Alston & Bird Consumer Finance Blog

Debt Collection

CFPB Publishes Fall 2022 Supervisory Highlights

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A&B ABstract:

On November 16, 2022, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released its Fall 2022 Supervisory Highlights (Issue 28) (the “Supervisory Highlights”), which, among other things, announces the creation of a Repeat Offender Unit and highlights supervisory observations from examinations conducted by the Bureau in the first half of 2022.  Below we discuss some of the key takeaways from the Supervisory Highlights.

The Supervisory Highlights

CFPB’s New Repeat Offender Unit

The CFPB announced the creation a Repeat Offender Unit (“ROU”) to focus its supervision on repeat offenders with the intent to recommend specific corrective actions to stop recidivist behavior. The ROU intends to engage in closer scrutiny of repeat offenders’ compliance with certain orders, along with the following activities:

  • Reviewing and monitoring the activities of repeat offenders;
  • Identifying the root cause of recurring violations;
  • Pursuing and recommending solutions and remedies that hold entities accountable for failing to consistently comply with federal consumer financial law; and
  • Designing a model for review of orders and monitoring that reduces the occurrences of repeat offenders.

The creation of the ROU is not surprising given Director Chopra’s prior statements signaling that the Bureau would focus its efforts on reining in corporate recidivism in the financial services industry. For example, in March 2022, Director Chopra delivered a speech to the University of Pennsylvania Law School, entitled Reining in Repeat Offenders, in which the Director noted that “[a]t the CFPB, we have plans to establish dedicated units in our supervision and enforcement divisions to enhance the detection of repeat offenses and corporate recidivists and to better hold them accountable…[and that] for serial offenders of federal law, the CFPB will be looking at remedies that are more structural in nature, with lower enforcement and monitoring costs…[including] seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

Supervisory Observations

The Supervisory Highlights identifies numerous supervisory observations pertaining to consumer reporting, debt collection, mortgage origination, mortgage servicing, and payday lending, among other topics. We discuss several of the Bureau’s notable observations below.

Consumer Reporting

With respect to credit reporting, the CFPB found violations of the Fair Credit Reporting Act and/or Regulation V involving the following issues:

  • Certain nationwide consumer reporting agencies failed to provide reports to the CFPB regarding consumer complaints received from consumers that the Bureau transmits to the credit reporting agency if those complaints are about “incomplete or inaccurate information” that a consumer “appears to have disputed” with the agency;
  • Some furnishers, including third-party debt collection furnishers, continue to: (1) inaccurately report information despite actual knowledge of errors; (2) fail to correct and update furnished information after determining such information is not complete or accurate; and (3) fail to establish and follow reasonable procedures to report the appropriate date of first delinquency on applicable accounts; and
  • Some furnishers also continue to fail to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of furnished information, such as by verifying random samples of furnished information, and fail to conduct reasonable investigations of direct disputes by neglecting to review relevant information and documentation.

Debt Collection

In recent examination activity, the CFPB has identified certain violations of the Fair Debt Collection Practices Act, such as:

  • Examiners found that certain larger participant debt collectors engaged in conduct intended to harass, oppress, or abuse consumers during telephone calls by continuing to engage in conversation even after consumers stated that the communication was causing them to feel annoyed, harassed, or abused.
  • Examiners found that debt collectors engaged in improper communication with third parties about a consumer’s debt when communicating with a person who had a similar or identical name to the consumer.

Mortgage Origination

Regarding mortgage origination, the CFPB found violations of Regulation Z and deceptive acts or practices prohibited by the Consumer Financial Protection Act (“CFPA”), such as:

  • Examiners found that certain entities improperly reduced loan origination compensation based on a term of a transaction by failing to use actual costs and fee amounts that were accurate and known to loan originators at the time initial disclosures were provided to consumers. Subsequently at closing, consumers were provided a lender credit when the actual costs of certain fees exceeded the applicable tolerance thresholds, which led entities to reduce loan originator compensation after loan consummation by the amount provided in order to cure the tolerance violation. Notably, the Bureau found that in each instance, the settlement service had been performed and the loan originator knew the actual costs of those services. The loan originators, however, entered a cost that was completely unrelated to the actual charges that the loan originator knew had been incurred, resulting in information being entered that was not consistent with the best information reasonably available. Thus, examiners found that the unforeseen increase exception permitted by Regulation Z did not apply to these situations.
  • Examiners also identified a waiver provision in a loan security agreement, which was used by certain entities in one state, that was determined to be deceptive in violation of the CFPA. The waiver provided that borrowers who signed the agreement waived their right to initiate or participate in a class action. The language was found to be misleading because a reasonable consumer could understand the provision to waive their right to bring a class action on any claim, including federal claims, in federal court, which is expressly prohibited by Regulation Z.

