Archives for October 2022

The White House’s Office of Science and Technology Policy has identified a framework of five principles, also known as the “Blueprint for an AI Bill of Rights,” that is intended to guide the design, use, and deployment of automated systems and artificial intelligence (AI).  The Blueprint defines automated systems broadly as any system, software, or process that uses computation to determine outcomes, make or aid decisions, inform implementation, collect data, or otherwise interact with individuals or communities. 

The framework is intended to apply to automated systems that have the potential to impact the public’s rights, opportunities, or access to critical resources or services.  The White House specifically indicated that the framework should apply to housing, credit, employment, and financial services.  While the Blueprint does not yet create mandatory new requirements for developers, designers, and deployers of automated systems, it may overlap with existing anti-discrimination laws.  “Deployer,” as used in the framework, appears to mean any entity that deploys or uses an automated system such as an AI interface or automated calling system.  The Blueprint may also be a signal of executive orders and regulations soon to come.

The framework’s principles consist of:

1. Safe and Effective Systems

The first principle provides that the public should be protected from unsafe or ineffective systems.  To that end:

All automated systems should be developed with consultation from diverse communities to identify risks, concerns, and impact.

• The systems should undergo pre-deployment testing.
  
• Design should focus on preventing issues such as irrelevant data usage.
  
• Developers should use independent evaluation and reporting to confirm safety and effectiveness of systems to mitigate potential harms.

2.  Algorithmic Discrimination Protections

The second principle is that automated systems should be used and designed in an equitable way to prevent algorithmic discrimination.  For instance, measures should be taken to prevent unfavorable outcomes based on an individual’s:

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• race,
  
• color,
• ethnicity,
• sex (including pregnancy, childbirth, and related medical conditions, gender identity, intersex status, and sexual orientation),
• religion,
• age,
• national origin,
• disability,
• veteran status,
• genetic information, or
• any other classification protected by law

Algorithmic discrimination is defined as unjustified different treatment which disfavors people based on any of these characteristics.   The White House also called for ongoing assessments based on use of representative data to prevent proxies for demographic features, such as algorithmic impact assessments.  Results for these assessments should be made available to the public when possible.

3.  Data Privacy

The third principle calls for protection against abusive data practices.  For instance, the White House stated the public has a reasonable expectation of privacy and data should be strictly used in the context it was collected.  System deployers should seek permission for the collection, use, access, transfer, and deletion of data to the greatest extent possible.  All consent requests should be brief, in plain language, and offer choices for specific contexts of use.

4.  Notice and Explanation

The fourth principle calls for up-to-date notice of how automated systems are being used and their impact on the public to be provided regularly.  It is unclear what methods of notice are necessary.

5.  Human Alternatives, Consideration, and Fallback

The fifth principle provides that consumers should be able to opt-out of automated systems and have access to a person who can quickly remedy issues.  Reasonable expectations should be considered to determine when a human alternative must be provided.  Those expectations should focus on protecting the public from harmful impacts. 

Reporting that includes a description of human governance processes, accessibility, outcomes, and effectiveness should be made publicly available when possible.

On October 13, the Consumer Financial Protection Bureau (CFPB) released its 12th Annual Report to Congress on college credit card agreements. The report reviewed agreements and data covering the over 1.2 million student checking and credit card accounts that are governed by partnerships between institutions of higher education and financial services providers, and it highlighted market trends and possible risks. The key findings include that marketing efforts directed at students promote accounts that impose more costs than comparable accounts, and agreements between some financial institutions and colleges are not being disclosed in the manner required.

The provision of Regulation Z that implements Section 305 of the Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act) requires credit card issuers to annually submit to the CFPB a copy of any college credit card agreements in effect at any time during the preceding calendar year between the issuer and an institution of higher education or affiliated organization. Credit card issuers are further required to submit: (1) the total number of credit card accounts covered by an agreement; (2) the total dollar amount of payments made by the issuer to the institution during the year and the method or formula used to determine such amounts; and (3) the number of new college credit card accounts covered by an agreement opened during the year. The CARD Act also requires the CFPB to submit an annual report to Congress and make the information submitted by credit card issuers publicly available.

