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Consumer Debt Collection and New CFPB Regs, Enforcement and Litigation: Game Changers for the Industry

Navigating New Paradigms for Debt Originators, Sellers, Collectors and Attorneys as Debt Collectors, Leveraging FDCPA Developments Today’s faculty features:

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THURSDAY, FEBRUARY 6, 2014

Presenting a live 90-minute webinar with interactive Q&A

Ronald L. Rubin, Partner, Hunton & Williams, Washington, D.C. David N. Anthony, Partner, Troutman Sanders, Richmond, Va. Angela E. Kleine, Morrison Foerster, San Francisco

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CFPB Debt Collection ANPR

Ronald L. Rubin

Partner, RRubin@hunton.com Hunton & Williams LLP

Debt Collection ANPR – November 2013

• CFPB seeks data and information to assist in developing

proposed rules for debt collection

• Final Regulations may take time – 12 to 18 months?
• Asks for answers to 162 questions (questions grouped

into eight substantive categories)

• Comment period extended to February 28, 2014

– Submit comments – CFPB interprets silence as agreement!

6

Debt Collection ANPR – November 2013

• Expected Highlights

– Persistent consumer protection problems/complaints – Updates needed due to technological developments since FDCPA – Original creditor (first party collection) – national standards

7

(continued)

CFPB Top Debt Collection Issues/Concerns

• UDAAP vs. FDCPA
• Mistaken Collection Efforts

– Quality of data – Obligations of debt seller

8

CFPB Top Debt Collection Issues/Concerns

• Time Barred Debt

– Deceptive statements – Required disclosures – Systems to ensure correct SOL information (how time-barred status is calculated and tracked)

9

CFPB Top Debt Collection Issues/Concerns

• Documentation

– When making calls; threatening litigation; suing – Having documents vs. ability to get documents – Agreements to pay debt, and amount owed (terms and conditions, account statements) – Chain of title – Affidavit language and execution

10

(continued)

CFPB Top Debt Collection Issues/Concerns

• Complaints/Dispute Resolution

– Always high priority for CFPB – CFPB analyzes complaint data, looks for patterns – CFPB looks closely at responses to complaints; internal investigations; validation requests

• Policies and Procedures

– Impossible to be perfect

11

(continued)

CFPB Top Debt Collection Issues/Concerns

• FCRA/Credit Reporting

– Steps taken to ensure accuracy and integrity of information reported to credit bureaus – Responses to disputes and adequacy of investigations – Reporting of accounts as disputed – Reporting of time barred debt

12

(continued)

CFPB Top Debt Collection Issues/Concerns

• Telephone Communications

– Call frequency, time of day restrictions (especially across multiple accounts) – Honoring written and verbal do not call requests – Call recording and monitoring systems – Statements made to encourage payment (e.g., regarding credit score improvement)

13

(continued)

CFPB Top Debt Collection Issues/Concerns

• Payments

– Payment application/crediting – Statements during repayment plans – Fees (e.g., “convenience fees”) – Offering settlement and repayment options

14

(continued)

CFPB Top Debt Collection Issues/Concerns

• Servicemembers/SCRA
• Older Americans

15

(continued)

mofo.com

Consumer Debt Collection and New CFPB Regs, Enforcement and Litigation

Angela E. Kleine

(415) 268-6214 akleine@mofo.com

17

FTC Enforcement Actions

• Joint FTC / CFPB authority
• January 20, 2012 MOU
• Information Sharing (including exam materials)
• 7 Actions Emphasized in CFPB Annual Report

CFPB’s 2013 Annual FDCPA Report

§§

18

FTC Enforcement Actions

1. FTC v. Forensic Case Management Services, Inc., No. 2:11-CV- 07484 (C.D. Cal. Jan. 17, 2013) ($30 million judgment against debt collection firm and employees) 2. U.S. v. Luebke Baker, No. 1:12-cv-1145 (C.D. Ill. May 22, 2012) ($3.1 million settlement, re: collection of magazine subscription debts) 3. FTC v. Goldman Schwartz, No. 4:13-cv-106 (S.D. Tex. Jan. 31, 2013) (TRO and asset freeze against debt collector, re: alleged false statements, including threats to take legal action) 4. FTC v. AMG Services, Inc., No. 2:12-cv-536 (D. Nev. Apr. 2, 2012) (TRO and asset freeze against lender)

