Stephanie Eidelman – Today the Federal Trade Commission published the following blog post by Christopher Koegel, Assistant Director, FTC Division of Financial Practices. I thought it was worth re-posting verbatim.

As the Consumer Financial Protection Bureau contemplates debt collection rulemaking, they are no doubt being influenced by the actions and opinions of other regulators. The CFPB has already signaled its intent to hold first party collectors responsible for some of the same rules as third party collectors. This may be yet another sign of things to come as rules are written.

As the song by The Who asks, “Who are you?” When it comes to the Fair Debt Collection Practices Act, many companies think they know who they are. If they’re third-party debt collectors, they’re covered by the FDCPA. If they’re creditors collecting their own debts, they aren’t. But as I mentioned recently in a presentation at an industry event, it’s not that simple. Some creditors and others may not realize that certain courses of conduct can put them squarely within the jurisdiction of the FDCPA.

The starting point, of course, is the language of the statute. Section 803(6) of the FDCPA defines a “debt collector” as “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.”

Creditors who collect their own debts may see that definition and stop reading. Big mistake – because Section 803(6) goes on to say “the term includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts.” In other words, if a creditor collects its own debts but uses a different name that suggests it’s a third-party debt collector, presto. The company is now a debt collector subject to the FDCPA.

The FTC has gone to court to challenge FDCPA violations by companies that used other names to collect their own debts. For example, LoanPointe, LLC, a Utah-based payday lending outfit, did business as Ecash or GeteCash. But when it came time to collect those debts, the defendants used the company name LoanPointe. Therefore, in addition to allegations under Section 5, the complaint charged them with FDCPA violations, including illegally garnishing consumers’ paychecks and revealing the existence of debts to people other than the debtor. The FTC urged – and the trial court agreed – that the defendants’ conduct made them “debt collectors” under that second sentence of Section 803(6).

There’s another provision that some companies mistakenly read as putting them outside the FDCPA. Section 803(6)(F)(iii) exempts from the FDCPA “any person collecting or attempting to collect any debt owed or due . . . to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.” (I added the emphasis.) But what about a debt that is in default? According to the FTC and several federal appellate courts, if the debt is in default when the company obtained it, the company’s activities to collect that debt are covered by the FDCPA.

That’s what the FTC alleged in cases like Fairbanks Capital, EMC Mortgage,CompuCredit, Consumer Portfolio Services (CPS), and Green Tree Servicing. For example, auto loan servicer CPS buys and services financing contracts from car dealers across the country. But when collecting on accounts that were delinquent or charged off at the time CPS purchased them or acquired servicing rights, servicer CPS became debt collector CPS with regard to those accounts.

The FTC-CFPB settlement with Green Tree (now Ditech) also illustrates that principle. Green Tree contracted to service mortgages that other lenders extend to consumers. As such, Green Tree created and sent monthly statements, processed payments and property taxes, etc. But many of the accounts Green Tree serviced were in already in default when Green Tree acquired them. Thus, for those accounts, Green Tree donned the additional hat of “debt collector” subject to the FDCPA.

Coverage under the FDCPA changes the compliance calculus, which is why creditors need to know if they’re subject to that law. The FDCPA imposes additional obligations and non-compliance can be costly. For example, under Section 809, within five days after the initial communication with a consumer, the debt collector must send a written validation notice including (among other things) the amount of the debt, the creditor’s name, and details about the procedure for disputing the debt. In addition, Section 807(11) requires certain specific disclosures that “the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose,” often called in industry parlance the mini-Miranda.

But even if the FDCPA doesn’t apply, your collection activities are still covered by Section 5 of the FTC Act’s general prohibition against deceptive or unfair practices. As cases like AMG, Payday Financial, and Cash Today demonstrate, practices that are false or misleading under Section 807 of the FDCPA – bogus claims of a government affiliation or false threats of legal action, to name just a few – likely violate Section 5, too. The same can be said for the host of unfair practices listed in Section 808. In addition, the FTC has taken action under Section 5 when first-party creditors engage in other practices expressly prohibited by the FDCPA – for example, revealing the existence of a debt to anyone other than the debtor.

Examine your company’s collection practices and ask yourself “Who are you?”

A coalition of big-name supporters has stepped into the case between ACA International and the Federal Communications Commission over the controversial TCPA Ruling.

