The Federal Trade Commission announced Friday that it had agreed to a settlement with American Municipal Services Corporation and its owners, Lawrence Bergman and Gregory Pitchford (Defendants), for alleged illegal debt collection tactics.

Without admitting or denying any of the allegations made against them, Defendants agreed to the Order and settlement.

The full text of the Complaint can be viewed here .

The full text of the court’s Order can be viewed here.

The firm collects debts owed to municipalities, including court fines, parking tickets, and debts for utility bills and other services on behalf of more than 500 municipalities in Alabama, Arkansas, Illinois, Louisiana, Mississippi, Oklahoma, and Texas.

The FTC said the company used “Warrant Enforcement Division” or “Municipal Enforcement Division” letterhead that falsely suggested that the letter was coming from a government agency. The defendants sent consumers an initial warning letter, and then a “FINAL NOTICE” falsely claiming, among other things, that the consumer was subject to imminent arrest for nonpayment, that their driver’s license may be suspended for nonpayment, and that the debts would be reported to consumer reporting agencies.

The defendants, who also employ collectors who call people in English and Spanish, are charged with violating the FTC Act and the Fair Debt Collection Practices Act (FDCPA).

Under a proposed stipulated order, the defendants are prohibited from making misrepresentations to collect debts, including: that an arrest warrant has been issued, that consumers must act immediately to avoid arrest, that failure to respond may lead to suspension of a driver’s license, that the defendants’ communications are from a government entity with arrest power, and that consumers’ payment status will be reported to credit reporting agencies.

The order also prohibits the defendants from making unsubstantiated claims and violating the FTC Act and the FDCPA, and imposes a $350,000 judgment that must be paid within seven days. Recordkeeping requirements are imposed for a period of twenty (20) years, including the following for any business that any of the Defendants owns or controls directly or indirectly:

• Records of all consumer accounts and payment histories
• Records of all documents evidencing the existence of a warrant
• Records of all consumer complaints, whether received directly or indirectly, such as through a third party, and any response
• Records of all contracts signed with client-creditors
• Records of all collection letters used in the collection of debts
• Personnel records showing, for each person providing services, whether as an employee or otherwise, that person’s name, addresses, telephone numbers, job title or position, dates of service, and (if applicatble) the reason for termination
• All records necessary to demonstrate full compliance with each provision of the Order, including all submissions to the FTC

The Commission vote authorizing the staff to file the complaint and proposed stipulated final order was 2-0. The U.S. District Court for the Eastern District of Texas, Sherman Division, entered the order on March 21, 2017.

The FTC announcement noted that the Commission files a complaint when it has “reason to believe” that the law has been or is being violated and it appears to the Commission that a proceeding is in the public interest. Stipulated final injunctions/orders have the force of law when approved and signed by the District Court judge.

insideARM Perspective

If proven true, the practices described here would be a textbook example of – at best – inadequate policies, procedures, and training, and – at worst – blatant and intentional violations of the law.

One also wonders where the oversight was. This organization supported over 500 clients. Nobody asked to review the letters or procedures?

A Magistrate for the United States District Court in Indiana has recommended that a motion to dismiss a Fair Debt Collection Act (FDCPA) case be denied where a collector, sued for a false, misleading, or unfair attempt to collect a debt, argued that case should be dismissed because the letter in question included partial language from a prior Federal Trade Commission (FTC) Consent Order. The case is Pittman v. Jefferson Capital Systems, LLC, et.al. (Case No 16-cv-3250, U.S. District Court, S.D., Indianapolis).

A copy of the Magistrate’s Report and Recommendation can be found here.

Background 

Plaintiff incurred a debt to Keybank. The bank then sold the debt to Defendant Jefferson Capital Systems (Jefferson), which in turn enlisted Defendant First National Collection Bureau (FNCB) to collect the debt. 

FNCB sent a letter (the Letter), to the plaintiff in June 2016.

The Letter included the following language:

The law limits how long you can be sued on a debt. Because of the age of your debt, out client will not sue you for it. In circumstances, you can renew the debt and start the time period for the filing of a lawsuit against you if you take specific actions such as making certain payment on the debt or making a written promise to pay. You should determine the effect of any actions you take with respect to this debt. 

In order to aid your financial situation, as may be necessary, we could set up your account on a monthly payment plan.

We would like to extend the following discounted offer:

An approximately 80 % discount payable in 4 payments . . . .

We are not obligated to renew this offer.

Per the Magistrate’s Report and Recommendations:

“At the time FNCB sent the letter, the statute of limitations had run, meaning that Defendants could not sue to collect the debt. Moreover, the debt could not in the ordinary course be included on Plaintiff’s credit report because of its age.”

Plaintiff filed suit in November 2016, alleging that the Letter constitutes a false, misleading, or unfair attempt to collect a debt in violation of the FDCPA. Plaintiff’s claims rest primarily on two theories: that the Letter falsely implies that paying the debt would somehow aid Plaintiff’s financial situation and that Defendants’ decision not to sue for the time-barred debt is a matter of choice.

