Alston & Bird Consumer Finance Blog

Consumer Financial Protection Bureau (CFPB)

Seventh Circuit Declines to Adopt FDCPA “Benign Language” Exception

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A&B ABstract:

The Seventh Circuit’s ruling in Preston v. Midland Credit Mgmt. departs from other circuits that have considered whether there is a “benign language” exception under the Fair Debt Collection Practices Act (“FDCPA”). The Seventh Circuit, ruled, as the Consumer Financial Protection Bureau (“CFPB”) urged in an amicus brief, that the FDCPA does not contain a “benign language” exception.

FDCPA Section 1692(f)

Section 1692(f) of the FDCPA broadly prohibits a debt collector from using unfair or unconscionable means to collect or attempt to collect any debt, and enumerates specific examples of prohibited conduct. Section 1692(f)(8) prohibits a debt 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. However, the section provides that a debt collector may use his business name if such name does not indicate that he is in the debt collection business.

The “Benign Language” Exception

Although Section 1692(f)(8) does not include any exceptions to the prohibition discussed above, courts have found that certain types of “benign language” do not run afoul of the prohibition.  As recognized by the Fifth Circuit and the Eighth Circuit, the “benign language” exception allows words such as “personal and confidential,” “immediate reply requested,” and “forwarding and address correction requested,” and other innocuous language and corporate logos that do not identify the sender as a debt collector to appear on a debt collector’s envelope to a consumer.

Fifth Circuit

The Fifth Circuit (in Goswami v. American Collections Enterprise, Inc.), believed that the text of section 1692(f)(8) was ambiguous and could be read two ways. In isolation, it could be read as barring “any markings on the outside of… [the] envelope other than the name and addresses of the parties. However, if it was read together with the prefatory language of section 1692f it could be read as “only prohibiting markings… that are unfair on unconscionable.” To resolve the ambiguity, the court created the “benign language” exception to allow for language on an envelope that “would not intimate that the contents of the envelope relate to collection of delinquent debts.”

Eighth Circuit

Similarly, the Eighth Circuit (in Strand v. Diversified Collection Service, Inc.) found that a literal reading of the statutory text would “create bizarre results.” Specifically, the Eighth Circuit found under Section 1692f(8) would “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 address correction requested.’” The court examined the legislative history of the FDCPA and found that benign language or other corporate markings and logos on an envelope would not thwart the purpose of the FDCPA.  As a result, it opined that a “benign language” exception should exist for this type of language on a debt collector’s envelope.

Preston v. Midland Credit Management

Factual Allegations

In Preston, the plaintiff appealed the district court’s finding that the “benign language” exception applied to a collection letter the defendant sent the plaintiff. The collection letter was enclosed in an envelope bearing the words “TIME SENSITIVE DOCUMENT.” The internal envelope was enclosed in a larger envelope with a glassine covering, so that the words on the internal envelope were visible to the recipient. The plaintiff argued that the defendant’s use of the words “TIME SENSITIVE DOCUMENT” violated section 1692f(8) of the FDCPA.

CFPB Amicus Brief

The CFPB filed an amicus brief in Preston, petitioning the court to rule that there is no “benign language” exception to the FDCPA. The CFPB argued: (1) that the statutory text of the FDCPA was clear, and (2) there was no statutory ambiguity between the prefatory language of section 1692f and the explicit prohibition in section 1692f(8). The CFPB noted that the “benign language” exception was unnecessary because the FDCPA already provides that debt collectors may “make use of the mails” in communicating with a consumer. The CFPB argued that the FDCPA’s text allowing a debt collector “use of the mails” rendered the “benign language” exception moot, because the language and symbols the courts analyzed would all be allowed by the FDCPA as “use of the mails.”

Interpretation of Eighth and Fifth Circuit Case Law

In analyzing the plaintiff’s claims in Preston, the Seventh Circuit examined the opinions of the Fifth and Eighth Circuits in creating the “benign language” exception. Ultimately, the court declined to recognize any such “benign language” exception in the FDCPA.