ACA International, the association of credit and collection professionals, is pleased to announce that it has secured significant amici, or “friend of the court,” support from a broad cross-section of trade groups and other interested parties in its pending appellate proceeding before the U. S. Court of Appeals for the District of Columbia.

After the Federal Communications Commission issued its Declaratory Ruling and Order on the Telephone Consumer Protection Act in July 2015, ACA and other petitioners filed lawsuits appealing the FCC’s TCPA Ruling. The petitioners in the consolidated case, ACA International, et al. v. Federal Communications Commission and United States, argue the FCC went well beyond the sensible mission of crafting reasonable TCPA protections for consumers aimed at curtailing abusive telemarketing activities, instead imposing an outdated, far-reaching and punitive regulatory model on legitimate businesses that use modern dialing systems to provide their customers normal, expected and desired information.

The amicus support has been filed as part of the appeals process and provides important legal and policy context to the appellate court for overturning the arbitrary and capricious provisions of the TCPA Ruling. The following seventeen agencies filed as amici in eight separate amicus briefs in support of ACA and the other challengers:

American Bankers Association
Credit Union National Association
The Independent Community Bankers of America
Retail Litigation Center, Inc.
National Retail Federation
National Restaurant Association
CTIA – The Wireless Association
Internet Association
American Gas Association
Edison Electric Institute
National Association of Water Companies
National Rural Electric Cooperative Association
Communication Innovators
American Financial Services Association
Consumer Mortgage Coalition
Mortgage Bankers Association
The National Association of Chain Drug Stores, Inc.

Also, nine businesses and organizations who moved to interveneas parties to the appellate proceeding because of the direct affect the TCPA Ruling has on them filed a joint legal brief asserting that ACA’s petition for review and others should be granted, and the challenged portions of the TCPA Ruling vacated:

MRS BPO LLC
Cavalry Portfolio Services, LLC
Diversified Consultants, Inc.
Mercantile Adjustment Bureau, LLC
Council of American Survey Research Organizations
Marketing Research Association
National Association of Federal Credit Unions
Conifer Revenue Cycle Solutions, LLC
Gerzhom, Inc.

“The wide spectrum of those who filed amicus briefs proves the breadth of support for challenging the FCC’s vague and inconsistent interpretation of the TCPA,” said ACA International CEO Pat Morris. “The FCC’s TCPA Ruling goes directly against the original meaning and purpose of the statute. We are grateful for the backing of other industries in ensuring that law-abiding businesses can contact consumers with the information they need in the method they want.”

ACA and other petitioners solidified their arguments against the FCC’s expansive and controversial TCPA Ruling in a joint legal brief filed Nov. 25. The FCC is expected to respond on January 15. Ultimately, this judicialc hallenge could be a defining moment for the future of all business communications with consumers.

ACA will continue to provide updates on the status of ACA’s ground breaking litigation against the FCC.

For more information contact ACA Public Affairs or at (952) 928-8000

Stephanie Eidelman –

On Nov. 20, Pennsylvania Senators Greenleaf, Tartaglione, Rafferty and Pileggi introduced SB 1072,which was referred to the Consumer Protection & Professional Licensure Committee. The legislation, if enacted, would the limit the number of telephone communications that a creditor or debt collector may have with a debtor to three, total.

The legislation amends the Pennsylvania Fair Credit Extension Uniformity Act by adding the following as an unfair act or deceptive practice:

(b.1) Limitation on telephone contacts with consumers.

(1) It shall constitute an unfair or deceptive debt collection act or practice under this act if a debt collector or creditor communicates with a consumer regarding a debt more than three times by telephone.

(2) Nothing in this subsection shall be construed to prohibit a debt collector or creditor from communicating with a consumer regarding a debt on a fourth or subsequent time by another form of communication, other than telephone.

One obvious problem with the bill, apart from the drastic limitation, is that it makes no provision for debtors who actually want to continue the conversation beyond three calls to resolve their debt, or for calls initiated by debtors. Presumably, voicemail left for a debtor would count toward the total.

SB 1072 goes far beyond the Massachusetts regulation, frequently lauded by consumer advocates, that prohibits calls “in excess of two such communications in each seven-day period to a consumer’s residence or cellular telephone and two such communications in each 30-day period other than at a consumer’s residence, or cellular telephone for each debt. . .” 209 CMR 18.1418.14(1)(d).

