JACKSONVILLE, Fla. — Stellar
Recovery, Inc. has adopted new core values that will shape the culture of the
company. The 4 C’s, which stands for Compliance, Customer Service, Communication,
and Collaboration anchors every aspect of business and embodies the commitments
that every employee working for Stellar must embrace. From orientation to floor
wide meetings, the newly accepted values have become the mantra of the company.
Every employee has the responsibility of shaping the company’s culture by
practicing the values each day.

Compliance is the number one value for Stellar. Stellar strives
for every customer interaction to meet compliance expectations. We want to
create a compliance centric environment, ultimately eliminating many risks that
cloud the industry.

Customer Service is key to the continued success of the company. While
we drive collections, it is important that every customer interaction is
handled in a professional manner. The customer experience is a key component in
retaining and attracting new clients.

Communication is important to continued growth internally and
externally. Cascading communication allows every employee to be aware of
changes, victories, and challenges facing the company. Open communication
creates an environment of mutual trust and respect on all organizational
levels.

Collaboration allows for employees to feel invested in the company,
adding value to how our employees feel about their job and the company. It
fosters an environment of learning and teaching, which will help develop future
leaders for a growing organization.

About Stellar Recovery

Stellar
Recovery, Inc is a collection agency
based in Jacksonville, Fl. and is dedicated to excellence in the accounts receivable
industry by meeting and exceeding our client’s expectations. Stellar Recovery
leverages the use of technology to drive effective and efficient collections,
while eliminating risks. Visit our website at www.stellarrecoveryinc.com or contact
us at 904-438-2500.

The
entire consumer financial industry has been buzzing about yesterday’s U.S. Court
of Appeals decision
in PHH Corporation v. Consumer Financial
Protection Bureau, wherein the D.C. Circuit Court ruled the CFPB’s
structure to be unconstitutional.  For
the debt collection industry, however, the Court’s firm ruling on how the
CFPB’s enforcement actions are subject to the statute of limitations and how new
interpretations of law cannot be applied to conduct that predates said
interpretations could be much more impactful. What’s more, the ruling opens the
CFPB up to potential legal challenges over past enforcement actions.

Unconstitutional Structure

In one of
the few cases where a financial services corporation challenged the CFPB’s
enforcement action, PHH’s legal challenge proved to be successful.  The Court vacated the CFPB’s $109 million
order against the mortgage lender and remanded the case back to the CFPB to
apply the law as the Court instructed in its 101-page ruling.

The Court
found the Dodd-Frank statutory scheme that created the CFPB unconstitutional,
holding that Congress created the CFPB as an independent agency without any
checks on its power. Historically, to be constitutional, administrative
agencies must either have a director who can be removed at will by the
President—“the official who is accountable to the people and who is responsible
under [the Constitution] for the exercise of executive power”—or have a
multi-member board comprised of “experts appointed by law and informed by
experience” from both major political parties. 
As the Court noted, the original blueprint for the CFPB, as envisioned
by “then-Professor, now-Senator, Elizabeth Warren,” had a traditional multi-member
board at the helm.  The Executive Branch’s
proposal also included a similar multi-member structure.  However, the final version established an
independent agency with a single Director removable only for cause.  This is the structure the Circuit Court found unconstitutional.
Per the ruling, the CFPB is “lack[ing] that critical check” that prevents “arbitrary
decision making” and protects “individual liberty.”

The Court
solved the constitutional flaw by deleting Dodd-Frank’s “for-cause” removal
language, thereby giving the President the power to “check” the CFPB through
the “at will” removal of the director.

The concern
for the financial services industry is that this “check” does not change the
ability of the CFPB to wield “vast power over the U.S. economy.” In fact, the Court-fashioned
remedy presents problems of instability in the enforcement and implementation
of agency initiatives as a result of inconsistent policy objectives between directors.  It is conceivable that every four years there
will be a new CFPB Director with different philosophies and goals for the
agency. For the time being, we can expect Director Cordray to remain at the
helm with no major shift in CFPB policy or goals, especially if the Democrats
remain in the White House.

Statutes of Limitations and Retroactive
Application

The Circuit
Court’s holdings concerning the application of a statute of limitations period
on CFPB enforcement actions and the retroactive application of new interpretations
of law are perhaps even more important for the debt collection industry in the
near-term.