Defendants jointly moved to dismiss Plaintiff’s Complaint for failure to state a claim. Defendants contended that the Letter used judicially-approved language from a consent decree; that the language is not otherwise misleading as to the possibility of a lawsuit or potential financial benefit.

Plaintiff argued that the Letter did not mirror the Consent Decree and that even if it did, such would not be binding upon this Court. Plaintiff also argued that an unsophisticated consumer may find the Letter misleading as to the possibility of a financial benefit, such as an improved credit rating, from paying the stale debt.

The Magistrate’s Report and Recommendation 

The Report and Recommendation was authored by Mark J. Dinsmore, United States Magistrate Judge for the Southern District of Indiana. Judge Dinsmore wrote: 

As a general rule, the misleading or unfair nature of a collection letter is “a question of fact,” Zemeckis v. Global Credit & Collection Corp., 679 F.3d 632, 636 (7th Cir. 2012), and courts are expected to “tread carefully before holding that a letter is not confusing as a matter of law . . . because district judges are not good proxies for the unsophisticated consumer whose interest the statute protects,” McMillian, 455 F.3d at 759. “Nevertheless, a plaintiff fails to state a claim and dismissal is appropriate as a matter of law when it is ‘apparent from a reading of the letter that not even a significant fraction of the population would be misled by it. 

In January 2012, the FTC entered into a Consent Decree with a debt collector in an FDCPA case in the Middle District of Florida (United States v. Asset Acceptance, LLC, Case No. 12-cv-00182, M.D. Fla. Jan 31, 2012). 

In relevant part, the Consent Decree provides:. . . Defendant shall make the following disclosure(s), clearly and prominent, as applicable: 

D. …Defendant shall make the following disclosure(s), clearly and  prominent, as applicable:

2. When collecting on debt where the debt is passed the date for obsolescence . . .:

• The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it, and we will not report it to any credit reporting agency.

E. Defendant shall not make any representation or statement, or take any other action that interferes with, detracts from, contradicts, or otherwise undermines the disclosures required . . . above.

Various district court opinions in the Seventh Circuit have looked to the Consent Decree as providing some guidance on what may be appropriate under the FDCPA, but those opinions recognize that consent decrees are not binding on nonparties and are frequently of limited persuasive value.” 

However, Judge Dinsmore then determined: 

“The Court need not determine whether the Consent Decree warrants any deference or weight in this case because the Letter in fact fails to replicate the language used therein. Moreover, the differences between the Letter and the Consent Decree are instructive in demonstrating why Plaintiff’s Complaint states a plausible claim to relief. Specifically, the Consent Decree included the disclosure that “we will not report [the stale debt] to any credit reporting agency.” The Letter in this case, by comparison, contains no similar disclosure and instead provides that “[i]n order to aid your financial situation, as may be necessary, we could set up your account on a monthly payment plan.” 

Judge Dinsmore moved to a discussion of the arguments presented regarding whether the language in the letter could be deemed a violation of the FDCPA. 

“Defendants do not contest Plaintiff’s argument that the Letter’s promise of “aid” connotes an improved credit score, nor do they articulate any argument that paying the stale debt would improve Plaintiff’s credit report. The Complaint thus plausibly alleges that the Letter could mislead an unsophisticated consumer into paying a stale debt under the false impression that doing so will improve her credit report.

An unsophisticated consumer may plausibly find the suggestion of a discounted offer to “aid your financial situation” in paying an unenforceable debt to be misleading and counterproductive, in which case payment really provides no aid at all.

Plaintiff’s Complaint plausibly alleges that the Letter she received could be misleading, confusing, or unfair to the unsophisticated consumer. Accordingly, the Magistrate Judge recommends that the Court DENY Defendants’ Motion to Dismiss.” 

insideARM Perspective 

This case offers three lessons to the ARM industry.

First, relying on direction in a prior FTC Consent Decree (or any Consent Decree?) is not an iron-clad defense to future FDCPA action. What is interesting about that is the numerous suggestions from CFPB Director Richard Cordray that the ARM industry should study the prior CFPB Consent Decrees for guidance on future behavior. 

Second, even if and when one chooses to rely on a prior Consent Decree, it behooves one to EXACTLY mirror language from the prior Consent Decree. In this case Judge Dinsmore ruled that: “The Court need not determine whether the Consent Decree warrants any deference or weight in this case because the Letter in fact fails to replicate the language used therein.” 

Third, collecting on Out-of-Stat debt continues to be a potential landmine for collectors.

GENESEO, N.Y. – Coast Professional, Inc. (Coast) presented a check for $12,130.00 to the Ronald McDonald House Charities (RMHC) of Rochester at Coast’s Geneseo office today. Coast’s donation is a result of Coast’s dress down for charity program in which employees donate $20 or more for the option to wear jeans and business casual attire for the month. This donation includes the employee contributions from Coast’s Geneseo, NY and Henrietta, NY offices and the company match of up to $1,000 per office. 