In a Memorandum to his fellow Senators, Senator Greenleaf explains that the legislation is necessary due to the volume of debt collection complaints received by the Pennsylvania Attorney General’s Bureau of Consumer Protection and the federal Consumer Financial Protection Bureau. He concludes that the bill “will further protect consumers from harassment or abuse in connection with debt collection, while still allowing businesses to collect debts owed to them.”

Michael Daly –

This article is republished with permission from Michael P. Daly, John S. Yi, and Drinker Biddle & Reath LLP. It originally appeared on www.tcpablog.com.

On November 25th, joint petitioners ACA International, Sirius XM, PACE, salesforce.com, ExactTarget, Consumer Bankers Association, U.S. Chamber of Commerce, Vibes Media, and Portfolio Recovery Associates (“Petitioners”), filed their opening brief in the consolidated appeal of the FCC’s July 10, 2015 Declaratory Ruling and Order (the “Order”) in the United States Court of Appeals for the District of Columbia Circuit. See ACA Int’l, et al. v. FCC, No. 15-1211 (D.C. Cir. Nov. 25, 2015). Rite Aid filed a separate opening brief that we will address in a subsequent post.

After providing a detailed overview of the TCPA and the FCC’s prior rulings, the Petitioners argue that FCC’s recent Order “rewrote the TCPA,” “jeopardizes desirable communications that Congress never intended to ban,” and “encourage[s] massive TCPA class actions seeking crippling statutory damages.” Brief at 2, 3. They challenge three aspects of the Order in particular: (1) its interpretation of the statutory definition of an ATDS; (2) its rulings regarding reassigned numbers; and (3) its pronouncements regarding the revocation of consent.

The Statutory Definition of an ATDS

The Petitioners argue that the majority’s statements regarding the statutory definition of an ATDS “misinterpret the TCPA, violate the Constitution, provide no guidance to regulated parties, and contradict themselves.” Id. at 21. They contend that the majority’s interpretation is flawed because “[e]very relevant principle of statutory interpretation confirms that ‘capacity’ refers to what equipment can do as is, not what it might be able to do if changed.” Id.at 22. Quoting Commissioner O’Rielly’s dissent, they argue that the majority’s focus on potential rather than present capacity results in a definition that “‘is so expansive that the [majority] ha[d] to use a rotary phoneas an example of a technology that would not be covered.’” Id. at 24 (emphasis in original); see id. at 2 (“Contrary to the First Amendment and common sense, the Order threatens to turn even an ordinary smartphone into an ATDS.”). They also argue that a “potential functionalities” test infringes upon callers’ First Amendment rights by “[t]hreatening crushing liability for millions of everyday calls simply because they came from devices that could be modified so that they might be able to generate random or sequential numbers….” Id. at 28.

The Petitioners also argue that the majority’s interpretation is unlawful because it contradicts the plain language of Section 227(a)(1), which only covers equipment that can: (1) generate random or sequential numbers, (2) store or produce those numbers, (3) dial those numbers, and (4) do all these actions automatically, that is, without human intervention. Id. at 31-32. They contend that the majority misconstrues the statute by focusing on some of those prerequisites and ignoring others. Id. at 32-33. For instance, the Order states that the “equipment need only be able ‘to store or produce telephone numbers,’ not just random or sequential ones.” Id. at 32 (quoting Order ¶ 12). Elsewhere, the Order states that the equipment must either have the “‘capacity to store or produce numbers and dial those numbers at random, in sequential order, or from a database of numbers.’” Id. at 33 (quoting Order ¶ 16). And in the next paragraph the Order “states that ‘the basic function’ of an ATDS is ‘to dial numbers without human intervention,’ without clarifying whether those numbers must be random or sequential.” Id.at 33 (quoting Order ¶ 17).

Reassigned Numbers

After stressing that the TCPA “protects otherwise-prohibited calls if they are … made ‘with the prior express consent of the called party,’” the Petitioners argue that the majority “misinterpreted this critical defense and violated the First Amendment by interpreting ‘called party’ to mean the called phone number’s ‘current subscriber or customary user,’ rather than the call’s expected recipient.” Id. at 39. Under the majority’s interpretation, a caller could face liability if it “tries to reach a consenting customer but inadvertently reaches someone else to whom the customer’s number has been reassigned.” Id. The Petitioners explain that the majority’s approach is unrealistic because “[t]here is no reliable way to ascertain whether a given cell phone number has been reassigned,” because “no available database tracks all reassignments,” and because the liability for untracked reassignments could “prove catastrophic.” Id. at 42-43. The result is an interpretation that is not only unworkable but also unlawful, as “the threat of unpredictable and unavoidable TCPA liability will deter calls even to people who expressly consented to be contacted.” Id. at 39; see id. at 2 (“It makes an empty promise of Congress’s assurance that callers may lawfully contact willing recipients, and it chills constitutionally protected expression.”).

