Alston & Bird Consumer Finance Blog

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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.

CFPB Issues Warning to Mortgage Servicing Industry

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A&B ABstract: On April 1, 2021, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Bulletin and Policy Guidance (the “Bulletin”) on the Bureau’s supervision and enforcement priorities with regard to housing insecurity in light of heightened risks to consumers needing loss mitigation assistance once COVID-19 foreclosure moratoriums and forbearances end.  The Bulletin warns mortgage servicers to begin taking appropriate steps now to prevent “a wave of avoidable foreclosures” once borrowers begin exiting COVID-19 forbearance plans later this Fall, and also highlights the areas on which the CFPB will focus in assessing a mortgage servicer’s compliance with applicable consumer financial laws and regulations.

The Bulletin

The Bulletin warns mortgage servicers of the Bureau’s “commit[ment] to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act” to ensure borrowers impacted by the COVID-19 pandemic “receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

Specifically, the Bureau highlighted two populations of borrowers as being at heightened risk of referral to foreclosure following the expiration of the foreclosure moratoriums if they do not resolve their delinquency or enter into a loss mitigation option, namely, borrowers in a COVID-19-related forbearance and delinquent borrowers who are not in forbearance programs.

As consumers near the end of their forbearance plans, the CFPB expects “an extraordinarily high volume of loans needing loss mitigation assistance at relatively the same time.” The Bureau specifically expressed its concern that some borrowers may not receive effective communication from their servicers and that some borrowers may be at an increased risk of not having their loss mitigation applications adequately processed. To that end, the Bureau plans to monitor servicer engagement with borrowers “at all stages in the process” and prioritize its oversight of mortgage servicers in deploying its enforcement and supervision resources over the next year.

Servicers are expected to plan for the anticipated increase in loans exiting forbearance programs and related loss mitigation applications, as well as applications from borrowers who are delinquent but not in forbearance. Specifically, the Bureau expects servicers to devote sufficient resources and staff to ensure they are able to clearly communicate with affected borrowers and effectively manage borrower requests for assistance in order to reduce foreclosures. To that end, the Bureau intends to assess servicers’ overall effectiveness in assisting consumers to manage loss mitigation, and other relevant factors, in using its discretion to address potential violations of Federal consumer financial law.

In light of the foregoing, the Bureau plans to focus its attention on how well servicers are:

  • Being proactive. Servicers should contact borrowers in forbearance before the end of the forbearance period, so they have time to apply for help.
  • Working with borrowers. Servicers should work to ensure borrowers have all necessary information and should help borrowers in obtaining documents and other information needed to evaluate the borrowers for assistance.
  • Addressing language access. The CFPB will look carefully at how servicers manage communications with borrowers with limited English proficiency (LEP) and maintain compliance with the Equal Credit Opportunity Act (ECOA) and other laws. It is worth noting that the Bureau issued a notice in January 2021 encouraging financial institutions to better serve LEP borrowers in a language other than English and providing key considerations and guidelines.
  • Evaluating income fairly. Where servicers use income in determining eligibility for loss mitigation options, servicers should evaluate borrowers’ income from public assistance, child-support, alimony or other sources in accordance with the ECOA’s anti-discrimination protections.
  • Handling inquiries promptly. The CFPB will closely examine servicer conduct where hold times are longer than industry averages.
  • Preventing avoidable foreclosures. The CFPB will expect servicers to comply with foreclosure restrictions in Regulation X and other federal and state restrictions in order to ensure that all homeowners have an opportunity to save their homes before foreclosure is initiated.

Takeaway

As more and more borrowers begin to near the end of their COVID-19-related forbearance plans, and as applicable foreclosure moratoriums near their anticipated expiration dates, mortgage servicers should consider evaluating their mortgage servicing operations, including applicable policies, procedures, controls, staffing and other resources, to ensure impacted loans are handled in accordance with applicable Federal and state servicing laws and regulations.

CFPB Rescinds Compliance Bulletin on Marketing Services Arrangements and Issues FAQs on RESPA Section 8

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A&B ABstract: 

On October 7, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) rescinded Compliance Bulletin 2015-05, RESPA Compliance and Marketing Services Agreements (“Bulletin 2015-05”).  In addition, the Bureau published Frequently Asked Questions (“RESPA FAQs”) on the Real Estate Settlement Procedures Act (“RESPA”) Section 8 topics in an effort to “provide clearer rules of the road and to promote a culture of compliance.”