The employees of Coast selected RMHC to be the recipient of the charity dress down program for the months of January and February as a result of the impact that RMHC has in the local area. The employees vote bimonthly for the charity that will receive the donations raised through the dress down program for the upcoming period. 

All proceeds from the event will benefit local families and help support RMHC’s mission to provide a home away from home for families that need to be near their children who are receiving health care in Rochester-area hospitals. 

“Coast’s dress down program was created to give back to the community through monthly donations and further establish our company culture of philanthropy,” stated Roxanne Baker, President of Coast. She continued, “Our staff have been the driving force behind this program, which continues to exceed our expectations. Coast is proud that we are able create a positive impact within the local area and establish an appreciation of charity throughout our organization. On behalf of Coast and our employees, we are proud to give this donation to the Ronald McDonald House Charities of Rochester.”

About Ronald McDonald House Charities of Rochester

Since 1990, Ronald McDonald House Charities of Rochester N.Y. Inc. has provided lodging and support for families of critically ill children receiving medical attention in Rochester’s health care facilities. Golisano Children’s Hospital is home to the House in the Hospital, which provides free lodging for families of children being treated in the hospital, and the Ronald McDonald Family Room, which welcomes pediatric patients and their families looking for a break from the hospital room. The local organization is part of a network of nearly 300 chapters in more than 50 countries. 

About Coast Professional, Inc.

Coast Professional, Inc. is an accounts receivable management company, dedicated to the respectful and ethical collection of higher education and government debt. Coast provides professional collection services to over 200 campus based colleges and universities, guaranty agencies, and government clients. Coast is a five time honoree on the Inc. 5000 list for American’s Fastest-Growing Private Companies provided by Inc. Magazine and in 2016, was recognized for the third consecutive year as one of the “Best Places to Work In Collections” by insideARM.com and Best Companies Group. Since 1976, Coast has worked closely with clients to increase recoveries by assisting consumers in resolving their financial obligations. Coast’s success is exemplified by exceptional recoveries, superior service, and dedication to the highest levels of compliance.

ROUND ROCK, Texas — In a recent ‘Dear Colleague’ letter (released on March 16, 2017), the U.S. Department of Education reversed its position on student loan collection fees related to past-due loans. Previously, the Department of Education had prohibited guaranty agencies from assessing collection costs to a defaulted borrower who enters into a repayment agreement within 60 days of receiving the initial notice of default.

This change of position by the Department of Education will not impact student loan borrowers working with TG. Under TG’s long-standing company policy, collection fees are not assessed to borrowers who agree to repayment, including rehabilitation of their loan, within 60 days of default.

“For more than 30 years, TG has not assessed collection fees when a student enters repayment or rehabilitates their student loan within the requisite period of time, and we have no plans to modify this policy,” said James Patterson, President and CEO. “Many student loan borrowers already have a difficult time managing their loan obligations. At TG, we want to help them successfully repay their student loans. Adding more fees does not help their situation.”

If any of TG’s borrowers have questions about their student loan, they are encouraged to contact TG at (800) 222-6297. TG’s call center is available Monday through Thursday (8 a.m. to 9 p.m. CT) and Friday (8 a.m. to 5 p.m. CT).

—

Editor’s note: See the following insideARM coverage of this matter. Great Lakes Higher Education Corp., parent of United Student Aid Funds has also said it would not charge fees to borrowers who agree to repayment arrangements within 60 days.

March 22, 2017: More Twists in ED’s ‘Dear Colleague’ Collection Fee Matter

March 21, 2017: Trump’s ED Dept Withdraws Position Prohibiting Collection Fees on FFEL Defaults

Our team at insideARM receives dozens of alerts every day pointing us to stories of interest to the ARM industry. Our inboxes are full each morning with TCPA cases, FDCPA cases, news regarding the CFPB, the FTC, and regulatory activity at the state level. We try to sort through those alerts and write articles on what is most relevant and important to our readers.

Every so often we see a story written elsewhere that cries out to be recognized in our publication and brought to the attention of the ARM industry.  This morning we saw an article published on Credit Strategy, a U.K. publication. The article, written by Amber Ainsley Pritchard, had the following headline: Collections staff frequently dealing with suicidal calls. This article should be mandatory reading for all ARM industry professionals.

The story discusses a recently published report, Vulnerability; a guide for debt collection. The report was published by the Finance and Leasing Association (FLA) and The UK Cards Association in partnership with Chris Fitch at the University of Bristol’s Personal Finance Research Centre.

From the Credit Strategy article:

“The research team behind the paper surveyed around 1,600 frontline collections and specialist staff from 27 UK lenders and debt collection firms. Across a 12-month period, 657 conversations were held between frontline collections staff and customers believed to be at serious risk of suicide. The report considered these findings at scale over a single year and the number of suicide disclosures, believed to be serious, were:

• 2-3 in a frontline collections team of 10
• 13 in a frontline collections department of 50
• 63 in a large call centre of 250 frontline staff
• 125 in a multi-site firm of 500 frontline staff

The findings in the paper have been used to develop 21 practical and commercially realistic steps to be shared across the credit industry for the benefit of customers, but have also been adapted for use in sectors such as utilities, telecoms, retail and government.”