First, the
Circuit Court dismissed as “absurd” the CFPB’s argument that, “under
Dodd-Frank, there is no statute of limitations for any CFPB administrative action to enforce any consumer protection law” (emphasis in the original).  The Court, citing a long line of Supreme Court
cases upholding the importance of a statute of limitations in civil penalty
provisions, held CFPB enforcement actions are confined to the statute of
limitations period in all 19 statutes the CFPB enforces.  In PHH’s case the Real Estate Settlement
Procedures Act (the statute the CFPB alleged PHH violated) has a three year
statute of limitations period.  In the
case of a Fair Debt Collection Practices Act (FDCPA) enforcement action, the
statute of limitations would be one year as proscribed by the statute.  Therefore, going forward, the CFPB cannot
punish a debt collector or debt buyer for FDCPA violations that occurred over a
year prior to the inception of the enforcement action.

Second, the
Court held that the CFPB violated PHH’s due process rights by retroactively
applying a new interpretation of a well-settled principle regarding captive
reinsurance arrangements  – “captive reinsurance
arrangements were lawful so long as the mortgage insurer paid no more than
reasonable market value to the reinsurer for reinsurance actually
furnished.”  PHH, in good faith,
developed its captive reinsurance practices based on this principal, reflected
in the Department of Housing and Urban Development’s “longstanding
interpretation of the law.”  However, in
2015 the CFPB “decided that captive reinsurance agreements were prohibited and
applied its new interpretation [] retroactively against PHH based on conduct
that had occurred as far back as 2008.” 

The
Circuit Court first held the CFPB’s new interpretation of the statute to be
wrong and sent the matter back to the CFPB to apply the correct and “well-settled
principle” regarding captive reinsurance arrangements to PHH’s actions.  In so ruling the court stated, “The CFPB
obviously believes that captive reinsurance arrangements are harmful and should
be illegal. But the decision whether to adopt a new prohibition on captive
reinsurance arrangements if for Congress and the President when exercising the
legislative authority.  It is not a
decision for the CFPB to make unilaterally.”

The
Circuit Court also found unconstitutional the CFPB’s retroactive application of
its new interpretation to PHH’s actions taken before the company knew of the
CFPB’s interpretation.  The Court held
this retroactive application was a violation of the Due Process Clause of the
Constitution, a deeply rooted principle in our history, which precludes the government
from applying new rules or laws retroactively to actions that occurred prior to
a new rule or law.

The CFPB
has advanced new interpretations of FDCPA provisions in many of the enforcement
actions and Consent Orders against debt collectors, debt buyers, and debt
collection law firms.  For example, in CFPB v. Frederick J. Hanna & Associates, PC the CFPB’s complaint alleged
a lack of meaningful attorney involvement under the FDCPA.  After losing a motion to dismiss on different
grounds, Hanna entered into a Consent
Order demonstrating the CFPB’s interpretation that debt collection law firms
should have in hand all the evidence necessary to prove the existence of a debt
prior to filing a law suit to recover the debt—a requirement that did not exist
in the FDCPA, in the Georgia court rules, or even under the ethical code of
conduct for attorneys.  This CPFB
interpretation also appears in its Outline of Proposed
Debt Collection Rules and Alternatives Considered. (Notably, the Seventh
Circuit recently dismissed an FDCPA claim alleging a violation against a law
firm for not having sufficient information to proceed to trial after filing a
collection lawsuit in St. John v. Cach,
LLC, 2016 U.S. App. LEXIS 9117 (7^th Cir. 2016).) 

One of
the major concerns raised at the SBREFA panel for debt collection rulemaking
was the possibility that the CFPB would attempt to apply its pending debt
collection rules retroactively.  This PHH
decision confirmed that the CFPB should only apply new regulations to accounts
not opened until after the new regulation takes effect.

The
Circuit Court declined to “consider the legal ramifications” of its decision on
past rules and enforcement actions, but opened the door for challenges of past
CFPB rules and past agency enforcement actions.  The Court explained in footnote 19 that other
agencies after losing constitutional challenges have “without major tumult”
been able to “work though the resulting issues regarding the legality of past
rules and past enforcement actions.” This footnote empowers companies (perhaps
even those who entered into consent orders) to consider a legal challenge to
any adverse action by the CFPB because at the time of CFPB action the agency
was structured unconstitutionally.

