Thursday, August 16, 2018

Settlement with debt collector moots claim against collector’s attorneys

By Katalina M. Bianco, J.D.

A consumer who settled her Fair Debt Collection Practices Act claims against a debt collector for $5,000 could not pursue FDCPA statutory damages claims against the debt collector’s law firm, the U.S. Court of Appeals for the Seventh Circuit has decided. Based on the single recovery for a single injury principle, the consumer could not recover from the law firm after having recovered the most the statute allowed from the debt collector, the court said. The consumer’s claim for attorney fees was lost for the same reason (Portalatin v. Blatt, Hasenmiller, Leibsker & Moore, LLC, Aug. 13, 2018, Manion, D.).

Winning in trial court. Debt collector Midland Funding hired the firm of Blatt, Hasenmiller, Leibsker & Moore to collect a claimed $1,330 debt from the consumer. The firm relied on then-binding Seventh Circuit precedent to decide where to file the collection suit, but soon had the rug pulled out from under it by a contrary Seventh Circuit decision on FDCPA venue rules (see Oliva v. Blatt, Hasenmiller, Leibsker & Moore, LLC). The consumer sued both the debt collector and the law firm for violating the debt collection suit venue restrictions.

The consumer settled her claim against Midland Funding, accepting $5,000 for releasing her claims. She did not settle her claims against Blatt, Hasenmiller. However, as that suit progressed, she abandoned her claim for actual damages and proceeded only on her claim for statutory damages. The jury awarded her $200, and the judge added $70,000 in attorney fees and costs.

Losing on appeal. The trial judge was wrong to have rejected the law firm’s argument that the consumer’s claim ran afoul of the single-satisfaction rule, the appellate court said. The consumer’s settlement of her claims against Midland Funding mooted her claim against the law firm because it fully remedied the consumer’s injury. Moreover, with no remaining injury for which to seek satisfaction, the consumer had no claim that could support an award of fees and costs, the court added.

A plaintiff generally can seek only one recovery for an injury, no matter how many defendants could be liable or how many theories of liability might be raised, the appellate court said. The consumer conceded that there was only one violation of the FDCPA—a violation of the venue restrictions—and that her injury could not be divided between the debt collector and the law firm. The two acted together.

The consumer might have been able to continue to sue Blatt, Hasenmiller had her settlement with Midland Funding included a good-faith allocation of the settlement funds to a claim only against the debt collector, the court pointed out. However, the settlement agreement included no such allocation; in fact, it said it resolved all claims arising out of the facts that were covered by the claims raised in the suit. As a result, the $5,000 settlement included the maximum possible award of $1,000 in statutory damages.

The FDCPA’s language also made clear that statutory damages were capped at $1,000 per suit, not $1,000 per defendant, the court added.

The case is No. 16-1578 and No. 17-3335.

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Tuesday, August 14, 2018

Treasury reports to president on nonbank financials, fintech, and innovation


In keeping with President Donald Trump’s February 2017 executive order setting forth core principles for regulating the U.S. financial system, the Treasury Department has released its fourth report, titled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation.” According to the Treasury, the report identifies “improvements to the regulatory landscape” to enable U.S. firms to “more rapidly adopt competitive technologies, safeguard consumer data, and operate with greater regulatory efficiency.” Notably, the July 2018 report makes over 80 recommendations, including setting a national data security and breach notification standard. Collectively, the Treasury recommendations are designed to: embrace the efficient and responsible use of consumer financial data and competitive technologies; streamline the regulatory environment to foster innovation and avoid fragmentation; modernize regulations for an array of financial products and activities; and facilitate experimentation to promote innovation—by setting up “regulatory sandboxes,” for example.

In a release accompanying the report, Treasury Secretary Steven Mnuchin commented, “American innovation is a cornerstone of a healthy U.S. economy. Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector.”

In 2017, the Treasury issued three reports in response to the set of core principles enunciated by President Trump in his directive (Executive Order 13772). These prior reports covered the U.S. depository system, capital markets, as well as asset management, investments, and insurance. Noting the Treasury’s latest installment in the series, Jay Clayton, Chairman of the Securities and Exchange Commission, remarked that these reports “clearly and comprehensively frame many of the key issues in our financial markets. The reports have informed … and will continue to inform the regulation of our markets. The Treasury reports have made an extremely valuable contribution to the SEC’s mission, and, importantly, to investors in our capital markets.”

Nonbank financial firms. As observed by the Treasury, nonbank financial firms play a number of key roles in the financial system such as “facilitating back-end check processing; enabling card issuance, processing, and network activities; and providing customer-facing digital payments software.” Further, these nonbank financial firms are involved in capital markets and provide financial advice and execution services to retail investors as well.