Background on Bulletin 2015-05

The Bureau issued the Bulletin 2015-05 on October 8, 2015, under then-Director Richard Cordray, in an effort to remind participants in the mortgage industry of the prohibition on kickbacks and referral fees under RESPA and to describe “the substantial risks posed by entering into marketing services agreements” (“MSAs”).  At the time, the Bureau characterized Bulletin 2015-05 as a nonbinding general statement of policy that merely articulated considerations relevant to the Bureau’s exercise of its supervisory and enforcement authority.  Consequently, Bulletin 2015-05 was not issued pursuant to the notice and comment rulemaking requirements under the Administrative Procedures Act (5 U.S.C. § 553(b)).

Through Bulletin 2015-05, however, the Bureau presented an ostensibly novel interpretation of RESPA Section 8 to caution against MSAs altogether.

For example, RESPA Section 8(c)(2) expressly provides that “[n]othing in this section shall be construed as prohibiting… the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”  Similarly, Regulation X, 12 CFR § 1024.14(g)(iv), provides that “Section 8 of RESPA permits . . . payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”  Moreover, HUD’s long-standing interpretation of Section 8(c)(2) provided that Section 8(c)(2) only allows “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or services actually performed,” i.e., permitting only that compensation which is reasonably related to the goods or facilities provided or services performed” (HUD RESPA Statement of Policy 2001-1).

In contrast, the Bureau’s prior interpretive position was that the opportunity to enter into an MSA by contract was itself a thing of value, regardless of whether the resulting agreement provided for payment for bona fide services at fair market value.  The Bureau relied on this interpretive theory in issuing Bulletin 2015-05, which effectively took the position that if a person is in a position to receive referrals from a third party, they could not otherwise do business with that party because the CFPB would attribute compensation paid to that party to be for referrals, even if the person paid fair market value for services actually rendered, because, the CFPB believed MSAs “are designed to evade” RESPA, such that engaging in MSAs poses a “substantial legal and regulatory risk of violating RESPA,” even where the MSA is “technically compliant with the provisions of RESPA.”

A three-judge panel of the D.C. Circuit Court, in PHH Corp. v. CFPB, rejected the Bureau’s theory, as it unanimously overturned then-Director Cordray’s interpretation of RESPA, holding that tying arrangements are ubiquitous and that Section 8 permits captive reinsurance arrangements so long as mortgage insurers pay no more than reasonable market value for reinsurance. The Court noted that the “CFPB’s interpretation of Regulation X is a facially nonsensical reading of Regulation X,” since Regulation X makes clear that, if a provider “makes a payment at reasonable market value for services actually provided, that payment is not a payment for a referral.” (emphasis in original).

The inconsistency between the Bureau’s apparent misinterpretation of Section 8, as espoused in Bulletin 2015-05, and longstanding HUD interpretations (and the D.C. Circuit’s decision in PHH Corp.), led to calls for rescission of Bulletin 2015-05.

Bureau’s Rescission of Bulletin 2015-05

 In rescinding Bulletin 2015-05, the Bureau acknowledged that the bulletin “does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X.”  Consistent with the rescission, Bulletin 2015-05 no longer has any force or effect.  The Bureau noted that its rescission of Bulletin 2015-05 does not mean that MSAs are per se or presumptively legal.  Rather, whether a particular MSA violates RESPA Section 8 will depend on specific facts and circumstances, including the details of how the MSA is structured and implemented.  The Bureau made clear that MSAs remain subject to scrutiny, and that the CFPB remains committed to vigorous enforcement of RESPA Section 8.

RESPA FAQS

Contemporaneous with its rescission of Bulletin 2015-05, the Bureau issued FAQs pertaining to compliance with RESPA Section 8.  The FAQs provide an overview of the provisions of RESPA Section 8 and respective Regulation X sections, and address the application of certain provisions to common scenarios described in Bureau inquiries involving gifts and promotional activities, and MSAs.