Following
the release of the Court’s ruling, the CFPB announced that it is “considering
options for seeking further review of the Court’s Decision.”  The first step would be a review by the
entire D.C. Circuit Court.  If denied,
the CPFB can petition the U.S. Supreme Court to hear the case.  

Yesterday, the Consumer Financial Protection Bureau (CFPB) announced that
it had entered into a consent order with Navy Federal Credit Union (NFCU). The
CFPB had taken action against NFCU for making false threats about debt collection to its members,
which include active-duty military, retired servicemembers, and their families.
The CFPB also claimed that NFCU had unfairly restricted account access when
members had a delinquent loan.

NFCU is correcting its
debt collection practices and will pay roughly $23 million in redress to
victims along with a civil money penalty of $5.5 million. A copy of the consent
order can be found here.

“Navy Federal Credit
Union misled its members about its debt collection practices and froze
consumers out from their own accounts,” said CFPB Director Richard Cordray, in
a release detailing the settlement. “Financial institutions have a right to
collect money that is due to them, but they must comply with federal laws as
they do so.”

NFCU is a federal credit
union based in Vienna, Va. Membership in the credit union is limited to
consumers who are, or have been, U.S. military servicemembers, Department of
Defense civilian employees or contractors, government employees assigned to
Department of Defense installations, and their immediate family members. It is
the largest credit union in the country, with more than $73 billion in assets
as of December 2015.

CFPB Findings

The CFPB investigation
found that Navy Federal Credit Union deceived consumers to get them to pay
delinquent accounts. The credit union falsely threatened severe actions when,
in fact, it seldom took such actions or did not have authorization to take
them. The credit union also cut off members’ electronic access to their
accounts and bank cards if they did not pay overdue loans. Hundreds of
thousands of consumers were affected by these practices, which occurred
between January 2013 and July 2015. The practices violated the Dodd-Frank Wall
Street Reform and Consumer Protection Act.

Specifically, the CFPB
found that Navy Federal Credit Union:

• Falsely
  threatened legal action and wage garnishment
• Falsely
  threatened to contact commanding officers to pressure servicemembers to repay
• Misrepresented credit consequences
  of falling behind on a loan
• Illegally froze members’ access to
  their accounts

The Consent Order

Under the terms of the order,
Navy Federal Credit Union is required to:

• Pay victims
  $23 million
• Correct debt collection practices
• Ensure
  consumer account access
• Pay a $5.5
  million civil money penalty

insideARM Perspective

It is interesting that the
announcement of the latest CFPB enforcement action comes on the same day as the
United States Court of Appeals for the D.C. Circuit decision determining the
structure of the CFPB is unconstitutional. See In Long Awaited Decision, DC Court of Appeals Rules CFPB Structure
is Unconstitutional.

It is not surprising that the
CFPB closely examined collection practices at NFCU. Treatment of servicemembers by creditors and
collectors is high profile. Just last
week insideARM wrote about another
significant case involving collection activity against servicememembers. That
case involved a settlement between 49 State Attorneys General and USA Discounters.

Our servicemembers deserve better.
They deserve to be treated in a fair and compliant manner.

In a decision filed on October 3, 2016,
a United States District Court Judge in Minnesota has ruled that a company
licensed to do business as a debt collector, servicing a debt that is not yet
in default, is not a “debt collector” under the Fair Debt Collection Practices
Act (FDCPA).

The case is Diaz v. Viking Client Services, (Case No. 16-cv-336 U.S. District
Court, District of Minnesota). A copy of the Memorandum and Order can be found here.

Background

On November 20, 2015 Plaintiff Rosendo
Diaz (Diaz) rented a car from Avis Budget Group, Inc. (Avis). The rental
agreement Diaz signed required him to return the car “in the same condition
[he] received it in . . . .” Diaz was responsible “for all loss of or damage to
the car regardless of cause, or who, or what caused it.” Diaz agreed to pay any
“administrative fee” associated with damage to the car, a “violation of the
agreement,” or attempts to collect on past due amounts. The agreement stated: 

If you do not pay all amounts due to us under
this agreement upon demand, . . . including . . . for loss of or damage
to the car . . . you agree to pay a late charge of 1 1/2% per month on
the past due balance or the highest rate permitted by applicable law . . .
.

Diaz returned the car on November 23,
2015 and claimed that it was “free of any damage or defect.” However, according
to Diaz, after he returned the vehicle “Avis charged him for damage he
allegedly caused to the vehicle . . . .”

