On July 5, 2022, the Consumer Relations Consortium (CRC) submitted comments to the California Department of Financial Protection and Innovation (DFPI) regarding its proposed consumer complaint and inquiry regulations.  The proposed regulations seek to establish complaint filing processes for consumers as well as investigation, response, reporting, and tracking procedures for covered entities.

The CRC’s comments were prepared by Legal Advisory Board (LAB) members Joann Needleman and Leslie Bender of Clark Hill, and Brit Suttell of Barron and Newburger.

In its comments, the CRC asked the DFPI to modify its proposed regulation as follows: 

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• Require appropriate verification as a prerequisite to filing a complaint on behalf of a third party due to the growing number of credit repair and debt management companies that seek extensive information by filing generic and duplicate complaints.

• Provide clarification to the definition of “complaint” to make it clear that a dispute made pursuant to the Fair Credit Reporting Act (FCRA) is not a complaint. 

• Allow covered entities to seek proof of authority to act on a consumer’s behalf to prevent covered entities from exposing consumers’ sensitive data to third parties. 

• Automate and standardize the inquiry and complaint process, including reporting and retention requirements to include a web portal. Standardization will increase efficiency. 

The complete comment filed by the CRC can be found here. 

About the Consumer Relations Consortium

The Consumer Relations Consortium(CRC) is an organization comprised of more than 60 national companies representing the diverse ecosystem of debt collection including creditors, data/technology providers and compliance-oriented debt collectors that are larger market participants. Established in 2013, CRC is evolving the debt collection paradigm by engaging stakeholders—including consumer advocates, Federal and State regulators, academic and industry thought leaders, creditors and debt collectors—and challenging them to move beyond talking points and focus on fashioning real-world solutions that actually improve the consumer experience. CRC’s collaborative and candid approach is unique in the market.  CRC is managed by The iA Institute.

On July 5, 2022, the Consumer Relations Consortium (CRC) submitted comments to the California Department of Financial Protection and Innovation (DFPI) regarding its proposed consumer complaint and inquiry regulations.  The proposed regulations seek to establish complaint filing processes for consumers as well as investigation, response, reporting, and tracking procedures for covered entities.

The CRC’s comments were prepared by Legal Advisory Board (LAB) members Joann Needleman and Leslie Bender of Clark Hill, and Brit Suttell of Barron and Newburger.

In its comments, the CRC asked the DFPI to modify its proposed regulation as follows: 

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• Require appropriate verification as a prerequisite to filing a complaint on behalf of a third party due to the growing number of credit repair and debt management companies that seek extensive information by filing generic and duplicate complaints.

• Provide clarification to the definition of “complaint” to make it clear that a dispute made pursuant to the Fair Credit Reporting Act (FCRA) is not a complaint. 

• Allow covered entities to seek proof of authority to act on a consumer’s behalf to prevent covered entities from exposing consumers’ sensitive data to third parties. 

• Automate and standardize the inquiry and complaint process, including reporting and retention requirements to include a web portal. Standardization will increase efficiency. 

The complete comment filed by the CRC can be found here. 

About the Consumer Relations Consortium

The Consumer Relations Consortium(CRC) is an organization comprised of more than 60 national companies representing the diverse ecosystem of debt collection including creditors, data/technology providers and compliance-oriented debt collectors that are larger market participants. Established in 2013, CRC is evolving the debt collection paradigm by engaging stakeholders—including consumer advocates, Federal and State regulators, academic and industry thought leaders, creditors and debt collectors—and challenging them to move beyond talking points and focus on fashioning real-world solutions that actually improve the consumer experience. CRC’s collaborative and candid approach is unique in the market.  CRC is managed by The iA Institute.

Show Notes:

In the last decade, the CFPB has tried to tackle the question of innovation through partnerships and No-Action Letters. First, there was Project Catalyst which resulted in very few collaborations and a small amount of No-Action Letters. Then there was the Office of Innovation which stood up the Compliance Assistance Sandbox which approved only 3 applications. Now the newly re-tooled Office of Competition and Innovation looks to continue these innovation partnerships but will it succeed? Nat Hoopes, VP and Head of Public Policy and Regulatory Affairs at Upstart stops by #creditecotogo to talk about the challenges of a regulatory partnership. While a No-Action Letter can offer a fintech or financial services entity an opportunity to “innovate in plain sight”, the time and available resources may not be attractive to many companies. For Upstart, the experience and collaboration with the CFPB was very positive but others may see that the juice is not worth the squeeze. 