The report is 98 pages. insideARM highly recommends that senior management, all members of HR and Q&A, as well as front line managers of ARM firms study it.  The report deals with much more than suicidal calls.

The key term in the report is “vulnerable.”   For purposes of the report, a “vulnerable” person may include individuals with mental health issues, suicidal thoughts, those dealing with some type of addiction, or those dealing with a terminal illness. The report offers suggestions for identifying a “vulnerable” person and how to support staff in dealing with the vulnerable.

Companies in the ARM industry are constantly recruiting, hiring and training staff. The call center industry typically has 100% turnover on an annual basis. In today’s “compliance centric” environment, the primary focus of new hire training and ongoing training is on the laws and regulations governing our industry. Once those skills are trained and engrained, the focus may shift to the soft skills necessary to create a positive customer experience during calls. But, is the ARM industry doing enough to train and support staff on dealing with the vulnerable consumer?

Collection calls are stressful for a consumer; particularly those calls that have been initiated by the collector. There is often a huge difference in tone when comparing outbound calls to inbound calls. An outbound call to a vulnerable person may trigger a negative response by that individual. Collectors need to be trained in identifying the issue and in how to properly respond to an elevated stress situation.

Bringing greater awareness of this issue to our call center agents and properly training those agents to deal with it something the industry needs to do. Let’s tackle this issue together. 

insideARM would like to hear from the ARM industry. What steps are being taken to recognize vulnerable consumers?  How is your company training your staff to deal with vulnerable consumers? How does your Q&A and call monitoring team deal with calls that were either well-handled or poorly-handled by staff?

If we get sufficient responses we will do a follow-up article where we share best practices.  Feel free to send your thoughts to me at: tbauer@insidearm.com. This may also be a terrific topic for an upcoming insideARM webinar. Mike Bevel, insideARM Director of Education – stay tuned.

BOCA RATON, Fla. – RSource announced today that Matt Vines and Lorrie Wood have been elevated to Co-Presidents.  Larry Reid, CEO of RSource stated, “Matt and Lorrie, as shareholders of RSource, have each provided oversight for the entire company for years now; their new title of Co-President isn’t so much a change in responsibilities as it is a recognition of their existing roles to do whatever it takes, wherever it is needed for RSource to provide superior solutions and service to our hospital clients.” 

Ms. Wood stated that she is “thrilled to play my new role and do it with Matt, since we both have a passion for client service and making claims pay.”  Mr. Vines added, “It’s an honor to be sitting at the table with my RSource partners; I am grateful for their confidence in me.”   

RSource also announced that Doug Gardner, previously with Mercy Health in Ohio, has taken on the role of Executive Vice President of Operations.  Mr. Reid stated, “Doug came to us with substantial provider experience and we want to leverage that experience across all our clients.”

About RSource

Specializing in third-party-payer receivables management for hospitals nationwide, RSource customizes solutions that maximize net back, accelerate cash, and enhance the patient financial experience.  Whether it’s providing programs for clinical or COB denials, motor vehicle accident, third-party-liability or workers compensation accounts, or providing its new claim authorization and assurance solution, AuthAssure™, RSource delivers cost-effective, high-value programs.  http://rsource.com/

This article previously appeared on the website of the Mercatus Center at George Mason University and is republished here with permission.

Problem

Drafted and enacted in response to the 2007–2009 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) became law in 2010. Dodd-Frank’s drafters hoped the law would repair the flaws in the financial system that had so painfully manifested themselves during the financial crisis. Rather than addressing the regulatory failures that led to the crisis, Dodd-Frank’s core solution was to shift decision-making from the private sector to regulators—the same regulators whose lapses had contributed to the crisis. Dodd-Frank has been costly in the short term, as any major regulatory overhaul would be. The financial industry and regulators have poured countless hours and dollars into implementing the new law. Of greater concern than these short-term implementation costs are Dodd-Frank’s potential long-run costs. Rather than averting crises, Dodd-Frank’s rejiggering of the financial system has created the preconditions for a future crisis, while inhibiting economic growth and dynamism.

Solution

Reinstituting precrisis financial regulation is not the answer. The precrisis financial regulatory system was broken, but Dodd-Frank is not the proper repair kit. The current rationale for financial regulation is misguided. A piece-by-piece assessment of Dodd-Frank to see what should be repealed is important, but it is not enough. To be effective, financial regulation also needs a perspective shift—a shift away from the current regulator-centric approach to a regulatory system that is grounded in the superior ability and incentives of market participants to collect, process, and act on information. An effective regulatory system punishes fraud, holds the institutions and people who take risks responsible for any resulting losses, avoids nonregulatory social objectives, forecloses bailout opportunities, embraces creative destruction, presumptively fosters innovation, and removes roadblocks to competition in the financial system. 

