CFPB’s Fair Lending Report Indicates Increased Focus for 2017 on Servicing and Small Business Lending

Small Business OwnerFor many of us, the mention of fair lending enforcement immediately brings us to the origination side of the industry, specifically conjuring thoughts of redlining and Home Mortgage Disclosure Act (HMDA) data. While these topics will always remain a significant focus of regulatory effort in the fair lending space, the recently released Fair Lending Report of the Consumer Financial Protection Bureau makes clear that fair lending supervision and enforcement is not limited to redlining and HMDA data, and, in fact, is not limited to origination activities. In this report, the Consumer Financial Protection Bureau (CFPB) explicitly highlights its intent to increase focus in the servicing space, both for mortgages and student loans, in an effort to determine whether delinquent borrowers may have more difficulty working out loss mitigation solutions because of their race or ethnicity.

Last week, the CFPB issued its fifth annual Fair Lending Report, which discusses the CFPB’s 2016 supervisory and enforcement activity, rulemaking, and interagency coordination with regard to fair lending. More important to the consumer finance industry looking forward, the report also previews the CFPB’s fair lending priorities for 2017. The report specifically identifies three areas where the CFPB intends to focus its efforts in the coming year: (1) redlining, (2) mortgage and student loan servicing, and (3) small business lending. While redlining in mortgage lending has been a past area of focus, the emphasis on mortgage and student loan servicing and small business lending represents a shift in the CFPB’s efforts. With the announcement of its new priorities, it appears the CFPB has moved away from its 2016 emphasis on indirect auto lending and credit cards, which, along with mortgage lending, provided the basis for the CFPB’s eight referrals to the Department of Justice in 2016 wherein the CFPB cited a pattern or practice of discrimination in violation of the Equal Credit Opportunity Act. According to the report, the CFPB utilized risk-based prioritization to identify its areas of focus for 2017, naming redlining, mortgage and student loan servicing, and small business lending as areas where it saw significant or emerging fair lending risk to consumers.

While the CFPB does not appear to be pulling away from the customary fair lending focus on mortgage origination, last week’s report signals to the industry that the CFPB’s focus will continue to expand to encompass products and activities outside of the traditional space, including servicing activities.

How’d You Score That? CFPB Fines Experian Because of Misleading Credit Score Marketing

Credit Score MeterWhether it’s a football game, a standardized test, or a person’s credit, scores matter. In the case of consumer credit scores, the difference between falling in the high and low ends of the score spectrum impacts the financial lives of individuals. Understandably, many seek out their credit scores so that they know where they fall along that spectrum. Well-known credit reporting agency Experian marketed a service that provided just that: consumer access to credit scores used by lenders in making their credit decisions. According to a March 23, 2017, consent order (which also outlined a separate Experian violation) announced by the Consumer Finance Protection Bureau (CFPB), however, the scores provided by Experian were not what Experian represented them to be.

From 2012 to 2014, Experian marketed access to credit scores by, according to one representative advertisement, inviting consumers to “see the same type of information lenders see when assessing your credit.” Once individuals accepted the invitation, though, they did not see the actual score that lenders used. Instead, Experian provided them a different “educational” score. In actuality, lenders rarely used the educational score when making credit decisions. As a result, the CFPB found that Experian used misleading and deceptive practices in marketing access to the credit scores, in violation of the Consumer Financial Protection Act.

Importantly, the CFPB found a violation despite the fact that (1) Experian did not explicitly state that the scores it offered were the same ones used by lenders, and (2) Experian included a disclosure that the score it provided was “for educational purposes and is not the same score used by lenders.” According to the CFPB, in many instances, the disclosure was not appropriately conspicuous or close to the representations.

In light of the consent order, others in the marketplace offering access to credit scores should review the representations they are making when advertising their products. At least in the eyes of the CFPB, educational scores are not the same as those scores used by lenders, and it would be unwise to equate the two in marketing materials. A misleading representation about a product’s significance may still be misleading even if accompanied by a disclosure, especially those that are inconspicuous. The CFPB’s action makes clear that, in any event, it will continue to keep score of how access to credit scores is marketed.