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DISCLAIMER – No information contained in this Podcast or on this Website shall constitute financial, investment, legal and/or other professional advice and that no professional relationship of any kind is created between you and podcast host, the guests or Clark Hill PLC. You are urged to speak with your financial, investment, or legal advisors before making any investment or legal decisions.

CHESAPEAKE, Va. — Spring Oaks Capital continues to expand its team of industry leaders. Susan Richards recently joined the group, as Director of Business Development, to strengthen our Portfolio Acquisitions team lead by Keith Walch, Chief Acquisitions Officer. Susan has significant industry experience, particularly in sales and operations previously serving as COO for a national debt buyer.

“I’ve been in the industry for 30 plus years and haven’t seen this level of managed growth anywhere. Not only is the company growing but it’s doing it by attracting top talent,” stated Richards, “It’s clear why this company is considered one of the Top10 debt buyers in the industry.”

Marcelo Aita, Executive Chairman, added, “Sue is one of the most driven executives I’ve had the pleasure to work with over the years. Goal oriented and results driven but uniquely qualified for business development. She uses her operations background and industry expertise to help lenders through the debt sales process.”

Spring Oaks Capital is also excited to announce that it has hired Yardley Klinger as Compliance Manager. In this role, Yardley will be responsible for managing the portfolio due diligence process for the organization as well as overseeing regulatory examinations, licensing, and other compliance related matters. Yardley joins Spring Oaks Capital with extensive experience in several different areas of the debt purchasing space.

“I am very excited to join the compliance team at Spring Oaks Capital. I look forward to helping this company maintain its best-in-class compliance management system,” stated Ms. Klinger. Andrew Blady, Spring Oaks Capital’s General Counsel stated, “I had the pleasure of working with Yardley previously for several years. Her work ethic, talent, and experience is second to none. I am very excited to get a chance to work with her again at Spring Oaks Capital. Adding, “Yardley demonstrates our company’s continued commitment to superior compliance. We are very excited to have her on our team.”

About Spring Oaks Capital, LLC

Spring Oaks Capital is a national financial technology company, focused on the acquisition of credit portfolios. The Company subscribes to an employee and consumer-centric operating philosophy that creates high-value jobs, a significant performance lift, and the highest standards of compliance. Spring Oaks’ business strategy is rooted in innovative data-driven technology to maximize collection results and a contact platform that offers multi-channel options to meet each consumer’s communication preference. Spring Oaks has the management vision and experience to nurture a culture and DNA that is unique in the space. The executive team maintains deep experience end-to-end across the consumer finance lifecycle with some of the largest global banks and innovative FinTech platforms. To learn more about Spring Oaks and our revolutionary FinTech platform, please visit www.springoakscapital.com.

The New York Division of Financial Services (NY DFS) plans to focus on equitable access to banking and on fostering innovation in consumer financial services. That’s according to Adrienne A. Harris, the current superintendent of NY DFS, who spoke the recently at Fintech Nexus in New York City.

This could have big implications for lenders who seek to broaden their customer base or integrate virtual currency into their businesses.

The influential regulator is the preeminent regulator of virtual currency, and has an extreme breadth of regulation in New York. The agency has often been among the first state agencies to regulate digital banking and virtual currencies. Other state agencies tend to take their cues from the NY DFS, which is why it is so important for companies in financial servies to monitor the agency.

The agency “strive[s] to be a forward-looking, innovative regulator,” Harris said, emphasizing that the agency is focused on policy, process, and people, and that they aim to continue to keep New York “at the center of technological innovation.”

The agency is currently working to triple the size of its staff. According to Harris, this is in order to lead through “greater engagement and new policy.”

