Earlier this week the Administrator of the Colorado Fair Debt Collection Practices Act (FDCPA) announced an upcoming meeting to discuss three things: collection practices trends and issues, potential rulemaking, and “other business — opportunity to address the Administrator on issues of interest and concern.”

As insideARM reported in June of 2017, Colorado recently conducted a sunset review of its FDCPA. As a result of the review, these changes were made:

• Continuing the Act through 2028;
• Defining a ‘debt buyer’ as a person who engages in the business of purchasing debt for collection purposes;
• Creating requirements for debt collectors and collection agencies that bring legal actions on debts owned;
• Defining what is expected of a collection agency that purchases, sells, or attempts to collect on a purchased debt;
• Clarifying that the statute of limitations for private actions and actions by the administrator of the Act is 2 years;
• Repealing the collection agency board; and
• Requiring the administrator of the ‘Uniform Consumer Credit Code’ to prepare a report concerning the Act.

The elimination of the collection agency board was one of the most controversial changes at the time. It was replaced with a requirement that the Administrator produce a biannual report. Read more about the details of that report here.

You can view a copy of the bill incorporating the updates here.

You can view a copy of the full Colorado FDCPA here.

The upcoming meeting will be held on Monday July 30, 2018 at 1:30pm and is for licensees, industry groups, client groups and other interested parties.  It will take place in Room 1D of the Ralph L. Carr Colorado Judicial Center at 1300 Broadway, Denver, CO 80203.

For further information, visit the Collection Agency website at: www.coag.gov/car. 

insideARM Perspective

One aspect of the Colorado FDCPA that’s been brought to my attention is that it requires collection agencies (even those located out-of-state) to have an office in the state where the consumer can walk-in payments.  This, of course, creates an additional burden and expense for the debt collector; but also, it’s of pretty limited benefit to consumers, as it’s only useful to those who live in the immediate geographic area of the local office. It hardly makes sense to expect that a consumer who lives in the southwest corner of Colorado will drive seven hours to Denver to walk in a payment on a $200 debt. This office requirement may have made sense at one time, but not in the digital age when consumers are able to pay immediately from the comfort of their living room via the web or telephone.

The rules also require the local office address and telephone number be on all written communications. This is confusing because the consumer is instructed to mail payments or send correspondence to certain addresses, but then yet another address and telephone number must appear on the letter.  It seems this deserves to be on the agenda.

Meanwhile, one must also view this meeting in the broader context of the philosophical changes going on at the federal Bureau of Consumer Financial Protection (BCFP, formerly CFPB). Those states that believe federal regulators are backing off their commitment to industry oversight have demonstrated that they intend to step into that role. As for debt collection, the BCFP continues to say that industry oversight and rulemaking are priorities.

We here at the Ramble are honored to have had Stephanie join the Baron on the FIREline last week. Womble Bond Dickinson is also delighted to announce a content partnership with insideARM – the WBD TCPA litigation team has been selected to provide TCPA-related content for insideARM and to power its crucial TCPA Resource page.

What a perfect match!

Stephanie Eidelman is CEO of the iA institute, a media company that specializes in providing context, insight, and practical information to the complex debt industry. A visionary and constant innovator, she has grown the company from its beginning as publisher of a daily newsletter (insideARM) to one that influences the industry at the highest levels.

Stephanie is a true pioneer and believes that high quality communication leads to good things: deeper relationships, better mutual understanding, innovation, and sales… to name a few. This is why everything she does at the iA Institute is designed specifically to foster deep and candid interaction. No one had ever attempted what Stephanie put together– a collection industry-focused media company seeking to drive innovation and understanding. 

Listen to the podcast to learn:

(Ep.7: Queenie, Primary Jurisdiction, and Implementing Regulations. The interview starts at approx. minute 17.)

How did Stephanie go from being a theater major with dreams of producing movies to operating one of the first media companies devoted to the collection professional industry?

What does ARM even mean?

How did insideARM develop a 60,000 visitor monthly following?

Why is the insideARM perspective so important to industry participants?

What the hottest topics are facing collection industry professionals and how is the iA Institute facilitating discourse, advocacy and innovation?

How is Stephanie’s media company trying to “bridge the gap” between consumers and collection professionals to increase consumer trust?

How can the FCC balance privacy and practicality under the TCPA in Stephanie’s view?

Hear Stephanie’s take on the big announcement regarding Womble Bond Dickinson powering insideARM’s extremely valuable TCPA resource pages.

Since my article on Monday describing the beginning of Round 4 in the Department of Education (ED) private collection agency saga, there have been a few additional developments.

First, Alltran Education, Inc. (Alltran) filed a motion to intervene as a defendant along with the government (or ED). The company stands to gain at least some of the accounts that are to be recalled on July 3rd by ED from those firms that are operating under a 2015 Award Term Extension (ATE). Alltran claimed that its interests were not fully represented by the governement, or anyone else, so this move was required. 

