CL&P Blog

Bloomberg Law Insight: Why the ABA Is Wrong on Amending Debt Collection Bill

by Jeff Sovern

That's the title of my essay my colleague Gina Calabrese and I wrote here in Bloomberg Law.  Excerpt:

The ABA argues that consumers don’t need protection from unscrupulous lawyers because lawyers are already subject to state ethics rules largely written by the ABA itself. Experience tells us otherwise. When a law firm sued consumers for debts they did not owe, the Consumer Financial Protection Bureau needed the FDCPA to stop it. One of us teaches in a law school consumer clinic and has observed that ethical rules do not stop attorneys from deceiving consumers.

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One of us has seen an attorney tell a court—under penalty of perjury—that a large balance remained on a debt that had been fully paid. The firm later admitted it was wrong, but only after it was held accountable under the FDCPA. Lawyers have frozen our law clinic’s clients’ bank accounts, blocking their access to their own funds, for debts that had already been paid. In none of these cases did the attorneys face ethics sanctions. Indeed, courts routinely excuse such missteps.

The ABA's wrongheaded goal of enabling lawyers "engaged in litigation activities" to ignore debt collection law

by Jeff Sovern

The federal Fair Debt Collection Practices Act provides consumers a variety of protections. Collectors, for example, are barred from making false statements and engaging in unfair practices, and are obliged to give consumers certain disclosures.  But the American Bar Association wants to excuse lawyers "engaged in litigation activities" from complying with the FDCPA.  In the ABA's view, state courts and ethical rules provide all the protection consumers need. The House Committee on Financial Services has already reported a bill, H.R. 5082, to accomplish the ABA's goals.

In my view, lawyers should not seek or obtain exclusions from the FDCPA.  The robo-signing scandal was only a few years ago, and lawyers did not exactly cover themselves in glory on that one. Robo-signing may have gone on for years, despite state courts and ethical rules.  The CFPB has brought a number of cases against lawyers behaving badly in debt collection matters.  In one case, for example, the CFPB complaint alleged (I reformatted the paragraphs and omit paragraph numbers for ease of reading):

Defendants, a law firm and its principal partners, have sued hundreds of thousands of Georgia consumers to collect debts that the consumers allegedly owe to others. To produce so many lawsuits, the Firm operates less like a law firm than a factory. It relies on an automated system and non-attorney support staff to determine which consumers to sue. The non-attorney support staff produce the lawsuits and place them into mail buckets, which are then delivered to attorneys essentially waiting at the end of an assembly line. The Firm’s attorneys are expected to spend less than a minute reviewing and approving each suit. Using high-volume litigation tactics, Defendants collect millions of dollars each year, often from consumers who may not actually owe debts or may not owe debts in the amounts claimed.

That case terminated in a consent order under which the firm agreed to pay a penalty of more than $3 million. That does not exactly suggest that we need fewer consumer protections against misbehaving lawyers. Will state courts force attorneys to compensate consumers when law suits allege the wrong amount of the debt? When lawyers sue the wrong consumer? When lawyers bring time-barred claims? Will consumers be told of their rights?  The ABA would do better to devote its energy to making sure attorneys behave appropriately in debt collection than to insulate attorneys from complying with existing debt collection laws.

Trump Administration's Student Loan Policy

Student loan debt has jumped from $1 trillion to $1.5 trillion in the last 5 years. The Education Department's official default rates

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seriously understate the share of young borrowers who default, or are not able to repay their loans. In the face of the growing student loan debt crisis, the Administration's corrupt policy is to undo the Obama administration's gainful employment rule for colleges, grease the wheels for fraudulent for-profit schools, curb loan relief to victims of school fraud, and sabotage consumer protection enforcement by the CFPB and state regulators (by asserting preemption) against student loan servicers who mislead and abuse borrowers. This article sums it up nicely.

More Results from an Empirical Study of Consumer Understanding of Debt Collection Validation Notices

by Jeff Sovern

We just posted to SSRN the draft of our article, Validation and Verification Vignettes: More Results from an Empirical Study of Consumer Understanding of Debt Collection Validation Notices, Forthcoming in the Rutgers U. L. Rev. (with Kate Walton & Nathan Frishberg). Comments welcome! Here's the abstract:

The federal Fair Debt Collection Practices Act obliges debt collectors to provide certain notices to consumers from whom they are attempting to collect debts. This article is our second to report findings from the first academic study of consumer understanding of one of those notices, commonly called the validation notice or “g notice.” We showed consumers different versions of collection letters and then asked questions to measure their understanding of the notices. Our findings raise serious questions about the efficacy of a commonly-used form of validation notice, especially when read in conjunction with the findings in our first article. 

