Monday, August 22, 2016

The “Least Sophisticated Debtor” Is Getting More Sophisticated, And Has An Improved Memory Too

When collectors get sued in an FDCPA action, they face a steep uphill battle.  Courts apply the very pro-consumer “least sophisticated debtor” standard when evaluating a collector’s communications, and most violations of the Act are “strict liability” – meaning the debtor can win the case without proving the collector intended to violate the statute.  Recently, however, the “least sophisticated debtor” seems to have gotten more sophisticated, and his memory about his account and his past communications with the collector has improved.  

Courts have gradually demanded more of the “least sophisticated debtor” and have rejected suits based on hypertechincal misstatements and strained interpretations of the Act.[i]  Even when a collector’s statement is false or misleading, it must also be “material” or it does not violate the FDCPA.[ii]  And in a significant recent trend, courts have insisted that the challenged communication cannot be considered in a vacuum.  Even though the “least sophisticated debtor” standard is objective, that hypothetical debtor is charged with knowledge of the account’s history, and the communication at issue must be considered in the context of all other communications made to the plaintiff regarding the debt.[iii] 

A striking example of this trend is the Ninth Circuit’s decision in Davis v. Hollins Law Firm, _F.3d _, 2016 WL 4174747 (9th Cir. Aug. 8, 2016).  There, the collection law firm defendant communicated with plaintiff on a number of occasions, and each time the firm identified itself as a “debt collector,” as required by section 1692e(11) of the FDCPA.  Id. at *2.  In a subsequent voice mail message, however, the defendant’s employee stated only “Hello, this is a call for Michael Davis from Gregory at Hollins Law. Please call sir, it is important, my number is 866-513-5033. Thank You,” without specifically reciting he was a “debt collector.”  Id. at *3.  Although the trial court felt this was only a “de minimus” violation of section 1692e(11), it entered judgment in favor of Davis.  Id.  On appeal, the Ninth Circuit reversed.

The Court observed that the overarching purpose of the FDCPA “is to prevent debt collection actions that frustrate consumers' ability to chart a course of action in response to a collection effort.”  Id. at *1.  The Court applies “an objective standard” to decide whether the “least sophisticated debtor” would be misled by the communication.  Id. at *4.  The standard presumes “that the debtor has a basic level of understanding, which does not include bizarre or idiosyncratic interpretations of the communication at issue.  We also must avoid taking a hypertechnical approach.”  Id. (citations, quotation marks omitted).  

The Court emphasized that while the “least sophisticated debtor” standard protects consumers, it must be interpreted in a way that protects collectors from “bizarre or idiosyncratic” interpretations of collection communications.  The Court stated: “Even though the least sophisticated debtor may be uninformed, naive, and gullible, the debtor's interpretation of a collection notice cannot be bizarre or unreasonable.  Courts have carefully preserved the concept of reasonableness and have presumed that debtors have a basic level of understanding and willingness to read [the relevant documents] with care in order to safeguard bill collectors from liability for consumers' bizarre or idiosyncratic interpretations of collection notices.”  Id. at *1. (citations, quotation marks omitted).

 In addition, a collector’s statement must be “material” in order to be actionable under the FDCPA.  Id. at *2.  This means a false or misleading statement does not violate the FDCPA, unless it also frustrates the ability of the consumer to intelligently choose an appropriate response.  “Immaterial errors, by definition, would not frustrate a debtor's ability to intelligently choose an appropriate response to a collection effort.”  Id.  

With this in mind, the Ninth Circuit concluded the failure to expressly state the voicemail was from a “debt collector” did not violate section 1692e(11).  Significantly, the Court noted that “given the extent of the prior communications” between Davis and the law firm, and given “the context,” the voice mail message complied with the Act: “We conclude, given the extent of the prior communications, that the voicemail message's statement that the call was from "Gregory at Hollins Law" was sufficient to disclose to a debtor with a basic level of understanding that the communication at issue was from a debt collector.  Indeed, any other interpretation of Daulton's voicemail message would be bizarre or idiosyncratic. Given the context, the call was not false, deceptive, or misleading, and would not frustrate consumers' ability to intelligently chart a course of action in response to a collection effort.  Although Daulton's voicemail message did not expressly state that Hollins Law is "a debt collector," § 1692e(11) does not require a subsequent communication from the debt collector to use any specific language so long as it is sufficient to disclose that the communication is from a debt collector, as it was here.”  Id. at *4.
             
The decision in Davis continues an encouraging new trend for collectors.  Consumers cannot simply pluck a single communication out of a series of interactions with a collector and argue that, when read in isolation, a minor misstatement contained in it would be confusing to the least sophisticated debtor.  Rather, the challenged communication must be materially false or misleading when evaluated in the context of the entire account history and all prior communications relating to the debt. 






[i] See, e.g, Wahl v. Midland Credit Mgmt., Inc.,556 F.3d 643, 645 (7th Cir. 2009) (“The unsophisticated consumer isn’t a dimwit.  She may be uninformed, naive, and trusting, but she has rudimentary knowledge about the financial world and is capable of making basic logical deductions and inferences.”) (citations and internal quotations marks omitted); Campuzano-Burgos v. Midland Credit Mgmt., Inc., 550 F.3d 294, 299 (3d Cir. 2008) (“Even the least sophisticated debtor is bound to read collection notices in their entirety.”); Greco v. Trauner, Cohen & Thomas, L.L.P., 412 F.3d 360, 363 (2d Cir. 2005) (“[E]ven the least sophisticated consumer can be presumed to possess a rudimentary amount of information about the world and a willingness to read a collection notice with some care.”) (citations and internal quotation marks omitted).

[ii] See, e.g.,  Donohue v. Quick Collect, Inc., 592 F.3d 1027, 1034 (9th Cir. 2010); Hahn v. Triumph Partnerships LLC, 557 F.3d 755 (7th Cir. 2009) (letter that accurately stated total amount due did not violate §§ 1692e or e(2)); Wahl, 556 F.3d at 646 (“If a statement would not mislead the unsophisticated consumer, it does not violate the FDCPA - even if it is false in some technical sense.”); Miller v. Javitch, Block & Rathbone, 561 F.3d 588, 596 (6th Cir. 2009).

[iii] See Wahl, 556 F.3d at 645-46 (the “unsophisticated consumer, with a reasonable knowledge of her account’s history, would have little trouble concluding that the ‘principal balance’ included interest charged by [the original creditor].”); McNair v. Maxwell & Morgan, P.C., 142 F. Supp. 3d 859, 871 (D. Ariz. 2015) (“ The least sophisticated debtor is charged with a reasonable knowledge of both communications between the debtor and the debt collector, and the account's history.”) (citations omitted); Goodrick v. Cavalry Portfolio Services, LLC, 2013 WL 4419321 (D. Ariz. Aug. 19, 2013) (“[E]ven the most unsophisticated debtor would not have been confused by Defendant's failure to say that Plaintiff's longstanding loan was continuing to accrue interest.”).

Saturday, May 21, 2016

Consent Order Compliance: Navigating The CFPB’s Unofficial “Rules” Governing Debt Collection

          The CFPB has entered into consent orders with major creditors, debt buyers and law firms during the past year relating to key areas of their collection practices.  The consent orders impose significant new requirements relating to data integrity, dispute handling, debt substantiation, debt sales, affidavit practices, and litigation practices.  The orders are not formal “rules” from the CFPB, nor are they “binding” on anyone, other than those identified in the orders.  In a speech given on March 9, 2016 to the Consumer Bankers Association, however, the CFPB Director, Richard Cordray, stated it would be “compliance malpractice” for other companies not to take “careful bearings” from the consent orders when assessing how to comply with the consumer protection laws.