The CFPB’s review included data on 11 deposit/prepaid account providers, including nonbank financial service providers, banks, and credit unions offering more than 650,000 student accounts in partnership with 462 institutions of higher education. Among other findings from the report, the CFPB highlighted:

• Students are subject to direct marketing efforts that promote accounts that impose more costs than comparable accounts — even comparable accounts offered by the same financial services provider.  Some providers’ agreements with schools allow them to charge students five overdraft and/or nonsufficient funds penalties per day, which could total up to $175.

• Under Department of Education regulations, students must be allowed to select the way they receive their financial aid from a neutral list. The CFPB identified instances where students were told that financial aid payments might not be as timely if students did not choose a college-sponsored account.

• Schools are required to post on their websites the agreements they have with financial services providers, any compensation exchanged between them, and the average costs paid by students. The CFPB’s review found that hundreds of schools did not appear to have posted the disclosures in the manner required.

• With respect to the college credit card market, the report found that the number of credit card agreements, overall payments from card issuers to institutions, and open accounts pursuant to such agreements continue to decrease over prior years. Additionally, agreements with alumni associations continue to represent most agreements, more than two thirds of accounts, and payments by card issuers.

CFPB Director Rohit Chopra summarized the key findings as “[t]oday’s report suggests that there is more work to do to ensure that students are not steered into school-endorsed products with junk fees. We will continue to work with the Department of Education to help students find the best possible products.”

In response to the report, the Department of Education released a Dear Colleague Letter, reminding institutions of higher education of their regulatory obligations in overseeing arrangements with financial institutions. In addition, the Department of Education committed to:

• Improving the process institutions use to report their financial arrangements to the Department of Education;

• Bringing on additional staff to monitor such arrangements; and

• Continuing to review arrangements with financial institutions as part of the program review process.

Per the Fifth Circuit Court of Appeals: the Consumer Financial Protection Bureau’s (CFPB) funding structure is unconstitutional, and the 2017 Payday Lending Rule, which was a direct result of this unconstitutional funding mechanism, must be vacated.

Does this mean that the CFPB itself is unconstitutional? What does this mean in the long run for the CFPB? And what does this bombshell decision mean for the ARM industry?

To assess where we are headed, here are three things you need to know about the October 19, 2022 Opinion in Community Financial Services Association of America v. CFPB (Case No. 21-50826, 5th Cir. 2022):

1. The Court said the CFPB’s funding structure was unconstitutional. Does that mean that the CFPB itself is unconstitutional? 

No.

The Community Financial Services Association of America (CFSA) argued that the CFPB’s “vague and sweeping” rulemaking authority is too broad without guiding principles and therefore violates the Constitution’s separation of powers. The Court disagreed. Instead, it held that though the boundaries set for the CFPB’s rule-making authority are broad, they exist and are delineated. Further, because Congress’s grant of rulemaking authority to the CFPB was accompanied by a specific purpose, objectives, and definitions to guide its discretion, granting authority to the CFPB passes muster and is sufficient. 

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That said, though the CFPB has the authority to make rules, the Court held its funding structure was unconstitutional. Under the Appropriations Clause of the constitution, as part of our system of checks and balances, congress has the “power over the purse.” Most other executive agencies rely on annual appropriations for funding. The CFPB, however, is not required to rely on appropriations. Instead, it simply requests an amount from the Federal Reserve that the CFPB director determines is reasonably necessary to carry out the CFPB’s business. So long as that request doesn’t exceed 12% of the Federal Reserve’s total operating expenses, the request must be granted. According to the Fifth Circuit, this “double insulation from congress’s purse strings,” is unconstitutional. 

Regarding the severity of the unconstitutional funding mechanism of the CFPB, the Court referenced an Alexander Hamilton quote and minced no words, stating, “ An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive—an abomination the Framers warned ‘would destroy that division of powers on which political liberty is founded.’”

2. If the CFPB was funded improperly does that mean every CFPB rule is invalidated? 

No, again. This decision doesn’t mean that every rule the CFPB has created since its inception is automatically invalidated. The Court explicitly stated that though it held the funding structure of the CFPB is unconstitutional, CFSA was not entitled to a compulsory invalidation of the Payday Lending Rule. 