Explanation

Dodd-Frank is a sprawling law, many pieces of which are unrelated to any financial crisis—past or future. What unifies the disparate pieces is an unquestioning faith in regulatory omniscience and broad grants of power to these infallible regulators. The law calls on regulators to step in where the rest of us—individuals, firms, and nongovernmental institutions—are supposedly destined to fail, namely, to identify and address all systemic and a wide array of nonsystemic risks. In giving such heavy responsibilities to regulators, Dodd-Frank’s drafters overlooked the fact that precrisis regulators missed risks and that precrisis regulatory design contributed to the buildup of risk. By giving regulators an outsized role, Dodd-Frank suppresses the market’s intrinsic disciplining mechanisms and builds bailout expectations. Revisiting Dodd-Frank thus requires a marked change in perspective—a shift away from the comforting but ineffective “entrust the financial system to the skilled hands of the all-knowing regulators” approach to financial regulation, as well as a piece-by-piece substantive overhaul. 

Shifting the Regulatory Perspective

Dodd-Frank favors regulatory discretion over market-based regulation. It empowers regulators to use their discretion to make risk-management decisions for companies and individuals, who would otherwise respond to direction from their shareholders, customers, and creditors. Dodd-Frank not only embraces more prescriptive microprudential regulation for individual financial institutions, but it also adds another regulatory layer designed to target ill-defined and elusive “systemic risk.” This so-called macroprudential regulation allows government lawyers and economists to overrule a financial institution’s decisions—even if those decisions are legal and appropriate for the individual firm—for fear that they might endanger the broader financial system.

Financial regulators thus become central planners charged with carefully balancing the interests and risk-taking of all market participants, ensuring that firms do not fail, keeping the financial system functioning smoothly, and managing firms’ relationships with one another. This form of regulation turns regulators into allocators of credit: regulators decide who gets financed and who does not, which, in turn, affects how the economy develops, which consumer and business needs are met, and where innovation occurs. 

Regulators, driven by an evolving understanding of the inscrutable “systemic risk,” override the clear market signals through which consumers and Main Street businesses communicate their needs to financial service providers. Macroprudential regulation also displaces the market mechanisms that signal impending trouble at a financial company or in a financial sector. Regulators, who rely on imperfect, delayed information, try to foresee and forestall problems. The customers, shareholders, and creditors, who have access to more immediate information and would otherwise be monitoring the firms with which they interact, instead get the message not to worry. Regulators’ very public and costly efforts at managing the financial system and keeping risk-taking in check blunt market discipline and train market participants to look to the government for solutions. With deposit insurance and assurances of federal oversight in place, how often do you check your bank’s balance sheet? When the next financial crisis comes, the calls for government bailouts will be even louder than they were in the last crisis. 

The next crisis is likely to be worse than the last because Dodd-Frank concentrates so much power in the hands of a few regulators. If these powerful regulators make mistakes, exercise poor judgment, or miss a key market development (all of which are inevitable because they are human), the consequences will be far-reaching. Every firm that has reordered its business to satisfy a regulatory directive will find itself in trouble if that directive proves unsound. And once a crisis happens, widely applicable regulatory mandates, such as liquidity rules, could intensify it. By contrast, if firms and individuals retain decision-making authority, their errors will be contained and firms will not walk in lockstep with one another. 

That the framers of Dodd-Frank embraced enhanced regulatory authority and discretion as the answer in the heat of the crisis is perhaps understandable. The crisis hurt many people, and policymakers wanted to prevent similar harm in the future. In the years since the crisis, however, research has shown that regulatory errors lay at the heart of the crisis. Regulatory decisions drove firms and individuals to make poor choices that they otherwise would not have made. For example, Stephen Matteo Miller has demonstrated that regulation created a demand by financial institutions for mortgage-related, structured products by classifying them as safer than the underlying mortgages. Arnold Kling and Russell Roberts likewise point to the government’s inadvertent contributions to the financial crisis through misguided regulatory and housing policies. Lawrence White has highlighted the role that credit rating agency regulation—which forced firms to rely on government-credentialed credit rating agencies and kept competitors out—played in the crisis. 

Read the full whitepaper Revisiting Dodd-Frank, Mercatus Policy Primer, here.

This article was written by Ashley Taylor, Mary Zinsner, and Reade Jacob, and originally published on the Troutman Sanders LLP Consumer Financial Services Law Monitor. It is republished here with permission. 

On March 17, the U.S. Department of Justice submitted a brief to the D.C. Circuit asserting that the Consumer Financial Protection Bureau’s single-director structure violates the Constitution’s separation of powers in the CFPB v. PHH Corporation case.

CFPB’s Single Director Structure

The Democratic-controlled 111th Congress created the CFPB as part of the Dodd-Frank Act in the wake of the 2008 financial crisis. Since then, the CFPB has acted as a watchdog over the consumer-finance industry, including loans, credit cards, and other financial products and services offered to consumers. The CFPB is headed by a single director who is appointed by the president, with the advice and consent of the Senate, for a term of five years. Under the law, the director may only be removed by the president “for cause.”