Avis uses Sedgwick Claims Management
Services, Inc. (Sedgwick) to collect debts related to damaged vehicles.
Sedgwick then engaged Viking Client Services (Viking) to collect on Diaz’s
alleged debt.

Diaz alleged that Viking is a
“consumer and commercial debt collection agency”, licensed to do business as such
in Minnesota.

On December 29,
2015, Diaz received a letter from Viking stating that Diaz owed $721.27 for
damage to the vehicle he rented in November. In relevant part, that letter
stated:

Viking provides claims administration services for Avis. … The
vehicle you rented from Avis was damaged on 12/08/15 while in your possession.
Per your rental contract, you are responsible for the costs associated with the
damage regardless of fault.”

It went on to
state that the damages amounted to $607.72, the loss of use charge was $13.55,
and also assessed a $100 “administrative fee.” The letter provided Diaz with
information about how to pay the amount he allegedly owed and how to contact
Viking with any questions. The words “debt” and “default” were not used in the
letter and Viking did not identify itself as a debt collector.

There is no
evidence, nor even any allegation by the plaintiff, that at any time before
this letter was sent to Diaz, Avis, Sedgwick, or Viking made any demand that he
pay for the alleged damage.

Diaz filed this
action against Viking under the FDCPA asserting that the December 29 Letter was
“false, deceptive, misleading, unfair, and unconscionable,” and did not contain
the required “mini-Miranda warning.”

Diaz also
believes Viking sent substantially similar letters to others under similar
circumstances and sought to bring the matter as a class action.

Viking moved to
dismiss, arguing that Diaz failed to state a claim because Viking was not a
“debt collector” and Diaz’s debt was not “in default.”

The Court’s Decision

The motion to
dismiss was heard by the Honorable Susan Richard Nelson, United States District
Judge. Judge Nelson agreed with the Viking and dismissed the complaint without
prejudice.

Judge Nelson
wrote:

“The parties’ arguments center on whether Viking is a “debt
collector” subject to the FDCPA. That question in turn requires assessing
whether the debt at issue was “in default” or treated as if it were.

A “debt collector” is “any person who uses any instrumentality of
interstate commerce or the mails in any business the principal purpose of which
is the collection of any debts, or who regularly collects or attempts to
collect, directly or indirectly, debts owed or due or asserted to be owed or
due another.” 15 U.S.C. § 1692a(6). However, explicitly excluded from the
definition of “debt collector” is “any person collecting or attempting to
collect any debt . . . to the extent such activity . . . concerns a debt which
was not in default at the time it was obtained by such person.” 15 U.S.C. §
1692a(6)(F)(iii) (emphasis added).

Whether an entity is subject to the FDCPA as a debt collector
depends on the default status of the debt at the time it was obtained. A person
who obtained the debt at issue when the debt was not in default cannot be
liable as a debt collector under the FDCPA.”). Additionally, a defendant is not
a debt collector if the defendant is servicing, rather than collecting, the
plaintiff’s debt.

The
FDCPA does not specifically address when a debt is in default, or acquired as
such, but case law provides some guidance. Generally, a debt does not go into
default at its inception or
immediately after payment first becomes due.

Here, Diaz conflates the act of incurring a debt (i.e., violating
the Rental Agreement) with a debt being in default. Returning a damaged vehicle
might violate the Rental Agreement and create an obligation to pay (i.e., a
debt), but that is a distinct consideration from whether that debt is in
default. This distinction is clear in the terms of the Rental Agreement. Before
imposing any “penalty” for nonpayment (i.e., treating the debt as in default),
Viking had to first notify Diaz of the claim. There is no evidence, or even an
allegation, that Avis, Sedgwick, or Viking ever notified Diaz of the claim
before the December 29 Letter. Under these circumstances, Diaz could not
simultaneously incur the alleged debt and have that debt be in default.

Thus, the Court holds that Viking did not acquire Diaz’s alleged
debt in default.”

Similarly, Judge
Nelson also determined that Viking never treated Diaz’s debt as if it were in
default.

Judge Nelson
wrote:

“An entity is a debt collector under the FDCPA if it treats the
debt it acquired as if it were in default.

Factors
to consider when deciding whether a debt was treated as in default include:

The number of times a creditor has requested payment, the time
that has elapsed since the first request, the urgency of the language used in
those requests, the debtor’s knowledge that she has been referred to a third
party, the creditor’s internal policies, any representations made by or on
behalf of the creditor . . . about how it collects debts, and apparent attempts
by the creditor or third party to circumvent the FDCPA’s consumer protections.

