Nonjudicial mortgage foreclosure not debt collection in Colorado

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

The Fair Debt Collection Practices Act does not apply to nonjudicial mortgage foreclosures under Colorado law, according to the U.S. Court of Appeals for the Tenth Circuit. Nonjudicial foreclosures are not debt collection, the court said. The mortgage servicing company was not a debt collector because the mortgage was not in default when it was transferred for servicing, the opinion added (Obduskey v. Wells Fargo, Jan. 19, 2018, Kelly, P.).

As outlined by the opinion, Wells Fargo began servicing the homeowner’s mortgage while it was still current. After the mortgage fell into default, the company started, but halted, foreclosures several times over a six-year span. In 2014, the company hired a law firm, McCarthy & Holthus, to initiate a nonjudicial foreclosure. That process was started by a letter to the homeowner in which the firm said that it had been instructed to begin foreclosure and that it "may be considered to be a debt collector attempting to collect a debt." The homeowner responded with a suit claiming FDCPA violations.

The appellate court had little difficulty deciding that Wells Fargo was not a debt collector because it had begun servicing the mortgage when it was not in default. The principal question was whether the law firm was attempting to collect a debt. If not, it was not a debt collector, and the provisions of the FDCPA were irrelevant to it.

Nonjudicial foreclosures. There is considerable disagreement among the courts about whether nonjudicial mortgage foreclosure is debt collection, the court first noted. Three U.S. appellate courts and the Colorado Supreme Court have decided that nonjudicial foreclosures constitute debt collection, while one appellate court—the Ninth Circuit—and "numerous" U.S. district courts have determined that the FDCPA is not implicated.

The Tenth Circuit decided that nonjudicial foreclosures are not debt collection as contemplated by the FDCPA, at least under Colorado law. The salient fact was that the law firm had not demanded any payment from the homeowner.

"[E]nforcing a security interest is not an attempt to collect money from the debtor," the court said. It disregarded the homeowner’s argument that the end goal of any foreclosure is obtaining payment on the debt.

A judicial foreclosure suit allows the creditor to obtain a deficiency judgment against the debtor if the sale proceeds do not pay the debt in full, the court pointed out. A nonjudicial foreclosure gives the creditor only the sale proceeds and requires a creditor that wants a deficiency judgment to file a separate suit after the sale. Since the law firm’s communications with the homeowner had never included any demand for payment, there was no effort to collect a debt, the appellate court concluded.

Other considerations. Two points bear noting. First, the FDCPA does not define explicitly what constitutes debt collection. However, it does define "debt collector" as anyone who collects or attempts to collect "debts owed or due or asserted to be owed or due another." It does not explicitly say that a debt collector must be collecting or attempting to collect money directly from the debtor (15 U.S.C. §1692a).

Second, the Tenth Circuit’s decision conflicts with a Colorado Supreme Court decision on whether Colorado nonjudicial foreclosures constitute debt collection (Shapiro & Meinhold v. Zartman, 823 P.2d 120 (1992)). Generally, it might be thought that the state court would be the authority when the interpretation of state law is in question. The apparent conflict could be resolved by remembering that the Tenth Circuit viewed the issue as the interpretation of the FDCPA, not Colorado state law.

The case is No. 16-1330.

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Misused safe harbor language gives debt collector no safety

By Richard A. Roth, J.D.

Language created by a court specifically to be used by debt collectors to tell consumers how much they owe does not protect debt collectors from Fair Debt Collection Practices Act liability if that language is inaccurate under the circumstances, the U.S. Court of Appeals for the Seventh Circuit has decided. The safe harbor language cannot simply be copied and pasted, the court said; rather, it provides safety only if it gives consumers accurate information (Boucher v. Finance System of Green Bay, Inc.).

Debt collector Finance System of Green Bay was hired to collect overdue bills for medical services. The amount owed would increase over time due to continuing interest charges. This situation creates a problem for debt collectors because they are required by the FDCPA to tell consumers the amount of the claimed debt, and disclosing in a collection letter a precise amount owed is difficult when the amount is not fixed.

In an effort to help debt collectors meet their FDCPA duties, the Seventh Circuit devised the safe harbor 17 years ago in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark, L.L.C. Debt collectors that need to state accurately an increasing amount owed can do so by saying:

As of the date of this letter, you owe $ [the exact amount due]. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1-800-[phone number].

FSGB used that language, nearly word-for-word.

Claimed inaccuracy. The problem, according to the consumer, is that state law prohibits the imposition of late charges or other charges on unpaid medical bills. Interest can be added, but nothing else. An unsophisticated consumer who was told that late fees and other charges could be imposed might be induced to make an immediate payment in order to avoid an increase in the debt.

That meant FSGB’s letter violated the FDCPA because it failed to state the amount owed and misrepresented the amount of the debt, even though the debt collector used the language specified by the court, the consumer said.