Here, according to Harris, is where the NY DFS will be focused:

Equitable Access to Banking

In early May, New York Governor Kathy Hochul signed legislation authorizing a study on underbanked communities, as well as legislation prohibiting banking organizations from issuing unsolicited mail-loan checks. Harris noted that increased equity is critical in banking and credit, and that the agency will be focused on ensuring New York is boosting consumer protections and bringing much-needed resources to consumers, as well.

Fostering a Positive Environment for Innovation

Harris recognizes that the regulatory approach to regulating innovation must be balanced, saying businesses and regulators “can’t approach either regulator or innovation as all good or all bad.” Harris explained that the NY DFS is funded by assessments, and because of that, they hope to provide a service to the industry, encouraging regulated entities to work “hand in hand” with their agency in order to create a better environment for consumers.

Collaborating with the Federal Regulators

Harris noted that federal regulators often turn to NY DFS, especially on the subject of virtual currencies. “There is a concern about a race to the bottom,” Harris explains. The federal regulators are concerned that states who do not implement regulations for virtual currencies and digital banking will attract more business than those that do, making consumers vulnerable to inconsistent or lax regulation. However, Harris said that we haven’t quite seen those fears come to fruition, since New York has some of the most rigorous regulation of virtual currencies, and about 46% of venture capital investments in 2021 in cryptocurrency was in New York.

As virtual currencies and digital banking become more prevalent, and as consumer protection becomes a central focus (particularly if we enter a recession) it will be critical for companies in financial services to pay attention to what is going on in New York.

San Francisco, Calif.  – LiveVox, Inc. (“LiveVox”), a leading cloud-based provider of customer service and digital engagement tools, has announced a new feature, called Human Text Initiator (HTI), as part of their U17 platform update.  HTI takes all the familiar and reliable features that LiveVox brought to outbound dialing with its Human Call Initiator (HCI®) functionality and delivers those same benefits to their SMS and MMS channels, allowing organizations to send out text messages at scale while helping to keep those campaigns in compliance with TCPA regulations and the CFPB’s Reg. F.  The new HTI functionality offers compliance-focused organizations a significant competitive advantage in reaching as many contacts as possible while reducing the risk of potential fines and lawsuits.

As organizations in the accounts receivable management space face a certain level of uncertainty in the market amid the implications of the TCPA regulations and the CFPB’s Reg. F for outbound engagement, HTI can be utilized to substantially mitigate compliance risks, such as those relating to wrong number lawsuits. With single-click, single-text activation for contact center agents as a part of LiveVox’s blended omnichannel, single pane of glass approach, HTI reduces the risk of compliance issues caused by multi-text applications. Use cases for HTI include, but are not limited to:

• Payment reminders
  
• Delinquency alerts
  
• Contact center volume deflection
  
• Letter replacement
  

“With the continued adoption and increased proliferation of smartphone usage in today’s digital environment, we developed HTI to ensure our customers are able to engage with consumers in a personalized, compliance-minded manner, on their channel of choice,” said LiveVox CEO and co-founder Louis Summe. “Just like we did with HCI, HTI allows contact center managers to develop customized SMS campaigns to deliver better digital customer experience and increase self-service capabilities while also remaining compliant in the face of increasing regulation.”

With HTI, now even organizations in highly regulated industries where TCPA and the CFPB’s Reg. F compliance is always a concern can use text messaging to provide better communication options and achieve significant cost savings. LiveVox customers are rapidly adopting digital messaging strategies to raise their competitive advantage and have already begun to see success with HTI, achieving a 90 percent read rate on texts sent through the system. There have also been increases in customer self-service rates and inbound voice traffic for payments-related issues.

Click here to learn more about HTI for compliance focused outbound SMS.

About LiveVox

LiveVox (Nasdaq: LVOX) is a next generation contact center platform that powers more than 14 billion omnichannel interactions a year. By seamlessly unifying blended omnichannel communications, CRM, AI, and WEM capabilities, the Company’s technology delivers exceptional agent and customer experiences, while helping to mitigate compliance risk. With 20 years of cloud experience and expertise, LiveVox’s CCaaS 2.0 platform is at the forefront of cloud contact center innovation. The Company has more than 650 global employees and is headquartered in San Francisco, with offices in Atlanta; Columbus; Denver; St. Louis; Medellin, Colombia; and Bangalore, India. To stay up to date with everything LiveVox, follow us at @LiveVox or visit livevox.com.

Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Some of the forward-looking statements can be identified by the use of forward-looking words. Statements that are not historical in nature, including those containing the words “anticipate,” “expect,” “suggests,” “plan,” “believe,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast,” “opportunity” and other similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon management estimates and forecasts and reflect the views, assumptions, expectations, and opinions of the Company as of the date of this press release, and may include, without limitation, changes in general economic conditions, including as a result of COVID-19, all of which are accordingly subject to change. Any such estimates, assumptions, expectations, forecasts, views or opinions set forth in this press release constitute the Company’s judgments and should be regarded as indicative, preliminary and for illustrative purposes only. The forward-looking statements contained in this press release are subject to a number of factors, risks and uncertainties, some of which are not currently known to the Company, which may cause the Company’s actual results, performance or financial condition to be materially different from the expectations of future results, performance of financial condition. Important factors, among others, that may affect actual results are described in the Company’s filings with the Securities and Exchange Commission (“SEC”), including our Form 10-K filed with the SEC on March 11, 2022. Although forward-looking statements have been made in good faith and are based on assumptions that the Company believes to be reasonable, there is no assurance that the expected results will be achieved. The Company’s actual results may differ materially from the results discussed in forward-looking statements. Readers are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. These forward-looking statements are made only as of the date hereof, and the Company does not undertake any obligations to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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On June 28, the U.S. Chamber of Commerce (Chamber) launched a focused campaign to highlight what it describes as unlawful regulatory overreach by the Consumer Financial Protection Bureau (CFPB or Bureau) and, specifically, new CFPB Director Rohit Chopra. “At every turn,” writes Chamber Executive Vice President and Chief Counsel Daryl Joseffer, the CFPB is pushing an activist agenda “without advance public participation or approval. That is not the system Congress designed, nor one which our laws will tolerate.”

The Chamber’s campaign specifically objects to several alleged unlawful actions, including:

CFPB Policy Fellowship. The Chamber believes that this program circumvents civil-service laws and executive-branch guidance that prohibit preferential hiring and conflicts of interest.

Revisions to CFPB Rules of Practice for Adjudication Proceedings. The Chamber describes this as an impermissible expansion of the director’s powers in ways that undermine due process for defendant companies and violate the separation of powers.

Repeal of Its 2013 Decision Not to Publish a Final Decision or Order Establishing Supervisory Authority Over a Covered Person. This, the Chamber believes, violates the Administrative Procedure Act (APA) because the revised rule did not go through the required notice-and-comment process.

The CFPB Interpretative Rule Regarding State Attorneys General and the Consumer Financial Protection Act. This rule, the Chamber points out, is inconsistent with federal law and exceeds the Bureau’s authority.

Chopra also proposes outright bans on certain products and states his intention to restructure the industry, ultimately hurting consumers by limiting choice and diminishing competition.

As part of its campaign against the federal agency, the Chamber has submitted several Freedom of Information Act (FOIA) requests to the CFPB, including:

• Communications relating to the May 26 interpretive rule, titled “Authority of States to Enforce the Consumer Financial Protection Act of 2010.”

• All records regarding the legal basis, authority, and validity of the CFPB Policy Fellowship Program announced in 2021.

• Current CFPB procedures manual, operating manual, and similar or other document(s) setting out the CFPB’s rules or guidelines concerning procedures, practices, and internal operations.

• All records regarding Director Chopra’s determination that the board of the Federal Deposit Insurance Corporation could hold a vote without the consent of its chair.

• All records as to changes to the CFPB’s examination procedures published on March 16.

• All records regarding President Biden’s July 9, 2021 executive order on promoting competition in the American economy.

The Chamber believes this collection of documents lays out the questionable and unlawful plans of a governmental agency with little oversight and too much regulatory power.

“Director Chopra is attempting to use the CFPB to radically reshape the American financial services sector,” said Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce. “Rohit Chopra has an outsized view of the CFPB’s role and the Director’s power.”

