Alston & Bird Consumer Finance Blog

Bank Regulatory

Modern-Day Redlining Enforcement: A New Baseline

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On October 22, 2021, the U.S. Department of Justice (DOJ) announced an aggressive new initiative, in collaboration with U.S. Attorneys’ Offices throughout the country, to combat the practice of redlining. Three days prior, the Consumer Financial Protection Bureau (CFPB) was said to be hiring up to 30 new enforcement attorneys to focus on redlining and other fair lending enforcement. While these developments are not surprising for an Administration that has emphasized the importance of promoting racial equity, particularly in homeownership, this swift and purposeful action by federal regulators signals that these agencies mean business. Indeed, as evidence of this new priority, federal regulatory agencies have issued two multimillion–dollar redlining settlements against financial institutions just in the past two months.

Since the early 1990s, federal regulatory agencies have recognized redlining as a type of illegal “disparate treatment” (i.e., intentional) discrimination that violates federal fair lending laws such as the Fair Housing Act and the Equal Credit Opportunity Act (ECOA). For example, in 2009, the agencies defined the term “redlining” as a form of disparate treatment discrimination where a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other protected characteristic of the residents of the area where the credit seeker resides or will reside or where the residential property to be mortgaged is located. As recently as 2019, the DOJ continued to use the term “redlining” to refer to a practice whereby “lenders intentionally avoid providing services to individuals living in predominantly minority neighborhoods because of the race of the residents in those neighborhoods.”

To that end, the earliest redlining enforcement actions were brought against banks whose alleged intent to discriminate could be the only explanation for the bank’s geographic distribution of loans around, but not in, minority communities. As proof of a bank’s intent to discriminate, the DOJ produced brightly colored maps to support its position that a bank had unnaturally drawn its service area boundaries to circumvent minority neighborhoods from its mortgage lending and then painstakingly adhered to this “red line” to avoid serving these neighborhoods. In Atlanta, one bank allegedly drew a red line down the railroad tracks that divided the city’s white and black neighborhoods, while in the District of Columbia, another bank allegedly drew its own line down the 16th Street corridor. Years later, in Detroit and Minneapolis-St. Paul, still other banks were alleged to have served a virtual “horseshoe” encompassing white neighborhoods while carving out minority neighborhoods. And again, in Indianapolis, a bank allegedly drew an “Indy Donut” that encircled and excluded the minority areas in the center of the city. In these cases, given that the banks were required by the Community Reinvestment Act (CRA) to define the areas they intended to serve, the DOJ pointed to the banks’ use of different, and in some cases, oddly shaped, service area boundaries (as opposed to existing legal borders or contiguous political subdivisions) as evidence of intent to discriminate.

Today, the majority of mortgage loans in the United States are made by nonbank mortgage lenders that, while not subject to the CRA’s requirements, remain bound by the antidiscrimination provisions of the Fair Housing Act and ECOA. In lieu of maps and service area boundaries, federal regulators now look to the loan application and origination data reported by the lender under the Home Mortgage Disclosure Act (HMDA) as the starting point for a redlining investigation. If the HMDA data suggests that a mortgage lender’s generation of mortgage loan applications or originations in majority-minority census tracts might not be as strong as that of its “peers” (e.g., similarly sized competitors), a federal regulator may initiate an investigation to determine whether the lender has violated fair lending laws. Of course, because data about “racial imbalance” has been deemed by the U.S. Supreme Court to be insufficient for establishing a prima facie case of discrimination, a federal regulator must supplement the data with evidence that the lender’s arguably weaker performance in minority neighborhoods may have resulted from an intent to discriminate by excluding or otherwise treating those areas differently.