Yesterday Judge Wheeler granted their request to intervene.

Second, last week FMS Investment Corp. (FMS), Account Control Technology, Inc. (ACT), GC Services Ltd. Partnership (GC), Continental Service Group, Inc. (ConServe), and Windham Professionals (Windham) requested a Temporary Restraining Order to prevent ED from recalling the accounts on July 3.

Yesterday Judge Wheeler denied that motion for TRO.

Finally, there was a scheduling hearing at the Court of Federal Claims yesterday. Here’s what’s going to happen next:

1. Defendant shall file the certified administrative record on or before Friday, June 29, 2018, providing a courtesy hard copy to the Court. The Government may file an electronic version of the administrative record using a CD.
2. Plaintiffs shall file their motions for judgment on the administrative record on or before Friday, July 13, 2018.
3. Defendant shall file its responses to Plaintiffs’ motions for judgment on the administrative record and its cross-motion for judgment on the administrative record on or before Friday, July 27, 2018.
4. Plaintiffs may file replies in support of their motions for judgment on the administrative record and responses to the Defendant’s cross-motion on or before Friday, August 3, 2018.
5. Defendant may file a reply in support of its cross-motion for judgment on the administrative record on or before Friday, August 10, 2018.

All current and prospective Defendant-Intervenors shall follow the Defendant’s briefing schedule. Oral argument, if necessary, will be scheduled at a later time.

I missed one other thing last week

Pioneer Credit Recovery, Inc. (Pioneer) also filed a complaint on June 22. They are situated similarly to, but not exactly like, the other plaintiffs (FMS, ACT, GC, ConServe, Windham), as Pioneer is also operating under a 2017 (vs. a 2015) ATE, and stands to gain some of the recalled accounts referenced above.

Nonetheless, Pioneer’s case was consolidated with the others under FMS Investment Corp. v. The United States.

Pioneer made these claims:

• ED improperly canceled the Solicitation for debt collection services in the unrestricted (large company) category.
• There should be no need for a TRO or Preliminary Injunction, given that ED does not plan to issue any new solicitation in the short term covering the services at issue. Pioneer thinks the matter can be resolved through Motions for Judgment on the Administrative Record (AR).
• In the previous and extensive litigation over the Solicitation, ED has consistently taken the position that making awards under the Solicitation was crucial to ED and that without such awards, ED, borrowers, and the public would suffer significant harm. This position is in sync with ED’s representations to this Court that the volume of defaulted accounts is increasing exponentially each month.
• ED’s actions in cancelling the Solicitation are pretextual and were taken solely to avoid continued litigation. Therefore its determination to cancel the Solicitation is arbitrary, capricious, and unreasonable, and otherwise violates applicable federal procurement laws and regulations.
• Pioneer is materially prejudiced by ED’s failure to properly evaluate its needs, ED’s improper cancellation so as to avoid conducting a fair and reasonable evaluation, and ED’s violation of the governing statutes and regulations.
• If ED had properly evaluated its needs, ED would have evaluated proposals under the Solicitation, Pioneer’s proposal would have been evaluated and considered for award, and that information would have been considered during the tradeoff and best value determination. If ED had conducted a proper evaluation, Pioneer would have received an award.
• ED’s May 3, 2018 notice of cancellation is based in part on a newly formed and unsupported notion that it wants a 90-day engagement process to reduce the number of defaulted borrower accounts. ED has presented no support for this unproven and new plan, or how this plan can be implemented.

Pioneer seeks relief in the form of a reinstatement of the Solicitation, re-evaluation of proposals, and a new award decision. The company also seeks an injunction to prevent ED from procuring these same PCA services under a related solicitation seeking defaulted loan collection services. Finally, Pioneer is requesting an award of costs, including bid and proposal costs and reasonable attorneys’ fees as damages for the cancellation.

While the other plaintiffs likely made similar claims, their Complaints are sealed, so the details are not public.

I won’t bury the lead here–in the Third Circuit a dialer that calls from a list of numbers “individually and manually inputted into its system by a user” is not an ATDS unless it has the present ability to randomly or sequentially generate numbers and dial them. Yahoo!

Today’s ruling in Dominguez v. Yahoo, Inc, No. 17-1243, 2018 U.S.App.Lexis 17350 (3rd. Cir June 26, 2018)(“Dominguez II”) is a huge– and undoubtedly satisfying– victory for Yahoo!, but it also represents a massive shift in case law in favor of a limited reading of ATDS, just when courts seemed to be content to continue reading the ATDS definition broadly. What an amazing development.

At issue in Dominguez is the least likely of all autodialers–Yahoo’s instant messenger platform. In the first place, does that thing still exist? In the second place, does it even make phone calls?

For purposes of Dominguez II–and this article–let’s just assume the answer to both questions is “yes.” That sets up the meat of the issue–does it have the needed “capacity” to “function” as an ATDS.