The Petitioners further argue that the majority’s one-call safe harbor fails to “mitigate the impossible demands imposed by its interpretation” because it would “arbitrarily impose liability for later calls regardless whether the first call provides any reason to believe that the number has been reassigned or that the caller has reached the wrong person.” Id. at 51 (emphasis in original). They argue that the “constructive knowledge” imposed by that safe harbor provision “leaves callers in an impossible situation” because a single call will not always result in actual knowledge that a number has been reassigned, and there is no way for callers to identify a number’s “customary user.” Id. at 52; see id. at 53 (“Imputing constructive knowledge – even though the Commission acknowledged that no amount of ‘reasonable care or diligence’ can ensure that the caller is aware of a reassignment – makes the Order all the more arbitrary.”). As a result, the majority’s safe harbor provision “simply takes $500 off the potentially enormous bill that will result from the arbitrary and capricious liability the Order otherwise imposes.” Id.

Revocation of Consent

The Petitioners mount two challenges to the majority’s approach to the revocation of consent. First, they argue that the majority failed to “establish any standardized and workable method of revoking consent, instead allowing individuals to use whichever methods they prefer, so long as the Commission or a jury later concludes it was ‘reasonable’ under ‘the totality of the facts and circumstances.” Id. at 54-55. They contend that this “every-individual-is-a-law-unto-himself” approach is arbitrary and capricious. Id. at 55; see id. at 3 (“This degree of customization of revocation methods makes it all but impossible for callers to track and process revocations, leaving everyone (including consumers) worse off.”). They state that a regulation is arbitrary and capricious if “‘compliance’ with it ‘would be unworkable,’” and suggest that the FCC “could have prescribed uniform revocation procedures, or allowed parties to agree to reasonable standard processes of revocation.” Id. at 55-56. They note that the FCC has adopted such an approach in the past, for example with regard to the dissemination of “certain types of financial or healthcare information,” and they question why the majority did not do likewise with regard to revocation procedures. Id. at 58-59 (noting that the exclusive means to revoke consent to automated text messages about certain types of financial or healthcare information is by “replying STOP”). Under the majority’s approach, callers would be faced with the impossible task of “forecasting every possible scenario under which a means revoking consent could be deemed ‘reasonable’’ under the ‘totality of the circumstances,’ putting procedures in place to handle each scenario, and training personnel on all of these procedures.” Id. at 57.

Second, the Petitioners argue that the Order “contradicts the common-law backdrop against which the TCPA was enacted” because at common law parties have the freedom to contractually waive their rights or agree on acceptable methods for providing notice. Id. at 61. They argue that “‘the TCPA’s silence regarding the means of providing or revoking consent” means that Congress incorporated the common law freedom of contract into the TCPA. Id. at 61-62. They also note that the Order is internally inconsistent because elsewhere it acknowledges the “common-law right to bargain about TCPA-related details.” Id. at 62 (noting that the majority suggested that callers may contractually require consumers to not only update their contact information but also indemnify callers who reach the holders of recycled numbers). Indeed, although the Order purports to “rely on the common law in concluding that consent is revocable in the first place,” it ignores the common law entirely when it comes to whether consumers may regulate or “waive that right by contract.” Id. at 62-63.

Next Steps in the Consolidated Appeal

The Petitioners ask the D.C. Circuit Court of Appeals to grant their petitions and vacate the challenged provisions of the Order. The FCC’s brief is due on or before January 15, 2016, the Petitioner’s reply brief is due on or before February 16, 2016, and final briefs are due on or before February 24, 2016. The court has yet to set a date for oral argument.

Stephanie Eidelman —

According to a report on The Hill website, House members from both parties were concerned after suddenly realizing that the new Federal Communications Commission (FCC) TCPA ruling clarifying auto-dialer restrictions related to mobile numbers would hamper their own efforts to reach constituents.

In a twist of irony that would not be lost on those in the debt collection industry, Rep. Ben Ray Lujan (D-N.M.) noted that autodialed calls are sometimes the only method available, since online sign-up sheets or emails do not work for those who don’t have an Internet connection at home. “If the rule requires them to opt into this program, how would we reach out to 700,000-800,000 constituents for them to opt-in?”