Recently, however, the evidence cited by federal regulators to establish redlining has evolved and expanded significantly. Specifically, regulators appear to be relying on a “discouragement” theory of redlining that looks at the totality of the circumstances to determine whether a reasonable person would have been discouraged from applying for a loan product or service – perhaps regardless of whether the lender intended to discriminate. It is worth noting that this theory derives from ECOA’s implementing regulation, Regulation B, which extends the statute’s protections to “potential” applicants, and is not found in the language of ECOA itself.[1] While a lender is prohibited by Regulation B from making discouraging oral or written statements to an applicant on the basis of race or other protected characteristic, long-standing federal agency guidance indicates that a finding of discouragement necessarily requires some evidence of differential treatment on a prohibited basis. Traditional examples of discouragement have included the use of phrases such as “no children” or “no wheelchairs” or “Hispanic residence,” or a statement that an applicant “should not bother to apply.” In contrast, recent redlining enforcement suggests that federal regulators may be interested in the multitude of factors that could have contributed to a lender’s observed failure to reach minority neighborhoods, which, when taken together, may prove the lender’s intent to discriminate.

For example, federal regulators appear to be scrutinizing a lender’s marketing efforts and strategies to determine whether the lender has sufficiently prioritized minority areas. Prior to 2020, redlining cases highlighted the lender’s alleged failure to market in minority areas by intentionally treating these areas differently, either by allegedly excluding such areas from any marketing campaigns or using different marketing materials, such as solicitations or offers, for white versus minority areas.[2] The most recent redlining cases, however, suggest that lenders’ marketing strategies might need to go beyond treating white and minority neighborhoods consistently. Specifically, in its summer 2021 Supervisory Highlights, the CFPB called out a lender that had engaged in redlining by marketing via “direct mail marketing campaigns that featured models, all of whom appeared to be non-Hispanic white” and using only “headshots of its mortgage professionals in its open house marketing materials … who appeared to be non-Hispanic white.” Notably, the CFPB did not indicate that the lender had marketed to, and conducted open houses in, white neighborhoods while excluding minority neighborhoods, nor that the lender had used different marketing materials for white versus minority neighborhoods. Rather, the CFPB’s claim effectively acknowledges that residents of minority neighborhoods would have received the same marketing materials as any other neighborhood. Yet the CFPB’s position appears to be that the use of white models and white employees in these otherwise neutral marketing materials would have discouraged a prospective applicant in a minority area, regardless of whether the lender intended to discourage anyone or not.

Indeed, recent redlining enforcement suggests that not only will regulators allege it insufficient to treat all applicants and neighborhoods the same, but a lender must undertake affirmative action to specifically target minority neighborhoods. This approach attempts to impose unprecedented, CRA-like obligations on nonbank mortgage lenders to proactively meet the needs of specific neighborhoods or communities and ensure a strong HMDA data showing – or else be subject to redlining enforcement. For example, the July 2020 complaint filed by the CFPB against Townstone Financial Inc. claimed that the lender had “not specifically targeted any marketing toward African-Americans.” Along the same vein, the August 2021 settlement between the DOJ, Office of the Comptroller of the Currency (OCC), and a bank in the Southeast resolved allegations that the lender had failed to “direct” or “train” its loan officers “to increase their sources of referrals from majority-Black and Hispanic neighborhoods.” Of course, lenders understand that “specifically targeting” prospective customers or neighborhoods on the basis of race or other protected characteristic is not required by, and may present its own risk under, fair lending laws. Indeed, the CFPB has suggested that the industry might benefit from “clarity” of how to use “affirmative advertising” in a compliant manner. Similarly, the CFPB’s allegation that Townstone had “not employ[ed] an African-American loan officer during the relevant period, even though it was aware that hiring a loan officer from a particular racial or ethnic group could increase the number of applications from members of that racial or ethnic group” was not only irrelevant since the lender’s main source of marketing was mass market radio advertisements but also presumptive and problematic from an employment-law perspective.

Setting aside the legal questions raised by this expanded approach to redlining, mortgage lenders will also face practical considerations when assessing potential fair lending risk. Given the mortgage industry’s extensive use of social media, lead generation, artificial intelligence, and other technologies to carry out marketing strategies and disseminate marketing material, an inquiry by a federal regulator into potential discouragement of certain applicant groups or areas could be endless. Could every statement or omission made by an employee on any form of media be relevant to a redlining investigation? How many statements or omissions would it take for a federal regulator to conclude that a lender has engaged in intentional, differential treatment based on race or other protected characteristic? To that end, could personal communications between employees, which are not seen by the public, and thus could not have the effect of discouraging anyone from applying for a loan, nevertheless be sought by a federal regulator to further a case of intentional discrimination? The language of recent redlining cases suggests that a regulator may find these communications relevant to a redlining investigation even if they do not concern prospective applicants.