For the vast majority of the Dominguez II decision the Third Circuit comes tantalizingly close to identifying the needed “functionalities” of an ATDS but–seemingly almost intentionally–did not specify and confirm what those functionalities were. Then, with all hope seemingly lost, the big reveal came at the very end of the decision–the “key factual question” the Court states is “whether the Email SMS System functioned as an autodialer by randomly or sequentially generating telephone numbers, and dialing those numbers.”  And there it is. A perfect encapsulation of the functional requirements of an ATDS as distilled by a U.S. Circuit Court of Appeal. Que bella!

But let’s dig in a bit here.

Framing the issues on appeal, the district court had determined that it was not bound to apply the FCC’s disastrous (and now overruled) TCPA Omnibus ruling respecting the “capacity” of an ATDS because–the district court found–that ruling only applied prospectively and not retroactively. The district court determined that Plaintiff’s expert reports were insufficient to establish the needed “present” capacity and were, indeed, inadmissibly awful on that topic.  So it granted judgment to Yahoo! on that basis. The Circuit Court of Appeal, thus, had to determine whether a device’s “present” or “potential” capacity to operate as an ATDS was at issue and whether Plaintiff had introduced sufficient (admissible) evidence of the needed capacity–whatever it is– to survive the summary judgment stage.

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In addressing the first issue the Third Circuit Court of Appeal took quick notice of ACA Int’l and held that Plaintiff could take no refuge in the “potential capacity” language afforded by the FCC’s Omnibus ruling, stating rather bluntly: “Dominguez can no longer rely on his argument that the Email SMS Service had the latent or potential capacity to function as autodialer.” Dominguez II at *6.

That left the issue of whether or not Yahoo’s platform had the requisite present “capacity” to operate as an ATDS. Here the Circuit Court of Appeal was left sifting through the wreckage of expert reports that had been largely designed to address the “latent” capacity of Yahoo’s system. Two of the Plaintiff’s four expert reports were grounded entirely on that basis. But two reports held elements of promise on a “present” capacity standard–one by Jeff Hansen and a second–a supplemental report supplied post ACA Int’l–by Randall Snyder.

The Court made short work of Hansen’s opinion, which argued, in essence, that “all computers can generate random or sequential numbers.” The Third Circuit panel heard echoes of ACA Int’l in those words, noting the “striking similarity” between Hansen’s conclusion that “any computer” has the capacity to be an ATDS and the ACA Int’l court’s rejection of the FCC’s capacity formulation which had made “any smartphone” an ATDS.  Hence, the Dominguez II court concludes, Hansen’s “capacity” argument was correctly excluded as “irrelevant to the present capacity inquiry.”

That left only Randall Snyder’s report to contend with. Mr. Snyder was brave enough to opine that “Yahoo’s Email SMS Service system had the ability to generate random numbers and, in fact, did generate ranom numbers.” Wow! What an opinion. But, as the Court finds–“[t]his opinion is supported by little more than the same type of overbroad, generalized assertions found in the Hansen Report.” Dominguez at *10.  The Court was unimpressed with Snyder’s rationale–that numerous operating systems can generate random numbers– and delivers a stinging blow on functionality: “[n]otably absent, however, is any explanation of how the Email SMS System actually did or could generate random telephone numbers to dial.” Id. at *10-11.

So, finally, we get to the meat. The entire discussion around “capacity” is rather aggravating when the punchline stays hidden. What capacity are we talking about? The capacity to do what?

Luckily the Court lets the cat out of the bag, just before it is too late. On page 12 of 12 the point is concretely made–

Ultimately Dominguez cannot point to any evidence that creates a genuine dispute of fact as to whether the Email SMS Service had the present capacity to function as an autodialer by generating random or sequential telephone numbers and dialing those numbers. On the contrary, the record indicates that the Email SMS Service sent messages only to numbers that had been individually and manually inputted into its system by a user.

Game. Set. Match. Euerka and Yahoo!

It remains to be seen, of course, whether courts outside the Third Circuit will follow Dominguez II, and even within the Third Circuit it is unclear whether district courts will–correctly–apply Dominguez II to thwart TCPA suits challenging predictively dialed calls. And so the saga continues. But the momentum has certainly swung and TCPAland will be all the better for it.

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Editor’s note: You may have noticed that Eric Troutman and other Womble Bond Dickinson attorneys have authored quite a few articles on insideARM lately. They have. We have just recently established a partnership for the firm to power our TCPA case law chart, and to provide a steady stream of their timely, insightful and entertaining take on this ever-evolving, never-a-dull-moment topic. Welcome to the WBD team!

The Massachusetts Supreme Court has ruled that a creditor is not exempt from rules limiting contact with consumers who owe them money. The court rejected the defendant’s argument that because they used an automatic dialer to contact the consumer – and because they never left a message — the company never actually “initiated” communications.

The case is Armata v. Target Corporation (Target). A copy of the decision can be found here.