With respect to MSAs, the FAQs provide guidance on the following questions:

  1. What are MSAs?
  2. What is the distinction between referrals and marketing services for purposes of analyzing MSAs under RESPA Section 8?
  3. How do the provisions of RESPA Section 8 apply when analyzing whether an MSA is lawful?
  4. What are some examples of MSAs prohibited by RESPA Section 8?

Notably, the FAQs provides that under RESPA Section 8(c)(2), if the MSA or conduct under the MSA reflects an agreement for the payment for bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed, the MSA or the conduct is not prohibited. Thus, RESPA Section 8 does not prohibit payments under MSAs if the purported marketing services are actually provided, and if the payments are reasonably related to the market value of the provided services only.

Takeaway

While rescission of Bulletin 2015-05 is likely to be welcomed by the industry and help to restore confidence in the viability of MSAs under the current legal landscape, it remains to be seen how the Bureau’s priorities on RESPA Section 8 enforcement will change.  Companies should consider reviewing existing MSAs to ensure compliance with the Bureau’s new guidance.  Moreover, it should be noted that the Bureau specifically designated its new FAQs as “compliance aids” as opposed to official interpretations. Under the Bureau’s policy statement on Compliance Aids issued earlier this year, the Bureau states only that it “does not intend to sanction, or ask a court to sanction, entities that reasonably rely on Compliance Aids.” An interpretive rule issued by the Bureau, to the contrary, affords market participants a clear legal safe harbor from liability under RESPA.

CFPB Issues CARES Act Consumer Reporting FAQs

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A&B ABstract

On June 16th, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Aid titled “Consumer Reporting FAQs Related to the CARES Act and COVID-19 Pandemic.” This Compliance Aid clarifies the Bureau’s April 1, 2020 Statement that providing furnishers flexibility in handling disputes during the pandemic is not unlimited, putting consumer reporting agencies and furnishers on notice that the Bureau is enforcing the Fair Credit Reporting Act (“FCRA”), as amended by the CARES Act, and its implementing Regulation V.  The Compliance Aid also addresses questions on reporting CARES Act accommodations.

CFPB Focusing on Credit Reporting Accuracy and Dispute Handling

In its April 1, 2020 statement, the Bureau indicated that while furnishers are expected to comply with the CARES Act, the Bureau “does not intend to cite in examinations or take enforcement actions against those who furnish information to [CRAs] that accurately reflects the payment relief measures they are employing” and will not take enforcement or supervisory actions against furnishers and CRAs for failing to timely investigate consumer disputes. On June 16th the Bureau clarified that it is enforcing FCRA and that while it previously provided some flexibility the April 1st Statement “did not state that the Bureau would give furnishers or CRAs an unlimited time beyond the statutory deadlines to investigate disputes before the Bureau would take supervisory or enforcement action.”  The Bureau warns that it will take public enforcement action against companies or individuals that fail to comply with FCRA, but will consider the unique circumstances that entities face as a result of the COVID-19 pandemic and entities’ good faith efforts to timely investigate disputes.

CARES Act Amendment to FCRA

Section 4021 of the CARES Act amends FCRA by adding a new section providing a special instruction for reporting consumer credit information to credit reporting agencies during the COVID-19 pandemic.  Specifically, if a creditor or other furnisher offers an “accommodation” to a consumer affected by the COVID-19 pandemic in connection with a credit obligation or account, and the consumer satisfies the conditions of such accommodation, the furnisher must:

  • report the credit obligation or account as “current;” or
  • if the credit obligation or account was delinquent before the accommodation maintain the delinquent status during the effective period of the accommodation, or, if the consumer brings the account current during such period, then to report the account as current.

Stated differently by the CFPB, “during the accommodation, the furnisher cannot advance the delinquent status.” The CFPB provides the following example:

If the credit obligation or account was current before the accommodation, during the accommodation the furnisher must continue to report the credit obligation or account as current.