Proponents of the bureau argue that it provides “a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace” and that Congress structured the agency under a single director, removable “for cause” only, in order to make the CFPB a powerful, centralized, independent force for protecting consumers in the financial marketplace.^[1]

Critics of the bureau argue that the CFPB is “destructive and dangerous” in large part due to the fact that the director is unaccountable to “Congress, the president, voters, and the democratic process.”^[2] Jeb Hensarling, R-Texas, congressman and chairman of the powerful House Financial Services Committee and vocal critic of the CFPB, has argued that the bureau’s unconstitutional structure has harmed consumers by allowing it to “act unilaterally to eliminate access to credit options and increase consumer costs.”^[3] 

PHH Case

The constitutionality of the bureau’s governing structure came to a head in October 2016 when a divided three-judge panel for the U.S. Court of Appeals for the District of Columbia held that the “for cause” removal of the bureau’s director is unconstitutional. In PHH Corp. v. Consumer Financial Protection Bureau, Circuit Judge Brett Kavanaugh wrote that “the CFPB, lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy.”^[4] The decision marked the first time that a court ruled against the CFPB on the constitutionality of the bureau’s structure.

Importantly, the three-judge panel opted not to dismantle the bureau in light of its unconstitutional structure, but instead remedied the defect by striking the “for cause” portion of the law. This ruling would allow the president to supervise the director, and remove him or her without cause.

The CFPB requested an en banc review of the October ruling before the entire D.C. Circuit. On Dec. 22, the solicitor general filed a brief supporting the CFPB request for en banc review, arguing that the court erred in its constitutional analysis. En banc review was granted, the earlier ruling vacated, and the D.C. Circuit set a hearing for May 24, 2017. By vacating the ruling, the D.C. Circuit removed the possibility of President Trump firing CFPB Director Richard Cordray during the pendency of the case on the basis of the three-judge panel’s ruling. The D.C. Circuit ordered full briefing from the parties, including the DOJ, on three specific issues pertaining to important constitutional and statutory issues at stake. 

The Trump Administration Weighs in on the Constitutionality of the CFPB

On Friday, March 17, the DOJ urged the entire D.C. Circuit to agree with the three-judge panel’s conclusion that the CFPB’s structure is unconstitutional. According to the DOJ’s brief, “a removal restriction for the Director of the CFPB is an unwarranted limitation on the President’s executive power.” The DOJ, however, stopped short of asking the court to eliminate the agency as a result of the constitutional defect. Instead, the DOJ sided with the three-judge panel’s decision that the proper remedy “is to sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.” The DOJ’s position that the D.C. Circuit should strike the “for cause” removal restriction rather than declare the entire agency and its operations unconstitutional is a signal that the Trump administration prefers a reformed CFPB rather than no CFPB at all.

The DOJ brief differs markedly from the brief of the U.S. Solicitor General filed pre-election under the Obama administration, which sided with the CFPB and asked the court to grant rehearing en banc. The DOJ brief is also at odds with the CFPB, which argues the agency structure is constitutional and urges a ruling affirming the constitutionality of the CFPB. It is the stark contrast between the position of the CFPB and DOJ provoking the most discussion on the DOJ brief. Indeed, the gap highlights the concerns addressed by the D.C. Circuit in its initial PHH opinion. The current structure of the CFPB leaves the director in an unfettered position of power, with its single director terminable only for cause and untouchable in its policy and enforcement decisions by the executive branch and Congress. The DOJ brief speaks out against the current structure and argues that it is unconstitutional. That, coupled with a judicial climate of concern regarding overreaching by President Trump with respect to executive order travel ban, makes the disparate views and interplay of several branches of government in the case a fascinating study on checks and balances.

What will be most disappointing to Republicans and President Trump, and which is entirely possible given the issues the D.C. Circuit requested to be briefed, is an outcome which avoids the constitutional issues and decides the case on the basis of the statutory provisions of the Real Estate Settlement Procedures Act (“RESPA”), the statute at issue in the underlying CFPB enforcement proceeding. Courts have long adhered to the doctrine of constitutional avoidance, which promotes disposition of cases on issues other than constitutional questions. It is entirely possible, if not very likely, that the court will decline to rule on the constitutional issues at stake and decide the case on RESPA or administrative law grounds. 

Regulatory Landscape Under Trump-Controlled CFPB

In the meantime, Cordray remains in office and it is business as usual at the CFPB. A decision by the D.C. Circuit to abandon the three-judge panel’s decision and leave the CFPB and statutory language in place will mean that there will be renewed calls for Trump to fire Cordray for cause. A Trump-appointed CFPB director will likely seek to dismantle the actions taken by the CFPB during Director Cordray’s tenure. It is also likely that a Trump-appointed CFPB director would elect to pursue a more laissez faire regulatory scheme than Cordray’s CFPB. For example, Rep. Hensarling has called for a Trump-appointed CFPB director to push reforms such as limits on class action “lawsuits wherein plaintiff law firms get fortunes but injured financial consumers get pennies.”