Securities Legislative Update – Elderly Investors 2017

elderly coupleThe SEC recently approved FINRA’s proposed rule aimed at preventing fraud and abuse of senior investors. On March 30, FINRA issued Regulatory Notice 17-11, setting the effective date for the new rule as February 5, 2018. The notice provides for the adoption of new FINRA Rule 2165, which will permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers. It also provides for amendments to FINRA Rule 4512, requiring members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account. FINRA proposed the new rule in response to concerns over abuse of the rapidly growing number of aging baby boomers.

In addition, several states have also recently adopted or proposed legislation aimed at protecting elderly or vulnerable persons’ investment interests. On March 27, Mississippi’s governor approved an amendment to the Mississippi Securities Act, which provides additional post-registration requirements for certain broker-dealers and investment advisers relating to “vulnerable persons.” The Mississippi Vulnerable Persons Act defines vulnerable persons as a person whose ability to perform the normal activities of daily living is impaired due to a mental, emotional, physical or developmental disability or dysfunction, or brain damage or the infirmities of aging. Investment advisers and broker-dealers are required to notify the Department of Human Services if they know or suspect a vulnerable person has been or is being abused, neglected, or exploited. The amendment further requires them to notify the Secretary of State’s Office and will allow them to notify a third party or delay disbursements if they reasonably believe financial exploitation has been attempted or has occurred. The amendment, along with its immunity provisions, aims to encourage firms to report potential financial exploitation as early as possible.

A proposed amendment to the Tennessee Securities Act increases penalties for violations wherein senior citizens and adults with certain mental or physical dysfunctions are victims, among other changes.  The amendment requires certain individuals to notify the commissioner if they reasonably believe that financial exploitation of a “designated adult” has been attempted. It also allows a broker-dealer or investment adviser to delay a disbursement from a designated adult’s account in the case of suspected financial exploitation. The Act defines a designated adult to include persons 65 years of age or older. TN HB0304, setting forth these amendments, was introduced on January 31, 2017, and has been placed on the Insurance and Banking Committee calendar for consideration on April 4, 2017. TN SB1192, also setting forth these amendments, was introduced on February 9, 2017, and has also been placed on the Senate Finance, Ways and Means Committee calendar for consideration on April 4.

Proposed amendments to the Texas Securities Act are also aimed at protecting vulnerable adults and elderly persons from financial exploitation and abuse. The amendments require certain persons to notify the broker-dealer or investment advisor of any suspected financial exploitation of vulnerable adults or elderly persons, who is then required to investigate the suspected exploitation. They also require the dealer or advisor to adopt certain internal policies to facilitate the notification process and outline requirements for transaction holds involving an account of a vulnerable adult. TX HB3921, setting forth vulnerable adult amendments, was introduced on March 10, 2017. TX SB2067, also setting forth vulnerable adult amendments, was introduced on March 10, 2017, and was referred to the Senate Business and Commerce Committee on March 28, 2017, where it remains pending. TX HB3224, setting forth elderly persons amendments, was introduced on March 7, 2017. TX HB3972 also sets forth elderly persons amendments and was introduced on March 10, 2017.

Given the recently proposed FINRA rule, other states are likely to follow by enacting additional legislation aimed at preventing the exploitation of elderly and vulnerable investors.

Bank Acting as Fiduciary Seeks Reversal of “Unprecedented” Tort Liability

Funeral ServicesIn Jo Ann Howard & Associates, et al. v. National City Bank; PNC Bank, N.A., now pending before the United States Court of Appeals for the Eighth Circuit, a Missouri bank entered into a contractual and statutorily authorized role as trust administrator of “pre-need” funeral services accounts. The accounts were funded by a company called National Prearranged Services (NPS) from its sales of “pre-need” contracts to individuals who could thereby purchase future funeral services at current fixed pricing. While the factual background is convoluted, the bank apparently facilitated distribution of the trust funds upon the instructions of NPS, the trust beneficiary, and these funds subsequently were misappropriated by NPS. Claims against the bank for negligence and breach of fiduciary duty were presented to the jury, resulting in a $390 million adverse verdict that included punitive damages. The $350 million in compensatory damages, according to briefs filed in the case, had little or no relation to the amount of trust funds actually lost.