19

FTC Enforcement Actions

“Phantom Debt” Collection

• 5. FTC v. Broadway Global Master, Inc., No. 2:12-cv-855 (E.D. Cal.
• Apr. 3, 2012) (ongoing)
• 6. FTC v. Pro Credit Group, LLC, et al., No. 12-CV-586 (M.D. Fla. Mar.

19, 2012) (Sept. 11, 2013 Stipulated Final Judgments and Orders for Permanent Injunction)

• 7. FTC v. American Credit Crunchers, No. 12-CV-1028 (N.D. Ill. Oct.

10, 2012) (Oct. 23, 2012 Stipulated Final Judgment and Order for Permanent Injunction)

20

FDCPA Circuit Splits

Key Definitions: FDCPA § 803

• “[C]reditor": “any person who offers or extends credit creating a debt or to

whom a debt is owed”

• Exception: “any person” who “receives an assignment or transfer of a

debt in default solely for the purpose of facilitating collection of such debt for another.”

• “[D]ebt collector”: “any business the principal purpose of which is the

collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

• Exception: Collection of “a debt” that (1) was originated by such person” or

(2) “was not in default at the time it was obtained by such person”

• But, see the Bureau’s 2013 Guidance and ANPR

21

FDCPA Circuit Splits

“Debt Collectors”

• 9th Circuit
• Foreclosure: [The bank] acquired the loan in default and later
• foreclosed. Held, it could be both a “creditor” and a “debt collector.”

Schlegel v. Wells Fargo Bank, N.A., 720 F. 3d 1204 (9th Cir. 2013).

• Mods: Bank was both a “debt collector” and “engaged in debt collection

activities when it offered the TPP.” Corvello v. Wells Fargo Bank, N.A., 728 F. 3d 878 (9th Cir. 2013).

• 11th Circuit
• Reese: Law firm that sent dunning letters was a “debt collector”
• Birster left open whether the servicer was a “debt collector”

22

FDCPA Circuit Splits

“Debt Collectors”

• 5th Cir.: “[M]ortgage servicing companies” and “debt

assignees” are not debt collectors, and therefore are not regulated by the FDCPA, “as long as the [mortgage] was not in default at the time it was assigned” by the originator.” Miller, et al. v. BAC Home Loans Servicing, 726 F.3d 717 (5th Cir. Aug. 13, 2013).

• 6th Cir.: “[Servicer] obtained the . . . loan for servicing

before default. Therefore, [servicer] is not a ‘debt collector.’” Glazer.

23

FDCPA Circuit Splits

Enforcement of a Security Interest as "Debt Collection"

• 6th Circuit rejected “[t]he view adopted by a majority of district courts

. . . that mortgage foreclosure is not debt collection.” Glazer v. Chase

Home Fin. LLC, 704 F.3d 453, 457 (6th Cir. 2013).

• 11th Circuit: “The rule the . . . law firm asks us to adopt would

exempt from the provisions of § 1692e any communication that attempts to enforce a security interest regardless of whether it also attempts to collect the underlying debt [in the note]. That rule would create a loophole in the FDCPA. A big one.” Reese v. Ellis, Painter,

Ratterree & Adams, LLP, 678 F.3d 1211, 18-17 (11th Cir. 2012); Birster v. American Home Mortgage Servicing, 481 Fed.Appx. 579 (11th Cir. 2012)

• CFPB amicus brief

24

FDCPA Circuit Splits

Oral vs. Written Notice of Dispute

• 4th Circuit: There is no “inherent writing requirement” for consumers

to dispute the validity of a debt under the FDCPA. Clark v. Absolute Collection Service Inc., No. 13-1151 (4th Cir. Jan. 29, 2014)

• “ACS asks that we disregard the statutory text to read into it words that

are not there . . . . We decline to do so.”