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) introduced several programs to support small business, amended provisions to the Fair Credit Reporting Act (FCRA) and established protections for consumers including homeowners and student loan borrowers. Since confirmation as CFPB Director, Rohit Chopra has led a resurgence in regulatory oversight.

To assist our clients in assessing preparedness for a CARES Act exam, Bridgeforce assembled a checklist to gauge readiness. Answer the following questions to determine your exposure to potential risk depending on how you’ve handled customer accounts under CARES.

CARES Act Checklist

After the CARES Act went live in 2020, did you…

Consumer Reporting – Update automated processes, such as consumer reporting, to ensure that customers who received accommodations did not advance in delinquency?

Complaints – Conduct root cause analysis on complaints tied to CARES Act accommodations and requests?

Program Selection – Ensure that all hardship programs were reviewed with the consumer and that the most consumer-friendly program was chosen?

Automation – Use automation to process accommodation requests and resulting account charges?

Controls – Maintain and monitor controls during the pandemic response for new accommodations; and recently, exists from these programs?

Compliance

• Adjust your compliance management system in response to the pandemic and CARES Act implementation?
• Conduct first and second line audits for potential consumer harm and complete necessary remediation (including review of supporting systems)?
• Incorporate state laws into process modifications to ensure adherence at federal and state levels?
• Define how to handle post-forbearance accounts with treatments geared to help borrowers stay in their home?

Consumer Communication and Education

• Ensure that consumers who received an accommodation clearly understand the terms and impact?
• Regularly monitor staff to confirm they are handling calls appropriately?

Policy, Procedures, Training

• Update and incorporate all relevant policies and procedures into training and monitoring?
• Effectively train your consumer-facing staff on how to address consumer inquiries about accommodations?

Ok, so how did you do?

There are many actions you could take if you answered “no” to any of the questions in the checklist. Here’s a non-exhaustive list of actions that should be prioritized to accelerate the closing of adherence gaps. Also, taking these actions will establish evidence of how you implemented CARES Act accommodations, which may need to be shared with regulatory examiners.

Consumer Reporting

• Review consumer reporting dispute volume pre-pandemic and post to evaluate increased volumes and confirm a well-documented action plan exists to address any trends identified through root cause analysis.
• Confirm detailed reviews were completed for all trade lines subject to CARES Act accommodations to evaluate furnishing accuracy.

Complaints

• Review any complaints tied to the CARES Act, which should by now be a unique category in your reporting and identify whether or not a violation of consumer financial laws or entity policies and procedures have occurred.
• Confirm any remediations, tied to the above complaints, were completed satisfactorily.

Program Selection

• Leverage reporting to identify customer percentages that are participating in each accommodation/hardship program as a pulse check that the results you find make sense based on your portfolio risk segments.
• Review QA listening forms and confirm there has been language added to listen for accommodation program selection effectiveness.
• Prepare now for the expected wave of post-forbearance loan reviews and treatments for mortgage and student loans.

Automation

• Evaluate where automation was introduced and confirm that appropriate testing was performed, and controls executed to ensure that the new automation operated as intended.
• If you automated your process to allow customers to self-initiate an accommodation, understand what non-automated decision points you have, if any, to graduate the loan into the performing loan bucket.

Controls

• Prioritize manual CARES Act related processes to determine areas of risk and define new or existing controls that care for these risks.
• Document controls in process maps and procedures to show the link between the process, the regulation, and the control.

Compliance

• Create/refine CARES Act regulatory applicability matrix at the state and federal level to clearly demonstrate adherence.
• Review previous updates to the Board of Directors that discuss specific action plans for CARES Act adherence and/or initiatives to confirm progress and status to resolution.

Consumer Communication and Education

• Review all forms of relevant customer communication (letters, emails, agent scripts) for clear, direct language around the details of customer accommodations.
• Increase targeted call listening activities to monitor effectiveness and thoroughness of presenting hardship programs to customers and handling post-accommodation account changes.

Policy, Procedures, Training

• Update all relevant procedures to include any process additions or changes related to CARES Act.
• Conduct training on CARES Act accommodations and test agents to ensure comprehension. Perform follow up training as needed based on monitoring activities.