PNC Bank as successor to the Missouri bank and the American Bankers Association as amicus are pleading for the appellate court to recognize a distinct line between trust liability and tort liability. PNC and the ABA assert that fiduciaries should be assessed only under the law of equity, whereas the lower court permitted both equitable and legal claims to go to the jury. Appellants argue that a corporate trustee’s duties and responsibilities are governed by the trust agreement itself and by common and statutory trust law. If the lower court’s judgment is not overturned, according to the ABA, then there will be a severe impact on the ability and willingness of banks and trust companies to offer corporate trustee services.

Generally speaking, a corporate trustee is charged with taking appropriate measures to protect trust assets. The trustee’s violation of this charge, whether characterized as negligence or other tortious conduct, should result in liability that corresponds to the consequential detriment to the trust assets. If the PNC ruling is allowed to stand, corporate fiduciaries will likely need to review whether more risk-expansive tort law principles – foreseeability, duty, causation – might be applied to their role as trustee.

One might wonder whether any pronouncements from the Eighth Circuit will parallel the recent trend, now delayed, toward establishing fiduciary rules in the securities industry. We anticipate, however, the appellate court will be constrained by the unique circumstances presented in this case, including the Missouri statutory scheme supporting these “pre-need” funeral service trust accounts. The Eighth Circuit heard oral argument on September 20, 2016, so a decision could be forthcoming soon.

States Oppose OCC’s proposed Fintech Charter

interest ratesAs part of its push to promote innovation in the financial services industry, the Office of the Comptroller of the Currency (“OCC”) plans to allow financial technology (“fintech”) companies to become special purpose national banks. If the proposal is successful, fintech companies could secure a charter providing them with preemptive effects of federal law over the patchwork of state laws under which fintech companies now operate. For example, online lenders could export their home state interest rates to avoid state-specific usury caps while money transmitters would no longer need a separate state licenses. In exchange for this federal cloak, fintech companies would voluntarily subject themselves to the similar OCC supervision as national banks, including consumer protection laws and BSA/AML requirements.

A fintech charter has the potential of facilitating innovative companies. But the states are not likely to cede their regulatory territory easily. State attorneys general, state regulators and the Conference of State Bank Examiners all oppose OCC’s move as an attack on federalism and state regulatory oversight. Those groups fear that the preemptive effect of a federal charter will nullify their ability to protect consumers. Most notably, New York Department of Financial Services Superintendent Maria Vullo has publically stated that she strongly opposed the proposal. Other commentators have suggested that the charter would impart a competitive advantage on large companies that can afford the costly OCC application process to the detriment of small start-ups.

Because of their opposition, the states are likely to mount legal challenges to any final rule. For instance, there is a significant open question about whether OCC’s enabling statute, dating back to 1863, even conveys authority to grant such charters. States might also argue that the charter represents a violation of state sovereignty. Absent a distinct shift in Supreme Court precedent, however, this position seems dubious because such companies are almost always engaged in interstate commerce and because the benefits of state regulation are easily outweighed by the access created by a unified federal system. On the policy side, states could argue that the charter has the potential of eventually bringing almost all non-bank financial activity within the OCC’s ambit, thereby stifling competition and innovation and creating regulatory capture.

Legal and public policy challenges may not be the most effective tool available to states. If the OCC overreaches on the scope of this optional regulatory burden, the states could seize the opportunity to create and adopt a competing uniform code to create a consistent, more favorable alternative to federal law. To compete against the threat of a state-based alternative, the OCC could take steps to sweeten the deal such as helping to ensure that charter holders are granted access to the Federal Reserve System.

The OCC fintech charter holds a great deal of promise. But to reach its full potential, OCC will need to do something familiar to the states—compete.

