Consumer Financial Services Alert - March 18, 2014

The CFPB released a report summarizing the recent complaints of servicemembers, veterans, and their families regarding various financial products and services. The report, which is the CFPB’s second such report, covered complaints that the CFPB received from July 21, 2011 through February 1, 2014. In connection with the report, the CFPB also announced that military consumers have recovered more than $1 million in relief since July 2011 and other non-monetary relief (e.g., correction of account information). The report also noted that the top three complaints related to mortgages, debt collection, and credit cards. The CFPB expressed particular concern about certain practices affecting military consumers, including alleged “aggressive and deceptive” tactics used in the collection of debts from military members. Despite a relatively small number of complaints related to payday loans, the CFPB also expressed concern that lenders were circumventing the Military Lending Act by lending just outside the MLA’s narrow parameters. The MLA generally prohibits creditors from charging servicemembers interest rates higher than 36% and prohibits mandatory waivers of consumer protection laws, arbitration, and allotments, among other things. Of import, the report noted the CFPB’s concerns that mortgage servicers lack knowledge about military-specific programs and short sale guidelines, such as the permanent change of station guidelines issued by the CFPB and other federal agencies (see June 26, 2012 Alert) and the Federal Housing Finance Agency’s 2012 short sale guidelines for Fannie Mae and Freddie Mac loans.

The CFPB solicited comments on a proposed information collection titled, “Debt Collection Survey from the Consumer Credit Panel.” The information collection follows an advanced notice of proposed rulemaking on debt collection rules practices (see November 12, 2013 Alert and January 21, 2014 Alert). The CFPB intends to conduct a mail survey of consumers to learn about their experiences interacting with the debt collection industry. The CFPB intends to use the information collected through the survey to inform it in its rulemaking on debt collection. The information collection seeks public input on: (1) whether the collection of information is necessary for the performance of the CFPB’s functions; (2) whether the CFPB’s estimated burden of collecting information is accurate; (3) ways to enhance the information being collected; and (4) ways to minimize the burden on respondents. Comments are due by May 6, 2014.

In its continuing advocacy related to debtors and time-barred debt, the CFPB and FTC jointly filed an amicus brief urging the United States Court of Appeals for the Sixth Circuit to reverse a district court’s decision granting defendant’s motion to dismiss a class action alleging violations of the Fair Debt Collection Practices Act. Defendant, a debt collector, sent plaintiff a “dunning” letter seeking to collect a debt by offering plaintiff a settlement. Plaintiff filed a class action alleging that by failing to disclose that the debt was time-barred and by offering to settle the debt, defendant violated the FDCPA’s prohibition on providing false and misleading representations in the collection of the debt. Defendant moved to dismiss the class action arguing that the FDCPA does not expressly require debt collectors to disclose that a debt is time-barred, and that its letter to plaintiff did not explicitly or implicitly threaten litigation. The district court granted defendant’s motion to dismiss. In reaching its decision, the district court dismissed plaintiff’s citations of CFPB and FTC materials interpreting the FDCPA in plaintiff’s favor, stating that such materials do not require courts to read the FDCPA in any particular way.

In their amicus brief, the CFPB and FTC argue that the FDCPA prohibits debt collectors from suing or threatening to sue on a time-barred debt. The agencies argue further that the outcome should not hinge on whether the letter threatened litigation because no threat of litigation is necessary for the letter to be deceptive. Rather, in the agencies’ view, the letter’s failure to disclose that the debt was time-barred is a deceptive omission under the FDCPA even if the letter did not threaten to sue on the debt, because it could mislead the least-sophisticated consumer as to the legal status of the debt.  Of concern to the agencies was the practical effect of such practice by debt collectors. Unsophisticated consumers, according to the agencies, “do not know or understand their legal rights with respect to time-barred debts.” The deadline in defendant’s letter to plaintiff could imply that failure to pay by the date would result in litigation. Ultimately, the agencies argued that “[i]n some circumstances, a debt collector may be required to make affirmative disclosures in order to avoid misleading consumers.”

The CFPB, in alignment with its continuing focus on payday lending, will hold a field hearing in Nashville, Tennessee on March 25, 2014, on payday lending. The CFPB previously took enforcement action against a payday lender for unfair and deceptive practices and actions related to the lender’s practice of allegedly “robo-signing” affidavits (see November 26, 2013 Alert). The New York and Colorado state attorneys general also settled with an online payday lender for unlicensed lending and violations of state usury laws (see February 4, 2014 Alert).