• Circuit Split:
• Hooks v. Forman, Holt, Eliades & Ravin, LLC, 717 F.3d 282 (2d Cir.

2013); Camacho v. Bridgeport Fin. Inc., 430 F.3d 1078 (9th Cir. 2005) (followed by the Fourth Circuit here).

• Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991) (Section 1692g(a)(3)

must be read to include a writing requirement).

25

FDCPA: Cost Recovery

Marx v. General Revenue Corporation, 133 S.Ct. 1166 (Feb. 26, 2013)

• FRCP 54(d): authorizes award of costs to prevailing party, “Unless a

federal statute . . . provides otherwise.”

• FDCPA: “On a finding by the court that an action under this section

was brought in bad faith and for the purpose of harassment, the court may award the defendant attorney’s fees reasonable in relation to the work expended and costs.” 15 U.S.C. § 1692k(a)(3)

• 10th Cir.: Prevailing defendant may be awarded costs regardless of

whether the lawsuit was brought in bad faith and for harassment.

• CFPB and FTC amicus brief urging reversal.
• SCOTUS: Affirmed, 7-2

26

FDCPA: Collection Fees

Limitation on Percentage Collection Fees

Bradley v. Franklin Collection Services, Inc., 739 F.3d 606 (11th Cir. 2014)

• 2 plaintiffs with past due medical bills.
• 2 different agreements re: payment of collection agency fees. (“all

costs of collection including . . . reasonable collection agency fees”

• vs. “costs of collection”)
• FDCPA: “[U]nfair or unconscionable” includes collection of additional

fees or charges “unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”

• Bradley: The 30% amount assessed by Franklin constituted

liquidated damages rather than the “costs of collection” that this plaintiff agreed to pay.

27

FDCPA: Attorney Issues

• “Regularly” Collecting Debts under Heintz v. Jenkins (U.S. 1995)
• 10th Cir.: “over the span of one decade Wadas engaged in only six to

eight debt collection cases. . . . cases accepted from this client comprises only a small portion of [her] overall caseload . . . [She] has not issued debt collection communications, and she does not have any system or personnel to assist with debt collection activity.” James v. Wadas, 724 F.3d 1312 (10th Cir. 2013).

• 11th Cir.: Claims that law firm sent similar dunning letters to over 500
• thers in the past year plausibly alleged that the firm regularly attempted

to collect debts. Reese, 678 F.3d 1211.

• Personal Liability: Principle of debt collection firm, who was a

lawyer, was personally liable for signing debt collection letters that contained false statements. Cruz v. Int'l Collection Corp., 673 F.3d 991 (9th Cir. 2012).

28

FDCPA: Punitive Damages Update

Miller v. Equifax, No. 3:11-cv-01231 (D. Or. Jan. 29, 2014)

• Jury
• $180,000 compensatory damages
• $18.42 million punitive damages

 Punitives = 102x multiplier

• Judge:
• 102x punitives award violated due process limitations.
• Revised to $1.62 million = maximum consistent with BMV v. Gore

/ State Farm v. Campbell (9x)

• No real discussion of Exxon Shipping 1x multiplier

29

Consumer Debt Collection and New CFPB Regs, Enforcement and Litigation

David N. Anthony Troutman Sanders

804.697.5410 david.anthony@troutmansanders.com

Federal Court Private Litigation

2007 2012 FDCPA 4,329 11,495 FCRA 1,516 2,249 TCPA

• 1,101

TOTALS 5,845 14,845

Summary of Litigation Risks for Debt Collection Actions

FDCPA TCPA FCRA

Class action risk Class action risk Class action risk Damages capped in class actions to the lesser of $500,000 or 1 percent of the debt collector's net worth Damages uncapped Damages uncapped No punitive damages; actual damages plus statutory damages up to $1,000. Statutory damages of $500 for each violation and up to $1,500 for each willful violation. Actual, punitive and statutory between $100 and $1,000. One year SOL Four year federal catch-all SOL or state SOL? Two year SOL from discovery/five year SOL maximum.