New York Sets Its Sights on Cybersecurity Weaknesses at Financial Institutions

CybersecurityThe New York State Department of Financial Services’ (NYDFS) cybersecurity regulations went into effect March 1, 2017, and the first of the staggered implementation deadlines is quickly approaching on August 28, 2017. Touted by the NYDFS as the “first in the nation” comprehensive cybersecurity regulation, the new rules pose significant compliance challenges for those covered entities that are subject to the regulation. The covered entities include any business operating under New York’s banking, insurance, or financial services laws. Covered entities should expect compliance with these regulations to elevate the importance of cybersecurity within their businesses, both for activities within and outside of New York. Even financial institutions that do not operate in New York should pay close attention, as the NYDFS’s regulations are likely to serve as a model for other states aiming to ensure increased cybersecurity for consumers.

An overarching theme in the new regulations is the NYDFS’s intent to make cybersecurity a priority for a covered entity’s senior management. The regulations assume that senior management will be intimately involved with the company’s cybersecurity protocols. For example, the regulations require a senior officer or the board of directors to approve written cybersecurity policies and procedures and to certify annually to the NYDFS that the organization is in compliance with the department’s regulations. A senior officer qualified to make these decisions must be a “senior individual” at the company who is “responsible for the management, operations, security, information systems, compliance and/or risk of a Covered Entity.” Each covered entity is also required to appoint a Chief Information Security Officer (CISO) who must report directly to the entity’s board of directors regarding its cybersecurity program and any material cybersecurity risks. Based on these provisions, covered entities should expect the NYDFS to seek to hold senior management responsible for cybersecurity failures.

As a direct result of the increased emphasis on management responsibility for cybersecurity, the CISO is likely to become a more important figure within covered entities. The regulations require each covered entity to appoint a CISO who not only has authority to oversee and implement the business’s cybersecurity program but also the authority to enforce the company’s cybersecurity policies. Practically speaking, these requirements will likely lead to a significant change in the way CISOs are viewed within an organization. Given the emphasis the regulations place on holding upper management responsible for a business’s cybersecurity program, it is imperative that the CISO is a person the business trusts to make discretionary decisions about cybersecurity policy and to be thorough and straightforward in reporting cybersecurity issues to upper management. It is also important that the business provide the CISO with the funding necessary for cybersecurity policies to be effectively implemented and enforced. Simply having a cybersecurity policy in place will not be enough to satisfy the regulations.

In designing a strategy for implementing the changes that the new regulations necessitate, covered entities should keep in mind that the NYDFS’s intent is not only to protect the business’s information systems but “to promote the protection of customer information.” The NYDFS expects a compliant cybersecurity program to protect not only the business itself but also the customers of a covered entity. Therefore, when completing risk assessments of its cybersecurity programs and designing policies and procedures, businesses must consider the risks that its policies and operating procedures pose to consumers. It is easy to see how regulatory authorities outside of New York may extend this focus on protecting consumers to hold entities responsible for cybersecurity failures when their policies and risk assessments do not include an express focus on consumer protection.

In sum, expect the new regulations to lead to:

  • Increased scrutiny into senior management’s involvement with your organization’s cybersecurity program;
  • Elevation of the CISO to a more senior and central role in your organization; and
  • Increased scrutiny from other regulating authorities into whether your organization’s cybersecurity plan and risk management assessments consider risks to the consumer.

The NYDFS’s new regulations will necessitate broad changes for covered entities that reach well beyond a business’s New York operations. Though the regulations do not identify specific penalties for noncompliance, covered entities should expect the NYDFS to approach enforcement with the same gusto it has displayed in enforcing similar regulations.

If the CFPB’s Protection Power Weakens, Who Will Fill the Void?

conference tableAs rumors circulate about the potential diminishing role of the Consumer Financial Protection Bureau (CFPB) within the new administration, one might wonder if the consumer financial lending space will become a lawless void. However, like a vigilante for justice, the state financial regulators are ready to step up and protect consumers in the financial space on a nationwide basis. The largest tool in the state regulator’s arsenal is the Nationwide Multistate Licensing System & Registry (NMLS).

How does a system that was designed for the mortgage industry protect consumers in other financial transactions?