The fact that Viking is a licensed debt collector is not
dispositive of whether, in this instance, it acted in that capacity. The
December 29 Letter explicitly stated that Viking’s role was that of a claims
administrator. In that capacity, Viking informed Diaz of the claim that he
returned the vehicle damaged and the amount he was obligated to pay as a
result.

In short, even taking Diaz’s allegations in the most favorable
light to him, he has not plausibly alleged that Viking treated his debt as if
it were in default. Viking sent a single letter to Diaz, approximately one
month after he returned the vehicle. That letter, for the first time, notified
Diaz of Viking’s claim that he damaged the vehicle and owed approximately $700.
The letter did not contain the words “debt” or “default,” nor did it employ any
of the aggressive, urgent language typically found in dunning letters. Viking
did not identify itself as a “debt collector,” but instead made clear that it
was providing claims administration services for Avis. Before the December 29
Letter, Diaz received no communications whatsoever from Avis, Sedgwick, or
Viking about the claim. Nor did he receive any further communications about the
claim after he disputed it.”

insideARM Perspective

This is a very
interesting case for ARM entities doing any type of servicing of pre-default accounts.  The FDCPA exception in the definition of a
“debt collector” for a person working on debt “not in default” is clear and
murky at the same time. This opinion provides excellent reasoning and sheds
light on the subject.

This exception is
most often utilized by ARM companies providing pre-charge-off, “first party”
services. In fact, that exception is the underlying basis for the Federal Trade
Commission’s May 23, 2002 “DeMayo” Opinion letter on first party servicing.
(See our August 10, 2015 article on the DeMayo opinion.)

This exception is
also often utilized in the healthcare receivables arena with ARM companies
functioning as Extended Business Offices for healthcare providers. That work is
also often performed in a “first party” capacity.

However, in this
case the work performed by Viking was done, not in a first party capacity, but
in the Viking name.  This is a very
positive case for the ARM industry.

The Supreme Court of the United States (SCOTUS) on Tuesday
agreed to consider an appeal in a case that should provide legal clarity for
the ARM industry. The case, Johnson v.
Midland Funding, LLC, considers whether knowingly filing a
proof of claim on out-of-statute debt is a violation of the Fair Debt
Collection Practices Act (FDCPA).

The case involves a dispute between Aleida Johnson and
Midland Funding, LLC. Midland filed a proof of claim on an account of Johnson’s
that was outside the applicable statute of limitations. Attorneys on both sides
of the case had filed petitions for a writ of certiorari seeking SCOTUS review.

SCOTUS, in granting
certiorari, says it will consider two specific questions:

1. Whether the filing of an accurate proof of claim
   for an un-extinguished time-barred debt in a bankruptcy proceeding violates the
   FDCPA.
2. Whether
   the Bankruptcy Code precludes the application of the FDCPA to the filing of an accurate proof of
   claim for an unextinguished time-barred debt.
   

SCOTUS will hear arguments and is expected to rule on the case by the end
of June 2017.

insideARM Perspective

SCOTUS agreeing to review this case is a good development,
and their eventual ruling should provide clarity to the ARM industry and
consumers alike. insideARM has written
recently about Johnson and
similar cases, which have led to varying opinions in Courts of Appeals.

Before the Johnson
case was taken up by SCOTUS, the Eleventh Circuit Court of
Appeals determined that filing a bankruptcy court proof of claim on a
time-barred account was an FDCPA violation.

In a similar case, Owens
v. LVNV Funding, LLC, the Seventh Circuit joined
with the Eighth Circuit Court of Appeals in rejecting the notion that filing
such proofs of claim violated the FDCPA.

insideARM provides an FDCPA case law grid that
highlights many significant FDCPA cases. The grid can be found here. The grid is
updated on a monthly basis, courtesy of Joann Needleman from the Clark Hill law
firm. A cursory review of the grid will show several cases relating to the
filing of proofs of claim, with inconsistent decisions from the courts.

The lesson? Until SCOTUS provides clarity, any debt
collector filing proofs of claim on accounts that may be outside the applicable
statutes of limitation is engaging in risky conduct.