Misrepresentation. The appellate court chose to address the claimed FDCPA violation before considering the applicability of the safe harbor. The first conclusion was that the collection letter was a material misrepresentation of the amount of the debt.

The core question for the court was whether the letter would “materially mislead or confuse an unsophisticated consumer.” The letter met that standard because: (a) it implied that late fees or other charges could be imposed even though doing so was illegal; and (b) an unsophisticated consumer’s considerations about whether and when to pay the medical bill could be influenced by a misunderstanding that immediate payment would eliminate or reduce the additional, illegal charges.

Safe harbor applicability. Initially, the appellate court noted that Miller had created the safe harbor to protect debt collectors from claims that they had not accurately stated the amount owed, which would violate 15 U.S.C. §1692g. That was a different claim from one that a debt collector had made a material misrepresentation in violation of 15 U.S.C. §1692e. However, the requirements of the two sections overlapped to such a degree that it would make no sense for the safe harbor to apply to one claim but not the other, the court said.

No safe harbor here. FSGB did use the safe harbor language established by Miller, the court conceded. However, that was not enough. The safe harbor would protect a debt collector only if the information it included actually was accurate; otherwise, the safe harbor language itself would be misleading.

Since the safe harbor included a warning that late fees and other charges could be imposed when doing so was forbidden, it was inaccurate, the court concluded. The debt collector could have, and should have, deleted the inaccurate part of the language. Having failed to do so, FSGB had no protection.

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CFPB sudden dismissal of online lending suit draws outrage from industry

By Stephanie K. Mann, J.D.

Without explanation, the Consumer Financial Protection Bureau has voluntarily dismissed, without prejudice, a lawsuit against four online payday lenders. In reaction to this sudden dismissal, two industry groups have expressed their outrage.

The National Consumer Law Center deplores the action to dismiss the lawsuit against the payday lenders “who preyed on working families by making loans up to 950% that were illegal in at least 17 states.” According to the trade association, all of the payday lenders are owned and incorporated by the Habematolel Pomo of Upper Lake Indian tribe located in Upper Lake, Calif. While the lenders claim that only tribal law applies to the loans, the NCLC notes that in 2014, the Supreme Court made clear that tribes “going beyond reservation boundaries are subject to any generally applicable state law.”

“It’s outrageous that Acting Consumer Financial Protection Bureau Director Mick Mulvaney, who took more than $62,000 from payday lenders while a member of Congress, is now giving a free pass to lenders that are collecting on illegal loans that charge an obscene 950% interest,” said Lauren Saunders, associate director of the National Consumer Law Center. Allied Progress also questioned Mulvaney’s objectivity.

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CFPB to investigate itself on function fulfillment

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is planning a series of requests for information that are intended to provide evidence on how well the Bureau is doing its job. The RFIs will ask for comments on the CFPB’s "enforcement, supervision, rulemaking, market monitoring, and education activities," Acting Director Mick Mulvaney said.

The first RFI will focus on civil investigative demands—demands for information from companies that the Bureau uses as part of investigations into specific industries, companies, and practices, as well as into how those practices affect consumers. Several U.S. district court judges have refused to enforce Bureau CIDs in the past year because the demands did not adequately describe what conduct was under investigation or what consumer financial protection laws might have been implicated.

According to Mulvaney, "In this New Year, and under new leadership, it is natural for the Bureau to critically examine its policies and practices to ensure they align with the Bureau’s statutory mandate. Moving forward, the Bureau will consistently seek out constructive feedback and welcome ideas for improvement."

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Financial Services Committee’s staff director to become CFPB’s chief of staff

By Thomas G. Wolfe, J.D.

The House Financial Services Committee’s staff director, Kirsten Sutton Mork, is leaving the committee to serve as chief of staff for the Consumer Financial Protection Bureau, according to a January 2018, announcement by Committee Chairman Jeb Hensarling (R-Texas). Hensarling also took the opportunity to announce that Shannon McGahn would replace Mork as the Financial Services Committee’s staff director after Mork departs for the CFPB in the near future.

Commending Mork for her leadership, character, and “commitment to conservative principles” in her committee role, Hensarling expressed his confidence that Mork “will do an outstanding job as Chief of Staff for the CFPB and be a tireless advocate for American consumers.” Likewise, noting that McGahn had been a staff director for the committee in the past, Hensarling welcomed McGahn back, stating that McGahn will be “invaluable this year as we work to put forth bold solutions to reform our broken housing finance system and continue our efforts to pass legislation that promotes a healthy economy that is working for all working Americans.”

Concerns of Allied Progress. Meanwhile, in a Jan. 5, 2018, release, Karl Frisch, Executive Director of Allied Progress, which refers to itself as a “consumer watchdog organization,” expressed his concern about Mork becoming the Bureau’s chief of staff. “Kirsten Sutton Mork has spent much of her career looking out for the interests of big banks and Wall Street heavy hitters—she’ll be no different at the CFPB. She simply can’t be trusted to protect consumers from these extremely powerful special interests,” Frisch remarked.