  • As of January 1, 2017, more than 200 licenses outside of the mortgage industry are maintained through the NMLS. The NMLS refers to these as “Expanded Industries,” and these include, among others: money service business-related licenses, debt collector/collection agency licenses and payday lending licenses.
  • Other financial services-related licenses take advantage of the standardized application and information collected on each entity in the NMLS. All companies regardless of industry, size or location start with the same standard company application (also known as a MU1 form), and each control person must complete an individual record (also known as a MU2 form). From there, each state can customize the information needed for each application, but there is always the same basic building block for all financial companies. This consistency allows for easy comparison across companies and industries.
  • The NMLS provides a central repository for ownership, officer and management information. Because the system is automated, it can provide real-time updates on any changes for applicants and licensees. The regulator can see the updates as they occur in the industry rather than waiting for a paper application to be mailed, received in the mailroom, date stamped and finally routed to the appropriate regulator’s desk.
  • By having the same information on all applicants across industries and states, state regulators can review trends, issues and potential consumer protection issues and collaborate with other state agencies for examinations.

Is this NMLS making changes to accommodate the expanded industries?

  • YES! As the NMLS has grown over the years, it has made many of its enhancements with the expanded industries in mind. These enhancements include adding new sections to the standard company/MU1 form for the expanded industries, providing new upload capabilities for documents specific to the industry, and constantly polling the industry beyond the mortgage world for new ideas.
  • The newest capability of the NMLS that arrived on March 20, 2017, is the Money Service Businesses (“MSB”) Call Report. Entities in states that are adopting this routine report and that maintain at least one MSB license in the NMLS will submit the call report through the NMLS. Currently, 18 state agencies (25 licenses) will adopt the NMLS MSB Call Report for Q1 2017 reporting. Review more information on the states adopting this new system of reporting.

What does this have to do with the CFPB?

  • As the CFPB potentially loses its initial powerful mandate to protect all consumers in financial transactions, the state regulators – armed with the NMLS – will step into the void.
  • More and more states have moved and will continue to move their licensing, reporting and monitoring capabilities to the NMLS. It is only a matter of time before all executives in any or all financial institutions will need to complete their very own individual record/MU2 on the NMLS.

A Bankruptcy Discharge Makes a Face-to-Face Meeting an Act in Futility

Face-to-Face MeetingJust last fall, we wrote about the Eleventh Circuit’s decision in In re Failla, Case No., in our article, “The Eleventh Circuit has spoken: Debtors who surrender property must get out of the creditor’s way.” Now, it appears that the discharge of a debtor’s mortgage loan in bankruptcy has other implications as well, including eliminating a lender’s obligation to meet the HUD face-to-face requirements of 24 C.F.R. § 203.604.

In PNC Bank, N.A. v. Wilson, Case No. 12-CH-5282, 2017 Ill. App. (2d) 151189, –N.E.3d–, 2017 WL 818569 (March 2, 2017), the Appellate Court of Illinois for the Second District affirmed a summary judgment in favor of the lender, finding that the lender did not have to present evidence that it had complied with 24 C.F.R. § 203.604 because the borrowers’ debts had been discharged in bankruptcy.

Meaningless and futile

Specifically, the court stated that “because the Wilsons did not reaffirm the debt, there was no contract to remediate or ameliorate. [Thus], [s]ending the letter seeking a face-to-face meeting would be meaningless and futile. Futile acts are usually excused, especially when the equities lie in that direction. A proceeding to foreclose a mortgage is a proceeding in equity.” According to the court, and simply put, “[T]he Wilsons’ discharge in bankruptcy without reaffirmation means that they are no longer bound by the mortgage contract between the parties and should not be allowed to enjoy any benefits of the mortgage contract that their own volitional act has nullified.”

Interestingly, it does not appear that PNC argued futility as a basis for affirming the summary judgment. Instead, the bank argued summary judgment was proper because it presented evidence that it sent a certified letter to the borrower and that it made one visit to the mortgaged property, all that is required under the “reasonable effort” definition in 24 C.F.R. § 203.604(d).