CHATTANOOGA, Tenn. — In a continuing effort to encourage employees, to live
healthier and well-balanced lives, North American Credit Services recently celebrated
the company’s 7th annual WALKtober employee wellness fair, at the Chattanooga,
Tennessee headquarters.

Employees were provided a healthy lunch, chair massages and personal
health information and assessments; including mammograms provided in the
privacy of a mobile medical bus. The event coincided with the company’s quarterly
blood donation drive and annual ‘Go Pink’ celebration in support of increased
awareness of breast cancer and regular wellness checks.  “NACS wellness events such as WALKtober creates
an opportunity to engage our employees while here at work, in hopes of
improving overall personal health and well-being.” states NACS Chairman and CEO
Dallas Bunton, Sr.

NACS began its operations in 1981 with less than 20
employees, specializing in the professional collection of healthcare
receivables. Today, NACS along with its affiliate company, Medical Services,
Inc. is a full service healthcare receivables management, company; comprised of
multiple specialized divisions with a healthy, growing workforce of 300 plus
employees.

In an opinion filed today a federal appeals court ruled the
structure of the Consumer Financial Protection Bureau is unconstitutional.  The case is PHH Corp. v. Consumer Financial
Protection Bureau, United States Court of Appeals, D.C. Cir., Case No.
15-cv-01177. 

PHH, a mortgage company in Mount Laurel, N.J., wanted the
U.S. Court of Appeals for the District of Columbia Circuit to vacate a June
2015 enforcement ruling by the Consumer Financial Protection Bureau (CFPB) that
said PHH violated anti-kickback provisions in Section 8(a) of the Real Estate
Settlement Procedures Act (RESPA) and had to give up $109 million in what CFPB
Director Cordray had said were ill-gotten mortgage reinsurance premiums. 

Among other issues, the case called into question the CFPB’s
structure and authority.

On April 19, 2016 insideARM published an article that described the case and the
arguments presented.

A copy of the Court of Appeals decision can be found here. The document is 110 pages
long.

There are several key elements of the court’s opinion that
can be found after just a cursory review of the Opinion. A few samples are
below:

“Because
the CFPB is an independent agency headed by a single Director and not by a
multi-member commission, the Director of the CFPB possesses more unilateral
authority – that is, authority to take action on one’s own, subject to no check
– than any single commissioner or board member in any other independent agency
in the U.S. Government. Indeed, as we will explain, the Director enjoys more
unilateral authority than any other officer in any of the three branches of the
U.S. Government, other than the President.

At
the same time, the Director of the CFPB possesses enormous power over American
business, American consumers, and the overall U.S. economy. The Director
unilaterally enforces 19 federal consumer protection statutes, covering
everything from home finance to student loans to credit cards to banking
practices.

The
Director alone decides what rules to issue; how to enforce, when to enforce,
and against whom to enforce the law; and what sanctions and penalties to impose
on violators of the law. (To be sure, judicial review serves as a constraint on
illegal actions, but not on discretionary decisions within legal boundaries; therefore,
subsequent judicial review of individual agency decisions has never been
regarded as sufficient to excuse a structural separation of powers violation.) That
combination of power that is massive in scope, concentrated in a single person,
and unaccountable to the President triggers the important constitutional
question at issue in this case.

This
new agency, the CFPB, lacks that critical check and structural constitutional
protection, yet wields vast power over the U.S. economy.

In
light of the consistent historical practice under which independent agencies
have been headed by multiple commissioners or board members, and in light of
the threat to individual liberty posed by a single-Director independent agency,
………………we hold that the CFPB is
unconstitutionally structured. (Emphasis added.)

insideARM will provide more detailed analysis and perspective in the coming days.  

The U.S. Department of
Treasury (Treasury) released a request for proposal last month for the
collection of non-tax debts, coinciding with a major announcement in the ARM
industry that four firms have
been hired to collect taxes for the Internal Revenue Service (IRS), a
unit of Treasury. 

While the decision to
award the IRS tax collection contract to four firms was announced through an
IRS press release linked within the article last week, news of the start of
this new procurement, issued through Treasury’s Bureau of the Fiscal Service,
was not as forthcoming.

The RFP’s issue date
is September 13^th, but a search on both FedBizOpps (the Federal
clearinghouse for procurement information) and on major search engines against
the title and solicitation number of the RFP produce no results.  The
solicitation is restricted to firms that are on the U.S. General
Services Administration (GSA) schedule for debt collection, and was released on
GSA’s eBuy website. 