32

TCPA - Stale Numbers

Soppet v. Enhanced Recovery, 679 F.3d 637 (7th

• Cir. 2012).
• Holding: A person who owns a cell phone

number previously used by another is entitled to bring TCPA claims for calls directed to the prior

• wner of the cell phone number.
• Practical Impact: Companies may: (1) increase

frequency of vendor and number scrubbing; (2) ensure initial calls are manual with non-capacity phone; and (3) alter reps and warranties to require change-in-number disclosure.

33

TCPA - ATDS Definition

Nelson v. Santander Consumer USA, Inc., 931 F.

• Supp. 2d 919 (W.D. Wis. 2013)
• Holding: If system used by debt collector had

“capacity” to make calls, even if that feature was not used, then TCPA is triggered. Summary judgment entered against Defendant for $500,000 for one account.

• Practical Impact: Increased focus on construction and

capabilities of phone/dialer.

• Compare Hunt v. 21st Mortgage Corp., 2013 U.S. Dist.

LEXIS 132574 (N.D. Ala. Sept. 17, 2013). Alabama federal court held that dialer definition requires “present” capacity.

34

TCPA - ATDS Definition

Pending FCC Petitions

• GroupMe, Inc. – March 2012

º Seeks ruling in which the FCC “adopt[s] a definition of ATDS that excludes technologies with a theoretical capacity, but not the actual capacity, to autodial random or sequential numbers.”

• Others:

º Revolution Messaging, LLC – Jan 2012 º Communication Innovators – June 2012 º 3G Collect – Oct. 2012 º YouMail, Inc. – April 2013

35

TCPA - Recent Circuit Ruling

Dish Network, L.L.C. v. FCC, et al., No. 13-1182 (D.C. Cir. Jan. 22, 2014)

• Holding: D.C. Circuit panel refused Dish

Network’s petition to review certain FCC guidance on TCPA. Court held that FCC guidance was not binding on courts.

• Practical Impact: Federal agencies can issue

influential legal interpretations, including of the TCPA, without accountability or legal challenge in court.

36

TCPA - Prior Express Consent Mais v. Gulf Coast Collection Bureau, Inc., 944 F.

• Supp. 2d 1226 (S.D. Fla. May 8, 2013).
• Holding: Neither creditors nor debt collectors

have “prior express consent” to call a cell phone number via an ATDS merely by obtaining a phone number on a credit application.

• Practical Impact: Outlier case that runs counter

to 2008 TCPA guidance from the FCC?

37

TCPA - Prior Express Consent, cont.

Baird v. Sabre, Inc., 2014 U.S. Dist. LEXIS 11246 (C.D. Cal. Jan. 28, 2014)

• Holding: Individuals who knowingly release their

cell phone numbers (e.g., on credit applications) have, in effect, given their “prior express consent” to be called at that number.

• Practical Impact: Baird followed the FCC’s 2008

TCPA Order and hopefully should resolve concerns that Mais would represent a bell- weather of change in the law.

38

TCPA - Prior Express Consent, cont.

Wills v. Optimum Outcomes, Inc., 2014 U.S. Dist. LEXIS 7377 (D. Utah 2014)

• Holding: Prior express consent is provided when

a cellphone number is included in a dispute/cease & desist letter to the creditor.

• Practical Impact: Provision of a cell phone

number in any document could be considered “prior express consent” under the TCPA.

39

TCPA - Good Faith Exception

Chyba v. First Fin. Asset Mgmt., 2013 U.S. Dist. LEXIS 165276 (S.D. Cal. Nov. 20, 2013)

• Holding: Where consumer listed cell phone

number as “Home” number on rental car application, Defendant had good faith basis to believe that Plaintiff provided “prior express consent.”