Another Democrat, Rep. Anna Eshoo (D-CA) evidently noted that the 1991 law might be in need of updating if it is not flexible enough to keep up with changing technology.

This raises many interesting questions. To articulate a few:

Do lawmakers have the technology and processes required to manage this data?

Who will fund the expense of frequent scrubbing of lists against cell phone data?

Is it more important for consumers to receive information about a town hall with their local representative than, say, to be contacted about options to restructure their student loans before they rack up insurmountable interest and fees?

Perhaps those who have filed suit against the FCC now have some unexpected allies.

–Stephanie Eidelman

Today Rohit Chopra, the Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman – who also just announced he is stepping down after next week – released a report finding high rates of consumers are being rejected for co-signer release on their private student loans, based on its review of industry practices. The Bureau uncovered problematic industry practices that may be disqualifying some consumers from securing a co-signer’s release from their loans.

The CFPB Student Loan Ombudsman’s Mid-Year Update is available at: http://files.consumerfinance.gov/f/201506_cfpb_mid-year-update-on-student-loan-complaints.pdf.

The report includes findings of the information request from industry participants as well as analysis of more than 3,100 private student loan complaints and approximately 1,100 debt collection complaints related to student loan debt received between October 1, 2014, and March 31, 2015. Overall, private student loan complaints increased by 34 percent compared to the same time period last year.

Among the findings:

Companies rejected 90 percent of consumers who applied for co-signer release: Many private student lenders advertise options to release a co-signer from a private student loan. However, an analysis of industry responses to the CFPB’s information request found that the lenders and servicers surveyed granted very few releases—of those borrowers that applied for co-signer release, 90 percent were rejected.

Consumers left in the dark on co-signer release criteria: The CFPB found that consumers have little information on the specific borrower criteria needed to obtain a co-signer release. Consumers reported being confused about their eligibility for obtaining a co-signer release as well as not understanding why they had been denied.

Most private student loan contracts continue to contain auto-default clauses: Last year, the CFPB reported that private student loan servicers were putting borrowers in default when a co-signer died or filed for bankruptcy, even when their loans were otherwise in good standing. Following that report, some financial institutions stated that they would no longer hit borrowers with auto-defaults. The CFPB’s analysis of private student loan contracts, however, found that most private student loan contracts continue to include auto-default clauses.

Borrowers are at risk when loans are sold and packaged by Wall Street: Even if individual companies state that they will not trigger auto-defaults in certain cases, loans are often sold to other banks and securitized on Wall Street. This exposes borrowers to risk that the new owner of the loan will trigger an auto-default.

Company policies can permanently disqualify borrowers from co-signer release: Student loan borrowers reported that some companies’ policies penalize or disqualify borrowers who prepay their loans and are in good standing. Some companies also disqualify borrowers from releasing a co-signer if the consumer accepts the servicer’s offer of postponing payment through forbearance. These company policies can permanently ban a consumer from seeking co-signer release for the life of the loan and penalize consumers that may have graduated during tough economic times.

Potentially harmful clauses found in the fine print: In addition to auto-default clauses, the CFPB found other potentially harmful clauses hidden in fine print of some loans including “universal default” clauses. Financial institutions use these clauses to trigger a default if the borrower or co-signer is not in good standing on another loan with the institution, such as a mortgage or auto loan, that is unrelated to the consumer’s payment behavior on the student loan. These clauses can increase the risk of default for both the borrower and co-signer.

The CFPB states that the report describes opportunities to improve the private student loan industry’s co-signer practices. The report identifies practices that could benefit consumers and industry, including:

Improving transparency around co-signer release criteria: Consumers and industry would benefit from increased transparency around the availability of co-signer release, including what specific requirements exist that a borrower needs to meet to obtain a release.

Improving consumer notifications for co-signer release eligibility: Private student loan servicers could notify consumers before placing them in a repayment status, such as forbearance, that it would disqualify them from co-signer release. In addition, private student loan servicers could improve their customer service by proactively notifying borrowers when they meet prerequisites for releasing a co-signer, such as making a certain number of on-time payments.

Examining potentially harmful clauses in the fine print: The CFPB report notes that policymakers should consider whether auto-default, universal default, and other potentially harmful terms in the fine print of private student loan contracts are appropriate.