          What unwritten “rules” can we glean from the string of consent orders that began in July 2015, with an order between the CFPB and Chase Bank USA, N.A., continued in September 2015, with orders against Encore Capital Group and Portfolio Recovery Associates, and culminated in orders with Frederick J. Hanna & Associates, Citibank, N.A., and Pressler & Pressler in January, February and April, 2016, respectively?  One theme that emerges is that the CFPB expects all participants in the collection space – creditors, debt buyers, and attorneys – to ensure that all other companies they deal with are using accurate and complete data, and are collecting in compliance with the consumer protection laws.

          Data Integrity, Debt Substantiation and Dispute Handling – The allegations in the consent orders reflect the CFPB’s deep skepticism with the way consumer disputes are handled, and the accuracy and integrity of the data creditors and collectors have used.  Although none of the allegations were proven to be true, and every one of the companies denied the allegations made by the CFPB when agreeing to the orders, the CFPB claimed the following:

                     •         Creditors allegedly failed to maintain accurate data about their own accounts or the accounts they acquired from other entities, and failed to properly investigate consumer disputes. This allegedly led to the sale of accounts with inaccurate balance or APR data, and the sale of accounts that were not owed, because they were opened as a result of fraud, the account holder was deceased or in bankruptcy, or the account had been settled or paid in full.

•         Debt buyers allegedly purchased accounts with inaccurate or unreliable balance information.  They allegedly signed purchase and sale agreements that disclaimed the accuracy of data sold, and limited the availability of media they could obtain from the sellers.  When media was obtained, debt buyers allegedly did not review it to compare it with the electronic data they had been provided, nor did they require their law firms to do so before filing suit.  Debt buyers allegedly continued to buy from sellers who had previously provided them with bad data, or who had promised to supply account documents but had been unable to do so.  When consumers disputed debts outside of the 30-day validation period, debt buyers allegedly made consumers prove they did not owe the debts, and did not obtain or review account documentation to investigate the disputes.  Nor did debt buyers inform their attorneys if accounts had been disputed.

          To address these concerns, the CFPB consent orders imposed the following “rules” relating to data integrity, debt substantiation and dispute handling:

•         Creditors agreed to adopt procedures to ensure that they sell accurate documents and account information to debt buyers, and that sale contracts prohibit the buyers from collecting unless sufficient account level documentation had been provided.  Future debt sales must include twelve to eighteen months of account statements as well as a copy of the terms and conditions that apply to the accounts sold.  Accounts with unresolved disputes should not be sold, and information about recent disputes and how those disputes were resolved must be provided to the buyer.

•         Debt buyers agreed to conduct a heightened review of account documentation with respect to 1) any accounts that have been disputed verbally or in writing, 2) any accounts purchased as part of a portfolio that contains “unsupportable or materially inaccurate information,” or 3) any accounts purchased pursuant to an agreement that lacks “meaningful and effective” representations regarding the accuracy and validity of the accounts, or the availability of media.  The review must be of “Original Account Level Documentation” (“OALD”) reflecting the charge-off or judgment balance, and OALD is defined as “(a) any documentation that a Creditor or that Creditor's agent (such as a servicer) provided to a Consumer about a Debt; (b) a complete transactional history of a Debt, created by a Creditor or that Creditor's agent (such as a servicer); or (c) a copy of a judgment, awarded to a Creditor or entered on or before the Effective Date.” If the claimed amount the debt buyer seeks to collect is higher than the charge off balance, the debt buyer must also review an explanation of how the amount was calculated and why it is authorized by the agreement or law.

                     •         Attorneys agreed not to threaten suit or initiate suit for a debt buyer without possessing of OALD reflecting the customer’s name, last four digits of the account number at charge off, the claimed amount (excluding post charge off payments), and, if suing under a breach of contract theory, the terms and conditions relating to the account.  In addition, attorneys must possess a certified or otherwise properly authenticated bill of sale or other document evidencing transfer of the debt to each owner, which must include a “specific reference to the debt being collected” and any one of the following:  1) a document signed by the consumer evidencing the opening of the account; or 2) OALD reflecting a purchase, payment, or other actual use by the consumer.

          Affidavit And Litigation Practices – The allegations of the consent orders also reflected the CFPB’s criticisms of the affidavit and litigation practices employed by creditors, debt buyers and attorneys.  Again, although none of these allegations were proven true, the CFPB claimed the following:

•         Creditors were accused of using affidavits signed by individuals who lacked personal knowledge of the record-keeping practices they described, or who had not actually reviewed the business records they referenced. Affidavits were allegedly notarized without properly administering an oath or witnessing the signature.  Dates and signatures were allegedly inserted after affidavits had been notarized, and dates were allegedly changed after affidavits were signed.  Creditors allegedly obtained judgments against consumers for incorrect amounts, and failed to promptly notify consumers or move to vacate judgments.

•         Debt buyers allegedly used affidavits which claimed personal knowledge of the debt or of the seller’s account-level documentation, where the affiant had only reviewed computer screens of data.  Affidavits allegedly made false representations that the generic terms and conditions specifically applied to the account.  Affiants allegedly claimed they had knowledge of account agreements but those agreements could not be located.  Debt buyers allegedly used seller affidavits which falsely stated that “hard copy” records had been reviewed by the seller’s affiants.  Debt buyers referred too many accounts to law firms staffed with too few attorneys, did not require those attorneys to review OALD before filing suit, did not tell the attorneys that the sellers had disclaimed the accuracy of the account data or had put limits on the availability of documentation.

•         Attorneys allegedly sued for debt buyers who lacked chain of title information, and without knowing if media would be made available or if the sellers had disclaimed the accuracy of the data provided, used affidavits when the attorney knew or should have known the affiant lacked personal knowledge, filed too many lawsuits and spent too little time reviewing account records, relied too much on computers and non-attorney staff to determine which accounts were suit-worthy and whether the amount due, interest, fees, date of last payment, and venue were correct.

          To address these concerns, the consent orders imposed the following “rules” relating to affidavit and litigation practices: 

•         Creditors must use affidavits with facts supported by “Competent and Reliable Evidence,” (“CRE”) which is defined as “documents and/or records created by Respondent in the ordinary course of business, which are capable of supporting a finding that the proposition for which the evidence is offered is true and accurate, and which comport with applicable laws and court rules.”  All affidavits must be based on personal knowledge of the affiant, who must actually review the referenced records and the affidavit for accuracy, and affidavits may not misrepresent the date of execution, the amount owed, or that the debt is supported by CRE.  Creditors must have written standards for training and quality control of affiants.  They may not pay affiants for volume and they must employ sufficient affiants to handle the workload.


