Subsequent debt collectors must give initial communication notices

By Richard Roth

Any debt collector trying to collect a debt must send the consumer the disclosures described by the Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Ninth Circuit has decided. If multiple debt collectors attempt collection, each must provide the disclosures either in their initial contact with the consumer or within five days thereafter (Hernandez v. Williams, Zinman & Parham PC).

The FDCPA says that “Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall . . . send the consumer a written notice” that tells the consumer of her right to demand that the debt be fully described and validated (15 U.S.C. §1692g(a)). These disclosures sometimes are called the “validation notice.” Including the validation notice in the initial communication is permitted, and is the normal tactic.

According to the court, the consumer fell behind in her payments on an automobile loan. Debt collector Thunderbird Collection Specialists sent the consumer a dunning letter that she apparently ignored. Williams, Zinman & Parham, a law firm, then wrote the consumer to demand payment on behalf of its client, Thunderbird. Thunderbird’s letter apparently included the validation notice, but the consumer claimed that the notice in WZP’s letter was deficient. She sued the firm for not providing a complete validation notice within five days of its initial communication with her.

Who must give the notice? The essential issue was the meaning of “the initial communication.” WZP claimed that, for any debt, there could be only one initial communication, no matter how many debt collectors became involved. The consumer claimed that the initial communication was the first communication from each debt collector that was involved.

According to the court, this was a case of first impression in the appellate courts, as no U.S. Court of Appeals had previously issued a published opinion. After interpreting the phrase in light of the entire act, including the act’s intent, the court determined that each debt collector must provide the validation notice.

Ambiguous phrase. “The initial communication” was ambiguous, the court began. The FDCPA did not define “initial,” and the interpretations advocated by both sides were rational.

On the one hand, using “the initial communication,” rather than “an initial communication,” implied there could be only one, the court said. On the other hand, using “a debt collector” implied an obligation that applied to all debt collectors.

Since the text of the FDCPA was not definitive, a broader view of the act was required.

The broader view. Elsewhere in the FDCPA, “a debt collector” applied to all debt collectors that participated in the collection process, the court said. Also, the statute’s definition of “debt collector” covered all collectors, not just the first in line. WZP’s arguments to the contrary, based on comparisons to other specific language in the act, did not persuade the court differently.

For one thing, accepting WZP’s argument would create a loophole that would undermine the act’s requirement that a debt collector had to stop its collection efforts until it satisfied a consumer’s demand for verification. A debt collector could evade the pause requirement by passing the debt to a second debt collector that would not be required to provide the validation notice, the court pointed out.

The consumer-friendly interpretation also was more consistent with the FDCPA’s goal of protecting consumers from abusive collection practices, the court pointed out. Since information about a debt, or about a dispute of that debt, can be lost each time the debt is sold, it is important that consumers retain all of their validation and dispute rights.

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CFPB amicus brief argues that inaccurate credit report is ‘concrete’ harm

By Colleen M. Svelnis, J.D.

The Consumer Financial Protection Bureau has filed an amicus curiae brief on behalf of a consumer in a case involving standing under the Fair Credit Reporting Act, arguing that the an inaccurate consumer report published about an individual constitutes concrete harm sufficient to satisfy the injury-in-fact requirement of Article III. The brief was filed in the case of Robins v. Spokeo, Inc. Robins alleges that Spokeo’s website displayed a consumer report about him that included inaccurate information while he was "out of work and seeking employment."

The FCRA requires that a credit reporting agency "shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates." Under the FCRA, an affected consumer may bring suit against any person who negligently or willfully fails to comply with any requirement imposed under the Act.

Incomplete analysis. The district court found that a mere violation of the FCRA would not confer Article III standing "where no injury in fact is properly pled." However, the Ninth Circuit Court of Appeals found that the FCRA confers statutory rights, and that "the violation of a statutory right is usually a sufficient injury in fact to confer standing." The Ninth Circuit concluded that Robins satisfies the requirements and that the "alleged violations of Robins’s statutory rights are sufficient to satisfy the injury-in-fact requirement of Article III." The Supreme Court vacated that judgment, taking only the position that the Ninth Circuit’s "analysis was incomplete," and remanded for further proceedings. The court must also consider that the injury-in-fact requirement requires a plaintiff to allege an injury that is both "concrete and particularized."