Last month, the CFPB launched a public inquiry into student loan servicing practices that can make paying back loans a stressful or harmful process for borrowers. The issues that the Bureau is seeking information on include: industry practices that create repayment challenges, hurdles for distressed borrowers, and the economic incentives that may affect the quality of service. The comment period is open until July 13, 2015. The CFPB also launched a new version of the Repay Student Debt tool, which helps borrowers get unbiased tips on how to navigate student loan repayment, along with other sample letters they can send to their student loan servicers.

The CFPB began accepting consumer complaints about private student loans in March 2012. More information is at: consumerfinance.gov/students.

It should be noted that the report includes the statement that the information included represents the ombudsman’s independent judgment and does not necessarily represent the view of the Consumer Financial Protection Bureau. Also, the report covers the private student loan market, not the much larger federal student loan arena, administered by the Department of Education.

It goes without saying (but of course I will say) that both federal and private student loans have been incredibly hot button issues in the last year+, including the Department of Education student loan collection contract drama, the acquisition and then demise of for-profit Corinthian College, and the mounting public pressure to forgive student loans on a mass scale.

The debt load on young consumers is bound to be a significant issue in the 2016 elections; whether it will become an actual matter addressed by Congress remains to be seen.

by – Patrick Kane

The U.S. Supreme Court recently held that a debtor in a Chapter 7 case cannot “strip-off” or void a wholly unsecured junior mortgage under section 506(d) of the Bankruptcy Code. A copy of the opinion is available at: Link to Opinion.

The debtors in the consolidated cases both had two mortgages on their homes. The petitioner held a second-position mortgage on each of the homes. The senior mortgage on each home exceeded its fair market value, meaning that the junior mortgages were entirely unsecured and “underwater.”

Each debtor moved to “strip-off” or void the junior mortgage liens pursuant to section 506(d) of the Bankruptcy Code, 11 U.S.C. 506(d). The Bankruptcy Court granted the motion in each case, and both the District Court and U.S. Court Appeals for the Eleventh Circuit affirmed.

The second lien mortgagee petitioned the Supreme Court for writs of certiorari, which were granted.

The Court began with a textual analysis of subsection 506(d), which provides that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured clam, such lien is void.”

The Court explained that a creditor’s claim is deemed “allowed” under section 502 of the Bankruptcy Code if no interested party objects or the Bankruptcy Court decides a claim should be allowed if an objection is filed.

The parties agreed that the bank’s claims were “allowed,” but disagreed on whether they were “secured” under subsection 506(d).

The Supreme Court held that its prior decision in Dewsnup v. Timm, 502 U.S. 410 (1992) controlled.

Dewsnup involved a Chapter 7 bankruptcy debtor that sought to “strip down” or reduce a $120,000 lien to the value of the collateral, which was $39,000. The Court refused to permit this, reasoning that the term “secured” in section 506(d) was ambiguous, and holding that section 506(d) does not apply to an allowed secured claim, and that a debtor could not strip down the lien to the value of the property serving as collateral.

The Court rejected the debtors’ argument that Dewsnup should be limited to the partially unsecured liens involved in that case, reasoning that the definition of “secured claim” arrived at in Dewsnup — that a claim is “secured” if it is “secured by a lien” and “has been fully allowed pursuant to § 502” — does not depend on whether a lien is partly or entirely unsecured.

The Supreme Court also rejected the debtors’ argument that section 506(a) should be construed as applying to a secured claim supported by collateral with some value, reasoning that adopting such an artificial reading would mean that the same words — “allowed secured claim” — meant different things in subsections 506(a) and 506(d).

The Court likewise disagreed with the debtors that its decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993) controlled, finding that case inapposite because it involved the interaction between section 506(a) and section 1322(b)(2), but not 506(d), and because the Court in Dewsnup had already refused to define the term “secured claim” in subsection 506(d) differently than in subsection 506(a), depending on the value of the collateral.

The Supreme Court concluded by reasoning that treating a secured claim differently based on the value of the collateral would not shed light on subsection 506(d)’s meaning and would be “odd” because if, as the debtors urged, “a court valued the collateral at one dollar more than the amount of a senior lien, the debtor could not strip down a junior lien under Dewsnup, but if it valued the property at one dollar less, the debtor could strip off the entire junior lien.”

The Court held this would lead to “arbitrary results,” as the value of real property fluctuates constantly.