Ultimately, both federal regulators and mortgage industry participants must work together to promote homeownership opportunities in minority areas. But along the way, a likely point of contention will be whether enforcement should be imposed on a lender’s alleged failure to develop and implement targeted marketing strategies to increase business from minority areas, such as expanding the lender’s physical presence to minority areas not within reasonable proximity to the lender’s existing offices, conducting marketing campaigns directed exclusively at minority areas, and recruiting minority loan officers for the specific purpose of increasing business in minority areas. Such an approach might overstate the meaningfulness of physical presence and face-to-face interaction in the digital age, when lenders rely heavily on their online presence.

Of course, there may be legitimate, nondiscriminatory business reasons for a lender’s chosen approach to its operations and expansion. It remains to be seen whether those reasons will be sufficient to assure a federal regulator that the lender’s arguably weak performance in a minority area was not the result of redlining. However, given that nearly all precedent regarding redlining has been set by consent orders and has yet to be tested in the courts, the outcome of any particular investigation will greatly depend on the lender’s willingness to delve into these issues.

[1] See 12 CFR § 1002.4(b), Comment 4(b)-1: “the regulation’s protections apply only to persons who have requested or received an extension of credit,” but extending these protections to prospective applicants is “in keeping with the purpose of the Act – to promote the availability of credit on a nondiscriminatory basis.”

[2] For example, the Interagency Fair Lending Examination Procedures identify the following as “indicators of potential disparate treatment”: advertising only in media serving nonminority areas, using marketing programs or procedures for residential loan products that exclude one or more regions or geographies that have significantly higher percentages of minority group residents than does the remainder of the assessment or marketing area, and using mailing or other distribution lists or other marketing techniques for prescreened or other offerings of residential loan products that explicitly exclude groups of prospective borrowers or exclude geographies that have significantly higher percentages of minority group residents than does the remainder of the marketing area.

Third Party Payment Processors as ‘Covered Persons’: A Return to CFPB Regulation by Enforcement?

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A&B ABstract: The CFPB has recently asserted extraordinary authority to make any payment processor monitor the activities of any merchant for which it processes payments, even if that merchant does not provide consumer financial products or services. Does its argument hold up?

The CFPB’s Complaint Against BrightSpeed

On March 3, 2021, the Bureau of Consumer Financial Protection (Bureau or CFPB) announced that it had filed a complaint in federal court against BrightSpeed Solutions Inc. and its founder and former CEO (collectively, BrightSpeed). The Bureau’s complaint alleges that before ceasing operations in 2019, BrightSpeed was a privately owned third-party payment processor that processed remotely created check payments for its merchant-clients. According to the Bureau, these merchant-clients purported to provide antivirus software and technical-support services to consumers, but actually scammed consumers into purchasing unnecessary and expensive computer software.

The Bureau alleges that despite numerous indicators of fraudulent activity by their tech-support merchant-clients, BrightSpeed continued to do business with and earn processing fees from them. These actions, the Bureau alleges, were “unfair” practices in violation of the Consumer Financial Protection Act of 2010 (the CFPA, also known as Title X of the Dodd-Frank Act) and deceptive telemarketing practices in violation of the Telemarketing Sales Rule.

Unfairness

Importantly, under Sections 1031 and 1036 of the CFPA the Bureau can only bring unfairness claims against (1) a “covered person”; (2) a “service provider”; or (3) a person who knowingly or recklessly provides substantial assistance to a covered person or service provider. Section 1002 of the CFPA defines a “covered person” as a person that offers or provides a “consumer financial product or service,” which is in turn defined to include “providing payments or other financial data processing products or services to a consumer by any technological means,” provided that such products or services are “offered or provided for use by consumers primarily for personal, family, or household purposes.”