• Practical Impact: Shakes up the notion that the

TCPA is a strict liability statute.

40

TCPA - Standing

Olney v. Progressive Casualty Ins. Co., 2014 U.S.

• Dist. LEXIS 9146 (S.D. Ca. Jan. 24, 2014)
• Holding: The party with standing under TCPA is

the subscriber of the telephone number, which is both: (1) The “account holder,” and (2) The “regular user” of the phone.

• Practical Impact: Provides for a potentially

dispositive affirmative defense on standing grounds.

41

Recent CAFA Decision

Mississippi ex rel. Hood v. AU Optronics Corp., Case No. 12-1036 (U.S. 2013)

• Holding: CAFA cannot be used to remove

federal court cases filed by state AGs as parens patriae on behalf of the state’s citizens.

• Practical Impact: (1) Less favorable state courts;

(2) Massive power of AGs as plaintiffs; (3) Increased partnerships between AGs and the plaintiffs’ bar; and (4) May not bring finality, despite class action settlement.

42

FDCPA - Communications/Voicemails Foti v. NCO Financial Systems, Inc., 424 F. Supp.

2d 643 (S.D.N.Y. 2006).

• Holding: If a debt collector leaves a message on a

debtor’s answering machine that merely invites a return phone call, the message amounts to a “communication” within the meaning of the FDCPA; voicemail message must disclose it is from a “debt collector” in order to comply with FDCPA.

• Practical Impact: “Foti paradox”: Third parties can often

gain access to voicemails, and many debt collectors have been sued under the FDCPA for violating prohibition on third party disclosure.

43

FDCPA - Recent Foti Decisions

• Marisco v. NCO Fin. Sys., 946 F. Supp. 2d.

(E.D.N.Y. 2013) (Denying motion to dismiss and rejecting argument that Foti places debt collectors between “a rock and a hard place,” i.e. Foti disclosure vs. 3rd party disclosure).

• Brody v. Genpact Servs., LLC, 2013 U.S. Dist.

LEXIS 158792 (E.D. Mich. Oct. 28, 2013) (no FDCPA violation where defendant’s agent failed to divulge any information that could “reasonably be construed to imply a debt”)

44

FDCPA - Affidavit Compliance

Midland Funding v. Brent, 2011 U.S. Dist. LEXIS 90004 (N.D. Ohio Aug. 12, 2011).

• Debt collector accused of filing actions based on

affidavits signed by employees claiming personal knowledge of the debts when they, in fact, did not possess such knowledge.

• Holding: The practice of robo-singing affidavits

in debt collection actions violates the FDCPA. The district court certified a nationwide class and approved a $5.2M class settlement.

45

FDCPA - Affidavit Compliance, cont.

Midland Funding v. Brent, 2011 U.S. Dist. LEXIS 90004 (N.D. Ohio Aug. 12, 2011).

• Robo-signing: Procedures must ensure an

affidavit process that: (1) accurately describes the knowledge of the affiant, (2) sets up significant controls around the creation of the affidavits themselves, and (3) helps to ensure that affiants themselves are qualified and trained.

46

FDCPA - Affidavit Compliance, cont.

Midland Funding v. Brent, 2011 U.S. Dist. LEXIS 90004 (N.D. Ohio Aug. 12, 2011).

• Data Integrity - Important factors:

(1) Process for obtaining account records (2) Process for integrating those records into its own record-keeping system, (3) Evidence and testimony regarding the Legal Specialists’ knowledge of these processes, and (4) The reliability of the account records obtained and maintained by Midland.

47

FDCPA - Affidavit Compliance, cont.

Vassale v. Midland Funding LLC, 2013 U.S. App. LEXIS 3914 (6th Cir. Feb. 26, 2013).

• 6th Circuit ultimately vacated the Brent class

settlement.

• Holding: Settlement was unfair because of the

disparity of relief between named plaintiffs and unnamed class members.

º Class reps’ debts were extinguished, class members’ not. º Class reps received $2,000 incentive payments.