Mortgage Servicing

The Bureau indicated that its mortgage servicing examinations focused on servicers’ actions as consumers experienced financial distress related to COVID-19. Mortgage servicing findings by the CFPB included the following:

  • Servicers engaged in abusive acts or practices by charging sizable phone payments fees when consumers were unaware of the fees’ existence and, if disclosures were provided, providing general disclosures indicating that consumers “may” incur a fee did not sufficiently inform consumers of the material costs;
  • Servicers engaged in unfair acts or practices by:
    • charging consumers fees during a CARES Act forbearance plan, in violation of the CARES Act’s prohibition on the imposition of “fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract”; and
    • failing to timely honor requests for forbearance from consumers;
  • Servicers engaged in deceptive acts or practices by misrepresenting that certain payment amounts were sufficient for consumers to accept a deferral offer at the end of their forbearance period, when in fact, they were not due to updated escrow payments; and
  • Servicers violated Regulation X by failing to maintain policies and procedures reasonably designed to:
    • inform consumers of all available loss mitigation options, which resulted in some consumers not receiving information about options, such as deferral, when exiting forbearances; and
    • properly evaluate consumers for all available loss mitigation options, resulting in improper denial of deferral options.

Payday Lending

Regarding payday lending, examiners found that some lenders failed to maintain records of call recordings that were necessary to demonstrate compliance with certain conduct provisions in consent orders, e.g., prohibiting certain misrepresentations. The consent order provisions required creation and retention of all documents and records necessary to demonstrate full compliance with all provisions of the consent orders. The Bureau determined that the failure to maintain the call recordings violated the consent orders and federal consumer financial law.

Although this finding was specific to payday lenders, it may have broader implications for entities subject to an active CFPB consent order, as the provision relied upon by the Bureau in making its finding is routinely found in CFPB orders.

Takeaway

The compliance issues noted in the Supervisory Highlights emphasize the importance of maintaining a strong and continually updated compliance management system. Entities should review the Bureau’s supervisory observations against their current policies, procedures, and processes to ensure consistency with the Bureau’s compliance expectations, and to determine whether enhancements and/or proactive consumer remediation may be appropriate. Finally, entities subject to active CFPB consent orders should pay particular attention to whether their current policies, procedures, and processes are sufficient to ensure compliance with applicable law and the terms of the consent order, in order to mitigate against the risk of being deemed a repeat offender and potentially subject to increased penalties or broader structural remedies such as “seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

Eleventh Circuit Finds Monthly Mortgage Statement Containing Boilerplate “This Is An Attempt To Collect A Debt” Language Constitutes A Communication “In Connection With The Collection of A Debt” Under The FDCPA

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A&B Abstract:

In Daniels v. Select Portfolio Servicing, Inc., 2022 U.S. App. LEXIS 14013 (11th Cir. May 24, 2022) a panel of the Eleventh Circuit addressed the question “whether a required monthly mortgage statement that generally complies with the TILA and its regulations can plausibly be a communication ‘in connection with the collection of a debt’ under the FDCPA…if it contains additional debt-collection language.”  Relying almost exclusively on the single sentence in the monthly mortgage statement that read “[t]his is an attempt to collect a debt,” the panel in a 2-1 decision said “yes” and reversed the granting of a motion to dismiss in favor of the mortgage servicer.  While the majority explained that the decision was not contrary to those from other circuit courts and within its own circuit, the dissent pointed out how this decision was arguably inconsistent with such precedent.  Going forward, mortgage servicers face a risk (at least in the Eleventh Circuit) that monthly mortgage statements that otherwise comply with TILA and its regulations could subject the servicer to liability under FDCPA if the statement contains errors and includes language that “this is an attempt to collect a debt.”