The borrowers’ argument

The borrowers argued, on the other hand, that the evidence was insufficient. Specifically, the borrowers argued the bank did not provide “proof from the postal service that the letter was ‘certified as having been dispatched.’”

Although the court appeared to agree with the borrowers on that point, the court stated that such failure does not bar a foreclosure because “where a mortgagor alleges only a technical defect in notice and fails to allege any resulting prejudice, vacating the foreclosure to permit new notice would be futile.” That statement from the court is another good takeaway from this case – it evidences the court’s consideration of prejudice, a burden placed on the borrower in many states, such as Florida, in the context of a substantial compliance argument.

The borrowers also argued the bank’s failure to comply with the time requirements in 24 C.F.R. § 203.604 should have prevented summary judgment. The court, however, did not address that argument on its merits, finding instead that the borrowers had waived that argument at trial.

Futility beyond the bankruptcy context

Finally, although the court’s application of the futility argument here was limited to a bankruptcy discharge, the court made several statements that might be of benefit to the lender in arguing that futility applies beyond the bankruptcy context, such as where the borrower could not qualify for any mitigation or has expressly declined mitigation offers. For example, the court stated in its order that “the law does not require futile acts as prerequisites to the filing of legal proceedings.”

Moreover, the court stated that “where it appears that a demand would have been of no avail, then none is required, for the law never requires the doing of a useless thing.” As the court duly noted, the regulation should not be used by borrowers as both a shield and a sword.

HUD Publishes Final HECM Rule

reverse mortgageLast year, the Federal Housing Administration (FHA) released a set of proposed rules affecting Home Equity Conversion Mortgages (HECMs) for notice and comment. After receiving 83 comments and responses, the Department of Housing and Urban Development (HUD) released its final rule on January 19, 2017. The final rule, entitled “Strengthening the Home Equity Conversion Mortgage Program,” provides several changes to both the origination and servicing of Home Equity Conversion Mortgages (HECMs, more commonly known as reverse mortgages). It is scheduled to go into effect on September 19, 2017, but it is unclear exactly how this effective date will be applied to existing HECMs, particularly those that are or will become due and payable before the rule takes effect.

The final rule codifies several existing policies that were previously issued under the Housing and Economic Recovery Act of 2008 (HERA) and the Reverse Mortgage Stabilization Act. Additionally, the final rule adds certain provisions from the proposed rule, as well as other provisions that have been revised in response to the comments received.

On the origination side, the new rule mandates that mortgagees must inform the borrower of all HECM products and features that the FHA will insure, regardless of whether that particular mortgagee offers each product. This new feature is designed to allow the borrower to gain knowledge of HECM products, as well as provide the borrower with the information necessary to make an informed decision on which products suit his or her needs.

An additional origination change impacts the HECM for Purchase Program. The original program requirements, which were located in Mortgagee Letter 2009-11, have now been codified and amended. Specifically, HUD modified the existing prohibition on interested party contributions to permit the seller to pay fees customarily paid by the seller as a permissible interested party contribution. Moreover, the seller can also purchase a home warranty for the buyer.

Finally, the new rule changes the seasoning requirements originally implemented through Mortgagee Letter 2014-21. The final rule changes the calculation of the 12-month seasoning requirement, starting the clock at the time of the HECM closing, rather than the HECM application. Moreover, the final rule will now allow the borrower to pay off a Home Equity Line of Credit (HELOC) that does not meet the seasoning requirements by using either borrower funds, HECM funds, or a combination of the two.

The final rule also changes several aspects of servicing a reverse mortgage. For example, the final rule mandates that a mortgagee ask the borrower, at closing, if the borrower would like to designate an alternate contact. If the borrower so chooses, the mortgagee would then be required to contact that third party if they are unable to reach the borrower. This change will place an additional communication burden on the mortgagee for borrowers that choose to designate an alternate contact.

Other changes to the servicing of reverse mortgages revolve around the current appraisal requirements. The new rule calls for an appraisal 30 days prior to a foreclosure sale, as opposed to the existing requirement to order an appraisal 30 days after the due and payable event and again no less than 15 days before a foreclosure sale. Additional appraisals may be required if the mortgagee is the successful bidder at the foreclosure sale in order to dispose of the property or if the property does not sell within six months of acquisition to file a claim based on the appraised value.