•         Debt buyers may not use affidavits that falsely state the affidavit was executed in the presence of a notary, that generic documents actually apply to the consumer’s account, that documents have been reviewed when they have not been, or that the affiant has reviewed the affidavit when he has not.  Debt buyers may not file a collection lawsuit unless they posses OALD reflecting the customer’s name, last four digits of account number at charge off, the claimed amount (excluding post charge-off payments), and if suing for breach of contract, the terms and conditions for the account.  If the claimed amount in the suit is higher than the charge-off balance, the debt buyer must also be prepared to explain for how the increase was calculated and why it is permissible by contract or law. Debt buyers also must possess a certified or properly authenticated bill of sale or other document evidencing transfer of the debt to each owner of the account, which must include a “specific reference to the debt being collected,” plus either of the following: 1) a document signed by the consumer evidencing the opening of the account; or 2) OALD reflecting a purchase, payment or other actual use by the consumer.

•         Attorneys may not submit an affidavit to any court that falsely represents personal knowledge of the validity, truth, or accuracy of the character, amount or legal status of any debt; falsely represents the affidavit has been notarized if not executed in the presence of a notary; contains an inaccurate statement, including that attached documentation relates to the specific consumer; misrepresents the affiant's review of OALD or other documents; or falsely states the affiant has personally reviewed the affidavit.  Attorneys may not file suit against a consumer unless they have logged into their software system to create a record they have accessed the account, and have reviewed OALD showing name, last four digits of account number at charge-off, the claimed amount (excluding any post charge off payments), and if suing under a breach of contract theory, the applicable terms and conditions.  Attorneys must review a certified or properly authenticated bill of sale or other document evidencing transfer of the debt to each owner which must include a “specific reference to the debt being collected”, plus any one of the following:  1) a document signed by the consumer evidencing the opening of the account; or 2) OALD reflecting a purchase, payment or other actual use by the consumer.  Attorneys must also confirm, using “methods or means proven to be historically reliable and accurate,” that the statute of limitations has not expired, that the debt is not subject to bankruptcy, and that the identity of the consumer, address, and venue are correct.

          Navigating the unwritten “rules” from consent orders – It is worth repeating that none of the factual allegations made by the CFPB were ever proven to be true, and the consent orders are not binding on any company not identified in the orders.  Having said this, any company that wants to take “careful bearing” of the orders as suggested by Director Cordray might ask some of the following questions about the accounts it handles, or that are being handled for it:

What is your criteria for identifying disputes and are you giving disputed accounts any heightened scrutiny or other special handling?
Are you training your staff to correctly identify disputed accounts and to promptly report them?
Has the seller disclaimed the accuracy of the data sold?
Has the seller restricted the availability of media?
Has the seller failed to provide media when asked?
Has the media supplied by the seller conflicted with the electronic data the seller supplied?
Are there certain portfolios that contain a high percentage of problem accounts?
Do you possess OALD reflecting the claimed amount, as well as OALD reflecting a purchase, payment, or actual use by the consumer?
Has the affiant reviewed OALD?
What have you done to confirm the affiant has personal knowledge of the facts attested to? 
Have you confirmed the affiant reviewed the affidavit and that it was executed in the presence of a notary?
Have you confirmed the attachments relate to the consumer’s account?
Has a record been created of the steps that were taken to verify the accuracy of the affidavits submitted to the court?
What is the proper role of attorneys, non-attorneys, and computers in preparing the complaint?
Should there be a maximum number of accounts, complaints, or letters that an attorney can review and approve in one day?
What information and documents have been provided to support the factual allegations of the complaint?
What documents have been reviewed to confirm the information supplied supports the factual allegations made in the complaint?
What investigation have you done to confirm the correct consumer is being sued, in the right venue, and that statute of limitations has not run?
What has been done to document attorney involvement?


Tuesday, December 15, 2015

Is The CFPB’s Collection Litigation Strategy Consumer Friendly?

   Collection attorneys who are nervous about the risks involved in handling consumer accounts can relax.  The CFPB has devised an ideal litigation strategy for you to follow.  Let’s take a closer look at what the Bureau wants you to do to make sure it dovetails with the CFPB’s consumer protection goals.

          First, if your client plans to place accounts with your office, you should ensure the client has access to or possesses all the evidence needed to file suit and win the case at trial.  Next, as soon as an account is placed with your office, you should sue the consumer quickly, before the expiration of the shortest possible statute of limitations period.  Finally, when you sue the consumer, you better mean business.  A dismissal may be viewed by the CFPB as an admission of guilt by your firm and your client – an acknowledgment that you never had sufficient evidence to support your claims, and that you did not intend to pursue the case through judgment. 

          In sum, in order to protect consumers, the CFPB wants you to follow this litigation strategy:  quickly sue all accounts placed with your office, and take every contested case to trial to get a judgment against the consumer. This description is too sarcastic, you say?  You may be right.  But let’s examine the positions taken by the CFPB to see if this summary of its ideal litigation strategy is accurate.

          There is no question the CFPB wants you to sue consumers quickly. The Bureau believes that filing a lawsuit after the statute of limitations expires violates the FDCPA and the Consumer Financial Protection Act.  See, e.g., CFPB Amicus Brief in Delgado v. Capital Management Services, LP, filed August 14, 2013.  Any attorney who files suit after the limitations period has run puts the attorney and the client at risk.  If there are two possible limitations periods that might apply to your client’s claims, the wisest path is to select the shorter of the two.  To avoid risk, attorneys must sue consumers faster. 

          The CFPB has also been openly hostile to the practice of dismissing collection lawsuits.  In the Spring 2014 Supervisory Highlights, it said the filing of a lawsuit is a “representation” to a consumer that the company intends to establish that the consumer owes the amount claimed in court filings.  See CFPB Spring 2014 Supervisory Highlights, p. 14.  If the case is dismissed after the consumer answers, the CFPB says the dismissal may be evidence that the company made a false representation when it filed suit.  Id.  This anti-dismissal mantra was repeated at page 19 of the CFPB 2015 Annual Report To Congress On The FDCPA.  Given this, whenever an attorney dismisses a consumer lawsuit, he may be putting himself or his client at risk. 

          The CFPB also wants attorneys to ensure that their clients have sufficient documents to prevail in the lawsuits they file against consumers.  In its July 2014 suit against the Frederick J. Hanna & Associates law firm, the CFPB faulted the firm for filing lawsuits for debt buyers who allegedly did not have “basic documents, such as the original contracts” or chain of title information, and for submitting affidavits signed by persons who lacked personal knowledge of their contents.  See CFPB v. Frederick J. Hanna & Associates Complaint, ¶¶ 20, 23 The Hanna firm allegedly did not confirm whether documentation to support the client’s claims would be made available, and did not review the clients’ purchase and sale agreements for disclaimers regarding the accuracy or validity of the debts.  Id. ¶ 24.  According to the CFPB, the firm “routinely” dismissed cases, and did so at a higher rate when the consumer retained an attorney.  Id.  ¶ 22.  The CFPB says these alleged practices violated the FDCPA and the Consumer Financial Protection Act.  Id.  ¶¶ 28-45.