CFPB rulemaking was the subject of a new blog post by Director Chopra published last week titled “Rethinking the approach to regulations.”

Director Chopra first discussed the CFPB’s efforts “to move away from highly complicated rules that have long been a staple of consumer financial regulation and towards simpler and clearer rules.”  He indicated that the CFPB “is dramatically increasing the amount of guidance it is providing to the marketplace, in accordance with the same principles.”

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Commenting that “[u]nnecessary complexity places new entrants and small firms at a disadvantage compared to their larger competitors,” he indicated that the CFPB plans to issue guidance that sets forth “simple bright-lines.”  According to Director Chopra, this approach will “prevent strategic or intentional ‘misunderstanding’ or plausible deniability that some companies use to ignore the law.”  He asserted that complexity “gives companies the ability to claim there is a loophole with creative lawyering.”

With respect to what he called “traditional rulemaking,” Director Chopra identified as priorities the Section 1033 rulemaking on consumer access to financial information, the Section 1071 rulemaking on data collection and reporting requirements in connection with credit applications made by women- or minority-owned small businesses, and rulemakings regarding quality control standards for automated valuation models and property assessed clean energy financing.

Most notably, he indicated that the CFPB “is reviewing other authorities authorized by Congress that have gone unused.”  Specifically, he identified the CFPB’s  authority to register certain nonbanks and stated that the CFPB is assessing whether to use that authority “to identify potential scammers and others that repeatedly violate the law.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  In regulatory agendas issued under former Director Cordray, the CFPB had indicated that it was considering whether rules to require registration of certain nonbanks would facilitate supervision.

Director Chopra also discussed the need to for the CFPB to take “a fresh look” at certain long-standing rules.  In addition to the CARD Act (Regulation Z) rules establishing safe harbors for credit card late charges, he indicated that the CFPB is reviewing the FTC rules implementing the FCRA (Regulation V) “in an effort to identify potential enhancements and changes in business practices,” and the Regulation Z qualified mortgage rules “to explore ways to spur streamlined modification and refinancing in the mortgage market, as well as assessing aspects of the ‘seasoning’ provisions.”

Finally, he indicated that in addition to using its new “circulars” to encourage consistent enforcement among government agencies, the CFPB would be “increas[ing] its interpretation of existing law to the marketplace” and referenced the CFPB’s advisory opinion program launched in 2020.

We are somewhat dubious about the CFPB taking on this massive project for several reasons.  First, to the extent the new approach to rulemaking is intended to apply to CFPB regulations and the regulations that the CFPB inherited from other agencies, Director Chopra has demonstrated a reticence to use new rulemaking as a tool, as opposed to enforcement, supervision, and the issuance of statements.  That is because rulemaking is very labor intensive and time-consuming and often leads to lawsuits challenging it, with the payday loan rule serving as a good example. 

Second, what Director Chopra has announced is very ambitious.  It would amount to a complete overhaul of all CFPB regulations and inherited regulations to convert them from complex, detailed, and prescriptive regulations to short, simple, non-prescriptive regulations with “bright-line” tests.  We doubt that the CFPB has nearly the bandwidth or time to undertake such a massive project, one which seems almost certain to engender opposition from the industry.  When regulators impose steep penalties for even-technical violations of regulations, regulated entities will want and need prescriptive rules rather than general principles.

We will be watching to see to what extent Director Chopra’s comments are reflected in the CFPB’s Spring 2022 rulemaking agenda which we expect to be released soon.  

The U.S. Court of Appeals for the Sixth Circuit recently ruled that a debt collector violated the federal Fair Debt Collection Practices Act when it sued a debtor’s wife to recover her husband’s legal fees under Ohio’s Necessaries Statute.

In so ruling, the Sixth Circuit held that: (a) the debt collection lawsuit brought first against the debtor’s wife violated Ohio Supreme Court precedent, and therefore was objectively baseless; and (b) bringing a claim against a party under circumstances where the state supreme court has explicitly held the party cannot be held liable is a violation of the FDCPA.

A copy of the opinion in Snyder v. Finley & Co., L.P.A. is available at:  Link to Opinion.