Accordingly, the judgments of the Eleventh Circuit Court of Appeals were reversed, and the cases remanded for further proceedings.

–Patrick Kane is an Associate at the law firm Maurice Wutscher LLP, practicing commercial litigation, consumer litigation, insurance recovery, and equine law.

Marika Mikuriya —

Consumer demand for quick credit has fueled the growth of a payday loan industry that, according to the Consumer Financial Protection Bureau (CFPB), imposes significant costs on those borrowers least likely to be able to afford them. The CFPB is concerned that these small, short-term, high-interest loans – which the borrower is expected to repay with his or her next paycheck – are forcing individuals into spiraling cycles of debt. This March, after months of debate, the Bureau released an outline of a proposed payday loan rule designed to protect borrowers from debt traps while preserving access to quick credit.

The outline of the proposed rule gives lenders two options for meeting CFPB requirements aimed at preventing short-term loans from becoming debt traps for borrowers. Lenders can choose either to meet certain verification requirements prior to granting loans, or to accept some limitations on the terms of the loans they offer.

Lenders opting to meet pre-loan eligibility verification requirements would be obligated to verify a prospective borrower’s ability to repay a loan based on his or her income, financial obligations, and credit history before making a loan. The outlined rule would also require borrowers to submit documentation of their improved financial situation and ability to repay before receiving a second or third loan within a 60-day period. Lenders could not make loans to consumers who have outstanding loans covered by the borrower’s collateral, or who have taken out three short-term loans in the preceding 60 days.

Alternatively, lenders could meet the proposed requirements by offering only loans with terms that protect borrowers from accumulating insurmountable debt. These requirements would prohibit loans over $500 and loans that keep borrowers in debt for more than 90 days in a one-year period. Additionally, lenders would be required to provide affordable repayment options before making a second or third loan during a 60-day period.

The CFPB outline also proposes requirements for higher-cost, longer-term credit products, including loans where the annual rate exceeds 36% and the loan provider holds an interest in the borrower’s car or can access his or her paycheck or bank account for repayment. Mirroring the outline’s proposal for payday loans, longer-term loan lenders could satisfy the requirements by making eligibility determinations at the creation of each loan or by offering only loans with terms that protect against debt traps. The CFPB is still considering possible restrictions on the amount, length, and repayment terms of these longer-term loans to accomplish this purpose.

The Bureau will also seek to protect consumers from debt traps by preventing lenders from collecting money from borrowers’ bank accounts without warning. When a loan is executed today, many lenders obtain permission to collect automatic payments directly from a borrower’s bank account. These collection attempts frequently result in overdrafts, subjecting the borrower to fees imposed by both the financial institution and the lender. The proposed rule would require lenders to notify consumers three days before accessing their bank accounts and limit the number of withdrawals a lender could make without renewed authorization. The CFPB expects this to reduce borrowers’ accumulation of fees for unsuccessful withdrawal attempts, thereby reducing the potential for debt traps.

On the same day the CFPB released the outline of its proposed rule, CFPB Director Richard Cordray held a field hearing to discuss the proposal. Consumer groups, industry representatives, and members of the public attending the hearing expressed divergent opinions about the proposal.

Consumer advocacy groups’ concerns focused on payday loan debt traps. In remarks delivered at the field hearing, Paulina Gonzalez, Executive Director of the California Reinvestment Coalition, illustrated this concern with a story about a borrower’s skyrocketing debt as the interest and late fees on his small loan rapidly accumulated. Data from the Center for Responsible Lending (CRL) show that a borrower taking out a loan with a repayment period of between two weeks and one month will, on average, remain trapped in debt for seven months. Although consumer groups generally support the CFPB’s proposal, some would like it to go further, requiring lenders always to ensure the borrower’s ability to repay. Many consumer groups have expressed concern that lenders will exploit “loopholes” to continue making unaffordable loans.

Consumer loan providers, on the other hand, criticized the CFPB’s proposal as unduly restricting lending, making credit less accessible. The Community Financial Services Association of America called for the Bureau to balance access to credit and consumer protection better, and to base regulations on “rigorous research, not anecdote or conjecture.” Similarly, Edward D’Alessio, Executive Director of the Financial Service Centers of America, expressed concern that “customers will lose many of the credit options available to them.” He asserted that consumers are intelligent and capable of making rational decisions about loans.

