consumer financial protection agency (CFPA)

Overview

In June, the Obama Administration issued its white paper and draft legislation, followed in July by House Financial Services Committee Chairman Barney Frank’s (D-MA) introduction of similar legislation (H.R. 3126).  The legislation would create a new, independent agency, the Consumer Financial Protection Agency (CFPA), devoted exclusively to consumer protection in the financial industry and for financial products. 

Debt buying, debt collecting and the entire Fair Debt Collection Practices Act (FDCPA) would be under the jurisdiction of this new agency.  The CFPA proposal is controversial and has been widely criticized in the press and on Capitol Hill.  There are several reasons.  The new agency would be funded by assessments from debt buyers, debt collectors and other financial entities that are regulated by the CFPA.  The agency would be armed with vast and, in some instances, unprecedented powers.  The CFPA legislation would strip the Federal Trade Commission (FTC) of most of its existing authority for debt buying, debt collecting and the FDCPA.  The CFPA legislation divorces consumer protection from most considerations about financial industry safety and soundness or the viability of financial industry markets.  And, finally, the CFPA legislation is not preemptive, so stronger state legislation and rules would also apply to debt collecting and buying.

For the debt buyers, the “good news” is that the CFPA would put originating lenders and debt buyers under the same roof.  Thus, issues like documentation could be dealt with comprehensively. 

Multiple congressional hearings have been held throughout July to consider the proposed agency.  Chairman Barney Frank had originally hoped to have his bill reported out of his committee before the August congressional recess, but in response to mounting external and internal pressure, he has agreed to postpone marking up the bill until September.  DBA expects the CFPA legislation, with changes and, perhaps, significant changes, to pass the House this fall.  The outcome and the timing in the Senate are not yet so clear. 

CFPA Summary (see recent Member Alert for an expanded summary)

• The CFPA would be given responsibility over any banking or financial institutions engaged “directly or indirectly” in a financial activity.  A “financial activity” is defined to expressly include “acquiring, brokering or servicing loans or other extensions of credit”, as well as “the collection of a debt related to any consumer financial product or service”. 
  
  
• The CFPA is expressly charged with regulating activity under various specifically enumerated statutes, one of which is the FDCPA.
  
  
• The CFPA could collect fees directly from covered persons (such as DBA members) to cover the amounts expended by the CFPA subject to rules the CFPA would be required to prescribe to govern any annual fee assessments and collections.  However, the CFPA is also authorized to receive a “such sums as necessary” direct appropriation from the Congress.
  
  
• The CFPA will have primary authority over the FDCPA, but the FTC would retain so-called “backstop” authority.  What this apparently means is that the FTC would be limited, with respect to debt buyers, debt collectors and all other covered entities, to proposing enforcement action to the CFPA.  If the CFPA fails to act on the FTC’s proposal within 120 days, the FTC would be able to institute its own action.

CFPA Authority over DBA Members

• Administrative Enforcement Authority.  DBA Members would be required to respond to CFPA subpoenas and other administrative enforcement actions by the CFPA, including other discovery devices, adjudicated hearings, and cease and desist orders. 

• Civil Penalty Authority.  DBA Members would be at risk of CFPA civil penalty litigation authority with fines of $5,000 per day per violation for a Final Order or “condition”; $25,000 per day for a “reckless” violation; and up to $1,000,000 per day for knowing violations. 

• APA Rulemaking Authority.  The CFPA would be given APA rulemaking authority.  The CFPA would be able to exercise that rulemaking authority with respect to any statute for which it has responsibility, including the FDCPA, as well as to address any other unfair, deceptive or “abusive” acts or practices.

• Examination Authority.  As regulated entities, DBA Member companies would be subject to CFPA examination authority, including the inspection of company books and records.

• Condition Reports.  The CFPA would be able to require reports regarding the “financial condition” of DBA Members in order to assess the DBA Member’s ability to meet its obligations to consumers.

• Research Powers.  DBA Members may also be required to respond to the CFPA’s comprehensive research powers to gather and compile information regarding covered organizations and their business conduct and practices, even if the CFPA has not launched an investigation.