The Seventh Circuit found that adhering to the plain wording of the statute would not prohibit the use of a debtor’s address on a debt collection letter, or of pre-printed postage. Rather, the court agreed with the CFPB, finding that because the FDCPA allows for debt collectors to communicate by “use of the mails,” it authorizes any language or symbol needed for communicating by mail to appear on an envelope, but not more. That is, “the use of the mails” provision permits the inclusion of language and symbols that are required to ensure the successful delivery of communications through the mail, but in Preston, the court found that that the inclusion of “TIME SENSITIVE DOCUMENT” was not required to ensure the successful delivery of the communication though the mail, and therefore was in violation of the FDCPA.

Takeaway

The Seventh Circuit’s ruling in Preston casts uncertainty on the status of the “benign language” exception. Although the Seventh Circuit addressed the printed language at issue in the Fifth and Eighth Circuit cases, the Seventh Circuit did not address the use of corporate logos that were not the debt collector’s name. Debt collectors that do business in the Seventh Circuit, comprising Illinois, Indiana, and Wisconsin, should ensure that any letters sent to consumers do not contain any extraneous language that is not used in the ordinary course of sending mail.

CFPB Director Provides Update Relating to QM Patch Expiration

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A&B ABstract: A recent letter from Consumer Financial Protection Bureau (“CFPB”) Director Kathleen Kraninger provides clues about the potential future of the so-called “QM Patch.”

Discussion:

In  a December 17, 2020 letter to Senator Mike Rounds (“Letter”), CFPB Director Kathleen Kraninger, revealed a number of interesting insights about the CFPB’s ongoing evaluation of the reformation of the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule, including the phase-out of the “QM Patch”.

Background:

The CFPB enacted the QM Patch as a temporary provision of the ATR/QM regulations promulgated pursuant to the Dodd-Frank Act.  It exempts lenders from having to underwrite loans with debt-to-income ratios not exceeding 43% in accordance with the exacting standards of Appendix Q to Regulation Z if the loans otherwise meet the definition of a qualified mortgage and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.

On July 25, 2019, the CFPB issued an advance notice of proposed rulemaking (“ANPR”) seeking public comment regarding the fate of the “QM Patch”, which is scheduled to expire no later than January 10, 2021.  In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently.

The Letter:

Based on public comments submitted in response to the ANPR, Director Kraninger indicated that the CFPB, in amending the definition of what constitutes a qualified mortgage, will issue a Notice of Proposed Rulemaking (“NPRM”) by no later than May 2020.

The Letter provides further detail on the NPRM.  First, the CFPB will propose to eliminate the current 43% debt-to-income requirement and impose an alternative measure such as a pricing threshold (“i.e., the difference between the loan’s APR and the average prime offer rate for a comparable transaction”).  Director Kraninger asserted that the pricing threshold would help facilitate the offering of “responsible, affordable mortgage credit”.   Second, the CFPB will propose to extend the expiration of the QM Patch for a short period pending the effective date of the proposed alternative.

Perhaps even more significantly, Director Kraninger indicated that the CFPB in a separate NPRM may adopt a new “seasoning” mechanism that would confer QM Safe Harbor treatment to certain loans that have a history of timely payments.  This mechanism would greatly facilitate the sale and securitization of non-QM loans that may have missed being classified as QM due to some blemish prior to consummation.

Takeaway:

Director Kraninger’s brief comments in the Letter indicate that the CFPB is determined to eliminate the QM Patch after a short extended transition period.   Further, the CFPB has demonstrated its commitment to reforming the definition of a qualified mortgage in a manner that will enhance credit availability to a broader spectrum of the credit markets—or so it is thought—and give a lifeline to seasoned highly performing loans that have previously been excluded from the gold standard QM Safe Harbor  category.   The credit markets anxiously await the promulgation of these anticipated proposed rulemakings.

 

CFPB Releases Policy Statement on Compliance Aids

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A&B Abstract:

On January 27, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) published a policy statement announcing a new designation for CFPB guidance, known as “Compliance Aids,” and explaining the legal status and effect of any Bureau guidance labeled as such (the “Policy Statement”).

CFPB Policy Statement

The Policy Statement announces the Bureau’s intent to establish a new category of materials similar to prior compliance resources, but which will now be designated as Compliance Aids. The Bureau noted that Compliance Aids “will provide the public with greater clarity regarding the legal status and role of these materials.”  The Policy Statement does not alter the status of CFPB materials that were previously issued, but the Bureau indicated that it may reissue certain existing materials as Compliance Aids “if it is in the public interest and as Bureau resources permit.”