Background

The consumer, Debra Armata, applied for a Target-branded debit card in May 2013. She incurred a debt, and became more than 30 days past due, at which point Target began contacting her to collect. The company called Armata using a predictive dialer, which – 95 percent of the time — transfers cardholders who answer the phone to a live representative. The other five percent of calls receive a recorded message which requests that the consumer contact Target. The record does not mention how often Armata heard the recorded message; she never connected with a live person. Internal Target policy was to not leave voicemail messages, so no messages were left.

Massachusetts debt collection regulations limit how often a creditor may attempt to contact a debtor via telephone in order to collect a debt. The limit is two communications per seven day period. Guidance issued by the Attorney General in 2013 states (emphasis added),

“According to the Regulations, creditors may not initiate a communication with a debtor via telephone more than two times in a seven day period to a debtor’s home, cell, or personal telephone number. The goal of this provision is to not only limit the number of times a creditor can communicate with a debtor via telephone to try to collect a debt, but to also limit the fees that a creditor can impose on a debtor (thereby limiting voicemails and text messages to twice in a seven day period). Accordingly, unsuccessful attempts by a creditor to reach a debtor via telephone may not constitute initiation of communication if the creditor is truly unable to reach the debtor or to leave a message for the debtor. Notwithstanding this interpretation, the Office of the Attorney General may still consider enforcement action against any conduct, including initiation of communication via telephone, the natural consequence of which is to harass, oppress, or abuse a debtor.”

A Superior Court judge originally granted Target’s motion for summary judgment. Armata appealed, and requested that the case be heard by the state’s Supreme Court.

Target’s Argument

Target did not dispute the fact that it phoned the plaintiff more than twice in a seven-day period in order to collect a debt. The company asserted that it did not initiate communications as defined by the regulation because it used an automatic dialer, their system plays a prerecorded message only after a call is answered, most of its calls to Armata went unanswered, no voicemails were left, and therefore no information was conveyed. Target also argued that it was exempt from the regulation because it would be in violation of state and federal law if it left a voicemail message.

[Editor’s note: This September 2017 insideARM article, covering the case of Hart v. Credit Control, LLC, illustrates the years-long struggle over voicemail messages and third party disclosure under the FDCPA.]

The Court didn’t buy Target’s argument.

“Target’s reading would create a loophole so large as to swallow the rule, such that nearly every creditor would be able to evade the limits imposed by the regulation simply by changing its dialing technology.”

The court said further, “We construe the Attorney General’s guidance to mean that attempts by a creditor to reach a debtor via telephone do constitute initiation of communication if the creditor is able to reach the debtor or leave a voicemail message for the debtor” (emphasis added).

Considering the definition of “truly unable to reach a debtor,” the court opined that this might mean, for instance, if the individual never answered a call and their voicemail was not set up, was full, or the phone had been disconnected. In Armata, however, it was clear that Target had the correct number and the consumer did answer the phone on occasion, so in this case Target was not “truly unable to reach” the consumer.

In the end, the court determined that the Massachusetts regulation does apply to creditors who use automatic dialers or voluntarily decide not to leave voicemail messages.

As to the argument that none of its calls actually conveyed information, the court also rejected this, saying that “the regulation does not limit ‘communication[s], but rather the initiation of communications…Under Target’s reading, a creditor would be permitted to telephone a debtor unremittingly so long as it chose not to leave voicemail messages. In such a scheme, a ‘communication’ would occur only if the debtor answered the call.”

Finally, the court dismissed Target’s “catch 22” argument that although it was able to leave a voicemail message, doing so would risk violating other Massachusetts debt collection regulations and the FDCPA. The court said, “This argument is unpersuasive, both because the Massachusetts regulations are not as restrictive as Target contends, and because Target does not fall within the purview of the FDCPA.” Further, “We do not interpret the regulatory scheme as prohibiting Target from leaving a voicemail message that simply states the caller’s name, that the call was on behalf of Target, and that the recipient should return the call, so long as the message does not mention or in any way imply that the call concerns the collection of a debt.” And, in any event, “Target was calling Armata to collect a debt on its own behalf, which exempts it from the FDCPA.”

insideARM Perspective

This case is another excellent illustration of the need for a standard, safe harbor voicemail message that can be left by debt collectors without risk of violating the law.

The FDCPA contains conflicting requirements in that a debt collector must disclose his or her identity to a consumer in every communication and that a collector must refrain from communicating about a consumer’s debt to a third party. Congress did not anticipate the challenges created by the wording of the FDCPA in the context of today’s modern communications.

For example, current interpretations of the FDCPA provide that leaving a voicemail message, no matter how terse, is considered a “communication” under the FDCPA, thus triggering both the mini-Miranda debt collector disclosure requirement (which might be heard by, e.g., a roommate) and the third-party disclosure prohibition.