A final substantial change to servicing reverse mortgages is the new “cash for keys” program. HUD has long used this program with forward mortgages, and the final rule now adopts the program for reverse mortgages. Under the “cash for keys” program, HUD may reimburse mortgagees for providing a monetary incentive to the party with the legal capacity to execute a deed in lieu of foreclosure within six months of the HECM becoming due and payable. The program can also be used to reimburse mortgagees that provide an incentive to a bona fide tenant to vacate the property after a foreclosure. These incentives will help mortgagees avoid costs related to foreclosure and eviction and provide the borrower a cash incentive to expedite the closing process.

The final rule aims to codify the many policies that are currently in place for the origination and servicing of reverse mortgages. While the final rule adopts many of the provisions found in the proposed rule, some comments and responses that were received during the comment period are still being evaluated and considered. Additionally, once the rule takes effect in September 2017, the commissioner will have the ability to introduce new policies related to both origination and servicing. Therefore, there is still considerable room for future changes and modifications to the requirements involved in the origination and servicing of reverse mortgages.

State AGs Ask Supreme Court to Spark Major Expansion to Scope of Federal Debt Collection Law

Final demand noticeShould a full-service consumer finance company be subject to federal debt collection law when it attempts to collect upon debt it purchased? Attorneys general from Maryland, the District of Columbia, California, New York, and more than two dozen other states have urged the Supreme Court to adopt a startling new interpretation of federal law and widen the scope of the Fair Debt Collection Practices Act (FDCPA) in a recent amicus brief. While the attorneys general argued that their interpretation of the law is a natural fit for Congress’ vision in drafting the FDCPA, there are significant reasons for the consumer financial services industry—particularly auto lenders—to be concerned about this novel proposed expansion.

Under the FDCPA, parties attempting to collect a debt may be classified either as a “debt collector” or as a “creditor.” This analysis has historically turned on whether the collecting party’s principal purpose is to collect debts, whether it regularly collects debts owed to someone else, or whether it collects its own debts using a different name. The language of the FDCPA also states that a party collecting debt “for another” is not a creditor.

The stakes of this analysis are often significant, as only debt collectors (and not creditors) are subject to the FDCPA’s reach and the hefty class-action lawsuits that are often brought under this statute. While the FDCPA regulates parties collecting debts for others (i.e. mortgage servicers), it does not usually regulate creditors collecting their own debts or those that they purchased. This distinction is critical, as damages for violations of the FDCPA’s technical provisions often reach $1,000 per claim plus attorneys’ fees and actual damages. When conduct is spread over a large portfolio of loans, class-action claims often implicate a large amount of money in controversy.

If the FDCPA is expanded to include the novel reading proposed by these attorneys general, much of the consumer financial services industry could be impacted. Auto lenders, in particular, would be subject to technical FDCPA claims if collecting upon defaulted loans purchased from another entity. Yet, where would this interpretation stop? It is conceivable that consumer advocates would seek to argue that indirect auto lenders would also be subject to the FDCPA after receiving an installment contract assignment from an originating dealership. Similar arguments would be also conceivable in the credit card and student loan industries.

This slippery slope is just one of many reasons why this scope change is likely inappropriate. Many states’ debt collection statutes already apply to creditors and provide redress to consumers if unscrupulous debt collection practices occur. The CFPB recently outlined a proposed debt collection rulemaking for debt collectors, while also noting that it is drafting a proposed rulemaking to cover the actions of creditors collecting debts on their own behalf. Of course, the CFPB has also aggressively pursued enforcement actions against creditors based upon unfair, deceptive and abusive practices relating to debt collection—all entirely outside the traditional scope of the FDCPA. Given these current regulatory and enforcement measures, there seems to be no need to extend the FDCPA beyond its historical footprint. Just how this will all play out remains to be seen when the Supreme Court reviews this proposed expansion in upcoming cases.