Notably, the Policy Statement provides that the Bureau does “not intend to use Compliance Aids to make decisions that bind regulated entities.” Rather, Compliance Aids “present the requirements of existing rules and statutes in a manner that is useful for compliance professionals, other industry stakeholders, and the public” and “may also include practical suggestions for how entities might choose to go about complying with those rules and statutes.” However, the Bureau acknowledges that Compliance Aids may not address all situations and that where there are multiple approaches to compliance that are permitted by the applicable rules and statutes, an entity can make its own business decisions regarding which method to use, which may involve methods not addressed in a Compliance Aid. While entities are not required to comply with Compliance Aids, such aids are designed to accurately summarize and illustrate the underlying rules and statutes. Accordingly, the Bureau indicated that in exercising its enforcement and supervisory discretion, it does not intend to sanction, or ask a court to sanction, entities that reasonably rely on Compliance Aids.

Takeaways

We applaud the Bureau for recognizing that enforcement should be based on compliance with applicable statutes and regulations.  Since its inception, the Bureau has provided guidance to the industry through a variety of means.  The Policy Statement provides a list of examples, including small entity compliance guides, instructional guides for disclosure forms, executive summaries, summaries of regulation changes, factsheets, and compliance checklists.  Notably missing from the Bureau’s list are compliance bulletins, through which the Bureau has previously provided its interpretation of certain statutes and/or regulations within its purview.  While the Bureau does not specify what categories of guidance would receive a Compliance Aid designation moving forward, it noted that it may reissue prior guidance as a Compliance Aid.  It will be interesting to see whether this list of examples is a signal of the types of resources that the Bureau may reissue as Compliance Aids.

California Governor Moves to Strengthen State Consumer Protection Enforcement in 2020

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A&B ABstract:

On January 10, 2020, California Governor Gavin Newsom released his budget summary for 2020 to 2021. Fearing that the Trump administration will further roll back consumer financial protections, Gov. Newsom proposed the California Consumer Financial Protection Law, which would provide the state’s primary financial services regulator with additional authority to enforce consumer protection laws.

Discussion

In his budget summary for 2020 to 2021 (“Budget”), Gov. Newsom expressed concern that “[t]he federal government’s rollback of the [Consumer Financial Protection Bureau (“CFPB”)] leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” Seeking to protect Californians from the effects of such rollbacks, Gov. Newsom proposed that state funds be allocated to enact and administer the California Consumer Financial Protection Law (“CCFPL”).

A draft of the CCFPL is not yet available.  However, as described in the Budget, the CCFPL would expand the authority and capacity of the state’s primary financial services regulator, the Department of Business Oversight (“DBO”), “to protect [California] consumers and foster the responsible development of new financial products.”

Change in Regulatory Structure

The DBO, which would be re-named the Department of Financial Protection and Innovation (“DFPI”), would be responsible for:

  • Offering services to empower and educate consumers, especially older Americans, students, military service members, and recent immigrants;
  • Licensing and examining new industries that are currently under-regulated [including, but not limited to, debt collectors, credit reporting agencies, and financial technology companies];
  • Analyzing patterns and developments in the market to inform evidence-based policies and enforcement;
  • Protecting consumers through enforcement against unfair, deceptive, and abusive practices;
  • Establishing a new Financial Technology Innovation Office that will proactively cultivate the responsible development of new consumer financial products;
  • Offering legal support for the administration of the new law; and
  • Expanding existing administrative and information technology staff to support the DFPI’s increased regulatory responsibilities.

The statements on the DFPI indicate that it will be another “mini-CFPB” (i.e. a state version of the CFPB) that will protect California consumers in a way that Gov. Newsom believes the CFPB cannot. Former CFPB Director Richard Cordray is reportedly working with California to develop the DFPI.

DFPI Funding and Staffing

The Budget includes a $10.2 million Financial Protection Fund and the creation of 44 new positions at the DFPI between 2020 and 2021. This will grow to $19.3 million and 90 new positions at the DFPI between 2022 and 2023, to establish and administer the CCFPL. According to the Budget, initial costs for the DFPI and the CCFPL “will be covered by available settlement proceeds in the State Corporations and Financial Institutions Funds, with future costs covered by fees on any newly-covered industries and increased fees on existing licensees.”