The combination of these outdated rules and the inability to use current communication channels threatens to leave this one industry in the last century, while the rest of the world moves ahead. Given that an estimated 77 million Americans have a debt in collections, this is an issue that will only cause more and more consumer frustration as today’s younger – digital only – consumers age.

We recommend regulators declare that a limited content message, delivered via any medium other than by letter (such as voicemail, email or text), is not a communication subject to the “debt collector” disclosure requirements. This message could be used, for instance, in cases where the right party contact information has not yet been confirmed.

A limited content message might sound something like this:

This is <name of person> seeking to communicate with <name of debtor> about an important matter. Please contact me at <123-456-7890> and reference account <account number>. Thank you.

PHOENIX, Ariz. – Empereon-Constar, a leading provider of end-to-end customer engagement and customer management solutions, is pleased to announce the promotion of Martha Hewitt to Vice President, Client Services Management. In her new role, Martha continues as a direct report to Travis Bowley, Chief Executive Officer with specific responsibility for ensuring client service satisfaction in a hyper growth business platform.

“Martha’s leadership has made a significant impact on the success of Empereon-Constar,” said Travis Bowley, Chief Executive Officer. “Her insights and commitment to Empereon-Constar will continue to be an asset, supporting our growth and facilitating our ability to provide the highest level of quality service to our clients. We look forward to her continued contributions.”

Martha will continue to lead development of administrative functions across the entire enterprise and to perform direct project management of all facility build outs. Her expanded responsibilities include oversight of client management, service and support, new client project launch management, new client set up, monitor corporate compliance, auditing, quality assurance and ensure client service satisfaction for both the current client base composed of ten plus years tenure and new Fortune 500, 100 client partners. She will work closely with senior management to develop and implement strategies that facilitate operational efficiencies, enhance execution of client services aimed at increased client satisfaction.

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Martha joined Empereon-Constar in 2010 and has over twenty-five years management experience across the entire consumer contact and BPO industry. Her experience, expertise, and knowledge are an invaluable resource to the Empereon-Constar portfolio of companies. Some of her significant achievements include Implementing a Compliance Platform including annual recertification for SSAE18 (SOCII) and PCI, facilitating and managing all facets of site design, build out, furniture, physical security, on time in budget. She oversaw launch of four (4) new operation centers in the last two (2) years, of which two (2) are mega sites housing 800 plus agents in 24×7 operations.

Please join us in congratulating Martha on this well-deserved promotion! 

About Empereon-Constar

Empereon-Constar is a leading business process outsourcing company providing end-to-end customer engagement and customer management solutions for New Sales Account Generation, Customer Care, Risk / Fraud Operations, Collections Operations, QA Agent Call Monitoring, Back Office Administration Support, and Tech Support across the entire customer account lifecycle. Our customized solutions, real-time analytics, and global footprint help our clients achieve their business goals.

Empereon-Constar’s full range of consumer and commercial services includes: lead generation, inbound / outbound sales, account origination, customer care, customer service, technical support, first party collections, recovery collections, credit bureau dispute management, fraud risk management, anti-money laundering, loan servicing and loan processing. Our world-class services and unique global strategy allows us to meet the needs of our client partners across multichannel (email, chat, phone) communication platforms, provide exceptional customer experiences, and consistently deliver world-class performance results, while maintaining the highest level of data security and compliance. For more information, please visit us online at www.empereon-constar.com or www.linkedin.com/company/22345663.

Empereon-Constar portfolio of companies: Empereon Marketing, LLC, Constar Financial Services, LLC, Empereon International, Constar International, and HQC International.

Editor’s note: While insideARM covered this development last Friday, Clark Hill did a nice job of describing the two other pending federal cases that challenge the constitutionality of the Bureau’s structure. The authors — Joann Needleman, Jane C. Luxton, and Thomas A. Brooks — have given permission to re-publish their article. 

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In an ongoing, high-profile legal debate, court opinions on the constitutionality of the structure of the Bureau of Consumer Financial Protection (“Bureau”) – previously known as the Consumer Financial Protection Bureau (“CFPB”) – continue to apply different legal analyses, positioning the issue for a possible U.S. Supreme Court resolution.  On June 21, 2018, in CFPB and The People of the State of New York v. RD Legal Funding, et al., Judge Loretta Preska of the District Court for the Southern District of New York ruled the Bureau’s creation as an independent agency with a Director removable only for cause, and not at will like other Presidential appointees, violates constitutional considerations of “history, liberty, and presidential authority.”  Rejecting a contrary January 31, 2018 en banc opinion by the D.C. Circuit in PHH Corp. v. CFPB, 881 F.3d 75, as non-binding in her Circuit, Judge Preska relied on Judge Brett Kavanaugh’s dissent in PHH in holding that the Bureau’s structure “violates Article II of the Constitution.”  Going even further, Judge Preska held this constitutional infirmity requires invalidation of Title X of the Dodd-Frank Act in its entirety, refusing to follow Judge Kavanaugh’s proposed, more limited remedy of severing the parts of the law that limited the President’s ability to supervise, direct, and remove the Bureau Director at will.   