Instead, the Court explained that to vacate the Rule, CFSA must show that the unconstitutional funding provision inflicted harm. That said, the Court found that in this case, the inflicted harm was straightforward because a CFPB report shows that it spent over nine million dollars for “research, markets & regulations” during the fiscal quarter in which the rule was issued. Since the CFPB lacked any other means to promulgate the rule without its unconstitutional funding, CFSA showed sufficient harm, and the Rule was vacated.

3. So, what does this mean for the CFPB’s Payday Lending Rule? If the Bureau were properly funded, would the rule have survived?

The Court did not say the Payday Lending Rule was unconstitutional or that the CFPB lacked authority to create it.  

The Consumer Financial Protection Act (Act) grants the CFPB the power to make rules prohibiting “unfair, deceptive, or abusive” acts or practices in connection with consumer financial products or services. There are specific definitions in the Act that govern when an act or practice may be deemed “unfair” or “abusive.” Under the Act, an act or practice meets the definition of “unfair” if the CFPB has a reasonable basis to conclude that (1) the act or practice causes or is likely to cause substantial injury to customers; (2) is not reasonably avoidable by consumers; and (3) is not outweighed by the countervailing benefits to consumers or competition. 

As explained in more detail here, the Payday Lending Rule regulates payday, vehicle title, and high-cost installment loans. Its provisions include a prohibition on attempting to debit an account again after two unsuccessful attempts. Though the CFSA did not dispute that consumers may experience injuries after failed payment attempts, they argued that lenders are not the cause of those injuries since the consumer’s bank decides whether to charge a fee or close the account. Since the lenders are not imposing the charge for withdrawal attempts, the CFSA argued that attempting to withdraw funds multiple times does not meet the definition of “unfair”, and therefore, the CFPB lacks the authority to regulate this practice. 

The Court disagreed with the CFSA. It concluded that the definition of “unfair” was satisfied because consumers would not be harmed without the repeated initiation of unsuccessful attempted withdrawals. Though insufficient funds charges come from a third party (namely the consumer’s financial institution), the role played by lenders in bringing about the harm cannot be erased. The court also rejected CFSA’s arguments that consumers could reasonably avoid charges if they would fund their accounts properly or choose not to utilize these financial products.

You can read the full opinion here. 

Thoughts from the Legal Advisory Board

Here’s what a few members of the Consumer Relations Consortium’s Legal Advisory Board had to say. 

Joann Needleman, Member, Clark Hill, PLC – “As much as industry did not like the CFPB, I do not think, after a decade, it was ever about its existence, but how it went about regulating the consumer financial services marketplace. Financial service regulators are nothing new. It was the breadth of power and unaccountability that was a concern. Because of its unaccountability it lost its credibility. It was also about its attitude that the only way to protect consumers was by taking a totalitarian approach. Nobody ever believed that it was an “independent” agency and this was certainly true during the prior Administration when you saw how Congress reacted when they did not have  “their” person at the CFPB. Since its inception, the CFPB has been a political football and the financial services industry simply cannot operate in that type of environment. Going forward I hope changes to the CFPB will bring more collaboration, more opportunities for consensus building and more measured approaches so that consumers can reap the true benefits of the CFPB’s work. The time has come to bring a commission to the CFPB.”

Brit Suttel, Shareholder, Barron &Newburger, P.C. – “I think the ruling is fascinating and the industry will certainly feel ripple effects.  I think right now the focus continues to be on the 5th Circuit because that is the only circuit where the ruling has precedential effect.  The holding will likely be a focus in the case that was filed against the CFPB by various trade organizations regarding the UDAAP examination update regarding fair lending and discrimination.  I also think it is very likely that this will end up in the Supreme Court.”

Stefanie Jackman, Partner, Troutman Pepper – “An appeal is very likely. Many think that the Fifth Circuit went further than necessary with its remedy. If the Supreme Court agrees that the funding process is unconstitutional but agrees that unwinding a decade plus of activity is not feasible, the easiest solution for the Court may be to simply strike the language in Dodd-Frank exempting the CFPB from the appropriations process. That should default to it being funded through appropriations and also would be consistent with Chief Justice Roberts’ position that the Court should not legislate or rewrite the law.”

