Act:

  • adopts a single definition of “institution of higher education,” eliminating for most purposes the distinctions between public and private nonprofit institutions and proprietary institutions;
  • effectively requires the Department of Education to treat programs that are not correspondence courses and that satisfy the current definition of “distance education” programs the same as traditional brick-and-mortar programs;
  • prohibits the DOE from defining any term in the Higher Education Act of 1965 (“HEA”), through regulation or otherwise;
  • repeals the borrower defense regulations promulgated by the DOE on November 1, 2016;
  • bars the DOE from developing, administering, or creating a ratings system for institutions of higher education;
  • expands the ways by which institutions may show that they are financially responsible for purposes of Title IV program participation;
  • forbids the DOE from prescribing the specific standards that an accreditor is required to implement and defers such standards to the discretion of each accrediting agency;
  • simplifies the Free Application for Federal Student Aid (“FAFSA”);
  • eliminates loan origination fees for all student borrowers;
  • eliminates the Public Service Loan Forgiveness Program for new borrowers; and
  • caps annual loan limits for various categories of students.

According to its supporters, the PROSPECT Act would improve higher education in at least two major ways. First, it focuses resources on helping Americans with the greatest financial need. Second, it expands the choices for students who need financial aid rather than steering them overwhelmingly towards community colleges.

While opponents have praised certain aspects of the bill, from its simplification of the FAFSA and linking of accreditation with outcomes for students, they have also criticized its limitations on student financial aid, removal of protections for students, and failure to incorporate rigorous data collecting requirements. Opponents also cite a February 7 report by the Congressional Budget Office that claimed that college students would lose $15 billion in federal student aid over the next decade if the PROSPER Act becomes law.

As of March 8, the full House has not voted on the PROSPER Act.

The text, as well as other legislative resources, including speeches from both sides, can be found here.

State in the Senate: Hearings and Debates

In contrast to the House, the process in the Senate has involved somewhat more give-and-take in considering the companion bill to the PROSPER Act. The Senate version was proposed by Health, Education, Labor and Pensions Committee Chairman Sen. Lamar Alexander (R-Tenn.), a former Secretary of Education. By February 6, his Committee had held four hearings on the problems posed by the rising cost of higher education and the nation’s increasingly troubled borrowers.

As in the House, partisan fault lines quickly emerged. However, unlike the House committee, a more robust debate has occurred. Like his House colleagues, Alexander has endorsed the “Bennett hypothesis” (named after former Secretary of Education William Bennett), which faults growing federal student aid for mounting college costs. For Alexander, the bottom line is simply, “How can we get the Federal Government out of the way so that we can meet our students’ needs?”

Alexander has urged his colleagues to focus on revisions to simplify the student aid process and redirect money to Pell Grants for low-income students.

In response, Committee Democrats expressed approval of streamlining grants and loans, but with the caveats that the total amount of aid must be preserved and that quality protections must be put in place for students and taxpayers.

Alexander, who has long worked with the Committee’s Democratic leader, Sen. Patty Murray (D-Wash.), saw a consensus emerging over the need for “simpler, more effective regulations to make it easier for students to pay for college and to pay back their loans; reducing red tape so administrators can spend more time and money on students; making sure a degree is worth the time and money students spend to earn it; and helping colleges keep students safe on campus.”

While Alexander is aiming for an April markup of the bill, which would allow Senate Majority Leader Mitch McConnell (R-Ky.) to bring legislation to the Senate floor in the first part of the year, observers are less optimistic. “The likelihood of it passing before 2020, I would put at very minimal,” said Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities. “I’d put it as close to zero as I would any likelihood.”

Nassirian’s viewpoint is representative of that of many observers: Although everyone seems to agree that the current state of student lending is a problem, no one can agree on a solution. Meanwhile, disagreements about gatekeeping, costs, and quality continue to fester.

On Thursday, February 22nd, from 3-4 p.m. ET, Troutman Sanders attorneys Michael Lacy, Mary Zinsner, Andrew Buxbaum, and Sarah Warren Smith presented a webinar that provided an overview of recent trends in the areas of lender liability, bank litigation, and arbitration. The webinar covered principles for avoiding liability, provided an update on important case law and regulatory developments, and illustrated certain real scenarios lenders and banks face daily, and concluded with a summary of recent rulings in the area of enforceability of arbitration provisions.

To access the webinar recording, please click here.

On Thursday, February 22nd, from 3-4 p.m. ET, Troutman Sanders will host a webinar that will provide an overview of recent trends in the areas of lender liability, bank litigation, and arbitration. Economic recession and unrest in the credit market has provided fertile ground for borrowers, guarantors, depositors, and other third parties to test legal theories, gain leverage in workout negotiations, and monetize failed commercial relationships by suing lenders, banks, and other facilitators of financial credit. This webinar will cover principles for avoiding liability, provide an update on important case law and regulatory developments, illustrate certain real scenarios lenders and banks face daily with potentially huge exposure, and conclude with a summary of recent rulings in the area of enforceability of arbitration provisions.

One hour of CLE credit is pending.

To register, click here.

 

On February 6, the Conference of State Bank Supervisors (“CSBS”) announced that seven states have entered into a compact that should streamline the process of applying for state money transmitter licenses.