The RD Legal case involved allegations that various corporate entities and their owner offered cash advances to consumers who had judgments entered in their favor.  Targeted included the National Football League (“NFL”) Concussion Litigation class members (“NFL Class Members”)  and individuals waiting for payouts from settlement agreements from the NFL or who qualify for compensation under the September 11th Victim Compensation Fund of 2001 (“VCF”).  The Bureau and the New York Attorney General, then Eric T. Schneiderman, claimed that the defendants misled these consumers into entering into agreements represented as valid and enforceable but, in reality, these payments functioned as usurious loans that were void under state law.  

If Judge Preska’s views hold, all actions by the Bureau since its inception could be in jeopardy.  This decision not only affects Bureau activities under Richard Cordray, but it could similarly invalidate actions taken by Mick Mulvaney, since he was appointed as Acting Director of the Bureau after Cordray’s departure in Fall 2017.

It would seem logical that the Bureau would appeal this decision to the Second Circuit Court of Appeals.  If the Circuit Court were to uphold Judge Preska’s decision, it would set up a circuit split that could be resolved only by the United States Supreme Court.  However, given the new direction of the Bureau under Mulvaney’s leadership, a Bureau appeal appears less certain.

Currently two other federal cases are pending that challenge the constitutionality of the Bureau’s structure. In CFPB v. All-American Check Cashing, the Federal District Court for the Southern District of Mississippi denied the Defendant’s Motion for Judgment on the Pleadings, relying on the D.C. Circuit’s holding in PHH.  However, in April 2018, the Fifth Circuit granted Defendants’ Certification of Questions for Interlocutory Appeal on one issue:   “Does the structure of the Consumer Financial Protection Bureau (CFPB) violate Article II of the Constitution and the Constitution’s separation of powers?”  If the Fifth Circuit disagrees with the D.C. Circuit, the issue would be primed for Supreme Court review.    

In CFPB v. Ocwen Financial Corporation et al., now before the Federal District Court for the Southern District of Florida, the Bureau recently filed a notice with the Court requesting the case be dismissed because Mulvaney, as the “Acting” Director, is removable at will under provisions of the Federal Vacancies Act and also because the Acting Director has ratified the decision to bring the Ocwen lawsuit; based on these facts, the Bureau argues, the Defendants’ constitutional challenge no longer applies.  However, Judge Preska specifically addressed the identical “ratification” argument by the Bureau in RD Legal and rejected it outright, holding:  

Here, the constitutional issues presented by the structure of the CFPB are not cured by the appointment of Mr. Mulvaney. As Defendants point out, the relevant provisions of the Dodd-Frank Act that render the CFPB’s structure unconstitutional remain intact. …Furthermore, Mr. Mulvaney cannot serve past June 22, 2018 (210 days after the vacancy arose), unless the President nominates a new Director, and then only until the new Director is appointed. Thus, there will likely be a new Director appointed in the coming months who will be subject to the for-cause removal provision. Therefore, the Ratification does not cure the constitutional deficiencies with the CFPB’s structure as the CFPB argues. Accordingly, the Court rejects the Notice of Ratification to the extent the CFPB argues that the Ratification renders Defendants’ constitutional arguments moot.

Lawyers for the Bureau have made the same ratification argument in All-American Check Cashing. Some have suggested that the Bureau’s filings in Owcen and All-American Check Cashing cases are an effort to avoid arguing the constitutionality of the agency’s structure.   The RD Legal decision may very well change that strategy, however.

In April, the Acting Director urged Congress to make the Bureau more accountable to the American people.  If the Bureau appeals the RD Legal decision, and in the interim a new Director is confirmed by the Senate, the Bureau will be forced into the political quagmire of advocating for one unaccountable director.  On the other hand, the court’s holding adds further questions to the Bureau’s authority, and enforcement targets are likely to continue challenging the Bureau’s authority outside the D.C. Circuit, based on constitutional arguments.  The continued uncertainty of the Bureau’s structure will likely reinforce calls for bringing a bi-partisan commission to this controversial agency.

WASHINGTON, D.C. – The Root Cause Coalition welcomed Credit Adjustments, Inc. (CAI) as its newest member, bringing the Coalition’s total membership to 53 organizations.

An industry leader specializing in health care and higher education accounts receivable management, CAI follows the motto: Delivering Respect. Collecting Results. One of only 11 small businesses nationally, CAI was awarded the contract with the Department of Education to assist in the recovery of student loan debt.  As a faith-based company, CAI is concerned about social issues in the communities they serve and invests in programs that help transform lives. Headquartered in Defiance, OH, CAI has more than 300 employees with additional offices in Toledo, OH, and Manchester, NH.