Discussion:

In Daniels, the borrower sued the mortgage servicer under the FDCPA and the Florida Consumer Collection Practices Act alleging that several monthly mortgage statements contained errors.  In particular, the borrower alleged that the statements contained errors in the deferred principal balance, outstanding principal balance and the amount of the interest-only payment that was due.  The statements were consistent with the requirements of TILA and its regulations.  The statements, however, also included the following language – “This is an attempt to collect a debt.  All information obtained will be used for that purpose.”  The district court granted the servicer’s motion to dismiss, and dismissed the case with prejudice on the grounds that the mortgage statements were not communications in connection with the collection of a debt under the FDCPA.

In reversing that decision on appeal, the majority first noted that communications can have “dual purposes” – providing a consumer with information and demanding payment of a debt.  The majority then discussed two prior decisions involving letters from law firms, Reese v. Ellis, Painter, Ratterree & Adams, 678 F.3d 1211 (11th Cir. 2012) and Caceres v. McCalla Raymer, LLC, 755 F.3d 1299 (11th Cir. 2014), where the court concluded that the letters were related debt collection for purposes of the FDCPA.

After reviewing the monthly mortgage statements in Daniels, the majority concluded that “viewed holistically, a communication that expressly states that it is ‘an attempt to collect a debt,’ that asks for payment of a certain amount by a certain date, and that provides for a late fee if the payment is not made on time is plausibly ‘related to debt collection.’”  In several places in the opinion, the majority reiterated that the servicer included the “this is an attempt to collect a debt” language that was not required by TILA or its regulations.  It is clear from the opinion that the inclusion of such language was the critical factor in the decision.  The majority noted that, while some portions of the monthly mortgage statements may have been for informational purposes, the communication can have “dual purposes.”  As such, the mere fact that the monthly mortgage statements were otherwise consistent with TILA and its regulations was not dispositive.

The majority recognized that two prior unpublished district court cases from the Southern District of Florida held that the inclusion of “this is an attempt to collect a debt” language did not convert a monthly mortgage statement into a communication in connection with the collection of a debt under the FDCPA.  See Jones v. Select Portfolio Servicing, Inc., 2018 U.S. Dist. LEXIS 75886 (S.D. Fla. 2018) and Zavala v. Select Portfolio Servicing, Inc., 2018 U.S. Dist. LEXIS 201259 (S.D. Fla. 2018).  The majority, however, “respectfully disagree[d]” with the decision in both cases.

Notably, in a prior unpublished decision, Green v. Specialized Loan Servicing LLC, 766 Fed. App’x 777 (11th Cir. 2019), a prior panel of the Eleventh Circuit held that a servicer’s monthly mortgage statement did not “rise to the level of being unlawful debt collection language” when the statement did not contain any language “beyond what is required by TILA.”  The majority in Daniels distinguished Green by noting that it was unpublished and, most importantly, did not contain the “this is an attempt to collect a debt” language.  (Furthermore, the majority noted that Green reached the merits and held that the statement did not constitute an “unlawful” debt collection language, whereas the decision in Daniels merely held that the plaintiff had plausibly alleged an FDCPA violation.).

The dissent in Daniels took issue with the majority’s reliance on the “this is an attempt to collect a debt” language contained in a monthly mortgage statement that otherwise complied with the TILA and its regulations.  The dissent noted that this language “appears once on each statement, is not physically separated from other information in the statement, is not capitalized or otherwise emphasized and is printed using the same font and font size as the rest of the information contained in the statement.”

The dissent discussed Green and other prior decisions (including the district court decisions in Jones and Zavala) and concluded that the mere inclusion of the “collect a debt” language was not enough to render an otherwise TILA-compliant monthly mortgage statement a communication “in connection with the collection of a debt” for purposes of the FDCPA.  “[T]he majority’s conclusion that, by including this extra language – which is not required but is neither inconsistent with nor materially additive to TILA’s requirements – the periodic mortgage statements have become communications subject to the FDCPA is far too broad.”