Takeaway

Gov. Newsom’s comments in the Budget suggest that California will be more active in investigating regulated financial services entities and enforcing California’s existing consumer protection laws. Additional regulations may be passed as part of this initiative. Action by California is consistent with a growing trend among the states to be more active in their oversight of regulated industries in response to a less active CFPB. Industry participants should be mindful of this trend, assessing their compliance programs to manage oversight from multiple entities under multiple regulatory schemes.

CFPB Issues New Edition of Supervisory Highlights

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A&B ABstract:

 The Fall 2019 edition of the CFPB’s Supervisory Highlights focuses on credit reporting issues of interest.

Discussion

The Fall 2019 edition of Supervisory Highlights represents the second time the Consumer Financial Protection Bureau (“CFPB”)  has focused entirely on credit reporting.  With respect to furnishers, the Supervisory Highlights includes five categories of supervisory observations relating to compliance with the Fair Credit Reporting Act (“FCRA”) and its implementing Regulation V and associated compliance management system weaknesses.

Policies and Procedures

 Under Regulation V, a furnisher must establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the consumer information it provides to consumer reporting companies (“CRCs”).  Related examination findings by the CFPB include:

  • Mortgage industry furnishers failed to have policies and procedures appropriate to the nature, size, complexity, and scope of their activities;
  • The policies and procedures of auto loan furnishers failed to provide sufficient guidance on the conduct of “reasonable investigations of indirect disputes that contain allegations of identity theft”; and
  • Debt collection furnishers failed to have policies and procedures that differentiated between FCRA disputes, disputes under the Fair Debt Collection Practices Act, and debt validation requests.

The CFPB also addressed examination findings for furnishers of deposit account information.

Reporting Information with Actual Knowledge of Errors

 Under FCRA, a furnisher cannot furnish information relating to a consumer that it “knows or has reasonable cause to believe … is inaccurate,” unless the furnisher clearly and conspicuously discloses to the consumer an address to which the consumer can send notice that specific information is inaccurate.

The CFPB found that one or more furnishers violated this prohibition by reporting to CRCs accounts with derogatory status codes that were inaccurate because of coding errors, and that the furnishers knew or had reasonable cause to believe were inaccurate.  Further, these furnishers failed: (1) in investigating disputes of such information to conduct a root-cause analysis that would have identified the source of the issue; and (2) to provide consumers with a clear and conspicuous disclosure of the address to which they could send notices of dispute.

Duty to Correct and Update Information

 A furnisher must promptly notify a CRC if it determines that information provided to the CRC is incomplete or inaccurate, and must make any corrections or addition to the information to correct the issue.  The CFPB identified examples of auto loan and deposit account furnishers who violated this duty.

Duty to Provide Notice of Delinquency of Accounts

 FCRA imposes on furnishers a duty to report the date of first delinquency – defined as “the month and year of commencement of the delinquency on the account that immediately preceded the action” – to a CRC within 90 days.  The CFPB identified instances of furnishers incorrectly reporting the date of delinquency

Obligations Upon Notice of Dispute

 The final category of findings in connection with the activities of furnishers is obligations upon notice of dispute.  If a consumer disputes the accuracy of information contained in a consumer report, FCRA and Regulation V require a furnisher to conduct a reasonable investigation of the dispute.

Among other issues, the CFPB noted that furnishers violated this duty by:

  • Failing to conduct reasonable investigations of both direct and indirect disputes;
  • Failing to timely complete dispute investigations within the timeframe established by Regulation V (generally 30 days); or
  • Failing to notify consumers of a determination that a dispute is frivolous or irrelevant (and that, as a result, the furnisher will not undertake an investigation).

Takeaway

As the second edition dedicated to consumer reporting, these Supervisory Highlights puts furnishers and CRCs that this is an area of focus for the CFPB.  Building on the credit reporting supervisory observations in the Summer 2019 edition, furnishers – banks, mortgage servicers, auto loan servicers, student loan servicers, and debt collectors – should take the opportunity to evaluate their own policies, procedures, and processes for compliance with FCRA and Regulation V.