A Trump-controlled CFPB would largely leave a regulatory “vacuum” in the consumer financial services space. State attorneys general, however, have publicly indicated that they plan to significantly increase their presence and police the financial services industry even if the CFPB is weakened. It is therefore likely that, even under Trump’s CFPB, enforcement actions against companies in the financial services space will continue, but primarily at the state rather than the federal level.

This will be particularly true in states where attorneys general have historically been active in bringing consumer enforcement actions, such as New York, New Jersey, Illinois, Connecticut, Massachusetts and California. These state regulators would likely play an increasingly active role in enforcing state and federal law against companies in the consumer financial services space.

Over the last 15 years, state attorneys general have grown adept at collectively utilizing their resources to bring major multistate investigations. State attorneys general will look to build on this foundation, and we anticipate increased enforcement actions aimed at business in industries like debt buying and collecting, auto finance, service-member lending, payment processing, credit reporting, cybersecurity, information governance and privacy.

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^[1] Motion to Intervene By Attorneys General of the States of Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont and Washington, and the District of Columbia, Phh Corp. et. al. v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Jan. 23, 2017).

^[2] Jeb Hensarling, Op-Ed., How We’ll Stop a Rogue Federal Agency, Wall. St. J., Feb. 8, 2017, https://www.wsj.com/articles/how-well-stop-a-rogue-federal-agency-1486597413.

^[3] Press Release, Representative Jeb Hensarling, Chairman Hensarling: CFPB Mission Important, But No Bureaucracy Should Evade Checks and Balances (Mar. 17, 2017).

^[4]PHH Corp. v. Consumer Fin. Prot. Bureau , 839 F.3d 1 (D.C. Cir. 2016).

Yesterday insideARM reported that the Trump Administration’s Department of Education (ED or Department) sent a “Dear Colleague” letter withdrawing an Obama Administration “Dear Colleague” letter prohibiting the collection of fees from borrowers who defaulted on student loans held by guaranty agencies, but entered repayment arrangements within 60 days. (Whew.)

Democrats cried foul, saying this only adds insult to injury for strapped borrowers, and pads the pockets of big companies.

Today, it seems the story is even more complicated than it was yesterday.

The story originates from a class action case in the Seventh Circuit, Bible v. United Student Aid Funds. Now owned by Great Lakes Higher Education Corp. (Great Lakes), United Student Aid Funds (USAF) is the nation’s largest guaranty agency, and has been battling the Department of Education in this matter for two years.

Yesterday afternoon Bloomberg reported about a connection between a former advisor to ED Secretary Betsy DeVos and USAF; Taylor Hansen, the son of Bill Hansen. Until last Friday, Taylor was part of the DeVos inner circle. Until January 1 of this year, Bill Hansen ran USAF.

The reason cited by DeVos’s letter for this rule reversal is that it wasn’t subjected to public comment. It turns out that much more was at stake. USAF (and others) had regularly charged borrowers the collection fee in question. Over the years, this amounted to millions of dollars – per company. The Obama Administration’s Dear Colleague letter prohibiting the fee would not only end this revenue stream, but it would generate an administrative nightmare and potentially create huge liability for past fees already collected.

According to the Bloomberg report, both ED and Bill Hansen’s current firm denied that there has been any impropriety. The report also noted USAF’s position that the Obama ED letter unfairly changed longstanding Department policy that allowed the fees, and that the National Council of Higher Education Resources (an industry group) said that in 135 audits or reviews of companies like United, the Department had never identified the fee as a problem.

Later yesterday, The Washington Post reported that Great Lakes said USAF “will not charge people with past-due student loans high collection fees if they agree to make good on the debt.”

On March 17, 2017, a Federal Judge in North Dakota dismissed a lawsuit brought by the Consumer Financial Protection Bureau (CFPB) against a third-party payment processor and its top executives that alleged that the defendants had “systematically enabled” consumer lenders, debt collectors, and other clients to make unauthorized or illegal debits and charges from consumer bank accounts. 

The case is Consumer Financial Protection Bureau v. Intercept Corporation, d/b/a Intercept EFT, et.al. (Case No 3-16-cv-144, U.S. District Court, N.D.) 

The CFPB initiated this action on June 16, 2016. A copy of the complaint can be found here. 

Background

The CFPB filed the complaint against Defendants, Intercept Corporation, Bryan Smith, and Craig Dresser (collectively the Intercept defendants), containing two causes of action which alleged violations of the Consumer Financial Protection Act (“the CFPA”). Defendants filed a motion to dismiss the complaint under Rule 12 of the Federal Rules of Civil Procedure arguing that the Complaint failed to state a plausible claim. 