• Arbitration Clauses.  The CFPA is authorized, by rule, to restrict the use of mandatory arbitration clauses.

• Regulation of Sales Practices.  The CFPA is expressly tasked with reviewing and regulating advertising, consumer notices and disclosures as well as operational standards and other business practices.

• “Plain Vanilla” Offerings.  The CFPA would be required to define “standard offerings” (“plain vanilla” offerings) for various financial products and services as well as publish rules for disclosure of the differences between these offerings and “alternative products” where those are offered by a company.

• Compensation.  The compensation of certain employees at DBA Member companies may also be controlled by the CFPA.  The CFPA would be able to conduct rulemaking regarding the metrics of compensation for employees who communicate directly with a consumer regarding a financial product or service.  Brokers or salesman have been identified as examples of such employees.  The CFPA would not be able to set specific limits on the compensation for these employees but could prescribe rules for commissions and other types of compensation standards.

• Annual Assessments.  As noted earlier, DBA Members may be required to pay an annual assessment to the CFPA to cover the CFPA’s annual expenses.
  

State and City Legislation

New York AB(s) 7558, 3552, 3926A
Statutes of Limitations, Debt Collecting, Regulation, Licensing

Overview:
May 14, 2009, DBA International testified at State hearings on the above Bills and opposed the Bills.  On June 4, 2009, DBA International General Counsel met with various law makers in Albany, New York to discuss these Bills and a possible Governor’s bill on the issues.  On July 17, 2009, the New York Senate and Assembly cancelled session with out a passage of the Bills in the Senate.  DBA will continue to work with its NY lobbyist.

New York A07558
     
History:

1. The proposed Bill would reduce the statute of limitations on actions arising from a consumer credit transaction from 6 years to 2 years.  DBA International testified on May 14, 2009 at State hearings and opposed this change, as it would cause unintended and undesirable consequences such as a flood of increased litigation by creditors seeking to protect their claims.  The sudden rush to the courthouse may cause wary creditors to make less credit available to consumers in need during the current financial crisis if those creditors are left without collection alternatives after a two-year period.

   In addition, DBA opposed such a  change as it would hamper personal responsibility by consumers who could only be encouraged by a legal protection that amounts to a “free ride” to those able to avoid payments on a voluntarily incurred debt by “hiding out” for a two-year period in anticipation of the statute expiring.

   The proposed change affects credit reporting as many state attorney generals interpret the extinguishment of the “right” as well as the “remedy” to preclude credit reporting.

   The Bill also required enhanced information requirements for state complaint filing which would unduly burden the industry.  The proposed Bill did not take into account that entities other than the original creditor do not always receive a complete breakdown of principle, interest and other fees.  Additionally, the proposed Bill would require the current owner of the debt to identify every prior owner in the claim of title in order to file a complaint, which would only serve the purpose on unduly hampering a debt buyer’s ability to pursue state litigation as a remedy.  

   Additionally, a debt may have been owned by multiple entities and this requirement would force plaintiffs to identify and contact entities to which they had no prior communications.

   The legislation seeks an Affidavit from the original creditor verifying the debt, but the benefits of such a document are diminished by the potential cost to the Plaintiff seeking to collect on the debt.  If proof of a debt’s existence is available, it should be accepted by the courts regardless of whether it is provided by the Plaintiff or the original creditor.

2. Thereafter, the Assembly revised A 07558 Bill was amended only to have a three (3) year (instead of the proposed two (2) years) statute of limitations on suits on consumer credit transactions and unfortunately left in the extinguishment the right and the remedy after three (3) years.
   
   
3. On June 4, 2009, DBA’s General Counsel met with various lawmakers as well as the Attorney General’s office in Albany New York to discuss these Bills and a possible Governor’s Bill on the issues.  On July 17, 2009, the New York Senate and Assembly cancelled session without passage of the Bills in the Senate.  DBA continues to work with its NY lobbyist.
   