The dissent in Daniels then discussed decisions from other circuits, including the Seventh Circuit and Eighth Circuit.  The dissent cited Gburek v. Litton Loan Servicing LP, 614 F.3d 380 (7th Cir. 2010), in which the court held that a communication stating that it was an attempt to collect a debt “does not automatically trigger the protections of the FDCPA, just as the absence of such language does not have dispositive significance.”  The dissent also discussed Heinz v. Carrington Mortgage Services, LLC, 3 F.4th 1107 (8th Cir. 2021).  In Heinz, the court addressed “so-called Mini-Miranda statements” where the communication notes that it is from a debt collector and for the purpose of collecting a debt.  Relying on Gburek, the court in Heinz held that such “boilerplate Mini-Miranda statements” do not trigger the protections of the FDCPA.

Therefore, according to the dissent in Daniels and consistent with these decisions in other circuits, the mortgage servicer’s inclusion of “this is an attempt to collect a debt” language in the monthly mortgage statement should not trigger the protections of the FDCPA.  Instead, the dissent would require “stronger demands for full or partial payment and threats of consequences for failure to do so” before a monthly mortgage statement would give rise to a claim under the FDCPA.

On June 14, 2022, the servicer filed a petition for rehearing and rehearing en banc asking the panel for a rehearing of the case.  In the petition, the servicer recognized that “the majority holds that inclusion of the statement, ‘this is an attempt to collect a debt,’ transforms federal-required mortgage statements into debt-collection communications under the FDCPA.”  The servicer argued that the decision conflicts with prior case law inside and outside of the Eleventh Circuit, and “the well-reasoned dissent” was correct to conclude that such language should not render TILA-compliant monthly mortgage statements subject to the FDCPA.

Takeaway:

A mortgage servicer should strongly consider removing from its monthly mortgage statements any language that reads “this is an attempt to collect a debt.”  The relevant language is not required by the TILA or the CFPB.  At least in the Eleventh Circuit now after Daniels, the inclusion of such language will give borrowers pursuing FDCPA claims a much better chance to survive a motion to dismiss and move the case into the expensive discovery phase.

It should be noted that the majority decision in Daniels included an important qualification in a footnote – “We do not hold that the statements are, as a matter of law, communications in connection with the collection of a debt.  Our ruling is that [the borrower] has plausibly alleged that they are.”  Therefore, the mere inclusion of the “this is an attempt to collect a debt” language does not mean, even in the Eleventh Circuit, that a mortgage servicer’s monthly mortgage statements are necessarily subject to the FDCPA as a matter of law.  That said, as a practical matter, it will be difficult for a mortgage servicer to convince a district court that has already denied a motion to dismiss to change its mind at the summary judgment stage and conclude that the inclusion of such language does not render the mortgage statement a communication in connection with the collection of a debt.

Of course, even if the mortgage statement is a communication in connection with the collection of a debt, the borrower must still establish that the statement otherwise was and violated the substantive provisions of the FDCPA.  See, e.g., 15 U.S.C. §§ 1692d, 1692e and 1692f.  Daniels, however, is likely to help borrowers clear the threshold hurdle at the motion to dismiss stage.

Maryland Regulator Puts Lenders and Servicers on Notice Regarding the Assessment of So-Called “Convenience Fees”

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A&B Abstract:

On May 12, 2022, the Maryland Office of the Commissioner of Financial Regulation (the “OCFR”) issued an Industry Advisory (the “Advisory”) “put[ting] [the] industry on notice” of the recent decision issued by the 4th Circuit Court of Appeals in Ashly Alexander, et. al. v. Carrington Mortgage Services, LLC.  The Advisory directs lenders and servicers to review their practices in charging consumer borrowers loan payment fees (referred to herein as “convenience fees”) both to ensure on-going compliance with the law and to determine whether any improper fees have previously been assessed so that they can undertake appropriate reimbursements to affected borrowers.

The Carrington Decision

In Carrington, the 4th Circuit Court of Appeals held that the Maryland Consumer Debt Collection Act (“MCDCA”) incorporates §§ 804 through 812 of federal Fair Debt Collection Practices Act (“FDCPA”), including the FDCPA’s prohibition on “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” under § 808(1). Because Maryland law does not expressly permit or authorize the assessment of convenience fees, the court held that such fees must be expressly authorized by the loan documents in order to be permitted under § 808(1).