If the credit obligation or account was delinquent before the accommodation, during the accommodation the furnisher cannot advance the delinquent status. For example, if at the time of the accommodation the furnisher was reporting the consumer as 30 days past due, during the accommodation the furnisher may not report the account as 60 days past due. If during the accommodation the consumer brings the credit obligation or account current, the furnisher must report the credit obligation or account as current. This could occur, for example, if the accommodation itself brings the credit obligation or account current (such as a loan modification that resolves amounts past due so the borrower is no longer considered delinquent) or if the consumer makes past due payments that bring the credit obligation or account current.

An “accommodation,” as defined in this section, includes relief granted to impacted consumers such as an agreement to defer a payment, make a partial payment, grant forbearance, modify a loan or contract, or any other assistance or relief granted to a consumer affected by COVID-19. The reporting requirements do not apply to charged-off accounts.  This section applies from January 31, 2020 through the later of 120 days after: (i) enactment of this section, or (ii) termination of the national emergency declaration.

Questions on Reporting Accommodations under FCRA

There has been much confusion in how the CARES Act requirements translate into Metro 2 reporting requirements.  The CFPB offers the following guidance:

  • When furnishers are reporting an account to the CRAs, furnishers are expected to understand all the CRA’s data fields, to ensure that the information reported accurately reflects a consumer’s status as current or delinquent. Specifically, the Bureau provides “information a furnisher provides about an account’s payment status, scheduled monthly payment, and the amount past due may all need to be updated to accurately reflect that a consumer’s account is current consistent with the CARES Act.”
  • With respect to the use of special comment codes, the CFPB provides that “Furnishing a special comment code indicating that a consumer with an account is impacted by a disaster or that the consumer’s account is in forbearance does not provide consumer reporting agencies with this CARES Act-required information.  Left unaddressed is whether servicers are permitted to report special comment codes and other fields as required by CDIA/Metro2.
  • With respect to reporting the status of an account after an accommodation ends, the Bureau provides two instructions.  First, the Bureau states “[a]ssuming payments were not required or the consumer met any payment requirements of the accommodation, a furnisher cannot report a consumer that was reported as current pursuant to the CARES Act as delinquent based on the time period covered by the accommodation after the accommodation end.” Second, “a furnisher also cannot advance the delinquency of a consumer that was maintained pursuant to the CARES Act based on the time period covered by the accommodation after the accommodation ends.”

Questions remain on how to address a consumer’s delinquency after an accommodation ends if the delinquency hasn’t been resolved through loss mitigation or otherwise.  Also unaddressed is whether furnishers are permitted to report (i) a “special comment code” for natural disaster or forbearance or (ii) the “terms frequency” field (each of which can indicate an account is in forbearance or deferment, even while the “account status code” field is marked “current”), without violating the CARES Act requirement to report borrowers in forbearance as “current.”

Takeaway

CFPB has put furnishers on notice that the Bureau will begin to enforce the CARES Act credit reporting requirements.  Companies should pay attention to credit reporting complaint trends in the coming months.  Companies should also document good faith efforts to comply and respond to disputes as soon as possible.  Last, with the CFPB’s revised Responsible Business Conduct Policy, companies may consider getting in front of any issues while the environment is still favorable. Once forbearance ends and foreclosures resume, and given where we are in the election cycle, the situation could turn political this Fall and the enforcement posture could change.

Misrepresentation and Deception: Government Enforcement Agencies Ready to Litigate

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A&B ABstract:  The COVID-19 pandemic appears to be drafting the attention to consumer protection regulators to products that were active after the 2008 recession.

In the midst of the global pandemic, with unemployment rates surging to unprecedented levels, consumer protection regulators appear focused on areas where cash-strapped consumers may turn,  such as credit repair, payday loans, and mortgage and other debt relief.

Notably, these are the same areas that consumer protection regulators were active in during the post-2008 recession. For example, on May 22, 2020, the Consumer Financial Protection Bureau (CFPB) and Commonwealth of Massachusetts filed a lawsuit alleging that defendants misrepresented that they can offer solutions that will or likely will substantially increase consumers’ credit scores despite not achieving those results.

In addition, on May 19, 2020, the Federal Trade Commission (FTC) was granted a temporary restraining order and asset freeze against a payday lending operation alleging that it deceptively overcharged consumers millions of dollars and withdrew money repeatedly from consumers’ bank accounts without their permission.