Report highlights. In compiling its report, the Treasury consulted with many stakeholders, including trade groups, financial services firms, investment strategists, federal and state regulators, consumer advocacy groups, and academics. The Treasury released a fact sheet in tandem with its 222-page report. Among other things the report recommends:
  • increasing efforts to enable digital communications, data sharing, and the use of cloud computing and machine learning;
  • modernizing rules for digital communications in general and for the Telephone Consumer Protection Act and the Fair Debt Collection Practices Act in particular;
  • setting a national data security and breach notification standard, permitting consumers to withdraw prior data authorizations, and developing more secure data-sharing methods;
  • encouraging state regulators to “harmonize rules” across the country, especially in connection with licensing, supervision, and money transmission, to create a clear and consistent environment for innovators and existing financial institutions;
  • moving forward with the Office of the Comptroller of the Currency’s special-purpose national bank charter to reduce “regulatory fragmentation and supporting beneficial business models;”
  • updating rules to accommodate technological advances, such as facilitating service partnerships between banks and nonbank financial firms;
  • for marketplace lending, urging Congress to codify the “valid when made” doctrine and the role of the bank as the “true lender” of loans it makes to bolster productive partnerships between banks and newer technology-based firms;
  • for mortgage lending and servicing, promoting changes to “accommodate an end-to-end digital mortgage, including acceptance of digital promissory notes, recognition of modern digital notary standards, and automated property appraisals;”
  • for student lending and servicing, establishing “minimum effective guidance” for loan servicers handling decisions with significant financial implications;
  • for short-term, small-dollar loans, recognizing and supporting the authority of states to establish comprehensive requirements for these financial products, recommending that the Consumer Financial Protection Bureau rescind its Payday Rule; and encouraging small-dollar installment lending by banks;
  • for debt collection, establishing “minimum federal standards” governing debt collection by third-party collectors;
  • updating the “IRS income verification system” to protect taxpayer information and enable automated and secure data-sharing with lenders or designated third parties;
  • testing “newer credit models and data sources” by both banks and nonbank financial firms to expand access to credit and improve risk assessments;
  • coordinating regulatory actions by agencies to best protect consumer data held by credit reporting agencies;
  • modernizing payment services by having the Federal Reserve continue working towards a faster retail payments system;
  • promoting the ability of smaller financial institutions, like community banks and credit unions, to access the most-innovative technologies and payment services;
  • harmonizing the current patchwork of regulatory authority over wealth management and financial planning, which makes these services more costly and “potentially presents unnecessary barriers to the development of digital financial planning services;”
  • working with federal and state regulators to invite innovations from new and existing market participants —similar to a “regulatory sandbox;” and
  • reforming procurement rules and encouraging “regulator engagement” to allow financial regulators to keep up with technological developments in the industries they regulate.
For more information about governmental reports affecting the financial services industry, subscribe to the Banking and Finance Law Daily.

Thursday, August 9, 2018

Debt buyers are debt collectors under consumer debt collection act

By Richard A. Roth, J.D.

A company whose sole business is buying and collecting consumer debts is a debt collector under the Fair Debt Collection Practices Act, according to the U.S. Court of Appeals for the Third Circuit. That means the company is required to conform its collection tactics to those that are permitted by the FDCPA (Tepper v. Amos Financial, LLC, Aug. 5, 2018, Ambro, T.)

The consumers originally took a home equity line of credit from a bank, and then they defaulted when the bank was placed into receivership and they had trouble making payments to the Federal Deposit Insurance Corporation receivership. The FDIC sold the note and mortgage to Amos Financial, which declared the loan to be in default, made payment demands, and then moved to foreclose.

The consumers responded by suing Amos under the FDCPA.

What is a debt collector? The appellate court began by noting that a company can meet the relevant FDCPA criteria for “debt collector” by satisfying either of two definitions:

  • the “principal purpose” definition, which applies to companies that use interstate commerce, or the mail or wires, in any business “the principal purpose of which is the collection of any debts”; or
  • the “regularly collects” definition, which applies to any person who regularly collects or tries to collects debts owed or said to owed to another person.

In Henson v. Santander Consumer USA, Inc., the Supreme Court clarified that the “regularly collects” definition did not cover a company that bought debts and then collected them for its own account. However, the Court did not examine the “principal purpose” definition.

Principal purpose. The plain language of the FDCPA makes clear a company that satisfies the “principal purpose” definition is a debt collector, the Third Circuit said. In this case, Amos admitted that collecting debts it had purchased was its sole business, and it clearly used both mail and telephone calls in its collection efforts. Collecting “any debts,” as the FDCPA section specified, did not consider to whom the debts were owed.