Section 1002 of the CFPA also defines a “service provider” as “any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.” In plain English, this means that a payment processor is only subject to CFPB “unfairness” authority if it provides payment processing services to a person that offers consumer financial products and services (and is therefore a service provider) or itself provides payment services to a consumer (and is therefore a covered person).

BrightSpeed’s merchant-clients were providing antivirus software and technical-support services, which are not consumer financial products and services. Accordingly, BrightSpeed does not appear to be (and the Bureau did not allege in its complaint that it is) a service provider. However, the Bureau claims that BrightSpeed is a covered person even though it provided its payment processing services only to its merchant-clients, not to consumers.

Current Status of the BrightSpeed Case

 BrightSpeed, citing ongoing settlement discussions with the Bureau since at least November 2020, sought and was granted multiple extensions of time to file its answer to the Bureau’s complaint. Acting with uncharacteristic leniency, given the length of time involved, the Bureau did not oppose BrightSpeed’s motions. On June 30, the parties reported they had reached an “agreement in principle” to resolve the Bureau’s claims, including injunctive relief, consumer redress, and the payment of a civil penalty, but that BrightSpeed was trying to obtain accelerated repayment of a loan in order to facilitate settlement.

BrightSpeed filed its answer on July 12, denying most of the Bureau’s allegations and argued in defense that: (1) the Bureau’s claims exceeded its statutory authority and (2) are barred by the statute of limitations; (3) the Bureau is aware that BrightSpeed is not subject to the Telemarketing Sales Rule but brought its action in bad faith in an effort to coerce monetary relief out of Defendants against the backdrop of the expense of a federal lawsuit; and (4) the Bureau was aware of BrightSpeed’s conduct since the inception of its business but waited until the business had closed and was in financial distress to bring its action in an effort to gain strategic leverage against the company’s position. On July 13, the court ordered the parties to submit a joint status report on the status of settlement negotiations by August 27.

Prior Cases

Because the BrightSpeed case has yet to advance past the pleading stage, the Bureau has not articulated why it believes BrightSpeed is a covered person. However, two prior cases that advanced to the motions stage shed some light on the arguments the Bureau would likely make in response to BrightSpeed’s defense that it is not a covered person for purposes of the CFPA.

Intercept

For instance, in 2016 the CFPB filed a complaint against Intercept Corporation and two of its executives (collectively, Intercept) for allegedly enabling unauthorized and other illegal withdrawals from consumer accounts by their clients. Intercept filed a motion to dismiss the Bureau’s complaint, arguing among other things that:

  • it is not a covered person, service provider, or related person;
  • the Bureau’s claims were time-barred under the CFPA’s three-year statute of limitations;
  • the Bureau failed to allege the necessary unfairness elements; and
  • the Bureau lacked authority to bring its enforcement action because it was unconstitutionally structured.

Intercept and the Third Party Payment Processors Association (as amicus) both filed briefs arguing that the language of the CFPA plainly excludes business-to-business companies such as Intercept from its reach and that a payment processor must offer its payment processing services directly to consumers to be considered a “covered person,” and those services must be used “primarily for personal, family, or household purposes.”

In response to Intercept’s motion, the CFPB argued that nothing in the statutory text even implies that a covered person must contract directly with the consumer, and when payment processors transmit credit and debit requests that were authorized by consumers, those processors provide the payment processing both “to” and “for use by” consumers regardless of whether they do so directly or via third-party arrangements. The CFPB then cited instances in which the Congress used the word “directly” in the Dodd-Frank Act to support a negative inference that the legislation did intend to capture as covered persons other companies that engage in financial data processing activities—even if those companies do not contract directly with consumers.

The district court dismissed the CFPB’s complaint in March 2017 for failure to state a claim on which relief can be granted but the court’s opinion did not examine whether Intercept was a covered person, noting only that under the applicable standard of review of Intercept’s motion to dismiss, the court considered and accepted the facts alleged in the CFPB’s complaint – including the allegation that Intercept was a covered person – as true.