John Bedard, Bedard Law Group, P.C.– “I am so pleased to see Courts finally listening to arguments about the [un]constituionality of the CFPB.  Hopefully, this decision will cause other courts throughout the country to think twice before cavalierly dismissing constitutional challenges to the CFPB.”

insideARM Perspective

Only time will tell what the long-term effects of this case will be. The CFPB did not put a “closed for business” sign on its door when the opinion came out. Its also important to note that had the CFPB been properly funded, the Payday Lender Rule would have survived. With that in mind, it would not be wise to unravel compliance procedures or assume the CFPB will disappear anytime soon.  However, this case may be the catalyst of some changes at the CFPB and certainly gives those inside and outside of the Fifth Circuit Court of Appeals reason to move to dismiss CFPB actions.

AURORA, Colo. — Wakefield & Associates, an industry-leading collections and healthcare revenue cycle solutions company, today announces it has acquired the debt collection business of Choice Recovery, Inc., an Ohio-based nationally recognized collections provider.  The acquisition of Choice Recovery will further grow Wakefield’s geographical presence in the Great Lakes region and enhance its ability to provide a full suite of revenue cycle management services to a wide scope of healthcare industry clients.

As part of this strategic acquisition, Choice Recovery will add more than 90 employees, further expand Wakefield’s operations, and bolsters the company’s expertise and capabilities within the healthcare financial services segment and other ancillary verticals. 

“The Choice Recovery team is highly skilled and talented, making them a great addition to our growing Wakefield family,” stated Matt Laws, President, and CEO of Wakefield.  “With our business experiencing record growth, the acquisition boosts our ability to rapidly expand our team to meet the growing demands of existing and new clients as we continue to offer best-in-class revenue cycle solutions to healthcare providers across the country at speed and scale.” 

Wakefield entered the deal now because it has been searching for growth opportunities in priority markets across the country, and Choice Recovery stood out as an appealing acquisition with a like-minded business focused on a consumer-centric collection approach and deep relationships with key healthcare provider partners. 

“We determined that this is a compelling transaction for all of Wakefield’s stakeholders and a smart strategic move considering today’s rapidly changing competitive landscape,” Laws said.  “Given accelerated industry consolidation, bringing Wakefield and Choice Recovery together provides beneficial scale for our clients.”

About Wakefield & Associates

Established in 1933, Wakefield & Associates specializes in Revenue Cycle Management Solutions, which includes System Conversions, Call Center Partnerships, Insurance Billing, Process & System Workflow Design, Eligibility Assistance Programs, Primary & Secondary Bad Debt Collections, Legal Solutions, Complex & Problem Claims, Out-of-Network Collections, and working with Debt Purchasing providers. Wakefield & Associates has and continues to make significant investments in people, processes, and technologies that allow us to develop and implement quality solutions that accelerate cash flow and A/R liquidation. Wakefield & Associates has developed effective recovery techniques and partnership collaborations that result in a positive patient experience.

A consumer debt buyer recently agreed to a $12 million settlement to resolve allegations by the Massachusetts Office of the Attorney General of a variety of allegedly unlawful debt buying and collection practices.

More specifically, the Massachusetts Attorney General reached an Assurance of Discontinuance with the consumer debt buying and collection company and its affiliates. The company denied all allegations made in the assurance but agreed to pay a $4.5 million fine, cease collections activity on another $7.5 million in uncollected debts, and to comply with various restrictions on its business practices as to Massachusetts debtors.

A copy of the Assurance of Discontinuance is available at:  Link to Assurance.

Accounts Referred to Disbarred Law Firm

The Massachusetts Attorney General alleged that the company purchased portfolios of “charged-off” debts from creditors that included credit card accounts and defaulted loans. 

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The company referred the collection of many of the debts to a law firm in Massachusetts. The law firm sued debtors on behalf of the company, and also allegedly used the threat of litigation to induce debtors to pay debts allegedly owed to the company. The law firm falsified internal records to make it appear that it filed suit when in many cases it did not. In 2011, the principal of the law firm was formally disbarred by the Massachusetts Supreme Judicial Court.

When the company discovered the misconduct of the law firm, the company recalled the debts they placed with the law firm and tried to detect and correct information falsified by the law firm. However, the company could not detect the falsified or incorrect information and placed over 19,000 of these debts with a new law firm for continued collection.