“Asking if Amos is a debt collector is thus akin to asking if Popeye is a sailor. He’s no cowboy,” the court said.

Summing up, the court said that “an entity whose purpose of business is the collection of any debts is a debt collector regardless whether the entity owns the debts it collects.”

For more information about fair debt collection practices litigation, subscribe to the Banking and Finance Law Daily.

Wednesday, August 8, 2018

RD Legal Funding moves to dismiss New York’s CFPA claims

By J. Preston Carter, J.D., LL.M.

RD Legal Funding submitted a letter motion to the U.S. District Court for the Southern District of New York asking it to dismiss the New York Attorney General’s Consumer Financial Protection Act claims against it for lack of subject matter jurisdiction, based on the court’s June order finding the CFPA structure unconstitutional.
Constitutionality decision. The AG and Consumer Financial Protection Bureau sued RD Legal Funding, two other companies, and an associated individual, claiming that they violated state laws and the CFPA in the process of exchanging structured settlements for lump-sum payments. The U.S. district judge decided that the Bureau’s single-director-removable-only-for-cause structure is unconstitutional, meaning the Bureau has no authority to sue the company. She also decided that the organizational section of the CFPA cannot be severed from the remainder of that Act; as a result, she ruled that the entire CFPA is unconstitutional. However, the judge then declined to dismiss the suit in its entirety, saying that the CFPA—which she had said was unconstitutional—allows the AG to bring an enforcement suit in federal court (Banking and Finance Law Daily, June 22, 2018).
Joint letter to the court. In a July joint letter to the court, called for by the judge, the AG interpreted the judge’s order as striking down the Bureau’s structure but the not entire CFPA. In that way, the U.S. district judge still would have subject matter jurisdiction over the CFPA claims and supplemental jurisdiction over the state law claims. RD Legal Funding, however, indicated that there no longer is a basis for federal question jurisdiction and that it would address the issue in a separate motion (Banking and Finance Law Daily, July 11, 2018).
Letter motion. RD Legal Funding’s letter motion addresses the federal jurisdiction issue. The motion states that the court’s June order struck each substantive provision of the CFPA that forms the basis of the AG’s federal claims as well as the statutory provisions of Title X of the Dodd-Frank Act granting the AG enforcement authority over the CFPA. The motion noted that, as plaintiff, the AG has the burden to establish subject matter jurisdiction, and states, "Here, however, the entire basis for the NYAG invoking federal jurisdiction is Title X of the CFPA, which has been stricken." RD Legal Funding requests that the federal claims in the case be dismissed with prejudice, under Rule 12(h)(3) of the Federal Rules of Civil Procedure, and that the state law claims be dismissed without prejudice to being refiled in state court.
The case is No. 17-cv-890.
For more information about the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.

Tuesday, July 31, 2018

According to CEI, New York’s online lending report is ‘flawed’



The Competitive Enterprise Institute (CEI) contends that the New York Department of Financial Services’ recent report on online lending is “flawed.” In its July 30, 2018, release, the CEI asserts that the NYDFS report “makes dubious legal and economic arguments with little empirical evidence to back it up, omits important historical events that do not support its conclusions, and supports policies that would significantly inhibit credit markets in the state, harming consumers and small businesses alike.”

On July 11, 2018, the NYDFS released a report on online lenders based on a “New York Marketplace Lending Survey” sent by the agency to 48 institutions believed to be engaged in online lending activities in the state. Mandated by legislation, the NYDFS report includes an analysis of online lenders operating in New York, including: the lenders’ methods of operation; their lending practices, including interest rates and costs charged; the risks and benefits of the products offered by online lenders; the primary differences with products offered by traditional lending institutions; and complaints and investigations pertaining to online lenders. In addition, the report includes information regarding actions undertaken by the NYDFS to protect the state’s markets and consumers, as well as the state agency’s analyses and recommendations.