Key allegations in the complaint the court considered and accepted as true for purposes of the motion were:

• The CFPB is an independent agency of the United States set up to regulate the exchange of consumer financial products or services under federal consumer financial laws.
• The CFPB has the authority to pursue litigation to enforce those laws.
• Intercept is a third party payment processor in the business of processing the electronic transfer of funds through the Automated Clearing House (“ACH”) network on behalf of its clients.
• Bryan Smith is Intercept’s president and owns fifty percent of its shares.
• Craig Dresser is the CEO of Intercept and owns the remaining fifty percent of its shares.
• Intercept is a “covered person” and a “service provider” under the CFPA.
• Smith and Dresser are “related persons” under the CFPA because of their status as officers of Intercept. 

The CFPB also alleged the following: 

“As a third party payment processor, Intercept provides its clients with access to banks in order to facilitate the debiting and crediting of funds electronically from consumer bank accounts. Intercept’s clients include consumer lenders, auto title lenders, sales finance companies, and debt collectors. Businesses and individuals utilize third party processors like Intercept when they are unable to establish their own relationships with banking institutions or because it is more administratively convenient. 

Intercept’s clients are known as “Originators.” When an Originator sends a request to Intercept, Intercept conveys the request to its own bank, which is known as the “Originating Depository Financial Institution” or “ODFI”. The ODFI then forwards the debit or credit request to an ACH operator, who transmits the request to the recipient’s bank, known as the “Receiving Depository Financial Institution” or “RDFI”. The RDFI then credits or debits the recipient’s account and sends the money back to Intercept through the ODFI. Intercept remits the debit amount back to its client and charges the client fees for its services.

The CFPB alleged in the complaint that Intercept ignored warnings from ODFIs of possible illegal activity by its clients, of debits unauthorized by consumers, of potential indicia of fraud by its clients, of discrepancies in dates and amounts debited, and of other possibly suspicious activity. 

The complaint also alleged that if an ODFI raised concerns or terminated its relationship with Intercept, Intercept would find another ODFI to process transactions for the same clients who were the subject of the concerns. 

The CFPB also claimed that Intercept did not properly investigate when ODFIs expressed concerns about high return rates for some of its clients. 

Finally, the CFPB alleged that Numerous consumers had complained about Defendants’ processing activities and that “Despite all of these warning signs from ODFIs and consumers, Defendants continued payment processing for these clients without investigation or consequence.” 

The Court’s Discussion and Holding

The court’s decision was rendered by the Honorable Ralph R. Erickson, District Judge United States District Court. Judge Erickson determined that the Motion to Dismiss the Complaint should be GRANTED and the case DISMISSED WITHOUT PREJUDICE.

A copy of the order granting summary judgment can be found here. 

Judge Erickson wrote: 

“To survive a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face. Factual allegations must be enough to raise a right to relief above the speculative level[.]” In other words, the facts alleged in the complaint must be plausible, not merely conceivable.

A close review of the complaint yields a conclusion that the complaint does not contain sufficient factual allegations to back up its conclusory statements regarding Intercept’s allegedly unlawful acts or omissions. While the complaint indicates that Intercept was required to follow certain industry standards, it fails to sufficiently allege facts tending to show that those standards were violated. Although the complaint contains several allegations that Intercept engaged in or assisted in unfair acts or practices, it never pleads facts sufficient to support the legal conclusion that consumers were injured or likely to be injured. Nothing in the complaint allows the defendants or the court to ascertain whether any potential injury was or was not counterbalanced by benefits to the consumers at issue. 

The complaint lacks factual allegations that would support a finding that Intercept interfered with consumers’ ability to understand the terms of their dealings with Intercept’s clients or that would support a finding that Intercept took unlawful advantage of consumers. 

A complaint containing mere conclusory statements without sufficient factual allegations to support the conclusory statements cannot survive a motion to dismiss. The defendants’ motion to dismiss, under Rule 12(b)(6) of the Federal Rules of Civil Procedure, for failure to state a claim is granted.” 

insideARM Perspective

If the case seems somewhat familiar, it is because the CFPB has previously filed an action against a third party payment processor.  

On April 8, 2015 insideARM wrote about a CFPB enforcement action involving “shady debt collectors” in Buffalo. But, in that proceeding the CFPB also named a number of payment processors and a voice broadcasting service as defendants for “enabling” the debt collectors in their scheme. Those defendants were charged with “providing substantial assistance to the Debt Collectors’ unfair or deceptive conduct.” 

Earlier this year, on January 17, 2017, insideARM wrote about one of the defendants in that earlier case “punching back” against the CFPB. The company, Pathfinder Payment Solutions, Inc. (Pathfinder) filed a motion for Rule 11 Sanctions against the Bureau for including them in that action. That case is still pending. 

There are two other interesting items from the Intercept case. First, the court dismissed the case without prejudice.  The CFPB could simply file an amended complaint. On the other hand, the CFPB could file an appeal of Judge Erickson’s decision. 

Second, in their motion to dismiss, Intercept also argued the case should be dismissed because of the “unconstitutional structure” of the CFPB. However, Judge Erickson wrote: 

“The court deems it unnecessary to decide the issue of the constitutionality of the CFPB at this time. Should the CFPB decide to renew this action in this court or another court, the issue may be addressed appropriately at that time.”