According to the Massachusetts Attorney General, because many of these debtors were never actually sued by the law firm, the statute of limitations lapsed, and the company and the new law firm were prohibited from collecting on the debts without providing the disclosures required by 940 C.M.R. 7.07(24) for such debts.

The Attorney General alleged that “the Company’s new Law Firm proceeded to collect Debts on which the statute of limitations had run without including the language required by 940 C.M.R. 7.07(24).”

Initial Disclosures Required by State Law

In addition, the Massachusetts Debt Collection Regulation, 940 C.M.R 7.08(2) states in part that “it shall constitute an unfair or deceptive act or practice for a creditor to fail to provide to a debtor or an attorney for a debtor the following within five business days after the initial communication with a debtor in connection with the collection of a debt, unless the following information is contained in the initial communication or the debtor has paid the debt:

(a) The amount of the debt;

(b) The name of the creditor to whom the debt is owed;

(c) A statement that unless the debtor, within 30 days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the creditor; and

(d) A statement that if the debtor notifies the creditor in writing within 30 days after receipt of this notice that the debt, or any portion thereof is disputed, the creditor will obtain verification of the debt and provide the debtor, or an attorney for the debtor, additional materials described in 940 C.M.R 7.08(2).”

Under 940 C.M.R 7.08(2), if the debtor disputes the debt in writing, the person seeking to collect must provide:

“(a) All documents, including electronic records or images, which bear the signature of the debtor and which concern the debt being collected;

(b) A ledger, account card, account statement copy, or similar record, whether paper or electronic, which reflects the date and amount of payments, credits, balances, and charges concerning the debt, including but not limited to interest, fees, charges or expenses incidental to the principal obligation which the creditor is expressly authorized to collect by the agreement creating the debt or permitted to collect by law;

(c) The name and address of the original creditor, if different from the collecting creditor; and

(d) A copy of any judgment against the debtor.”

and all collection efforts must stop until the person seeking to collect “has made reasonable efforts to obtain the necessary information and provide this information to the debtor.”

The Massachusetts Attorney General alleged that the company did not provide the statement required under 940 C.M.R. 7.08.

Account Level Documentation

Moreover, the company allegedly did not obtain certain account level documentation when it acquired many of the debts, including documentation provided to the debtor by the prior owners of the debts, complete transactional histories of the debts, and copies of any final judgments awarded to the seller. 

The company also allegedly entered into agreements to purchase debts that did not require the seller to provide this account level documentation, and that limited the seller’s responsibility for the accuracy and validity of the debts.

Excessive Calls

Massachusetts Debt Collection Regulation 940 C.M.R. 7.04(l)(f) “prohibits a Debt Collector from initiating more than two telephone calls to a Debtor’s residence, cellular telephone, or other personal telephone in a seven-day period.”  Outbound calls that do not reach a consumer, or where no message is left for the consumer, are included as “initiating” a communication with any debtor via telephone pursuant to 940 C.M.R. 7.04(f).

The company did not include “outgoing calls where its collectors did not reach a consumer, or decided not to leave a message on an answering machine” within its call frequency limits. “As a result,” the Attorney General alleged, “in certain circumstances, the Company exceeded the number of calls allowed by 940 C.M.R. 7.04(1)(f) in a seven-day period.”

Collecting on Exempt Income

“Under Massachusetts law, Exempt Income is categorically exempt from court-ordered payment and includes, amongst others, Supplemental Security Income (“SSI”), Social Security Disability Insurance (“SSDI”), unemployment assistance, and pension benefits.”

The Attorney General alleged that the company and its law firm collected or attempted to collect against exempt income of the debtor.

The Assurance

The company denied these allegations but agreed to a $4.5 million fine to the Commonwealth of Massachusetts. The company also agreed to a variety of restrictions as to Massachusetts debtors, and to not attempt to collect $7.5 million in charged off debts of Massachusetts debtors that the company had previously purchased. 

The assurance also contains a provision that if the company acquires an entity in the debt collection business in Massachusetts, then the acquired entity will have a 90-day transition period before it also must comply with the terms of the assurance.