These lawsuits are just two of many efforts that government enforcement agencies have undertaken recently to combat fraud and protect consumers. Businesses should be aware that agencies are actively pursuing litigation as a means to remedy potential consumer harm.

CFPB and Commonwealth of Massachusetts v. Commonwealth Equity Group d/b/a Key Credit Repair and Nikitas Tsoukales

The CFPB and Massachusetts allege that Commonwealth Equity Group d/b/a Key Credit Repair (KCR) and its president, Nikitas Tsoukales violated §§ 1031 and 1036 of the Consumer Financial Protection Act (CFPA), the Telemarketing Sales Rule’s (TSR) prohibition on deceptive and abusive telemarketing acts or practices, and the Massachusetts Credit Services Organization Law. 16 C.F.R. §§ 310.3 & 310.4; M.G.L. c. 93, §§ 68A-E (MA-CSO). KCR markets to consumers a service for supposedly removing harmful information from the consumer’s credit history, credit record, or credit scores or ratings.  Since 2011, KCR has collected at least $23 million in fees from tens of thousands of consumers through its telemarketing services.

The Complaint

According to the complaint, consumers pay KCR a “first work fee” upon enrolling with the company and then charges an additional monthly fee. KCR allegedly collects these fees from consumers before performing any service. KCR markets to consumers that “on average it can raise a person’s credit score by 90 points in 90 days” and that clients start “seeing removals of bad credit history in 45 days.”  However, “consumers did not see credit scores with an average 90-point increase in 90 days,” nor did they see “removals on their credit reports within 45 days” of enrolling with KCR in many instances.

The Complaint alleges that this scheme constitutes an abusive telemarking act because it is an improper advance fee to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating.

Further, the Complaint alleges that KCR’s conduct violates the CFPA because KCR allegedly misrepresented the material aspects of its services. Therefore, the CFPB and Massachusetts are seeking injunctive and monetary relief as well as civil monetary penalties.

FTC v. Lead Express, Inc., et al.

On May 11, 2020, the FTC filed an ex parte emergency motion for a temporary restraining order and sought other relief including an asset freeze against 11 payday lenders operating as a common enterprise through websites and telemarketing.  The FTC alleged that the entities were engaging in the deceptive, unfair, and unlawful marketing tactics in violation of the FTC Act, the TSR, the Truth in Lending Act (TILA) , and the Electronic Fund Transfer Act (EFTA).

The Complaint

According to the FTC’s complaint, despite claiming that consumers’ loans would be repaid after a fixed number of payments, the defendants typically initiated repeated finance-charge-only withdrawals without crediting the withdrawals to the consumers’ principal balances. Thus, consumers allegedly paid significantly more than what they were told they would pay. These misrepresentations violate Section 5(a) of the FTC Act (15 U.S.C. § 45(a)) as well as the TSR (16 C.F.R. § 310.3(a)(2)(iii)).  Additionally, the defendants allegedly made recurring withdrawals from consumers’ bank accounts without proper authorization which violates Section 907(a) of EFTA (15 U.S.C. § 1693e(a)) and illegally used remotely created checks, which under the TSR (16 C.F.R. § 310.4(a)(9)) are a prohibited form of payment in telemarketing.

The complaint also alleges that the defendants often failed to make required credit transaction disclosures in violation of Section 121 and 128 of TILA (15 U.S.C. §§ 1631 and 1638), and Sections 1026.17 and 1026.18 of Regulation Z (12 C.F.R. §§ 1026.17 and 1026.18).

The Court Order

On May 22, 2020, the District Court of Nevada granted an emergency motion for temporary restraining order against all eleven defendants. The order restrains the defendants from: (1) engaging in prohibited business activities in connection with advertising, marketing, promoting, or offering any loan or extension of credit, (2) releasing or using customer information, and (3) destroying, erasing falsifying documents relating to the business.  Furthermore, the defendants’ assets are frozen pending the show-cause hearing or further court order which will take place via videoconferencing on June 2, 2020.

Takeaway

With these two cases, government enforcement agencies support their statements that as the global pandemic continues, they are watching for deceptive or fraudulent practices in the financial services industry. Businesses should remain vigilant in their compliance with existing and new laws and regulations.