Universal Debt Solutions

In 2015, the CFPB also filed a complaint against a number of individuals, their debt collection companies, and several payment processors (collectively Universal Debt Solutions), alleging unlawful conduct related to a phantom debt collection operation. The Bureau alleged that the debt collectors, acting through a network of corporate entities, used threats and harassment to collect phantom debt from consumers. The Bureau alleged that the payment processors should be held liable because, among other things, they should have recognized that chargebacks connected with the alleged phantom debt scheme were suspicious and likely connected to fraud. The Bureau alleged that the payment processors were covered persons and service providers that provided substantial assistance to the debt collectors in violation of the CFPA’s UDAAP prohibitions.

The payment processors filed motions to dismiss the CFPB’s complaint, arguing among other things that they were not covered persons because they did not offer their services to consumers but to merchants. In its response to the motions, the CFPB argued that while the payment processors may not interact directly with consumers, they “play a key role in the consumer payment processing network,” and while they may not have directly contacted the debt collectors’ victims, “their work enabled consumers to pay the [d]ebt [c]ollectors with bank and credit cards and they thus fit squarely within the statutory definition of a ‘covered person.’”

The court denied the payment processors’ motions to dismiss, finding that “even if the [p]ayment [p]rocessors are not covered persons, they could still be subject to liability for unfair acts or practices if they are service providers” and that they were service providers to the debt collectors. However, in August 2017, the court sanctioned the CFPB by striking the counts in the complaint against the payment processors and dismissing them from the lawsuit, citing the CFPB’s repeated willful violations of the court’s discovery orders, including its instructions to identify the factual bases for its claims, its refusal to present a knowledgeable 30(b)(6) witness in depositions, and its continued use of privilege objections in response to questions that the court expressly identified as permissible.

Implications for Merchants and Third Party Payment Processors

Because the Intercept and Universal Debt Solutions cases were resolved on other grounds, trial courts have not reviewed on the merits the Bureau’s contention that third party service providers are covered persons for purposes of the CFPA. And, of course, the ultimate disposition of the BrightSpeed case remains unknown. However, the implications of the Bureau’s assertion of authority in these cases is significant.

If the Bureau succeeds in asserting jurisdiction over payment processors that provide services only to merchants and not consumers (and especially over those merchants that do not even offer consumer financial products and services), it can make any payment processor monitor the activities of any company or person for which it processes payments. This would constitute a choke-point-style deputization of payment processors to regulate merchant activity, which would appear at odds with the express exclusion from the Bureau’s rulemaking, supervisory, enforcement or other authorities granted to merchants and retailers in Section 1027(a) of the Dodd-Frank Act. This would also appear to intrude upon the jurisdiction and enforcement priorities of the Federal Trade Commission (FTC), which in recent years has engaged in a concerted effort to combat merchant fraud enabled by payment processors. And this also echoes the Bureau’s prior efforts – which Congress soundly rejected – to coerce indirect auto lenders into regulating compensation paid to automobile dealers, another category of merchant similarly excluded from Bureau jurisdiction.

Conclusion

Companies  and individuals engaged in fraud should be held accountable. However, Congress has carefully established the limits of the Bureau’s jurisdiction and has left states and other federal agencies like the FTC with ample authority to combat fraud that falls outside of that authority. The efficient functioning of financial markets, including the payments system, depends on the CFPB honoring the rule of law.

Agencies would normally be expected to clearly announce their legal position in advance of taking enforcement action, such as by issuing an interpretive rule to explain how providing payment processing services “to a merchant” rather than “to a consumer” renders a third party payment provider a “covered person” for purposes of the CFPA. Such a rule could at least be challenged under the Administrative Procedures Act as contrary to law. However, the Bureau appears poised to establish a potentially far-reaching new precedent by entering into a consent order with a company that has already gone out of business. If the proposed BrightSpeed settlement is approved by the district court judge, such an outcome could be characterized as a muscular return of the Bureau’s dormant “regulation by enforcement” doctrine.