          All of these themes were confirmed in the CFPB’s September 2015 Consent Orders with Encore Capital Group, Inc. and Portfolio Recovery Associates, LLC.  The Bureau faulted both companies for buying portfolios where the seller had placed restrictions on the availability of media.  See Encore/CFPB September 2015 Consent Order, ¶¶ 32-35; PRA/CFPB September 2015 Consent Order, ¶¶ 29-32.  Encore was accused of using “scattershot litigation” tactics, including filing suit without verifying that account-level documentation existed to support the claims.  See Encore Consent Order, ¶ 51.  Both companies were criticized for misrepresenting their intent to “prove the debt, if contested” – and this allegation was based in part on their filing lawsuits without sufficient documentation.  See Encore Consent Order, ¶¶ 48-53; PRA Consent Order, ¶ 67-70.  Both companies allegedly threatened to sue, or actually filed suit, on claims where the statute of limitations had expired.  See Encore Consent Order, ¶¶ 65-69; PRA Consent Order, ¶¶ 56-59.  Both are now required to possess detailed documentation and information before filing suit, presumably to ensure they can pursue cases through judgment even if contested by the consumer.   See Encore Consent Order, ¶ 129; PRA Consent Order, ¶ 116.

          What message should collection attorneys glean from all of this CFPB activity?  Arguably, the Bureau is telling attorneys:  “Go Big or Go Home.”  To minimize risk, you should not accept new placements unless your clients have access to the documents and witnesses needed to prove the claim at a contested trial.  Once an account is placed with your office, sue the consumer quickly to avoid risks with the statute of limitations.  If the consumer files a response, do not dismiss the case – litigate the case through trial and get a judgment.  Follow all of these steps and you can help the CFPB achieve its consumer protection goals.

Tuesday, November 10, 2015

Will You Know A “Dispute” When You See It?

            How can a collector accurately identify, track, and respond to consumer disputes when the FDCPA does not define what a “dispute” is?  When Supreme Court Justice Potter Stewart famously stated, “I know it when I see it,” in Jacobellis v. Ohio, 378 U.S. 184 (1964), he was not talking about consumer disputes.  But his catch phrase succinctly described how it can be a struggle to define common words in different contexts.  How exactly do you define a consumer “dispute”?  Are you sure you will know a dispute when you see it?
          Collectors have to recognize when a consumer is disputing a debt so they can react appropriately.  But so far, nobody has managed to define what a “dispute” is under the FDCPA.  Consider for example whether any of the following statements qualify as a “dispute” by the consumer:
                     •         “I don’t remember this account.”
                     •         “I think I paid that one off.”
                     •         “The balance doesn’t sound right because I think my credit limit was only $500.”
           •         “I don’t recognize the name of your firm or your client.”
                     •         “Do you have any proof that I owe this?”
                     •         “I’m not going to talk to you until you send me documents.”
           •         “My ex-husband agreed to pay this as part of our divorce.”
                     •         “I think my insurance company was supposed to cover this.”
                     •         “I hired a debt consolidator who agreed to pay all my debts.”
                     •         “The television that I bought with the card never worked.”
                     •         “Stop calling me about this account.”
          A consumer advocate might argue that some or all of the statements listed above qualify as a “dispute” by a consumer, but a collector could reasonably conclude that none are.  Some of the statements express uncertainty about whether the debt is due, or about the amount owed.  Others raise questions whether someone else agreed to pay the debt.  Some ask the collector for more information; others ask the collector to stop further contact.  But none of these statements provide the collector with specific information indicating why the consumer believes he may not be responsible for payment. 
          The context of these statements is also important.  Were these comments made during the course of a collection phone call, or in a letter sent to the collector?  What else was said during the call or in the letter?  How did the phone call end?  What else, if anything was included with the letter?
          It is strange that Congress never bothered to define the term “dispute” in the FDCPA, given the important role that disputes play in the statute’s framework.  Collectors must notify consumers in writing of their right to “dispute” a debt, or any portion thereof, with their initial communication.  See 15 U.S.C. § 1692g(a).  Collection activity during the 30-day period after the notice is sent may not overshadow or be inconsistent with the disclosure of the consumer’s right to dispute the debt.  Id. § 1692g(b). 
          Collectors must treat disputed debts differently.  If a consumer verbally disputes a debt within thirty days of receiving the validation notice, the collector is not entitled to assume the debt is valid.  Id. § 1692g(a)(3).  If the dispute was in writing and within thirty days of receipt of the validation notice, the collector must cease all further collection activity until it mails validation of the debt to the consumer.  Id. § 1692g(b). 
          Even if the dispute is received outside of the thirty-day validation period, a collector violates the Act if it communicates or threatens to communicate “credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.” Id. § 1692e(8).  Where a consumer owes more than one debt and makes a single payment, the collector cannot apply the payment to any disputed debt.  Id. § 1692h. 
          In short, the word “dispute” appears in numerous places throughout the FDCPA, and the existence of a “dispute” imposes important obligations on collectors, but Congress never tells us what exactly qualifies as a “dispute” in these contexts. 
          Congress was more clear about disputes when it wrote the Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. (the “FCRA”).  Under the FCRA, a furnisher of credit information must conduct a reasonable investigation of a direct dispute received from a consumer if it relates to 1) the consumer's liability for the debt (e.g., identity theft, fraud); 2) the terms of the account (e.g., the balance, payment amount); 3) the consumer's performance or other conduct concerning an account (e.g., current payment status, date, or amount of a payment), or 4) other information in a consumer report that bears on the consumer's creditworthiness.  See 16 C.F.R. § 660.4(a).  A furnisher may deem a dispute to be “frivolous or irrelevant,” however, if the consumer fails to provide the furnisher with sufficient information to investigate.  See 15 U.S.C. § 1681s–2 (a)(8)(F)(i)(I); 16 C.F.R. § 660.4(f).  Given that the FCRA and the FDCPA are both part of the Consumer Credit Protection Act, it is reasonable to believe Congress would want a “dispute” to be defined the same way, and handled by collectors in the same way, under the FCRA and the FDCPA. 
          Consumer disputes are also a main focus of the CFPB, so maybe the Bureau will ultimately define what a “dispute” is.  The Bureau gathers information about consumer complaints, including complaints about collectors’ alleged failure to properly handle consumer disputes, and publishes reports about them to Congress.  See Fair Debt Collection Practices Act, CFPB Annual Report 2015
          The CFPB has also imposed new requirements for handling disputed debts in recent enforcement proceedings.   The September 2015 consent orders with Encore Capital Group, Inc. and Portfolio Recovery Associates, LLC provide that if a debt is “disputed” by a consumer, Encore and PRA must take additional steps to substantiate the debt before proceeding with collection.  See Encore Order, ¶ 129, PRA Order, ¶ 116.  The CFPB also required Encore to notify the collection agencies and law firms it retains whenever a debt has been previously disputed by the consumer.  See Encore Order, ¶ 134. 
          If the CFPB ultimately promulgates debt collection rules, it may finally provide a definition of a “dispute” under the FDCPA.  In numerous questions posed by the CFPB in its Advanced Notice Of Proposed Rulemaking relating to potential rules under the FDCPA, the Bureau strongly suggests it is considering rules that would define a “dispute” and further regulate the handling of disputes by collectors.  See ANPR, Questions Nos. 2, 5, 20, 31-53.
          At this point, it is unclear when the CFPB will publish rules, or whether those rules will include a clear definition of what a “dispute” is.  Until then, collectors will have to refine their own definition of disputes so they can implement procedures for tracking and responding to them.


            

Monday, March 23, 2015

Is Your Envelope “Benign” Under The FDCPA?

            The FDCPA prohibits a collector from placing “any language or symbol” on a debt collection envelope, other than the collector’s address.  That’s right, you read that sentence correctly – absolutely nothing can be safely placed on the envelope, except for the collector’s address.  A collector cannot even put its own name on the envelope, unless the collector is certain the name does not indicate that the company is in the debt collection business. 