‘Concrete’ harm requirement. In Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), the Supreme Court determined that the U.S. Court of Appeals for the Ninth Circuit’s analysis of the standing to sue issue was insufficient because the appellate court did not consider whether the consumer had outlined a concrete injury that would give him standing under the U.S. Constitution

CFPB brief. The brief argues that publication of false, material information in Robins’ consumer report is a concrete harm supporting his standing to sue. Consumer reports contain information that influences employers’ and other persons’ decisions about the individual, and the "additional harms that may result from an inaccurate report" like losing a job or a loan, could be "difficult to prove or measure," according to the bureau’s brief.

According to the brief, Spokeo reaffirms that "intangible" injuries, including exposure to a "risk of real harm," can satisfy Article III’s concrete injury requirement. The brief points to Congress’ action in putting forth the FCRA, which sought to curb the "dissemination of false information" in consumer reports. Further, the brief states that it was "eminently reasonable" for Congress to "regard the dissemination of an inaccurate consumer report as an injury to the individual whom the report inaccurately describes."

In addition to Congressional action, the brief argues that historical practice indicates that publication of false consumer report information is a sufficiently concrete injury to satisfy Article III.


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Report seeks to dispel FinTech’s ‘un-level playing field’

By John M. Pachkowski, J.D.

Financial Innovation Now, a public policy coalition comprised of Amazon, Apple, Google, Intuit, and PayPal, has released a report detailing the current state and federal regulatory compliance requirements for new marketplace innovators in financial services.

The report entitled "Examining the Extensive Regulation of Financial Technologies" summarized the regulatory environment for two new categories of financial services: online lending and emerging payments technologies. Specifically, the report examined the types of regulations that two hypothetical innovators—a payments security technology and an alternative small business lending service—face in providing their services. The report also provides an overview of the comprehensive regulatory scheme covering data security as well as the laws governing consumer protection and anti-money laundering that apply to these new entrants.

Although it has been argued that new technologically advanced services somehow face fewer regulations and unfairly benefit from an unlevel playing field, the report concluded, "If anything, the regulatory playing field is heavily tilted against new entrants." It added, "Like banks, these companies are heavily regulated within their respective business lines. They are, in fact, subject to the same regulations as banks and are subject to extensive oversight by government agencies, bank customers, card brands and their insurance companies."





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What does first report on Enterprises’ sales of non-performing loans reveal?

By Thomas G. Wolfe, J.D.

The Federal Housing Finance Agency (FHFA) issued its first report on the sales of non-performing loans by the government-sponsored enterprises—Fannie Mae and Freddie Mac. As articulated by FHFA Director Melvin Watt in a recent release, “This report reflects the first available results since the Enterprises started to sell NPLs [non-performing loans] and since we put in place enhanced requirements for servicing these loans.” According to Watt, the report demonstrates the FHFA’s “commitment to transparency” as the agency works to “achieve more favorable outcomes for borrowers and for the Enterprises by providing alternatives to foreclosure whenever possible.”

As observed by the FHFA’s “Enterprise Non-Performance Loan Sales Report,” non-performing loan sales reduce the number of severely delinquent loans in the Enterprises’ portfolios. Moreover, the rules are subject to FHFA requirements that “encourage NPL buyers to prioritize outcomes for borrowers other than foreclosure.”

Report highlights. The FHFA’s report reviews available data on NPL sales by Fannie Mae and Freddie Mac through May 31, 2016, and preliminary outcomes for borrowers through Dec. 31, 2015. Among other things, the FHFA’s first report on the sales of NPLs by the Enterprises indicates that:

• the Enterprises have sold over 41,600 NPLs with a total unpaid principal balance of $8.5 billion through the end of May 2016;
• New Jersey, Florida, and New York accounted for nearly half of the NPLs sold;
• the NPLs had an average delinquency of 3.4 years and an average current loan-to-value ratio of 98 percent;
• a nonprofit organization, Community Loan Fund of New Jersey, was the “winning bidder on five of six small, geographically concentrated pools” sold by Fannie Mae and Freddie Mac through May 2016 and is a service provider for the sixth pool;
• NPLs where the home is occupied by the borrower had a higher rate of foreclosure avoidance than for vacant properties;
• generally, the FHFA believes that foreclosure of vacant homes can “improve neighborhood stability and reduce blight” as the homes are sold or rented to new occupants; and
• only 24 percent of the 8,849 NPLs have been resolved to date, with half of those being resolved without foreclosure and half being resolved through foreclosure.