Moving forward, the participating states– Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas, and Washington – will accept each other’s findings regarding certain “key elements of state licensing.”  The “key elements” include IT, cybersecurity, business plan, background check, and compliance with the federal Bank Secrecy Act.

If the compact works as planned, a company that has obtained a money transmitter license from one of the compact states will be able to obtain a license from any other compact state without the delay and expense of duplicative review and approval requirements, at least as to the “key elements” outlined above.

“This MSB licensing agreement will minimize the burden of regulatory licensing, use state resources more efficiently, and allow for broader participation by other states across the country,” said John Ryan, CSBS president and chief executive officer.

The CSBS’s announcement also noted that more states are expected to join the compact, which is only the “first step among state regulators in moving towards an integrated, 50-state system of licensing and supervision for fintechs.”

A copy of the CSBS’s announcement is available here.

On January 19, a federal district court judge closed the damages phase of the CFPB’s long-running challenge to CashCall’s tribal-lending operation by ordering the company and its associates to pay a $10 million penalty.  While the $10 million penalty is substantial, the order stands as an impressive victory for CashCall, as the CFPB requested a $52 million penalty and an additional $236 million in restitution. 

In the earlier liability phase of the litigation, U.S. District Court Judge John F. Walter granted the CFPB’s motion for partial summary judgment, finding that CashCall engaged in unfair, deceptive, and abusive acts or practices when it serviced and collected on loans made by Western Sky Financial, a lending operation owned by an enrolled member of the Cheyenne River Sioux Tribe.  Invoking a contested doctrine, Judge Walter found that CashCall was the “true lender” of the loans and, therefore, had deceived consumers by creating the false impression that the loans were enforceable and that borrowers were required to repay them.  

But in the damages phase of the litigation, Judge Walter softened his earlier ruling.  He rejected the CFPB’s request for $236 million in restitution, finding that the CFPB failed to present any evidence that CashCall “set out to deliberately mislead consumers” or “otherwise intended to defraud them.”  In the same vein, he rejected the CFPB’s reliance on evidence that CashCall structured its lending operation to avoid state licensing and usury laws, noting that “companies frequently structure business operations and transactions to minimize exposure to unfavorable laws and regulations.”   He also found that CashCall “plainly and clearly disclosed the material terms of the loans to consumers,” and that “the evidence indicated quite clearly that consumers received the benefit of their bargain—i.e., the loan proceeds.”  

In addition, Judge Walter rejected the CFPB’s request for a $52 million penalty.  In seeking that award, the CFPB argued that CashCall “knowingly” engaged in unfair, deceptive, and abusive acts or practices.  But Judge Walter found that the CFPB failed to prove that CashCall knowingly engaged in any misconduct; in fact, he noted that, “at its inception, there was nothing inherently unlawful about” CashCall’s lending operation.   

Moreover, Judge Walter also rejected the idea that CashCall was reckless.  “[T]here was no evidence [CashCall] decided to create and implement an unlawful scheme to defraud consumers, which would have been relatively easy to accomplish given their sophistication and experience in the lending business,” Judge Walter wrote.  “Instead, [CashCall] sought out highly regarded regulatory counsel to assist them in structuring the Western Sky Loan Program.”

Recently, a Manhattan federal jury convicted Richard Moseley Sr., the head of an online network of payday lenders and loan servicers, on charges of wire fraud, aggravated identity theft, and violating the Racketeer Influenced and Corrupt Organizations Act and Truth in Lending Act, among other counts.

Moseley was convicted due to his leadership role over a vast and complicated system of interrelated companies that collected over $220 million from more than  600,000 borrowers and deceived regulators in the process.  Convincing state and federal regulators and even his own lawyers that his companies were based offshore and not bound by U.S. law, Moseley coordinated a network of lenders and loan servicers that routinely misled both consumers and regulators.  At the time of his indictment, then-United States Attorney Preet Bharara stated, “As alleged, Richard Moseley, Sr., extended predatory loans to over six hundred thousand of the most financially vulnerable Americans, charging illegally high interest rates to people struggling just to meet their basic living expenses.”

The indictment alleges that Moseley-related lenders went so far as to autodebit accounts in ways unanticipated by borrowers and lend money to borrowers who did not request it after their personal information was sent to various Moseley companies.  Moreover, important terms were hidden in small print, interest rates were charged that violated the laws of the states in which the businesses were operating, and lenders and loan servicers made “deceptive and misleading” fee disclosures to borrowers.  The case was originally referred to prosecutors by the Consumer Financial Protection Bureau.

Although Mosely claimed to incorporate his companies in the Caribbean and New Zealand beginning in 2006, the indictment states that Moseley’s companies operated out of Kansas City, Missouri instead.  Based on these incorporation claims, Moseley’s attorneys told state regulators that loans from Moseley’s network of lenders and loan servicers originated exclusively from overseas offices.  In reliance on this materially false and misleading correspondence, many state attorneys general and regulators closed their investigations on the mistaken belief that they lacked jurisdiction over Moseley’s companies as they supposedly had no presence or operations in the United States.

Moseley, 73, is not scheduled to be sentenced until April 2018, and his RICO and wire fraud convictions carry 20-year maximum sentences.  Following news of the jury’s conviction, Acting United States Attorney Joon H. Kim stated, “Moseley can no longer take advantage of those already on the brink, and he now faces significant time in prison for his predatory ways.”