            There has been a lot of litigation relating to envelopes recently, but section 1692f(8) of the FDCPA, which regulates collection envelopes, is not new.  It has been a source of frustration for collectors for decades.  Fortunately, some courts have recognized that a strict application of section 1692f(8) may lead to absurd results, and have held that “benign language” on an envelope does not violate the FDCPA.  Not every court has adopted the “benign language” exception to section 1692f(8), however, and it is not always easy to predict what language will fit within the exception.  How do you know if your envelope is “benign” or not?

            Section 1692f(8) of the FDCPA prohibits a collector from using “any language or symbol, other than the debt collector's address, on any envelope when communicating with a consumer by use of the mails or by telegram, except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business.”  15 U.S.C. § 1692f(8).  By its plain language, the only “language or symbol” that can appear on the envelope is the collector’s address.  The collector’s name can only be on the envelope if the name does not indicate the company is in the collection business.  Courts have held that collectors may violate section 1692f(8) simply by placing their own name on the envelope.  See, e.g., Keasey v. Judgment Enforcement Law Firm, PLLC,  2014 WL 1744268, **3-4 (W.D. Mich. Apr. 30, 2014) (section 1692f(8) violated by use of name “Judgment Enforcement Law Firm” on envelope); Rutyna v. Collection Accounts Terminal, Inc., 478 F. Supp. 980, 982 (N.D. Ill. 1979) (envelope stating company name “COLLECTION ACCOUNTS TERMINAL, INC.” violated section 1692f(8): “The purpose of this specific provision is apparently to prevent embarrassment resulting from a conspicuous name on the envelope, indicating that the contents pertain to debt collection.”); but see Simmons v. Med-I-Claims, 2007 WL 486879, *9 ( C.D. Ill. Feb. 9, 2007) (rejecting as “frivolous” plaintiff’s claim that use of name “Med-I-Claims” on envelope violated section 1692f(8)).

            Some courts have recognized that section 1692f(8) was enacted to prevent embarrassment to consumers, and language or symbols that do not disclose the collection purpose of a letter are “benign” and do not violate the statute.  For example, in Strand v. Diversified Collection Servs., Inc., 380 F.3d 316 (8th Cir. 2004), plaintiff argued that defendant’s envelopes violated section 1692f(8) because they “included the terms ‘D.C.S., Inc.’ above the return address, ‘PERSONAL AND CONFIDENTIAL’ in capital boldface type, and ‘IMMEDIATE REPLY REQUESTED’ in capital reverse typeface” along with an image of the company’s logo “depicting a grid with an upward-pointing arrow and the initials ‘DCS.’”  Id. at 317.  The Court stated: “We first observe Ms. Strand invites us to read § 1692f(8) to create bizarre results likely beyond the scope of Congress's intent in enacting the statute.  Under her literal reading of § 1692f(8), a debtor's address and an envelope's pre-printed postage would arguably be prohibited, as would any innocuous mark related to the post, such as ‘overnight mail’ and ‘forwarding and address correction requested.’”  Id. at 318.  The Strand Court relied upon legislative history indicating that section 1692f(8) was designed to prevent disclosure that the letter pertains to debt collection as well as FTC Staff Commentary stating that words like “Personal” or “Confidential” on an envelope would not violate the statute.  Id. at 319.  The Court held, as a matter of law, “the language and symbols were benign because they did not, individually or collectively, reveal the source or purpose of the enclosed letters.”  Id. 

            Consistent with Strand, other courts have recognized the “benign language” exception to section 1692f(8).  See, e.g., Goswami v. American Collections Enter., Inc., 377 F.3d 488, 492 (5th Cir. 2004) (envelope with half-inch thick blue bar across front and words “Priority Letter” in white did not violate section 1692f(8), because subsection “only prohibits markings on the outside of envelopes that are unfair or unconscionable, such as markings that would signal that it is a debt collection letter and tend to humiliate, threaten, or manipulate debtors.”); Johnson v. NCB Collection Servs., 799 F. Supp. 1298, 1305 (D. Conn. 1992) (no violation to use terms “Revenue Department” and “Personal and Confidential” on envelope: “Nothing in the innocuous designation of ‘Revenue Department’ distinguishes the letter from other permissible forms of correspondence such as direct billings from creditors for debts not yet past due. The mere use of the departmental designation ‘Revenue Department’ in the return address of a collection notice is simply not the type of abusive collection practice that the FDCPA was intended to reach.”); Lindbergh v. Transworld Sys., Inc., 846 F. Supp. 175, 180 (D. Conn. 1994) (envelope with symbol comprised of blue stripe and the word “TRANSMITTAL” did not violate section 1692f(8), because symbol did not pertain “to debt collection in any way” and the “mechanical interpretation of section 1692f(8)” would not comport with the structure or purpose of the FDCPA); Masuda v. Thomas Richards & Co., 759 F. Supp. 1456, 1466 (C.D. Cal. 1991) (envelope containing notice that theft of mail or obstruction of delivery is federal crime, as well as words “PERSONAL & CONFIDENTIAL” and “Forwarding and Address Correction Requested” did not violate section 1692f(8): “Congress' interest in protecting consumers, however, would not be promoted by proscribing benign language.”).

            It is risky to rely on the “benign language” exception.  Many courts have never formally recognized the exception, or have held that the words or symbols used by the collector did not fall within it.  For example, in Douglass v. Convergent Outsourcing, 765 F.3d 299 (3d Cir. 2014), the Court held the collector violated section 1692f(8), because the debtor’s account number was visible through the window of the envelope.  The Court declined to adopt the “benign language” exception, noting that the language of section 1692f(8) was “unequivocal.”  Id. at 303.  Even if a “benign language” exception existed, however, the Court held disclosure of the account number was not benign, because it “implicates a core concern animating the FDCPA – the invasion of privacy.”  Id.  The Douglass Court summarized:  “The account number is a core piece of information pertaining to Douglass's status as a debtor and Convergent's debt collection effort.  Disclosed to the public, it could be used to expose her financial predicament.  Because Convergent's disclosure implicates core privacy concerns, it cannot be deemed benign.”  Id. at 303-04; see also Peter v. GC Servs. L.P., 310 F.3d 344, 352 (5th Cir. 2002) (envelope containing words “US Department of Education. . . . Official Business.  Penalty for Private Use $300" violated section 1692f(8):  “We do not need to reach the issue of whether § 1692f(8) implicitly includes an exemption for benign language, since the Defendants' impersonation of the Department of Education is certainly not benign.”); Kryluk v. Northland Group, Inc., 2014 WL 6676728, *11 (E.D. Pa. Nov. 21, 2014) (granting consumer leave to amend complaint to add section 1692f(8) claim where account number was visible through envelope’s window); Voris v. Resurgent Capital Servs., LP, 494 F. Supp. 2d 1156 (S.D. Cal. 2007) (envelope with words “return service requested” and “You are Pre-approved* See conditions inside” may violate section 1692f(8) by causing debtor to discard envelope without reading section 1692g notice inside:  “[I]f printed language on an envelope causes a debtor damage, loss of rights, or other harm, the language is not benign.”).

            Have you looked closely at your collection envelopes lately?  Given the renewed focus on section 1692f(8) claims, now is probably a good time to ensure that your envelopes do not have any language or symbol on them that may run afoul of the Act. 