Prior to the litigation giving rise to the appeal, the defendant debt collector (Debt Collector) filed a debt collection action against the plaintiff spouse (Spouse) and her husband (Debtor) seeking to recover unpaid attorney’s fees owed by Debtor.

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Debt Collector asserted a “spousal obligation to support” claim against Spouse pursuant to Ohio’s Necessaries Statute which permits the collection of certain debts from one spouse that were incurred by the other.

Spouse filed a lawsuit alleging violations of the FDCPA, arguing that Creditor’s lawsuit against her for legal fees incurred by Debtor was “objectively baseless.”  The parties filed cross-motions for summary judgment and the trial court resolved the motions in favor of Debt Collector.  The Spouse appealed.

As you may recall, under the FDCPA, “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.”  15 U.S.C. §1692e.  A violation of the FDCPA occurs when the debt collector’s action or representation is materially misleading or false. Wallace v. Wash. Mut. Bank, F.A., 683 F.3d 323, 326–27 (6th Cir. 2012), and has the purpose of inducing payment by the debtor. Grden v. Leikin Ingber & Winters PC, 643 F.3d 169, 173 (6th Cir. 2011).

The Sixth Circuit noted that advancing a debt collection claim that is ultimately unsuccessful does not, in and of itself, rise to an FDCPA violation. Heintz v. Jenkins, 514 U.S. 291, 296 (1995). However, a litigation filing containing a material misstatement of state law that is “false, deceptive, or misleading” at the time it is made can constitute an FDCPA violation. Van Hoven v. Buckles & Buckles, P.L.C., 947 F.3d 889, 893-94 (6th Cir. 2020) (quoting 15 U.S.C. § 1692e).

The Sixth Circuit distinguished between what constitutes a non-winning debt collection claim that violates the FDCPA and one that does not. “A lawyer does not ‘misrepresent’ the law by advancing a reasonable legal position later proved wrong.” Id. at 896. However, if the “legal contention was objectively baseless at the time it was made,” it is “legally indefensible and groundless in law” and violates the FDCPA. Id.

The Sixth Circuit noted that Ohio’s Necessaries Statute provides that a “married person must support the person’s self and spouse,” and if one is “unable to do so, the spouse of the married person must assist in the support so far as the spouse is able.” Ohio Rev. Code § 3103.03(A).

The parties and the trial court focused on whether attorneys’ fees constituted “necessaries” under the statute. The trial court found that Debt Collector’s claim was “at the very least, arguable” as the Supreme Court of Ohio has held that certain attorneys’ fees’ are recoverable against a spouse. See Wolf v. Friedman, 253 N.E.2d 761, 765-67 (Ohio 1969); Blum v. Blum, 223 N.E.2d 819, 820-21 (Ohio 1967).

However, the Sixth Circuit held that the issue of whether attorneys’ fees are included under the Ohio Necessaries Statute as irrelevant, as Debt Collector’s lawsuit failed to comply with the statute’s threshold procedural requirements.

In an earlier case, the Ohio Supreme Court held that “each married person retains primary responsibility for supporting himself or herself from his or her own income or property,” and a “nondebtor spouse becomes liable only if the debtor spouse does not have the assets to pay for his or her necessaries.” Embassy Healthcare v. Bell, 122 N.E.3d 117, 121 (Ohio 2018). Thus, the Sixth Circuit noted, Embassy Healthcare requires a creditor to first exhaust its debt collection efforts against the debtor before it can attempt to collect from the spouse.

Specifically, the Ohio Supreme Court held in Embassy Healthcare that “[a] creditor must…first seek satisfaction of its claim from the assets of the spouse who incurred the debt. [The Ohio Necessaries Statute] does not impose joint liability on a married person for the debts of his or her spouse.” Id.

The Sixth Circuit found the ruling in Embassy Healthcare established that the debt collection lawsuit brought first against Spouse was objectively baseless. The Court further held that bringing a claim against a party under circumstances where the state supreme court has explicitly held the party cannot be held liable is a violation of the FDCPA.

Thus, the Sixth Circuit reversed the trial court’s judgment, and remanded with instructions to enter judgment in favor of Spouse.