CEI’s contentions. Generally, the CEI maintains that, in a number of instances, the NYDFS study does not include “supporting evidence” or “makes broad assertions without substantiating the claims.” More specifically, the CEI:
  • disputes the NYDFS report’s statement that “payday lenders often operate in a regulation-free environment,” and asserts that many federal laws cover consumer credit generally and that all 50 states “regulate small-dollar loans extensively”—with 18 states and the District of Columbia prohibiting high-cost payday lending entirely;
  • takes issue with the report’s claim that small businesses “have reported dissatisfaction with their online loans because of both high interest rates and unfavorable terms that are not often clear to the owners,” because “no evidence is provided” to bolster that claim, and because certain market studies have found that “online lending can be cheaper and fairer than other sources;”
  • argues that small businesses frequently cannot gain access to conventional bank financing, and that the emergence of new technologies giving rise to online business models to fill this void is a “positive development;”
  • maintains that the high interest rates associated with online small-dollar lending “are also likely a genuine assessment of risk, demonstrated by the high level of competition in the marketplace;”
  • asserts that the NYDFS report’s attempt to draw parallels between the “predatory lending” of the financial crisis and online consumer lending is unsubstantiated, threadbare, and without merit, especially because the NYDFS claim omits any discussion of “the two enormous government sponsored enterprises (GSEs) that drove underwriting standards to dangerous lows during the financial crisis;”
  • observes that although commercial lending is a “completely different animal” from consumer lending, the NYDFS report fails to make this distinction in its proposed regulatory framework, and, therefore, “regulating business lending the same as consumer lending is conceptually flawed and will only further the exodus of innovative lenders from the New York market;” and
  • opposes “NYDFS’s call for the application of New York usury limits to all online lending” because, among other things, not only would that approach conflict with the National Bank Act, federal preemption principles, and long-standing Supreme Court precedent, it also would “drastically reduce credit availability” for both consumers and small businesses and would create “a greater number of unbanked customers” in the process.
For more information about regulators' reports affecting the financial services industry, subscribe to the Banking and Finance Law Daily.


Friday, July 27, 2018

Debt collection company and former CEO settle with CFPB

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau announced that it has reached a settlement with National Credit Adjusters, LLC (NCA), a privately-held company headquartered in Kansas, and its former CEO and part-owner, Bradley Hochstein. The order imposes a judgment for civil money penalties of $3 million against NCA and $3 million against Hochstein. Full payment of those amounts is suspended subject to NCA paying a $500,000 civil money penalty and Hochstein paying a $300,000 civil money penalty.

As described in the consent order, the CFPB found that NCA and Hochstein used a network of debt collection companies to collect consumer debt on NCA’s behalf. Some of those companies engaged in unlawful debt collection acts, including representing that consumers owed more than they were legally required to pay and threatening consumers and their family members with lawsuits, visits from process servers, and arrest, when neither NCA nor the collection companies had the legal authority to take those actions.

The CFPB found that NCA and Hochstein continued placing debt with those companies for collection with knowledge or reckless disregard of the companies’ illegal consumer debt collection practices. They also sold millions in consumer debt to those companies with knowledge or reckless disregard of the company’s illegal consumer debt collection practices. Between 2011 and 2015, NCA sold more than $700 million in consumer debt portfolios to the companies.

The CFPB charged NCA and Hochstein with violating the Consumer Financial Protection Act and also charged NCA with violating the Fair Debt Collection Practices Act. Under the terms of the consent order, NCA and Hochstein are barred from certain collection practices and Hochstein is permanently barred from working in any business that collects, buys, or sells consumer debt. NCA must submit a comprehensive compliance plan to the CFPB, designed to ensure that its future debt collection practices are in compliance with federal law.

For more information about CFPB oversight of debt collectors, subscribe to the Banking and Finance Law Daily.

Thursday, July 26, 2018

CFPB settles loan disclosure violation charges with small-dollar lender

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau has reached a settlement with Triton Management Group, Inc., and related entities, relating to alleged violations of the Truth in Lending Act and implementing Regulation Z, as well as the Consumer Financial Protection Act, the agency announced. Triton is a small-dollar lender operating in Alabama, Mississippi, and South Carolina, and does business under several names including “Always Money” and “Quik Pawn Shop.” The companies entered into a consent order pursuant to a stipulation, without admitting or denying any wrongdoing.
 
According to the Bureau, Triton violated the TILA and Reg. Z by failing to properly disclose finance charges associated with Mississippi auto title loans. The Bureau further determined that these actions constituted deceptive acts or practices in violation of the CFPA. In addition, Triton’s advertisements failed to disclose annual percentage rate and other information required by TILA, the Bureau alleged.
 
The order imposed a judgment against Triton and its related companies in the amount of $1,522,298, which represents the undisclosed finance charges consumers paid on their Triton loans. However, the order suspends payment of the judgment subject to Triton’s payment of $500,000 in redress to affected consumers, who are expected to number approximately 1,309, representing approximately 2,136 loans.
 
The order also prohibits Triton and its related businesses from:
  • using or disclosing payment schedules for title pledges or loans that contradict or obscure the actual finance charge or other terms of the obligation between the parties; and
  • misrepresenting, in connection with the marketing or offering of consumer credit, the fees charged for loan extensions, the finance charge and annual percentage rate for loans, and any other terms or conditions for credit.
For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.