The United States Supreme Court declined to grant certiorari to decide whether Congress had the authority to confer Article III standing to sue when the plaintiff suffers no concrete harm and alleges as an injury based on a bare, technical violation of a federal statute; namely the Electronic Fund Transfers Act. Prior to 2012, the EFTA required ATM operators that imposed a fee for use of the ATM to provide prior notice of the fee by providing an on-machine notice posted in a prominent and conspicuous location on the ATM and a separate on-screen notice after the transaction is initiated, but before the consumer was “irrevocably committed” to completing the transaction. The EFTA was amended in 2012 to remove the requirement to provide notice on the machine. Petitioners, two banks, sought dismissal of class actions alleging violations of the EFTA arising from the failure of the banks to post on-machine notices advising consumers that a $2.00 transaction fee would be charged to consumers who did not hold accounts with the banks. Although petitioners had not posted on-machine notices, petitioners did provide electronic notice of the fee on the ATM screen before the consumers could be charged, as also required by EFTA. In their initial suit, which was filed before the EFTA was amended in 2012, respondents did not allege any actual damages for the violations, but rather, sought statutory damages only for the class, along with attorneys’ fees and costs. While the district court concluded that respondents lacked standing to sue because their sole injury was an “injury in law,” the United States Court of Appeals for the Eighth Circuit held that respondents suffered an “informational injury” that established standing. The petitioners’ request for certiorari followed a similar request in First Am. Fin. Corp. v. Edwards, No. 10-708, where the Supreme Court initially granted certiorari to consider whether the injury-in-fact requirement for Article III standing was satisfied when the only harm alleged was a technical violation of the Real Estate Settlement Procedures Act, but subsequently dismissed the writ of certiorari as improvidently granted (see First Am. Fin. Corp. v. Edwards, 132 S. Ct. 2536, 2537 (2012)). The Supreme Court’s most recent denial of certiorari in the present case further frustrates those who wanted the Court to seize the opportunity to clarify whether a technical violation of a federal statute can confer standing under Article III.

The Appellate Division of the Superior Court of New Jersey ruled in two consolidated appeals from summary judgment rulings issued in favor of plaintiffs, debt buyers, affirming one and reversing the other based largely on the detail provided within affidavits explaining transfer of debt ownership. Plaintiffs filed collection actions against defendants, borrowers of charged-off credit debt. After the lower court granted summary judgment to plaintiffs, defendants appealed arguing that the summary judgment was improper because plaintiffs did not submit sufficient proof of their ownership of the debts and did not offer admissible evidence of the amounts allegedly owed.

The Court made four essential holdings: (1) “lack of notice to the debtor of the sale of the debt does not affect the validity of the assignment;” (2) “the assignment need not specifically reference defendant’s name or account number and instead may refer to an electronic data file containing that information;” (3) “plaintiff need not procure an affidavit from each transferor in its chain of assignments and may instead establish prima facie proof of ownership on the basis of business records documenting its ownership;” and (4) “that an electronic copy of the periodic billing statement for the last billing cycle is prima facie proof of the amount due on the account at charge off.”

The Court addressed a number of sub-issues in reaching the above conclusions. First, it rejected borrower-defendants’ request that the court ascertain plaintiff’s debt ownership preliminarily, before borrowers were required to participate in discovery. And, concerning proof requirements for establishing assignment of a debt, the Court ruled that “[a]ll that is required is evidence of the intent to transfer one’s rights and a description of the intangible right being assigned sufficient to make it readily identifiable.” Borrowers could not claim “lack of notice” of the assignment as a defense when they showed no prejudice from it. Further, in assessing the record in each of the two cases before it, both of which involved multiple debt transfers, the Court found one creditor’s proof sufficient and the other’s inadequate. The latter creditor, while providing adequate electronic records to support many of the debt transfers, did not prove “the first link in [the] assignment chain: the transfer of [borrower]’s account from the card issuer to” the party that obtained the debt directly from the card issuer. Though the creditor had an affidavit from an employee of the original debt purchaser, the employee’s affidavit “neither revealed his position, if any, with [the original debt purchaser], nor the source of his knowledge.” However, in upholding the award of summary judgment in favor of the other creditor, the Court “reject[ed] the claim that a separate affidavit is required from each transferor authenticating each assignment in the chain,” as “long as the proponent of the documents can satisfactorily attest to the circumstances under which it acquired the documents on which it relies.” And, under the business records exception, electronic records reflect the day-to-day realities of modern business operations, and an affiant who is familiar with the record-keeping system and associated business practices can establish the records’ foundation.

The New York Department of Financial Services issued a public order indicating that it will begin to consider proposals and applications for the establishment of regulated virtual currency exchanges operating in New York. The public order marks the next phase of the DFS’ attempt to regulate virtual currency. The DFS previous held hearings on virtual currencies in January 2014 (see January 21, 2014 Alert). The DFS will accept formal proposals and applications to operate virtual currency exchanges. Approved applicants will ultimately be subject to new virtual currency regulations, which are expected to be proposed in the second quarter of this year.