Tuesday, November 11, 2014

Avoiding Overshadowing Claims

             Section 1692g of the FDCPA says collectors must provide notice to consumers within five days of the initial communication regarding the debt, stating the amount of the debt, the name of the current creditor, and explaining the consumer’s right to dispute the debt and to obtain verification. You might assume that a collector can comply with that section by simply copying the language from the statute into their initial notice to consumers.  Simple enough to include this language and move on, right?  Not exactly. 
            Although collectors are not required to quote from the text of section 1692g verbatim, that is probably a good first step.  Even if the letter tracks the language of the statute word for word, however, a collector may still draw an “overshadowing” claim if he says something, or does something, during the thirty-day validation period that may confuse the consumer about their section 1692g rights.  To avoid overshadowing claims, collectors must assess not only the wording, typeface and layout of their initial letters, but also all of their consumer interactions during the 30-day validation period. 
            It is not always easy to predict the language or conduct that might give rise to an overshadowing claim.  The First Circuit recently observed: “Overshadowing is rarely a black-or-white proposition: there are many shades of gray.  It is impossible to catalogue the manifold ways, some subtle and some not, in which a debt collector may attempt to circumnavigate section 1692g.”  Pollard v. Law Office of Mandy L. Spaulding, 766 F.3d 98, 106 (1st Cir. 2014) (citation omitted).
The section 1692g requirements
            To answer the question “what is overshadowing?” we look first to what Congress said the validation notice must contain.  Section 1692g requires that within five days of the “initial communication with a consumer in connection with the collection of any debt” a collector must send the consumer a written notice containing, inter alia,  the amount of the debt, and the name of the creditor to whom the debt is owed.  See 15 U.S.C. § 1692g(a)(1), (2).  The notice must contain “a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector; . . .”.  Id. § 1692g(a)(3).  In addition, the notice must include “a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; . . .” Id. § 1692g(a)(4).  Finally, the notice must contain “a statement that, upon the consumer's written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.”  Id. § 1692g(a)(5).
            The statute gives certain limited protections to a consumer who disputes the debt during the 30-day period.  If the consumer verbally disputes the debt, the collector need not respond, but the collector is no longer entitled to assume the debt is valid.  Id. at § 1692g(a)(3).  If a written dispute is sent by the consumer, the collector must cease further collection efforts until it provides the consumer with verification of the debt, a copy of a judgment, or, if it has been requested, the name and address of the original creditor.  Id. at § 1692g(a)(4), (5).  The statute also provides: “Any collection activities and communication during the 30-day period may not overshadow or be inconsistent with the disclosure of the consumer's right to dispute the debt or request the name and address of the original creditor.”  Id. at § 1692g(b).
Obscuring the validation notice
            The consumer must receive notice of his section 1692g rights in a manner that it not confusing.  As the First Circuit observed, “confusion can occur in a myriad of ways, such as when a letter visually buries the required validation notice, contains logical inconsistencies, fails to explain an apparent inconsistency, or presents some combination of these (or similar) vices.  In the last analysis, a collection letter is confusing if, after reading it, the unsophisticated consumer would be left unsure of her right to dispute the debt and request information concerning the original creditor. The emphasis, then, is on practical effect.”  Pollard, 766 F.3d at 104 (citations omitted); see also Swanson v. Southern Oregon Credit Servs, Inc., 869 F.2d 1222, 1225 (9th Cir. 1989) (“The statute is not satisfied merely by inclusion of the required debt validation notice;  the notice Congress required must be conveyed effectively to the debtor.   It must be large enough to be easily read and sufficiently prominent to be noticed – even by the least sophisticated debtor.  Furthermore, to be effective, the notice must not be overshadowed or contradicted by other messages or notices appearing in the initial communication from the collection agency.”) (citations omitted).
            Even if the letter contains the full validation notice, it will violate section 1692g if the language of the notice is obscured by other text in the letter.  See Swanson, 869 F.2d at 1225 (notice was “dwarfed” by bold faced type, several times larger than notice, stating: “IF THIS ACCOUNT IS PAID WITHIN THE NEXT 10 DAYS IT WILL NOT BE RECORDED IN OUR MASTER FILE AS AN UNPAID COLLECTION ITEM. A GOOD CREDIT RATING--IS YOUR MOST VALUABLE ASSET.”); compare Terran v. Kaplan, 109 F.3d 1428, 1434 (9th Cir. 1997) (no overshadowing: “The text of the letter is uniformly presented in ordinary, same-size font.  No emphasis is placed on any particular statement, with the exception of the creditor's name and the name of the person to contact at Kaplan's office, both of which appear in uppercase letters.”).  Even when a letter has a friendly tone, its content may overshadow the validation notice if it contains language that obscures the debtor’s section 1692g rights.  See, e.g., Caprio v. Heathcare Revenue Recovery Group, LLC, 709 F.3d 142, 151 (3d Cir. 2013) (letter stating “if you feel you do not owe this amount, please call us toll free” overshadowed notice; consumer may believe that a phone call was sufficient to trigger duty to verify debt); Abramov v. I.C. Systems, Inc., _ F.Supp.3d_, 2014 WL 5147549 at *5 (E.D.N.Y Oct. 14, 2014) (directing consumer to dispute debt “in writing” if identity theft is suspected may overshadow right to verbally dispute debt); Oberther v. Midland Credit Management, Inc., _F.Supp.3d_, 2014 WL 4548871, at *6 (D. Mass. Sept. 15, 2014) (letter that gave only two options to stop referral of account to attorney – mail payment, or call to settle - without mentioning that submitting a dispute would also do so, overshadowed validation notice).
Demanding immediate payment
            A collector is free to make a demand for immediate payment during the 30-day validation period.  Doing so, however, can be risky.  For example, in Savino, although a collector’s “request for immediate payment did not, standing alone, violate the FDCPA”, the letter violated the section 1692g by failing to also explain that the demand for immediate payment did not override the right to seek validation.  See Savino v. Computer Credit, Inc., 164 F.3d 81, 86 (2d Cir. 1998) (notice stating “[t]he hospital insists on immediate payment or a valid reason for your failure to make payment” violated section 1692g); see also Russell v. Equifax, 74 F.3d 30, 34 (2d Cir. 1996) (the phrase “if you pay it within the next 10 days we will not post this collection to your file” overshadowed the validation notice).
            Requesting “immediate” payment was held permissible in Wilson v. Quadramed Corp., 225 F.3d 350 (3d Cir. 2000), where the Court found that language stating the account had been placed with agency for “immediate collection” and that the agency would “afford [the debtor] the opportunity to pay this bill immediately and avoid further action against you” was not confusing.  Id. at 356.  The debtor was properly “presented with two options: (1) an opportunity to pay the debt immediately and avoid further action, or (2) notify Quadramed within thirty days after receiving the collection letter that he disputes the validity of the debt.  As written, the letter does not emphasize one option over the other, or suggest that Wilson forego the second option in favor of immediate payment.”  Id.  Similarly, in Renick v. Dun & Bradstreet, 290 F.3d 1055 (9th Cir. 2002), the Court held that a letter asking the debtor to “send payment today” and stating that “PROMPT PAYMENT IS REQUESTED” did not overshadow the validation notice.  Id. at 1057.  In the same vein, the Court in Peter v. GC Services, LP, 310 F.3d 344 (5th Cir. 2002), held that the phrase “FULL COLLECTION ACTIVITY WILL CONTINUE UNTIL THIS ACCOUNT IS PAID IN FULL” did not overshadow the notice.  Id. at 349.  Likewise, in Taylor v. Cavalry Investment, LLC, 365 F.3d 572 (7th Cir. 2004), the Court held that the phase “Act now to satisfy this debt” was “in the nature of puffing” and did not overshadow the language explaining the debtor’s right to seek validation during the 30-day period.  Id. at 575; see also Gruber v. Creditor Protection Serv., Inc., 742 F.3d 271, 275 (7th Cir. 2014) (language stating “We believe you want to pay your just debt” was puffing and did not overshadow the validation notice).  In Terran, the Court held that the phrase “Unless an immediate telephone call is made to J SCOTT, a collection assistant of our office at (602) 258-8433, we may find it necessary to recommend to our client that they proceed with legal action” did not overshadow the validation notice, because it did not require “payment” immediately and merely requested a phone call.  Terran, 109 F.3d at 1434.
Threatening suit or filing suit
            A collector can file suit, and may refer to a potential lawsuit, within the 30-day validation period.  Again, doing so can be very risky.  In Avila v. Rubin, 84 F.3d 222 (7th Cir. 1996), after reciting the validation notice, the letter promptly overshadowed it by stating “if the above does not apply to you, we shall expect payment or arrangement for payment to be made within ten (10) days” in order to avoid “additional proceedings by our firm” including a potential “civil suit” by the creditor.  Id. at 226.  The letter in Bartlett v. Heibl, 128 F.3d 497 (7th Cir. 1997) overshadowed by validation notice by stating “if you wish to resolve this matter before legal action is taken you must do one of two things within a week of the date of this letter”: pay the debt or call the creditor to “make suitable arrangements for payment.”  Id. at 499.  The Court held that the language regarding a potential suit was confusing when read together with the validation notice: “He might well wonder what good it would do him to dispute the debt if he can't stave off a lawsuit.”  Id. at 501.  Although the First Circuit agreed in Pollard that the validation period was “not a grace period” it held that the letter overshadowed the notice, because it suggested “that a lawsuit is going to proceed without delay whether the consumer disputes the debt or not.”  Pollard, 766 F.3d at 105.  The Second Circuit held in Ellis v. Solomon And Solomon, P.C., 591 F.3d 130 (2d Cir. 2010) that serving a consumer with a summons and complaint during the 30-day validation period overshadowed the validation notice, because the collector did not provide “an explanation” clarifying that the lawsuit had no effect on the information contained in the notice.  Id. at 136.
             By contrast, in Zemekis v. Global Credit and Collection Corp., 679 F.3d 632 (7 th Cir. 2012), language stating that the debtor’s account “now meets ... [the] guidelines for legal action” and that “Capital One Bank (USA), N.A. may be forced to take legal action” did not overshadow the notice, because “The letter warns only that Capital One Bank had the right to pursue legal action. . . . As written, the letter alerted Zemeckis only to the possible repercussions she faced for failing to pay.”  Id. at 636-37.  In FHML v. Lamar, 503 F.3d 504 (6th. Cir. 2007), the collector did not overshadow the validation notice when it served a collection complaint that included the validation language in the text of the pleading.  The consumer was properly advised that under state law, she had to respond to the complaint in twenty days, but she had thirty days to dispute the debt under the FDCPA.  Id. at 511; see also Lansing v. Wilford, Geske & Cook, P.A., 2013 WL 5587956, at *4 (D. Minn. Oct. 10, 2013)(foreclosure complaint would not overshadow where validation letter stated:  “[a]ny future actions taken by our office to begin a foreclosure proceeding do not terminate or limit the thirty-day period to dispute the validity of the debt, or any portion thereof, or your ability to request verification of the debt or the name of the original creditor, as described above.”). 
Mentioning negative credit reporting         
            Informing debtors of the potential negative consequences of their failure to pay does not necessarily overshadow the validation notice.  In Durkin v. Equifax, 406 F.3d 410 (7th Cir. 2005), a letter stating “CONTINUED REFUSAL TO HONOR THIS RETURNED CHECK WILL RESULT IN YOUR CREDIT FILE BEING IMPACTED WITH A NEGATIVE REFERENCE WHICH MAY IMPACT FUTURE CREDIT GRANTING DECISIONS” did not overshadow the validation notice.  Id. at 425.  The Court observed: “these letters do not indicate that the time for disputing the debt has passed.  Nor do they misrepresent or cloud the amount of time remaining to dispute the debt.  The letters encourage debtors to pay their debts by informing them of the possible negative  consequences of failing to pay.  The letters simply do not contain any overt misinformation, apparent contradiction, or noticeable lack of clarity concerning the validation period or the debtor's rights under § 1692g.”  Id. at 417-18.  The Fifth Circuit followed this same reasoning in McMurray v. ProCollect, Inc., 687 F.3d 665 (5th Cir. 2012), where the letter warned the consumer:  “It is important that you pay your debt as failure to timely validate the referenced amount due will cause us to report your account to the credit reporting agencies.  The negative mark can remain on your credit for up to seven (7) years, and may among other things significantly affect your ability to: (1) OBTAIN CREDIT; (2) OBTAIN EMPLOYMENT; (3) PURCHASE HOME OR CAR; OR (4) QUALIFY FOR APARTMENT RENTAL.”  Id. at 667.  In rejecting the overshadowing claim, the Fifth Circuit stated: “The supposed threat falls in the category of letters that encourage debtors to pay their debts by informing them of the possible negative consequences of failing to pay, words that do not overshadow the required notice language. . . The letter in this case essentially provided such warnings and nothing more.  Thus, the notice language in ProCollect's letter is not overshadowed by the letter's bad-credit warnings.”  Id. at 671 (citations and quotation marks omitted).
Conclusion