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BancorpSouth to pay $10.6M under mortgage lending discrimination settlement

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau and the Justice Department have settled claims against BancorpSouth Bank to resolve allegations that discriminatory mortgage lending practices harmed African Americans and other minorities. The settlement, which is subject to court approval, provides over $10 million in monetary relief including loan subsidies and compensation for alleged victims. The investigation was the CFPB’s first use of testing, sometimes referred to as “mystery shopping,” to support an allegation of discrimination.

The joint complaint filed by the CPFB and DOJ alleges that BancorpSouth engaged in numerous discriminatory practices, including: illegally redlining in Memphis; denying certain African Americans mortgage loans more often than similarly situated non-Hispanic white applicants; charging African-American customers for certain mortgage loans more than non-Hispanic white borrowers with similar loan qualifications; and implementing an explicitly discriminatory loan denial policy.

“BancorpSouth’s discrimination throughout the mortgage lending process harmed the people who were overcharged or denied their dream of homeownership based on their race, and it harmed the Memphis minority neighborhoods that were redlined and denied equal access to affordable credit,” said CFPB Director Richard Cordray. The director stated that the action against BancorpSouth is a reminder that redlining and overt discrimination are not yet remnants of the past, and that federal enforcement is needed to bring real relief to communities and individuals.”

The CFPB said that it sent “undercover testers” to several BancorpSouth branches to ask about getting a mortgage loan. The testers found that BancorpSouth employees treated African-American testers worse than they treated white testers with similar credit qualifications.

Under the terms of the proposed settlement, BancorpSouth will invest $4 million in a loan subsidy fund to increase the amount of credit the bank extends to majority minority neighborhoods in the Memphis Metropolitan Statistical Area. In order to make residential mortgage loans available to residents of minority neighborhoods that were not adequately served by BancorpSouth, the bank will further invest at least $800,000 in advertising, outreach and community partnership efforts and open a new full-service branch or loan processing office in a predominantly minority neighborhood.

To compensate borrowers harmed by its discriminatory pricing and underwriting policies and practices, BancorpSouth will establish a $2.78 million settlement fund and extend credit offers to unlawfully denied applicants. The settlement will also require BancorpSouth to amend its pricing and underwriting policies; further develop strong internal standards to ensure compliance with fair lending obligations; and provide fair lending training to its employees, senior management and board of directors. The bank must also pay a $3 million civil money penalty to the CFPB.

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Senators urge Watt to leave housing finance reform to Congress

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

Several senators sent a letter to Federal Housing Finance Agency Director Mel Watt urging him to avoid taking steps that might help the release of government sponsored enterprises—Fannie Mae and Freddie Mac—from conservatorship without comprehensive reform. The letter requests that, as Congress "looks to reengage on the issue in the coming months," Watt continues to take "incremental steps" regarding housing finance reform.

In their letter, Sens. Bob Corker (R-Tenn), Mike Crapo (R-Idaho), Heidi Heitkamp (D-ND), Dean Heller (R-Nev), Jon Tester (D-Mont), and Mark Warner (D-Va) said that "the pre-crisis GSE model came with a laundry list of government-provided benefits that gave the GSEs a competitive advantage in the market and put taxpayers at risk."

According to the senators, the benefits "facilitate a government-backed duopoly that led to excessive risk-taking and cost taxpayers and the economy dearly." They said that "changes will be needed to the existing structure," which "should come through housing finance reform legislation, not unilateral action by this or any future Administration."

In a press release, Corker said that housing finance reform remains the last major piece of unfinished business of the financial crisis. "[R]ecapping and releasing Fannie and Freddie without reform would keep taxpayers on the hook for future bailouts," he continued. "It is my hope that Director Watt will avoid any measures that would hinder the ability to pass bipartisan reform legislation in the future."