Further, the
opportunity cautions offerors that submissions by firms without five years of
experience providing debt collection services for non-tax Federal debts on a
large scale and national level will not be further evaluated.

The four firms also
selected by IRS, CBE Group (Cedar Falls, Iowa), ConServe (Fairport, N.Y.),
Performant (Livermore, Calif.) and Pioneer (Horseheads, N.Y.), have serviced
this contract since the last procurement held in 2011.  While tax
collection privatization policies at the IRS have waffled over the years,
non-tax collection efforts by private collection agencies (PCAs) have been
continuous since at least 1998.

In 2012, MyGovWatch.com,
a clearinghouse for documents and intelligence not generally
available to the public for all government
collection contracts, sued Treasury when it balked at providing contract
pricing information and a list of companies that submitted an offer in response
to the 2011 solicitation.  A Federal judge later summarily ruled in favor
of the website.

Placements under the
contract originate from more than 40 different Federal agencies, and are
broadly characterized as fines, fees, overpayments, loans, penalties, grants,
employee advances, and miscellaneous debts.  Slightly more than half are
commercial.  Procurement documents indicate that, during Federal fiscal
year 2015, Treasury placed more than 360,000 accounts with PCAs with an average
balance close to $20,000.  Over the last five fiscal years, it has
averaged 449,000 placements per year.

Bids are currently due
on October 12^th.

On
September 30, 2016 ProPublica reported on a settlement between a coalition
of attorneys general representing 49 states and the District of Columbia and
USA Discounters, requiring USA Discounters to pay $40 million in penalties and
wipe out more than $95 million in debt for its past customers. The penalties
and debt relief in the settlement cover every state except Colorado. The state
of Colorado settled separately with the company. A copy of the Settlement
Agreement can be found here.

USA Discounters admitted no wrongdoing as part of the
settlement. The company shut down all of its stores last year, but continues to
collect on loans made before it filed for bankruptcy.

The settlement was reported elsewhere, but the Propublica
coverage is most appropriate, as ProPublica
published its investigation of USA Discounters in 2014.

As
noted in the September 30^th news article:

“The states accused the company of a
laundry list of abuses that encompass virtually every aspect of its
transactions. The company misled customers about the quality and price of its
merchandise, the terms of loan contracts, and its warranty and debt
cancellation products, the states claimed. Then came aggressive debt
collection, including calls to soldiers’ chain of command when they fell behind
and the lawsuits flowing through that Virginia court.

Similar complaints surfaced in
ProPublica’s 2014 report. One Army private bought a laptop at the company’s
store near Fort Bliss in Texas shortly before shipping out for Iraq. For a
model that typically retailed for $650, he agreed to pay almost $3,000. After
he fell behind on his payments, he was sued in Virginia while stationed in
Germany. The company later sought to seize his military pay and froze his
credit union account.”

Both
of the above articles were written by Paul Kiel, who covers consumer finance for ProPublica.
Recently, his focus has been on debt collection and high-cost lending. His work
in 2013 was honored as a finalist for both a Gerald Loeb Award and a Best in
Business award from the Society of American Business Editors and Writers.
insideARM provided a summary or prior Kiel articles on debt collection and high
cost lending in an article we published on April 28, 2016.

On the same day as the announcement of
the USA Discounters settlement, the Consumer Financial Protection Bureau (CFPB)
issued a press release indicating that they had updated exam procedures for the
Military Lending Act. The exam procedures were
released by the Bureau to provide guidance to the industry on what the CFPB
will be looking for during reviews covering the amended regulation.

“Protecting
servicemembers is a priority for the CFPB,” said CFPB Director Richard Cordray.
“The updated exam procedures being released today will help ensure that servicemembers
and their families are dealt with in a fair and safe manner when attempting to
access credit.”

In 2006, Congress passed
the Military Lending Act to help address the problem of high-cost credit as a
threat to military personnel and readiness. In July 2015, the Department
of Defense issued a final rule expanding the types of credit products that are
covered under the protections of the Military Lending Act. The protections
provided by the Military Lending Act extend to active-duty servicemembers
(including those on active Guard or active Reserve duty) and covered
dependents. When lending to servicemembers and their dependents creditors must
abide by the following requirements:

• A 36 percent rate cap: Creditors cannot charge servicemembers or their covered
  dependents more than a 36 percent Military Annual Percentage Rate, which
  generally includes the following costs (with some exceptions): finance
  charges, credit insurance premiums or fees, add-on products sold in
  connection with the credit extended, and other fees such as application or
  participation fees.
• No mandatory waivers of consumer protection laws: Creditors cannot require servicemembers or their
  covered dependents to submit to mandatory arbitration or give up certain
  rights under state or federal law, such as the Servicemembers Civil Relief
  Act.
• No mandatory allotments: Creditors cannot require
  servicemembers or their covered dependents to create a voluntary military
  allotment in order to qualify for a loan.