            To avoid overshadowing claims, the best place to start is with the text of your validation letter.  Make sure that it tracks the language of the statute, and that it does not contain any other language that might arguably obscure or contradict the debtor’s validation rights.  Collectors should also assess any other communications or conduct that occurs within the 30-day validation period to determine if it presents any overshadowing risks.  

Tuesday, May 27, 2014

Why The CFPB's Position On Time-Barred Debt Is Bad For Consumers

            Does a consumer need to be “protected” from repaying his own debts?  Can a consumer be “harmed” if he voluntarily makes a payment on a debt that he admittedly owes?  The CFPB apparently believes that sometimes the answer is “yes.” 

            The CFPB and the FTC have forcefully argued that debt collectors should make an affirmative disclosure to consumers when they are seeking to collect debts that cannot be judicially enforced, and that the failure to make this disclosure may violate the FDCPA.  This is necessary, according to the CFPB and FTC, because consumers are usually unfamiliar with the statute of limitations that apply to their debts, and a collector’s failure to disclose that the debt is no longer judicially enforceable could have “adverse consequences” to a consumer.  In other words, the consumer might actually pay the debt he owes, unless the collector “protects” him by affirmatively advising him that the collector cannot sue to collect it. 

            The CFPB wants seriously delinquent consumers to know their debts are no longer judicially enforceable so they can make an informed decision to not repay them.  But does this make for good “consumer protection” policy?  Not really.  If the CFPB discourages delinquent consumers from paying debts they admittedly owe, this raises the cost of credit for all consumers, and it may eliminate the availability of credit to low and moderate income consumers who need it the most.  And if consumers stop paying on seriously delinquent accounts, this will force creditors and collectors to file even more lawsuits, so the creditor can be sure to collect before the limitations period has run. 