   
4. Among the other Bills passed by the Assemby, the Pheffer Bill (A271A) was passed and requires debt collectors to send consumers a written notice of their rights under state law along with its debt collection correspondence.  The notice would contain information such as who and when a principal creditor may contact a debtor about the debt owed, as well as, the fact that a  principal creditor cannot disclose information affecting a consumer debtor’s reputation for credit worthiness if the principal creditor knows or has reason to know that such information is false.
   
   
5. Governor Patterson's Program Bill #28 would put into effect a “mini-FDCPA” for the State of New York.  The program will mirror various federal prohibitions on contacting consumers at inconvenient or inappropriate times, on revealing publicly that the individual is subject to the debt collections, require debt collectors to properly identify themselves and the debt, and make available details of the debt to the consumer upon request.  The program would also require creditors and collectors to notify consumers when they have sold the debt.  DBA supports this Bill as it closely mirrors the FDCPA.

North Carolina SB 974 (Consolidated with SB 954) “Protection from Abusive Debt Buyers”

Overview:
DBA International has hired a lobbyist, opposed the Bill and provided Comments and a redlined Bill to the Attorney General’s office.  The Bill in current form would seek to restrict how complaints are filed by debt buyers, how judgments are submitted and would require itemization of the debt and notice prior to suit.  DBA International will continue to work with its North Carolina lobbyist to oppose this Bill.

History:

• North Carolina's General Assembly introduced SB954, a Bill which was later converted to SB974.  This Bill was considered at the Senate Judiciary Committee hearing on May 7, 2009, wherein, DBA’s interests were represented by DBA Board Member Rich Munroe and testimony was provided in opposition to SB954.  It was communicated that this Bill would create disparate treatment of debt buyers than that of original creditors, in direct conflict with North Carolina Rules of Evidence and the Federal Rules of Evidence.
  
  

  Thereafter, DBA along with it’s North Carolina lobbyist, submitted its talking points for this hearing advising that if creditors won’t be able to collect or sell debts, they may make adverse credit decisions against NC consumers.  The Senate Bill put unreasonable requirements on debt buyers to prove their case in a court of law that is not required of original creditors with respect to entering default judgments and summary judgments against debtors.
  
  The Bill includes certain requirements on collecting on past statute debt, including a duty to inform the consumer that the debt is time-barred.  DBA conveyed that such a requirement could constitute the unlicensed practice of law by non-lawyers, confuses the consumer, and is not supported by the FTC or existing case law.

  DBA further has responded to this new legislation by having two (2) conferences with Paul Lehman, Assistant Attorney General and Al Ripley, Staff Attorney and Director for the North Carolina Consumer Action Network regarding the harmful effects on passage of such a Bill.  DBA redlined the new Bill (SB974) and presented its changes. DBA continues to oppose this Bill.

New Jersey AB/3839 and A2493   “Debt Collection Industry Bill”

DBA International, along with active member Garry Felt of Pressler & Pressler, continue to meet with key legislators to defeat these Bills which seek to limit how debts may be collected and suit brought on consumer debts in New Jersey.  DBA International continues to monitor and oppose said Bills.

Nevada NRS 97A; AB 472 – Credit Card Complaint

Effective July 1, 2009, Nevada has passed a law which requires that complaints and judgments have specific information including attaching statements to the request for judgment and either an affidavit of the custodian of the issuer.  The law can be found at http://www.leg.state.nv.us/75th2009/Reports/history.cfm?billname=AB472.

Kansas Lender Licensing, SB240

Effective July 1, 2009, the State of Kansas passed SB240 which requires a supervised loan license of those who take assignments directly or indirectly, including the use of servicing contracts.  DBA has been made aware that the Kansas State Banking Commission has taken an active position that both active and passive debt buyers should be licensed.  DBA intends to seek clarification on this law.

Fair Debt Collection Practices Act (FDCPA) Case Law

U.S. Supreme Court

• Bona Fide Error:   On June 29, 2009, the U.S. Supreme Court granted Cert. to Consider whether the FDCPA’s bona fide error defense should apply to mistake of law. Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, LPA, 77 USLW 3562, 2009 WL 803127 (June 29, 2009). 