Takeaway

All third-party payment providers may soon have to monitor the payment activities of all of their merchant-clients for compliance with CFPB UDAAP prohibitions, whether or not those merchant-clients offer consumer financial products and services. This development would be an extraordinary expansion of the CFPB’s authority and potentially reach merchant activity previously thought to fall outside of its jurisdiction.

The Hunstein Case: Upending Servicing and Debt Collection?

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A&B Abstract:

The U.S. Court of Appeals for the Eleventh Circuit, covering Alabama, Florida, and Georgia, recently decided in Hunstein v. Preferred Collection and Management, Inc., that a debt collector’s communication with its third-party vendor violated section 1692c(b) of the Fair Debt Collection Practices Act (“FDCPA”), which prohibits a debt collector for communicating, in connection with the collection of any debt, with an unauthorized third party.

The FDCPA and Regulation F

 In 1977, Congress enacted the FDCPA to eliminate abusive debt collection practices by debt collectors.  Section 1692c(b) of the FDCPA generally provides that, except with respect to seeking location information:

without the prior consent of the consumer given directly to the debt collector, or the express permission of a court of competent jurisdiction, or as reasonably necessary to effectuate a postjudgment judicial remedy, a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector.

The FDCPA defines “communication” to mean “the conveying of information regarding a debt directly or indirectly to any person through any medium.”

For decades the FDCPA was enforced by the Federal Trade Commission (“FTC”).  However, prior to the Dodd-Frank Act, no federal regulator had rulemaking authority under the FDCPA.  The Dodd-Frank Act empowered the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) with rulemaking authority with respect to the collection of debts by debt collectors, as defined by the FDCPA.  Prior to finalizing Regulation F, the CFPB conducted market outreach to better understand how debt collectors attempt to collect on accounts.  In July 2016, the CFPB published a study of third-party debt collection operations (“Operations Study”) that recognized debt collection firms’ reliance on vendors (such as print mail services, predictive dialers, voice analytics, payment processes and data servers).  In fact, the CFPB noted that most respondents use an outside vendor for sending written communications.

On November 30, 2020, amended Regulation F,  implementing the FDCPA, was published in the Federal Register with an effective date of November 30, 2021 (which has subsequently been delayed to January 29, 2022).  Regulation F does not specifically address the use of third-party vendors, such as print mail services, although the Operations Study was cited in the preamble to Regulation F.

With regard to civil liability, section 1692k of the FDCPA states that “[n]o provision of this section imposing any liability shall apply to any act done or omitted in good faith in conformity with any advisory opinion of the Bureau, notwithstanding that after such act or omission has occurred, such opinion is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.”

The Hunstein Case

Despite the CFPB’s implicit recognition of debt collectors’ use of print and other vendors,  a recent court decision suggests that use of certain vendors could violate the FDCPA’s prohibition on third-party communications.  In Hunstein, the U.S. Court of Appeals for the Eleventh Circuit reversed the district court’s judgment, holding that (1) a violation of section 1692c(b) of the FDCPA confers Article III standing; and (2) a debt collector’s transmittal of a consumer’s personal information to its dunning vendor constituted a communication “in connection with the collection of any debt” within the meaning of section 1692c(b).

The facts in this case are not unusual, and reflect the typical interactions between a debt collector and their third-party vendors. Specifically, the debt collector, Preferred Collection and Management Services Inc. (“Preferred”), electronically transmitted information concerning Hunstein’s debt (his name and his status as a debtor, the entity to which he owed the debt, the outstanding balance, the fact that his debt resulted from his son’s medical treatment, and his son’s name) to its third-party vendor. In turn, the vendor used that information to create, print, and mail a dunning letter to Hunstein.  As a result, Hunstein sued alleging that by sending his personal information to the third-party vendor, Preferred had violated section 1692c(b). The district court dismissed Hunstein’s action for failure to state a claim, holding that Hunstein had not sufficiently alleged that Preferred’s transmittal to its third-party vendor violated section 1692c(b), because it was not a communication “in connection with the collection of any debt.”  Hunstein appealed to the Eleventh Circuit. On appeal, the Eleventh Circuit addressed both the issues of Article III standing and whether Preferred’s communication was “in connection with the collection of any debt.”