“The Root Cause Coalition welcomes Credit Adjustments into our membership. We have argued from the outset that we cannot achieve health equity in America without a broad commitment by the private sector to achieving our shared goals,” said Barbara Petee, Executive Director of The Root Cause Coalition. “Through its laudable efforts to lift up underserved communities in Toledo and throughout its service areas, CAI provides a model for businesses seeking to play a part in resolving social inequities.”

“We feel that it is part of our responsibility to invest in our communities, especially in programs that address the social determinants of health,” said Michael Osborne, Chairman of the Board, CAI. “We have seen first-hand the positive results of programs that improve the health and well-being of people in the community. That has led us to partner with like-minded organizations. Becoming a member of The Root Cause Coalition is one more positive step towards further collaboration and hopefully will encourage additional companies in the private-sector to join us.”

CAI becomes the tenth organization to join the Coalition in 2018, following the University of Pittsburgh Medical Center, Second Harvest Heartland, Local Initiatives Support Corporation, the Children’s Hospital of Michigan Foundation, the Alliance for Strong Families and Communities, Fairview Health Services, Aetna, the Center for Population Health at Cheshire Medical Center, and Enterprise Community Partners.

About the Root Cause Coalition

Established in 2015, The Root Cause Coalition is a non-profit, member-driven organization comprised of 53 leading health systems, hospital associations, foundations, businesses, national and community nonprofits, health insurers, academic institutions and policy centers. The Coalition works to achieve health equity through cross-sector collaboration in advocacy, education and research. For more information, visit www.rootcausecoalition.org and connect with us on Twitter, Facebook and LinkedIn.

In the last few weeks, several new lawsuits have been filed against the Department of Education (ED) by private collection agencies (PCA). This marks round 4 in the on-going quest for the unrestricted (large) debt collection contract.

Backing up slightly, last month insideARM reported that four firms had notified the Court of Federal Claims of their intention to protest ED’s request to dismiss the case of FMS v. USA as moot. On May 25, 2018, Judge Thomas C. Wheeler did infact grant the motion for dismissal and lifted the the February 26, 2018 preliminary injunction that prevented ED from recalling in-repayment accounts. — and so ended round 3 of the quest. 

Since that dismissal, ED did in fact send notice to the firms operating under 2015 Award Term Extentions (ATEs) notifying them that the government will be recalling their accounts on July 3. Those firms are FMS Investment Corp. (FMS), Account Control Technology, Inc. (ACT), GC Services Ltd. Partnership (GC), Continental Service Group, Inc. (ConServe), and Windham Professionals (Windham).

Last Friday, June 22, the fourth of those same firms — FMS, ACT, GC, and ConServe — filed a new complaint, which was consolidated with the others under FMS Investment Corp. v. The United States, No. 18-862. Most of the court documents are sealed. What we do know is that there will be a scheduling conference tomorrow morning to address a Temporary Restraining Order that has been filed to prevent the recall of accounts. 

A source close to the matter tells insideARM that many assume the accounts will be recalled from the five ATE holders and transferred to Pioneer Credit Recovery and Alltran, the two firms that won their appeal of ED’s sudden termination of their contract on February 27, 2015. As a result of that win, these two firms received an ATE on April 28, 2017, but have yet to see meaningful account volume. This recall and transfer would cure that issue.

Now, back to the curent complaint.

As justification for cancelling the Solicitation for unrestricted PCA services, ED said it would be changing its strategy, and instead of using 3rd party debt collectors for defaulted accounts, it would be implementing an “enhanced servicing” strategy, using its pre-default servicers. ED says this is a part of its NextGen solution. This is the source of the round 4 dispute.

Basically, here is the argument, in bullet points to make it easier to follow:

• As currently posted, NextGen is a two-part procurement: proof of concept, and then system delivery (at least a year from now; some say this timing would be very optimistic).
• The latest diagram describing NetGen clearly shows a separate default servicing component, which has not been included in the bidding detail.
• The requirements for post-default servicing are completely different from pre-default, and cannot be handled on the same system as it is currently designed. 
• The loan servicers ED expects to perform “enhanced servicing” receive their accounts prior to default. This means that, under federal rules, they are not subject to the Fair Debt Collection Practices Act (FDCPA).
• ED is already fighting with states over who is the rightful regulator of federal student loan servicing. It seems pretty clear that if ED makes a change that removes default servicing from the protection of the FDCPA, then states will step in and ensure their individual laws require equivalent protections.
• PCAs are experts at complying with both federal and state collection laws, and their systems are built specifically for this. As a result, they can do it for far less cost. The pre-default servicers would have to invest in building this capability from scratch.
• So. ED’s arguments simply make no sense.

insideARM Perspective

Although the complaints are sealed it seems the argument has moved from “ED, your criteria for selecting unrestricted contractors was flawed” to “ED, your justification for not needing large PCAs is crazy, and your proposed strategy of using ‘enhanced servicing’ is a) non-sensical and b) at best, years away from being practical.”