9th Circuit

• Attorneys’ fees are and for frivolous FDCPA case:  June 9, 2009.  The Ninth Circuit, in reviewing an award under 15 USC 1692e(a)(3), considered whether attorney for the plaintiff should have to pay the award.  The Court held that the FDCPA does not include a provision that fees were authorized against the attorney.  Hodge v. Midland Credit Management Inc., 567 F.3d 1137 (9th Cir. 2009).

• Credit Pulls:      On April 30, 2009, the US Court of Appeals for the Ninth Circuit withdrew its prior opinion on Pintos v. Pacific Creditors and held that in order to have a “permissible” purpose and 15 USC 1681b(a) that the party should be collecting on a “credit transaction” which “involved” the consumer.  Where the consumer is “draw in as a participant” on the transaction but not where they are “obligated to be associated”.  The Ninth Circuit also held that the Credit Reporting agency could be liable for providing a credit report with no permissible purpose. Pintos v. Pacific Creditors Accoc., 865 F.3d 1106 (9th Cir. 2009).

Circuit Courts

• WWJD on Collection letter:  May 14, 2009, the District Court of Minnesota held that complaint could proceed and that issues of fact remained whether WWJD was an unfair practice.  Neil v. Bulls Eye Collection Agency Inc., 2009 U.S. Dis. LEXIS 41931, D. Minn. May 14, 2009.

• Settlement Letters/Validation Notices:  On March 9, 2009, in Stark v. RJM Acquisitions, LLC, the Eastern District of New York held that a collection letter does not violate the FDCPA by having a settlement letter on the front and the validation notice on the reverse side.  Stark v. RJM Acquisitions, LLC, 2009 U.S. Dist. LEXIS 17666 (E.D. NY, March 9, 2009)

• On June 30th, the U.S. Court of Appeals for the Sixth Circuit held that a document that appeared to be an account statement, but that was generated on behalf of a debt collection company, was not necessarily misleading under the Fair Debt Collection Practices Act (FDCPA).  The court declined to grant summary judgment in order to determine if the appearance as a credit card statement was in order to avoid state law.  Hartman v. Great Seneca Financial Corp., 6th Cir. No. 08-3773/3804, 2009 U.S. App. LEXIS 14110, 6/30/2009.

• On June 12th, a federal district court in Pennsylvania held that a privacy notice that refers to the collection of nom public personal information about consumers from employers and other third parties to verify information the consumer has already provided is a violation of the FDCPA.  The court noted that the FDCPA permits communicating with anyone other than the debtor only for the purpose of acquiring location information.  The court further noted that the least sophisticated consumer could believe that the debt collector could verify a much broader range of information than is actually permitted, which the court considered misleading under the FDCPA.  Smith v. NCO Financial Systems, Inc., PA Civil Action No. 08-CV-5626, 2009 U.S. Dist. LEXIS 51576, 6/12/09.

• On June 26th, a federal district court in New York held that a debtor’s allegation that she was fired from her job because of a wage garnishment order issued to her employer by a debt collector is not harassing or oppressive behavior under the Fair Debt Collection Practices Act (FDCPA).  The court held that the debtor’s cause of action was against the employer and not the debt collector, who was, at least, one step removed from the termination decision.  Moore v. Diversified Collection Services, Inc.. NY 07-CV-397-ENV-VVP, 2009 U.S. Dist. LEXIS 54798, 6/26/09
  
  
• On June 19th, a federal district court in New Jersey held that a debtor that disputes the amount owed in a letter cannot subsequently claim ignorance that the letter came from a debt collector.  The court held that the least sophisticated consumer would understand that the letter, viewed a s a whole, was from a debt collector even though the letter was not “emblazoned with explicit language taken verbatim from the” FDCPA.  Shanker v. Fair Collection & Outsourcing, LCC, NJ Civil Action No. 3:09-cv-1759 (FLW), 2009 U.S. Dist. LEXIS 52213, 6/19/09.