            But wait a minute, you say, why would the CFPB take this position?  I thought it was important for consumers to repay their debts. And I thought that debt collection was critically important to the economy, because it helps to keep the cost of credit lower, and helps keep credit widely available for all consumers. When people repay the debts they owe, this makes credit more available and more affordable, and all consumers benefit, right? 

            You are right on all these points.  Indeed, the FTC and CFPB have repeatedly told us that you are right.  For example, in the February 2009 report issued by the FTC entitled “Collecting Consumer Debts: The Challenges Of Change” the FTC reminded us: “Consumer credit is a critical component of today’s economy. Credit allows consumers to purchase goods and services for which they are unable or unwilling to pay the entire cost at the time of purchase. By extending credit, however, creditors take the risk that consumers will not repay all or part of the amount they owe. If consumers do not pay their debts, creditors may become less willing to lend money to consumers, or may increase the cost of borrowing money.”  See Executive Summary, pp. ii-iii.

            The FTC was even more forceful on this point in its report in July 2010 entitled “Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration” where it stated:  “Credit benefits consumers by allowing them to obtain goods and services without paying the entire cost at the time of purchase. . . . Because consumers sometimes fail to pay their creditors, debt collection plays a vitally important role in the consumer credit system. Debt collection benefits individual creditors, of course, who are repaid money they are owed. More importantly, however, by providing compensation to creditors when consumers do not repay their debts, the debt collection system helps keep credit prices low and helps ensure that consumer credit remains widely available.”  See Executive Summary, p. i.

            These same points were echoed by the CFPB on March 20, 2013 in its Annual Report To Congress on the Fair Debt Collection Practices Act, where it stated: “Consumer debt collection is critical to the functioning of the consumer credit market. By collecting delinquent debt, collectors reduce creditors’ losses from non-repayment and thereby help to keep consumer credit available and potentially more affordable to consumersAvailable and affordable credit is vital to millions of consumers because it makes it possible for them to purchase goods and services that they could not afford if they had to pay the entire cost at the time of purchase.” See CFPB’s Report To Congress, p. 9.

            Thus, CFPB and FTC have publicly stated that when delinquent consumers repay the debts they actually owe, all consumers benefit.  And of course the economic benefit that comes from repayment of a debt does not magically evaporate when the statute of limitations on the debt expires.  Why, then, has the CFPB so adamantly insisted that consumers must be advised by collectors when the statute of limitations has expired.  What exactly is the “consumer protection” goal that is being met here?  The answer is not clear.

            Through its Amicus Program, the CFPB has been an active supporter of consumer class action attorneys who have sued collectors alleging that an offer to “settle” a time-barred debt is a misleading and deceptive practice that violates the FDCPA.  For example, the CFPB filed an amicus brief in support of the consumer in the Seventh Circuit Court of Appeals in Delgado v. Capital Management Services, LP, No. 13-2030, where the CFPB argued that “actual or threatened litigation is not a necessary predicate for an FDCPA violation in the context of time-barred debt . . . Depending on the circumstances, a time-limited settlement offer could plausibly mislead an unsophisticated consumer to believe a debt is enforceable in court even if the offer is unaccompanied by any clearly implied threat of litigation.” See CFPB’s Delgado Brief at p.2. The CFPB acknowledged in its brief that: “[i]n most states, the expiration of the statute of limitations on a debt does not extinguish the debt.”  Despite the fact that time-barred debts are not extinguished, however, the CFPB argued that “The running of the statute [] works to the benefit of consumers who owe debts that become stale.”  Id. at p. 12-13. In other words, the seriously delinquent consumer will “benefit” if the statute of limitations runs, because the creditor can no longer sue that consumer to collect it.  But do the rest of us consumers also “benefit” if that consumer does not repay the money they owe?  Not so much.

            In another case that is now pending before the Sixth Circuit Court of Appeals, Buchanan v. Northland Group Inc., No. 13-2523, the CFPB filed another amicus brief in support of the FDCPA class action attorneys who lost that case at the district court level.  There, the CFPB reiterated the FTC’s position that “consumers do not expect” that a partial payment “will have the serious, adverse consequence of starting a new statute of limitations” and that collectors may violate the FDCPA if they fail to disclose “clearly and prominently to consumers prior to requesting or accepting such payments that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would revive the collector’s ability to sue to collect the balance.”       See CFPB’s Buchanan Brief at pages 17-18.  Again, the “serious, adverse consequence” to the delinquent consumer in this example is that they actually may have to pay a debt that they owe.  But if these consumers refuse to pay because they are advised that the statute of limitations has run, what about the “adverse consequences” to the rest of us, the paying consumers, who the CFPB is also supposed to protect?

            Surely the courts will continue to recognize that there is nothing wrong with offering to settle a time-barred debt, so long as the collector does not threaten sue, right?  Nope.  In a setback for paying consumers everywhere, the Seventh Circuit recently adopted the position urged by the CFPB in McMahon v. LVNV Funding, 744 F.3d 1010 (7th Cir. 2014), which held that a letter offering to “settle” a debt violated section 1692e and 1692f of the FDCPA, because the limitations period had expired.  Relying in part on the “well-reasoned position put forth by the FTC and CFPB” in their amicus brief (the Delgado case was combined with McMahon on appeal), the Court held that the running of the limitations period a “central fact” about the “legal status” of a debt, and therefore will be important for a consumer to know if the limitations period has run.  “The proposition that a debt collector violates the FDCPA when it misleads an unsophisticated consumer to believe a time-barred debt is legally enforceable, regardless of whether litigation is threatened, is straightforward under the statute. Section 1692e(2)(A) specifically prohibits the false representation of the character or legal status of any debt. Whether a debt is legally enforceable is a central fact about the character and legal status of that debt.  A misrepresentation about that fact thus violates the FDCPA.  Matters may be even worse if the debt collector adds a threat of litigation, see 15 U.S.C. § 1692e(5), but such a threat is not a necessary element of a claim.” Id. at 1020.

            In light of McMahon and in view of the CFPB’s position on the subject, can collectors safely collect on time-barred accounts?  It will not be easy, since any offer to “settle” those accounts could lead to a class action lawsuit alleging that the collector implied the account is legally enforceable.  If creditors know they are unlikely to collect on their accounts once the limitations period has expired, the only sensible approach is to sue every consumer before the statute expires.  Is increased litigation the best way to protect consumers?  Or should creditors simply stop collecting all their accounts once the limitations period expires and then raise the cost of credit for the rest of us?

            One basic economic point that has been made by the CFPB and the FTC in their reports cannot be disputed: the repayment of legitimate debts is good for consumers.  This issue was discussed at length at the 2013 NARCA Legal Symposium by a panel of economists and regulators, who pointed out the cruel irony of how low and moderate income consumers are the more likely to be harmed by the increasing cost of credit, and restricted availability of credit, which results when consumer debts are not repaid.


            All consumers deserve the CFPB’s protection, not just the seriously delinquent ones.  The CFPB should consider the unintended consequences of its position, which will encourage seriously delinquent consumers to avoid payment of time-barred debts, and will increase the cost and reduce the availability of credit for the rest of us.