What’s also worth following is that we now have the interests of collection agencies (the veritable Davids, even though they are considered “large”) in this case colliding with the interests of student loan servicers like Nelnet, Navient and Sallie Mae (the Goliaths). Meanwhile, whatever folks want to say about collection agencies, these large servicers have their own issues with regulators.

This will continue. Forever.

In spite of the recognition of the en banc decision by the Court of Appeals for the District of Columbia in the case of PHH Corp. v. CFPB, which upheld the constitutionality of the structure of the CFPB, the U.S. District Court for the Southern District of New York has declared the CFPB’s structure UNconstitutional (emphasis added).

The case in question is CFPB and NY Attorney General v. RD Legal Funding, LLC, et al. You can download the 108-page decision here.

The CFPB and NYAG have accused RD Legal Funding (RD) of scamming consumers who accept cash advances while waiting for payouts from settlement agreements or judgments in their favor. The Government alleges that RD misled consumers into accepting what were actually usurious loans not allowed under state law.

What’s interesting about the decision for the ARM industry are not the details of this particular case, but whether the now disparate rulings regarding the constitutionality of the CFPB’s (now known as BCFP or Bureau) structure will have any actual effect on the future of the Bureau.

Judge Loretta Preska in RD notes her acknowledgement of the D.C. en banc ruling but says, “Of course, that decision is not binding on this Court.” She then went on to issue the most aggressive interpretation we’ve seen following the PHH case. 

The Court disagrees with Section V of Judge Kavanaugh’s opinion (a dissenting judge from the en banc review of the PHH case) wherein he determined the remedy to be to ‘invalidate and sever the for-cause removal provision and hold that the Director of the CFPB may be supervised, directed, and removed at will by the President.’ Instead, the Court adopts Section II of Judge Karen LeCraft Henderson’s dissent wherein she opined that ‘the presumption of severability is rebutted here. A severability clause ‘does not give the court power to amend’ a statute. Nor is it a license to cut out the ‘heart’ of a statute. Because section 5491(c)(3) is at the heart of Title X [Dodd Frank], I would strike Title X in its entirety.” (emphasis added)

That’s right – the Court says it would do away with Dodd Frank altogether – which means fully shutting down the Bureau. Supported by this argument, Judge Preska declared the CFPB ineligible to bring the current case and dismissed the agency as a party to the action.

The Court concluded, however, that the New York Attorney General may still pursue the case under the Consumer Financial Protection Act (CFPA) as well as New York law — so as a practical matter for RD, the case will move forward.

insideARM Perspective

What practical effect this decision will have is unknown. Will this court’s opinion with respect to the constitutionality of the Bureau be appealed? Under former CFPB Director Richard Cordray, it likely would have been. Under Acting (BCFP) Director Mulvaney? Perhaps there will be other priorities.

Just as Judge Preska in RD said she is not bound by the decision of the D.C. Circuit, so are other courts not bound by her ruling. Though one would certainly have to consider the effect of this decision on enforcement matters or other cases in the Second Circuit.

At a minimum, the decision could be used by those who would support those who seek to introduce a commission structure to the Bureau. When the D.C. Circuit Court of Appeals released its en banc decision in January 2018 upholding the constitutionality of the CFPB’s structure, House Financial Services Committee Chairman Jeb Hensarling (R-TX) – a long time critic of the CFPB, and also (at the time) a rumored potential Cordray replacement – released this statement:

“I am deeply disappointed with the court’s decision and hope the Supreme Court will review the ruling in short order. In the meantime, I take great solace in the fact that Mick Mulvaney can use his unchecked, unilateral powers to continue the agency’s transformation into one that will, as he said, “exercise [its] statutory authority to enforce the laws of this nation….execute the statutory mandate of the bureau to protect consumers’ and go no further.

Even though I have total confidence in Acting Director Mulvaney’s vision, the fact remains that no one person in America – especially someone who is unelected – should have the authority to unilaterally control whether working Americans can get a mortgage or a checking account. The Bureau’s consumer protection mission is important, but no government agency – no matter how well-intentioned – should be able to evade common sense checks and balances that are necessary for accountability.

Republicans stand ready to work with Democrats to reform the CFPB into a law enforcement agency that truly protects consumers and is accountable to the people’s elected representatives.”

Following yesterday’s decision in the RD case, Hensarling said this:

“The District Court for the Southern District of New York has confirmed what House Republicans have said all along, that the Bureau’s structure is unconstitutional.

By design the Bureau is arguably the most powerful and least accountable Washington bureaucracy in American history—and under then-Director Richard Cordray, it showed.  The Bureau infringed on the economic freedoms of consumers, limited their financial choices, increased their costs, and failed to hold managers accountable for widespread discrimination and abuse of its own employees. 

On June 8, 2017 the House of Representatives passed HR 10, the Financial CHOICE Act, which fixes the constitutional defects identified by the District Court by subjecting the Bureau to the control of the people’s elected representatives.”