The Carrington court further clarified that the FDCPA’s substantive provisions apply to any person who meets the broad definition of a “collector” under the MCDCA, even if such person would not be considered a “debt collector” under the FDCPA. Notably, the FCDPA contains important exclusions from the definition of “debt collector”, such as when a person is collecting a debt that was obtained prior to default, or if the person collecting the debt was the original creditor.  On the other hand, as amended effective October 1, 2018, the MCDCA defines a “collector” broadly to include all persons collecting or attempting to collect an alleged debt arising out of a consumer transaction and does not provide for similar exclusions.  We discussed the Carrington decision in greater detail in a prior blog post.

The Advisory

The Advisory reminds Maryland “collectors” of the Carrington court’s ruling, that collecting fees on any form of loan payment violates the MCDCA if the fees are not set forth in the loan documents. As a result, Maryland lenders and servicers are cautioned “that any fee charged, whether for convenience or to recoup actual costs incurred by lenders and servicers for loan payments made through credit cards, debit cards, the automated clearing house (ACH), [or other payment methods], must be specifically authorized by the applicable loan documents.” The Advisory makes clear that “[i]f such a fee is not provided for in the applicable loan documents, it would be deemed illegal.” Further, attempts to circumvent this fee restriction by directing consumers to a payment platform associated with the lender or servicer that collects a loan payment fee or requiring consumers to amend their loan documents for the purposes of inserting such fees could also violate Maryland law.”

The Advisory anticipates that some lenders or servicers may discontinue offering certain payment options as a result of the Carrington decision. However, the Commissioner expressly requests that such lenders or servicers promptly notify their customers of such change and encourages lenders and servicers “to work with consumers to minimize the impact any change in payment options could have, including where possible, continuing such payment options without fees, especially when consumers are attempting to pay their obligations in a timely manner.”

Lenders and servicers are directed to review their records to determine whether any improper fees have previously been assessed and, if so, make appropriate reimbursements to affected borrowers. The OCFR intends to monitor the impact that the Carrington decision has on lender and servicer fee practices and lenders and servicers can expect a follow-up on this topic from the OCFR in the coming months.

Takeaway

The implications of the Carrington decision are numerous. First, lenders and servicers must immediately cease the collection of convenience fees from Maryland borrowers, unless such fees are expressly authorized by the loan documents. Lenders and servicers choosing to discontinue certain payment services as a result of the Carrington decision, must also ensure that affected consumers are promptly notified of such change.  In addition, lenders and servicers who meet the definition of a “collector” under the MCDCA must ensure compliance with §§ 804 through 812 of the federal FDCPA, regardless of whether they meet the FDCPA’s definition of a “debt collector.” Finally, while the Carrington decision was focused on the permissibility of convenience fees, we note that the court also held that “[t]he FDCPA’s far-reaching language [under § 808(1)] straightforwardly applies to the collection of ‘any amount.’” Thus, the implications of the Carrington decision go beyond convenience fees to arguably any other fee that is not expressly authorized by the loan documents or permitted by law, and we understand that Maryland regulators have informally indicated as much.  Accordingly, lenders and servicers should carefully review all fees that are, or may be, assessed to Maryland borrowers to ensure such fees are either expressly authorized by the loan documents or permitted by law.

Fourth Circuit Rules That a Mortgage Servicer Can Be Liable for FDCPA Violations Even if Not Subject to the FDCPA

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A&B ABstract:

Putative class action plaintiffs recently prevailed on appeal in a case involving mortgage servicing fees charged to Maryland borrowers. In doing so, the opinion opens the door for FDCPA liability for all mortgage servicing activity and other collection activity in Maryland, even if such activity is otherwise exempt from FDCPA liability.