The CFPB plans to seek comments from industry representatives, advocacy groups, and government officials through a Small Business Review Panel. Once the CFPB publishes its proposed rule, the public may submit written comments, which the CFPB will consider in developing a final rule.

by Patrick Lunsford —

A committee in the Oregon House of Representatives next week will consider a bill that could place extensive new requirements on debt buyers that file collection lawsuits against consumers. In a public hearing late last month, debt buyers expressed opposition to the bill as introduced noting “this legislation has very significant problems.”

HB 2252 was introduced early this year at the very beginning of Oregon’s current legislative session. After being referred to the House Committee on Consumer Protection and Government Effectiveness, the bill had a public hearing and is scheduled for a work session on April 21 which may include a Committee vote and recommendation on passage.

The bill’s purpose, as written, is to establish requirements under which debt buyer may bring legal action to collect debt and specifies the notices that a debt buyer must give to a debtor before a suit is filed. The new requirements include an exhaustive list of documents that must be presented to the consumer and the court.

In separate submitted testimony, debt buying trade group DBA International and ARM giant Encore Capital Group stressed their opposition to the bill at a public hearing on March 26.

Encore noted that the bill goes far beyond federal requirements and new rules in other states and is impractical in its current form.

“As introduced, HB 2252 would require documents and data that simply do not exist,” Encore said. “Both the CFPB and FTC have publicly recognized that pre-charge-off account itemization is typically not provided to debt purchasers. Similarly, a copy of the original contract is often unavailable. This is largely because banks that originate credit card debt are, under federal law, not required to maintain this information longer than 24 months.”

Encore also explained that the original contract may not be available simply because it does not exist. “For an increasing number of credit card accounts opened by phone or online today, there is never a contract that the consumer signs,” the company noted.

“As drafted, the legislation’s impossible requirements would in no uncertain terms eliminate the ability of the entire debt collection industry to do business in Oregon,” Encore concluded.

DBA International had similar reservations about the bill. The trade group noted that the bill would do nothing to prevent scammers from preying on Oregon residents.

“DBA International respectfully opposes HB 2252 as originally drafted as it imposes extreme and in some cases impossible requirements on the industry which will not solve the problem of ‘bad actors,’” the DBA said, “it will simply serve to punish legitimate companies already complying with the law while the conduct of bad actors would continue.”

DBA noted that the bill would require debt buyers to provide over 20 different data elements, documents, and notices to the consumer on three different occasions as proof that they have the correct consumer identity, they own the debt, and have the correct balance owed.

The work session scheduled for next week in the House Committee could see amendments or other alterations made to the bill and could also result in a vote on whether to send the legislation to the full House.

Patrick Lunsford —

Nine state attorneys general Thursday sent a letter to U.S. Department of Education Secretary Arne Duncan urging him to “immediately relieve borrowers of the obligation to repay federal student loans that were incurred as a result of violations of state law by Corinthian Colleges, Inc.”

The AGs – from California, Connecticut, Illinois, Kentucky, Massachusetts, New Mexico, New York, Oregon, and Washington – joined a group of Senators who also recently asked ED to forgive the federal loans owed by former students of Corinthian campuses.

A large portion of the private student loans owed by Corinthian student have already been forgiven. That was a concession made by student loan debt collector and guarantor ECMC Group, who closed on its acquisition of Corinthian in February. In a deal brokered by the CFPB, ECMC agreed to forgive some $480 million in private student loan debt initiated by a Corinthian subsidiary.

The nine AGs want the government to go further and forgive federal direct and federally-backed student loans.

Federal and state regulators and investigators launched numerous actions against Corinthian over its lending, funding, and debt collection practices. In July, the company and the ED agreed on a plan that would shutter a dozen Corinthian campuses and sell the remainder to third parties.

“These cases against Corinthian have unmasked a school that relentlessly pursued potential students — including veterans, single parents, and first-time higher education seekers — promising jobs and high earnings, and preying on their hopes in an effort to secure federal funds,” the attorneys general wrote. “These students deserve relief.”

It is not known how federal loan forgiveness would impact the Corinthian portfolio acquired by ECMC. The company did agree to major reforms of the lending program in conjunction with the transaction.

ECMC agreed to not offer its own private student loans to current and future students for a period of seven years. In addition, ECMC has agreed to refrain from certain debt collection practices, including the threat of lawsuit, on Corinthian loans it now owns. ECMC also agreed to remove negative information from student borrowers’ credit reports.