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Fed considering new large institution risk management guidance

By Andrew A. Turner, J.D.

 

The Federal Reserve Board is asking for comments on proposed supervisory guidance that would outline its risk management expectations for larger banks and holding companies—generally, those with $50 billion or more in U.S. assets, the subsidiaries of such companies, and designated systemically important financial institutions. The guidance, which would be part of a new large institution rating system, would outline expectations for:

• senior management;
• business line management; and
• independent risk management and controls.

The core principles include ensuring that the firm manages its risk in a way that is prudent and consistent with its business strategy and risk management capabilities. The guidance is intended to consolidate and clarify the Fed’s existing supervisory expectations regarding risk management, and is part of a broader initiative to develop a new rating system for large financial institutions that will align with the post-crisis supervisory program. Comments are due by March 15, 2018.

 

The Fed’s previously issued corporate governance proposal looks to enhance the effectiveness of boards of directors by refocusing supervisory expectations for the largest firms’ boards on their core responsibilities to promote the safety and soundness of the firms. The Fed’s earlier ratings proposal, also issued in August 2017, is aimed at better alignment of the Fed's rating system for large financial institutions with the post-crisis supervisory program for these firms.

 

Questions for comments. The Fed invited comment on the following questions on the proposal.

1. What considerations beyond those outlined in this proposal should be considered in the Federal Reserve’s assessment of whether a large financial institution has sound governance and controls such that the firm has sufficient financial and operational strength and resilience to maintain safe and sound operations?
2. How could the roles and responsibilities between the board of directors set forth in the proposed board effectiveness guidance, and between the senior management, business line management, and independent risk management be clarified?
3. What, if any, aspects of the structure and coverage of independent risk management and controls should be addressed more specifically by the guidance?
4. The proposal tailors expectations for foreign business organizations, recognizing that the U.S. operations are part of a larger organization. How could this tailoring be improved?
5. In what ways, if any, does the guidance diverge from industry practice? How could the guidance better reflect industry practice while facilitating effective risk management and controls? Are there any existing standards for internal control frameworks to which the guidance should follow more closely?
6. Other supervisory communications have used the term “risk appetite” instead of risk tolerance. Are the terms “risk appetite” and “risk tolerance” used interchangeably within the industry, and what confusion, if any, is created by the terminology used in this guidance?
7. The proposal would adopt different terminology than is used in the proposed large financial institution rating system, and the Board expects to align the terminology so the element in the governance and controls component would change from “management of core business lines” to “management of business lines.” Does this proposal clearly explain this expected change? Do commenters anticipate any impact from this change?

The guidance would only apply to large financial institutions, such as domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets, as well as the intermediate holding companies of foreign banking organizations operating in the United States, and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Board.

 

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Data breach protection bill demands more from credit reporting agencies

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

Legislation introduced by Sens. Elizabeth Warren (D-Mass) and Mark Warner (D-Va) is intended to hold large credit reporting agencies accountable for data breaches involving consumer data. Warren stated that the bill “imposes massive and mandatory penalties for data breaches at companies like Equifax—and provides robust compensation for affected consumers—which will put money back into peoples' pockets and help stop these kinds of breaches from happening again.”

The DataBreach Prevention and Compensation Act would give the Federal Trade Commission more direct supervisory authority over data security at credit reporting agencies (CRAs), impose mandatory penalties on CRAs to incentivize adequate protection of consumer data, and provide robust compensation to consumers for stolen data. Warner said, “if companies like Equifax can’t properly safeguard the enormous amounts of highly sensitive data they are collecting and centralizing, then they shouldn't be collecting it in the first place.”

In September 2017, Equifax made public a data breach which compromised the personal information of as many as 143 million Americans. The attack highlighted that CRAs hold vast amounts of data on millions of Americans but lack adequate safeguards against hackers, according to Warren. She stated that, under this legislation, Equifax would have had to pay at least a $1.5 billion penalty “for their failure to protect Americans’ personal information.”

According to a FactSheet distributed by Warren and Warner, the Data Breach Prevention and Compensation Act would:

•  establish an Office of Cybersecurity at the FTC tasked with annual inspections and supervision of cybersecurity at CRAs;
• impose mandatory, strict liability penalties for breaches of consumer data beginning with a base penalty of $100 for each consumer who had one piece of personal identifying information compromised and another $50 for each additional compromise per consumer;
• require the FTC to use 50 percent of its penalty to compensate consumers and increase penalties in cases of inadequate cybersecurity or if a CRA fails to timely notify the FTC of a breach; and
•  double the automatic per-consumer penalties and increase the maximum penalty to 75 percent of the CRA’s gross revenue in cases where the offending CRA fails to comply with the FTC’s data security standards or fails to timely notify the agency of a breach.

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