The court first considered the threshold issue of whether a violation of section 1692c(b) confers Article III standing. Specifically, the court focused on whether Hunstein had suffered an injury in fact, which requires an invasion of a legally protected interest that is both concrete and particularized and actual or imminent, not conjectural or hypothetical. The court indicated that the “standing question here implicates the concreteness sub-element.”  The court explained that a plaintiff can satisfy the concreteness requirement in one of three ways. A plaintiff can meet this requirement by (1) alleging a tangible harm (e.g., physical injury, financial loss, and emotional distress), (2) alleging a risk of real harm, or (3) identifying a statutory violation that gives rise to an “intangible-but-nonetheless-concrete injury.”  The court ultimately concluded that Hunstein had met the concreteness requirement “[b]ecause (1) § 1692c(b) bears a close relationship to a harm that American courts have long recognized as cognizable and (2) Congress’s judgment indicates that violations of §1692c(b) constitute a concrete injury.”

After concluding that Hunstein had standing to sue, the court considered whether Preferred’s transmittal to its third-party vendor was a “communication in connection with the collection of any debt.” At the outset, the court noted that the parties were in agreement that Preferred was a “debt collector,” that Hunstein was a “consumer,” and that the debt at issue was a “consumer debt,” as contemplated under the FDCPA. Moreover, the parties agreed that Preferred’s transmittal of Hunstein’s information to the third-party vendor constituted a “communication” within the meaning of the FDCPA. Thus, the only question remaining before the court was whether Preferred’s communication was “in connection with the collection of any debt.” The court began its analysis by reviewing the plain meaning of the phrase “in connection with” and the word “connection,” and determined that “in connection with” and “connection” are generally defined to mean “with reference to or concerning” and “relationship or association,” respectively.  Based on these definitions, and the facts at issue, the court found it “inescapable that Preferred’s communication to [its third-party vendor] as least ‘concerned,’ was ‘with reference to,’ and bore a ‘relationship or association’ to its collection of Hunstein’s debt.”  Accordingly, the court held that Hunstein had alleged a communication “in connection with the collection of any debt” as that phrase is commonly understood.

The court next considered, and rejected, Preferred’s three arguments that its communication was not “in connection with the collection of any debt.” First, the court found Preferred’s reliance on prior Eleventh Circuit decisions interpreting the phrase “in connection with the collection of any debt,” as used under section 1692e, to be misplaced. The court explained that in those line of cases, the court had focused on the language of the underlying communications that were at issue. However, the court found that the district court’s conclusion that the phrase “in connection with the collection of any debt” necessarily entails a demand for payment “defies the language and structure of § 1692c(b) for two separate but related reasons—neither of which applies to § 1692e.” First, the court explained that the “demand-for-payment interpretation would render superfluous the exceptions spelled out in §§ 1692c(b) and 1692b.” The court noted that under section 1692c(b), “[c]ommunications with four of the six excepted parties—a consumer reporting agency, the creditor, the attorney of the creditor, and the attorney of the debt collector—would never include a demand for payment,” and that the “same is true of the parties covered by § 1692b and, by textual cross-reference, excluded from § 1692c(b)’s coverage.” Accordingly, the court held that the phrase “in connection with the collection of any debt” in section 1692c(b) must mean something more than a mere demand for payment, so as not to render “Congress’s enumerated exceptions…redundant.”

The court also rejected Preferred’s argument that the court adopt a holistic, multi-factoring balancing test that was adopted by the Sixth Circuit in its unpublished opinion in Goodson v. Bank of Am., N.A., 600 Fed. Appx. 422 (6th Cir. 2015), for two reasons: (1) “Goodson and the cases that have relied on it concern § 1692e—not § 1692c(b),” and (2) sections 1692c(b) and 1692e differ both “linguistically, in that the former includes a series of exceptions that an atextual reading risks rendering meaningless, while the latter does not, and…operationally, in that they ordinarily involve different parties.” Moreover, the court found that “in the context of § 1692c(b), the phrase ‘in connection with the collection of any debt’ has a discernible ordinary meaning that obviates the need for resort to extratextual ‘factors.’”