The Maryland Consumer Debt Collection Act

The case is a putative class action challenging certain fees charged by the borrowers’ mortgage servicer in the ordinary course of business. Among other claims, the plaintiffs alleged that the servicer violated the Maryland Consumer Debt Collection Act (MCDCA). Specifically, the MCDCA prohibits a “collector” from “engag[ing] in any conduct that violates §§ 804 through 812 of the federal Fair Debt Collection Practices Act.” The plaintiffs alleged that the attempt to collect certain mortgage servicing fees violated the FDCPA’s proscription for a “debt collector” to engage in “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”

The MCDCA applies to any “collector,” defined as any “person collecting or attempting to collect an alleged debt arising out of a consumer transaction.” The FDCPA, on the other hand, uses the term “debt collector” which is defined with several limitations and exceptions, including for debt that was not in default when obtained. Despite the narrower scope of the FDCPA, plaintiffs in the case argued that a servicer could engage in conduct that violated the FDCPA, and thereby be in violation of the MCDCA, even if the servicer was not a “debt collector” subject to the FDCPA.

The district court dismissed the case before considering class certification, determining that the servicer was not a “collector” under the MCDCA and, likewise, was not a “debt collector” under the FDCPA.

The Fourth Circuit’s Decision

On appeal, the Fourth Circuit reversed and remanded the case for further proceedings, finding that the servicer was a collector under the MCDCA. Critically, the court determined that the servicer could be held liable for engaging in conduct that violated the FDCPA, even if it was not actually subject to the FDCPA. The court reasoned that even though the FDCPA only applies to “debt collectors” and, even though the MCDCA, in turn, only prohibits conduct that violates the FDCPA, an entity could still be in violation of the MCDCA even if it was not engaging in debt collection under the FDCPA. The court concluded that “[t]he MCDCA’s broader definition controls here, as it is not displaced by the federal definition.” The court stated that the MCDCA only incorporated the FDCPA’s “substantive provisions” contained in §§ 804 through 812, thus the FDCPA’s applicable definitions and exemptions, contained in §§ 803, 818 were to be disregarded in determining if a violation of the FDCPA occurred for purposes of the Maryland law.

Takeaway

This decision subjects several otherwise exempt and excluded actors to potential liability for FDCPA violations via the MCDCA within Maryland. In addition to mortgage servicers, who are typically exempt from the FDCPA under normal circumstances, the FDCPA contains a number of other exemptions including for entities collecting their owns debts, process servers, and certain nonprofit organizations performing credit counseling. Under the reasoning of the Fourth Circuit’s decision, all of these actors could now potentially be held liable under the MCDCA for FDCPA violations within Maryland. Furthermore, all such actors arguably need to comply with the strictures of the FDCPA in communicating with consumers. This would include restrictions on the timing, frequency, and format of communications with consumers that do not apply to communications outside the scope of the FDCPA. On February 15, 2022, the court denied a Motion for Rehearing and Rehearing En Banc, thus finalizing the decision.

Following this decision, recent legislation introduced in the Maryland General Assembly may delay foreclosure proceedings in Maryland. On February 3, 2022 a delegate introduced HB 803, which would allow borrowers to file counterclaims in response to foreclosure proceedings, would make additional procedural requirements applicable to such actions, and would prevent a foreclosure from proceeding if a borrower files such a counterclaim. Under the Fourth Circuit’s decision, servicers could experience increased MCDCA challenges alleging violations of the FDCPA that would otherwise not apply, and, combined with the additional procedural requirements and delays contemplated by HB 803, foreclosure proceedings could face significant delays as a result.

While some state laws offer state remedies for a violation of federal law, we are unaware of any case that has interpreted such a law to expand the scope of liability under the incorporated federal law. While states can and have adopted consumer statutes that are more expansive than federal law, it remains to be seen if other courts will now interpret simple incorporation of federal law as something more expansive as well.

Application Deadline Looms Under California Debt Collection Licensing Act

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On September 25, 2020, California Governor Gavin Newsom approved Senate Bill 908 – enacting the Debt Collection Licensing Act (DCLA). The DCLA, which takes effect January 1, 2022, requires a person or entity engaging in the business of debt collection in California to be licensed and provides for regulatory oversight of debt collectors by the Department of Financial Protection and Innovation (DFPI). Pursuant to the DCLA, debt collectors who submit an application by Dec. 31, 2021 may continue to operate in California pending the denial or approval of their application. On April 23, 2021, the Commissioner of the DFPI (the Commissioner) issued proposed regulations (the Regulations) to adopt procedures for applying for a debt collection license under the DCLA. On June 23, 2021, after consideration of public comments, the Commissioner issued a Notice of Modifications to the Regulations (the Modifications). On November 15, 2021, the Commissioner issued a second Notice of Modifications to the Regulations (the Additional Modifications).

