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. 

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[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.”).

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?