Finally, the court rejected Preferred’s “industry practice” argument—namely that there is widespread use of mail vendors and a relative dearth of FDCPA suits against them—holding that simply because “this is (or may be) the first case in which a debtor has sued a debt collector for disclosing his personal information to a mail vendor hardly proves that such disclosures are lawful.”

In holding that Preferred’s communication with its third-party vendor constituted a communication “in connection with the collection of any debt,” the court acknowledged that its “interpretation of § 1692c(b) runs the risk of upsetting the status quo in the debt-collection industry…[and that its] reading of § 1692c(b) may well require debt collectors (at least in the short term) to in-source many of the services that they had previously outsourced, potentially at great cost.” Moreover, the court recognized that “those costs may not purchase much in the way of ‘real’ consumer privacy.” Nevertheless, the court noted that its “obligation is to interpret the law as written, whether or not we think the resulting consequences are particularly sensible or desirable.”

Takeaway 

The court’s textual reading of the statute fails to account for the technological changes to the industry since the FDCPA was enacted in 1977.

The CFPB has the authority to take a more pragmatic view, either through its advisory opinion program or formal rulemaking to recognize the important role of vendors while also putting in proper guardrails to protect consumers’ privacy.  Such a view would be consistent with the FTC’s treatment of this issue.  The FTC previously indicated that a debt collector could contact an employee of a telephone or telegraph company in order to contact the consumer, without violating the prohibition on communication to third parties, if the only information given is that necessary to enable the collector to transmit the message to, or make the contact with, the consumer. Presumably, a debt collector would have to transmit much the same information for purposes of communicating with the debtor through a letter vendor.

Congress also has the authority to modernize the FDCPA.  The House of Representatives recently passed a comprehensive debt collection bill (H.R. 2547, the Comprehensive Debt Collection Improvement Act, sponsored by Chairwoman Waters). While this bill currently doesn’t address the issue in Hunstein, that could be remedied in the Senate.

The consumer finance industry will be closely watching the Hunstein case as it works through the appeal process, as well as how other courts, Congress, CFPB and other regulators react.

Alston & Bird Welcomes Brendan Clegg

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Brendan Clegg joined Alston & Bird in March 2021 as counsel in the Financial Services & Products Group in Washington, D.C. He focuses his practice on state and federal bank regulatory issues and advises bank and non-bank clients regarding Bank Secrecy Act/Anti-Money Laundering (BSA/AML) and Office of Foreign Assets Control (OFAC) compliance. He also represents bank clients in state and federal enforcement actions.

Before private practice, Brendan served as an attorney in the Enforcement & Compliance Division of the Office of the Comptroller of the Currency (OCC), conducting investigations and working on enforcement actions against national banks and their officers and directors. Brendan obtained his B.A. in Political Science & History, magna cum laude, from Colgate University and his J.D., summa cum laude, from William & Mary Law School. He is recognized in the 2021 edition of The Best Lawyers in America© “Ones to Watch” for his work in Banking and Finance Law.

Avoiding Pitfalls During Post-Pandemic Government Investigations

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As the country begins to emerge from the COVID-19 pandemic and the U.S. economy gets back on track, banks nationwide should expect their activities to come under government scrutiny. The impacts of the coronavirus have touched every corner of the banking industry as institutions have striven to meet the evolving needs of their customers, continue operations in a remote working environment, and stand up new programs in response to government relief efforts, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act. With 2020 in the rearview mirror, banks’ efforts to balance these challenges during a year of unprecedented changes will be put under the microscope as their compliance with an ever-expanding list of laws and regulations is assessed by regulators. The conduct of banks’ management, service providers, and even customers will likewise be reviewed.

CSI: Confidential Supervisory Information is not a show many banks would enjoy watching, but in a recent advisory it’s one of three areas our Financial Services & Products Group notes banks should keep in mind if they become the subject of subpoenas, document requests, examinations, or investigations by government agencies.