The Regulations

The Regulations – among other things –  define relevant terms, include information regarding application procedures, and contain other miscellaneous information regarding licensing. The definition of “debt collector” was substantially the same as the broad definition under the enacted DCLA (which in turn is very similar to the Rosenthal FDCPA definition) and encompasses a wide array of activity in relation to consumer debt, including mortgage debt. Likewise, the regulations define “debt buyer” identical to the existing definition in Section 1788.50 of the Civil Code, which contains an exception for purchasers of a loan portfolio predominantly consisting of consumer debt that has not been charged off. See our prior post on the DCLA for more information regarding the scope of the licensure requirement.

The Regulations designate NMLS for the submission and processing of applications and reference and rely upon uniform NMLS forms and procedures. The application process includes completion of the NMLS uniform licensing form (MU1), including by any affiliates to be licensed under the same license. The application process includes collection of information regarding other trade names, web addresses used by the applicant, contact employees, organizational information (including information on any indirect owners), a detailed statement of business activities, certificates of good standing, and sample dunning letters. Applicants do not need to provide bank account information in Section 10 of Form MU1 or information on a qualifying individual in Section 17 of Form MU1. Fingerprinting (which is processed outside of NMLS), criminal history checks, and credit report authorizations are required for certain related individuals, including officers, directors, managing members, trustees, responsible individuals, and any individual owning directly or indirectly 10% or more of the applicant. An investigative background report is also required for any such individual who is not residing in the United States. Branches must also be licensed through NMLS uniform forms (MU3). Notice and additional filing requirements apply upon any change in the information submitted. The Regulations also contain surety bond requirements and outline the Commissioner’s authority in reviewing and examining applicants.

First Notice of Modification to the Regulations

On June 23, 2021 the Commissioner issued the Modifications which made several changes to the Regulations including, revising the definition of “applicant” to make clear that an affiliate who is not applying for a license is not an “applicant” – this revision, however, does not seem to impact the ability of applicants to include affiliates under a single license. Further, the Modifications added an English language requirement for documents filed with the DFPI. The Modifications also eliminated certain requirements to provide the Commissioner with additional copies of documents submitted through NMLS and otherwise revised requirements to allow information to be processed predominately through NMLS. The Modifications also eliminated the need to file certain fingerprinting documents in NMLS. Additionally, the Modifications added a requirement to explain derogatory credit accounts for any individual subject to credit reporting requirements. The Modifications also removed requirements that applicants provide information concerning compliance reporting and audit structure, the extent to which they intend to use third parties to perform any of their debt collection functions, that applicants file a copy of their policies and procedures with the NMLS, and certain annually collected financial information. The Modifications also eliminate the Commissioner’s ability to modify surety bond amounts.

Second Notice of Modification to the Regulations

On November 15, 2021 the Commissioner issued the Additional Modifications to the Regulations which amended the definitions of “branch office” and “debt collector.” “Branch office” was amended to mean any location other than the applicant’s or licensee’s principal place of business so long as “activity related to debt collection occurs” at that location and that the location is “held out to the public as a business location or money is received at the location or held at the location.” The Additional Modifications state that “holding a location out to the public” includes the receipt of postal correspondence and meeting with the public at the location, placing the location on letterhead, business cards, and signage, or making “any other representation to the public that the location is a business location.”

The definition of “debt collector” was amended to reference the definition set forth in the DCLA, rather than actually defining the term. Thus, any future revisions to the DCLA definition will automatically apply to the regulations as well.

Conclusion  

Debt Collection agencies and participants in California should anticipate additional regulations from the DFPI as aspects of the DCLA continue to be hammered out – in the interim any entity subject to licensing who has not done so already should submit an application before end of year to ensure continued operations.