Consumer Finance Insights (CFI)

The Consumer Financial Protection Bureau (CFPB) has set its sights on debt collection practices again.  In April, we wrote about the CFPB’s $63 million settlement with a mortgage servicer, Green Tree Mortgage, in part for Green Tree’s alleged treatment of mortgage debt.  On July 8, 2015, the CFPB once again demonstrated it was making debt collection practices an enforcement priority, announcing that it had entered into a consent order with Chase Bank, USA N.A. and Chase Bankcard Services, Inc. (see our initial coverage of the action on Consumer Finance Enforcement Watch here).  Indeed, in the CFPB’s press release on the Consent Order, Director Cordray stated that “[o]ur action today puts debt sellers, debt buyers, and third-party collectors on notice that they are all responsible for following the law and must perform their due diligence when collecting debts.”  Moreover, as in past CFPB actions like the Green Tree enforcement, the CFPB cooperated with other government agencies, here, the Office of the Comptroller Currency (OCC) and the attorney general of 47 states and the District of Columbia.  This type of cooperation is expected to continue, and it will allow the investigations to be broader in scope and more far reaching.

The Consent Order requires over two hundred million dollars in penalties and restitution consumers.  The CFBP further imposed requirements for Chase’s going forward debt collection practices.  Specifically, the CFPB required that the lender:

1. halt collections on more than 528,000 consumers’ accounts;
2. provide at least $50 million in refunds to consumers;
3. pay a $30 million civil penalty to the CFPB;
4. pay a $30 million civil penalty to the OCC on a related matter; and
5. pay $106 million to the various states.

Remarkably, the CFPB entered into this enforcement action even though it recognized that the lender suspended pursuing the subject of its enforcement action—collection and sale of debt– in 2011 and in 2013, respectively.   For its part, the lender has only admitted facts sufficient to confer jurisdiction on the CFPB, but did not otherwise admit to the facts in the Consent Order.

Statutory Authority 

The CFPB had two theories in this investigation — both that lender’s own actions were unfair, deceptive or abusive, and that the lender was “providing substantial assistance” to another party that was engaged in deceptive activity.  It used §§ 1036(a)(1)(B), 1031(a), (c)(1) of the CFPA – which prohibit unfair, deceptive, or abusive acts or practices and §1036(a)(3) of the CFPA, which prohibits providing substantial assistance to covered parties in deceptive practices.

The CFPB’s Factual Allegations

This enforcement action centers on the lender’s credit card business, and more specifically, how the lender allegedly treated delinquent accounts. The CFPB focused on two kinds of actions: (1) collection activity during litigation, and (2) the lender’s sale of debt to third party.   In particular, the CFPB found that the lender:

• Did not always obtain or maintain good records relating to debt it purchased or relating to the credit it had extended, and the lender’s records were sometimes inaccurate as a result. Inaccurate information could include the identity of the account holder, the amount owed, whether the account was settled, and whether there had been fraud.
• Sold inaccurate accounts that it “knew or should have known were unenforceable or uncollectable” and it knew that the purchaser of the account would attempt to collect payments using unlawful collection practices, given the inaccuracies in the sale of the accounts and that many were so called “zombie” accounts.
• Provided “robo-signed” sworn statements in support of lawsuits filed to collect on the delinquent accounts. These statements were sworn in bulk using stock templates, and the signing individual often lacked personal knowledge of the information they were attesting to and did not perform the requirements of a sworn statement.
• Never informed consumers that they had a possible remedy for reported judgments against them based on the lender’s improper evidentiary practices.
• For 9% of the judgments the lender obtained, the judgment amount was greater than what the borrower legally owed, and even after the lender became aware of the error, it did not notify the affected borrower, nor did the lender move to vacate the judgment

Changes to the Lender’s Business

Beyond the monetary penalties already discussed, the CFPB also imposed onerous and long term requirements that will affect the lender’s credit card business, and it retained oversight of those changes through 2020.   These requirements are very detailed, particularly as to any potential sale of debt to third parties and as to the lender’s collection of debts. Some of the more specific requirements include that:

1.  The lender will implement effective processes, systems and controls to provide accurate information and documentation to debt buyers and consumers in connection with debt sales. These systems will be documented and be made available to its employees.
2. There were many conditions and restrictions placed on the lender relating to any future sale of debt to third parties:
   • If the lender sells debt after the Consent Order, the lender must insist that the contract include various provisions, including that the debt collector cannot collect on accounts that do not have specific information (like the first date of delinquency) and provide the purchaser with specific account information for at least three years;
   • The lender must make specific information available to the consumer prior to the sale of the debt, and after the sale of the debt. The lender must also establish methods, including telephone routing, for the consumer to obtain information on the debt that has been sold.
   • The lender cannot sell accounts where the consumer is a service member or a minor, if there is litigation at issue, if there has been a discharge, or if there is a dispute over the amount owed.
   • The lender must conduct due diligence prior to entering into any relationship with any new debt buyers, and must further obtain various representations from the new debt buyers, including specific limitations on how the debt buyers will behave in trying to collect the debt.
3. The CFPB also imposed specific, detailed requirements both in how the lender must go forward with its collection litigation, including how complaints should be drafted, and specifically relating to any declarations that the lender makes in connection with collecting on the debt—including keeping records for five years to support any declarations issued.  The CFPB imposed a very vague standard—“effective processes, systems and controls”– that must be documented and circulated to its employees, relating to the lender’s obligations in managing its debt collection litigation practices, and declarations regarding debts.  The lender must further have written training materials regarding how to execute declarations.

Remediation

In addition, the lender also must undertake various steps for remediation within 60 days. The lender must:

1. seek to withdraw, dismiss or terminate all pre-judgment collections litigation pending from 1/1/09-6/30/14, and withdraw, dismiss, or terminate its collection efforts for judgments obtained in that same time period.
2. inform all affected consumers that it will not pursue collections on judgments obtained during the 1/1/09-6/30/14 time period.
3. request that each consumer reporting agency amend, delete or suppress information of any of the judgments obtained by the lender from 1/1/09-6/30/14 and notify the consumer of the lender’s action.
4. adjust any potential balance inaccuracies by treating each account as if had not been refereed to collection litigation, and must waive all pre-and post-judgment interest fees and costs that accrued.

Finally, the lender has to provide the CFPB semiannual reports describing how it has implemented the remediation and balance adjustments, updates on its progress, and state specific data.

Lessons Learned

There are several takeaways from the Consent Order.  First, this puts first party debt issuers on notice that the CFPB is going to hold them responsible for actions taken by any third party purchasers/debt collectors under the CFPB’s authority pursuant to 1036(a)(3) of the CFPA, 12 U.S.C. § 5536(a)(3), which prohibits providing substantial assistance in the deceptive acts of a covered person.  Both credit issuers and debt collectors should review the requirements the CFPB has for the lender’s debt collection practices to evaluate whether they may be subject to CFPB scrutiny.

Next, data integrity was a key issue that the CFPB honed in on, as poor data maintenance appears to be what led to many of the practices singled out by the CFPB.  It was also an issue in the above-referenced action against Green Tree.

Finally, even where a company has ceased to operate in the debt collection space, it is not safe from regulatory action—the CFPB, and the OCC, will reach back to past practices in their investigations.