A copy of the Department
of Defense’s Military Lending Act rule can be found here.

A copy of the new CFPB
Military Lending Act Exam Procedures can be found here.

insideARM Perspective

While both of these
announcements are about creditors and creditor practices when dealing with
lending and collecting debt of military personnel, the entire ARM industry
should pay close attention. The distinction between rules for creditors and
rules for collection agencies is rapidly blurring. insideARM suggests that
collection agencies download and incorporate appropriate provisions from The
Military Lending Act, The Department of Defense Military Lending Act Rule, and
the CFPB Exam Procedures into their Compliance Management System and internal
policies and procedures. 

“We are excited about this new chapter for BillingTree and are poised to significantly accelerate the growth of the Company,” said Edgars “Edz” Sturans, President and CEO of BillingTree. “We look forward to working closely with Parthenon to leverage their expertise in the payments arena to further strengthen our existing customer relationships, expand our existing proprietary product offerings and grow our service footprint into adjacent industry verticals.”

Headquartered in Phoenix, Arizona, BillingTree was established in 2003 to meet the market’s growing need for a vertically-focused provider of integrated payments solutions. Serving the healthcare, ARM and financial services sectors, the Company has experienced significant growth over the past few years, growing payment volumes at a compounded rate of nearly 40% per annum since 2013. In 2015, the Company announced the launch of Payrazr, a proprietary, web-based solution suite comprised of a payment gateway, consumer portal and virtual terminal, among other features. Following the growth investment from Parthenon, BillingTree will continue to focus on industry-specific strategies via integration with leading software partners in the Company’s core verticals, a customer-first service culture, and a variety of value-added offerings, such as the Company’s compliance suite.

“We are excited about the opportunity to partner with BillingTree,” said Zach Sadek, a Partner in Parthenon’s Boston office. “We have long believed that integrated payment solutions and industry-focused software and service capabilities provide tremendous value.”

Brian Golson, Parthenon’s co-CEO added, “We are thrilled to partner with Edz and the outstanding BillingTree executive team to further the Company’s impressive history of growth and sector leadership. The Company delivers significant value to its clients through a customer-centric culture, market-leading technology and unique value-added services. We look forward to working together to build on the Company’s strong momentum.”

Marlin & Associates acted as exclusive strategic and financial advisor to BillingTree and Snell & Wilmer, LLP, acted as legal counsel to BillingTree in connection with the transaction. Kirkland & Ellis, LLP, acted as legal advisor to Parthenon Capital Partners in connection with the transaction.

About BillingTree 

BillingTree® is the
leading, technology focused payment solutions company providing innovative
Accounts Receivables products and services that enable organizations to
increase efficiency and decrease costs of processing payments while adhering to
compliance regulations. For over a decade, BillingTree has committed itself to
understanding the marketplace and growing payments with technology, helping
merchants accept multiple payment channels while offering comprehensive value
their clients have come to rely on. BillingTree has a reputation for dependable
solutions and extraordinary customer service, processing billions of dollars of
payments annually through a suite of solutions and services that integrate with
your company’s needs. Visit MyBillingTree.com or call 877.4.BILLTREE for payment
technology that works.

About Parthenon Capital Partners

Parthenon
Capital Partners is a leading mid-market private equity firm based in
Boston and San Francisco. Parthenon utilizes niche industry expertise and a
deep execution team to invest in growth companies in service industries.
Parthenon seeks to be an active and aligned partner to management, either through
recapitalization transactions or by backing new executives. Parthenon has
particular expertise in financial and insurance services, healthcare technology
and services, and business services, but seeks any service, technology or
delivery business with a strong value proposition and proprietary know-how.
Parthenon’s investment team has deep experience in corporate strategy, human
capital, capital markets, and operations, thereby enabling the firm to pursue
complex, multi-faceted value creation opportunities.