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Junk debt buyer reinvestigating debt needed to seek additional information

By Richard A. Roth

A debt collector that bought charged-off debts for collection purposes could not respond to a consumer’s dispute by simply rechecking the limited information in the electronic file it purchased, the U.S. Court of Appeals for the Eleventh Circuit has decided. While what constitutes a “reasonable investigation” of a consumer’s dispute will vary depending on the circumstances, concluding that a debt was verified without looking at any account-level information or documentation or verifying the electronic file contents in some other manner could not be considered to be reasonable, the court said (Hinkle v. Midland Credit Management, Inc.).

The decision has the potential to impose higher Fair Credit Reporting Act compliance burdens on debt buyers when consumers dispute entries in their consumer reports.

Junk debt purchases. Midland Credit Management bought two charged-off debts from other debt collectors, receiving only electronic files that gave the amount of the debt, original creditor’s name, charge-off date, and personal information about the account-holder. In neither case did Midland receive any account-level documentation, but in both cases the debt seller had at least some obligation to help Midland obtain that documentation if it was requested. Charged-off debts that may be sold from one debt buyer to another, usually at increasing discounts, sometimes are referred to as “junk debts,” the court noted.

Consumer’s disputes. The company sent separate dunning letters for each of the debts, with each letter offering a settlement for less than the full amount claimed. The first settlement offer apparently was accepted, as Midland marked the account “paid in full” and stopped reporting it to consumer reporting agencies. However, the consumer said she hadn't received the letter and hadn't made any payment.

In fact, the consumer claimed that she knew nothing about the account or the settlement until she obtained a copy of her credit report several years later and saw that the report listed the debt as having previously been in collection. She disputed the debt with the national consumer reporting agencies, which passed the dispute to Midland for reinvestigation.

Not long after, Midland sent a collection letter for the second debt, which the consumer acknowledged having received. In a subsequent telephone conversation, she told Midland that she had not opened the account in question and did not owe the debt. Midland, by letter, asked the consumer for any documentation she could provide to support her dispute but, according to the court, did nothing else.

Six months later, the consumer disputed the second debt with the three CRAs, which again referred the dispute to Midland for reinvestigation. The court said that Midland never took any steps to investigate either dispute beyond, at most, reviewing the electronic files it had purchased and asking the consumer if she could supply any more information. Specifically, it never invoked its ability to ask the sellers for help in obtaining account-level information.

Reasonable reinvestigation. The Fair Credit Reporting Act requires a company that furnishes information to CRAs to perform a reasonable reinvestigation if it is told a consumer has disputed that information (15 U.S.C. §1681i). According to the appellate court, what Midland did wasn’t enough to be considered reasonable.

What constitutes a reasonable reinvestigation depends in part on who the information furnisher is—the original creditor, the creditor’s collection agency, a debt buyer, or a “down-the-line” debt buyer like Midland, the court said. Under the FCRA, there are three possible ends of a reinvestigation—the debt claim could be found to be verified, the debt claim could be found to be inaccurate, or the information could be inadequate to reach a conclusion.

The statute does not define either “verify” or “investigation,” the court noted. However, in this context, “verify” calls for “some degree of careful inquiry.” If Midland did not have information showing that the contents of the electronic files were accurate, it should have obtained such information before reporting the debt was verified.

An information furnisher, including a junk-debt buyer, has two choices, the court said:

1. It could verify the information it had reported through documentary evidence or some individual’s personal knowledge.
2. If the necessary evidence was not available or would be “too burdensome to acquire,” it could report that the information it had reported could not be verified.

The court added that the debt collector would be obligated to cease reporting unverifiable information to CRAs. However, it would not be required to halt its own collection efforts.

Shifting the burden. The court also rejected Midland’s argument that its suggestion the consumer should furnish information to support her claim could effectively shift the burden to her and, if she did nothing, allow it to report the debt as verified. Nothing in the FCRA allowed Midland to shift the burden of its investigation to the consumer. Moreover, even if doing so was possible, Midland at least would have had to tell the consumer that additional information was required, not just that it would be “helpful.”

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