In this article, we report that a fifth of the respondents who said they would write a letter if told they needed to do so to dispute a debt they did not owe failed to realize that the letter they saw said that the collector would have to verify the debt if they wrote 25 days after receipt of the collector’s demand for payment—even though the demand letter had been approved by the Seventh Circuit. Most respondents did not find the validation notice salient enough to mention when asked an open-ended question about the contents of the two-page collection letter they saw. We also found a gulf between what many consumers expect when requesting verification of a debt and what some courts say collectors must provide. 

Some consumers also seemed to run out of patience to dispute debts. Significantly fewer consumers said they would dispute a debt with a second collector when they had already disputed it once, though most said they would dispute the debt a second time. Because some collectors sell disputed debts to other collectors, that finding suggests that consumers will surrender some rights simply because they grow tired of asserting them. On the positive side, we found that seeing a validation notice made a difference on some questions, though not on others. After discussing these and other findings, the article offers some recommendations to lawmakers for addressing the problems revealed in our study.

House Appropriations Committee Votes to Subject CFPB to Annual Appropriations

by Jeff Sovern

The Hill has a report here. I don't think that can pass the Senate unless the Senate abolishes the filibuster rule or nine Democratic senators go along with it, so it seems unlikely to pass unless Democrats make a deal to do something they see as more important--which hasn't happened in the years the Republicans have been trying to get this through and so seems unlikely to happen this year.

Jeb Hensarling, the Financial Choice Act, and Wells Fargo

by Jeff Sovern

When the Bureau fined Wells Fargo $1 billion, it did so using its power to prohibit unfair practices in 12 USC 5531(c), 5536(a)(1)(B). (see pages 9 and 12 of the consent order). House Financial Services Committee Chair Jeb Hensarling's Financial Choice Act, passed by the House, would eliminate that power.  But don't take my word for it: the bill's Executive Summary says it would "Remove the [CFPB's] opaque and ill-defined 'unfair, deceptive, or abusive acts and practices' (UDAAP) authority (emphasis added)." The relevant section of the statute is 736, which provides that the bill would repeal section 5531 altogether and would also repeal subsection 5536(a)(1)(B), the two provisions under which the Bureau proceeded. So I was mystified when Congressman Hensarling praised the $1 billion fine--which would have been impossible under the power the Bureau used if he had gotten his way--as "well-deserved." 

During a recent interview, Politico's Ben "Morning Money" White asked Hensarling about the conflict. Hensarling first asked why the Bureau would not have had the power to assess the fine under his bill, and then said it would have. Certainly that would not be true under the powers the Bureau actually used. 

Mr. Hensarling also complained during the interview that the Bureau's use of its power to bar financial institutions from engaging in abusive practices is itself abusive.  His bill would also eliminate that power.  While the Bureau did not use its "abusive" power in connection with the billion dollar fine, it did use it, along with its unfairness power, when it fined Wells $100 million for opening unauthorized accounts. When discussing the unauthorized accounts scandal, Mr. Hensarling mentioned the Truth in Savings Act and Truth in Lending Act and seemed to suggest that the Bureau could have taken the same actions under those statutes.  As for the billion dollar fine, given that Interim Director Mulvaney's party thinks that the Bureau should not have the power to punish financial institutions for behaving unfairly, it is odd that Mr. Mulvaney would have used it if he had alternatives, especially given Mr. Mulvaney's view that he will do only what the law requires of him, and the use of the unfairness power necessarily requires some discretion.

CORRECTION: As Jonathan Joshua has pointed out to me, 15 USC § 1642 prohibits the issuance of credit cards in the absence of a "request or application."  So Wells did violate the Truth in Lending Act when it issued credit cards without such a request or application.  While Wells Fargo issued unauthorized credit cards, I'm not sure how many unauthorized credit cards it issued, and how many ordinary bank accounts it opened, though I have the impression that it opened many more bank accounts. I'm still not sure what Mr. Hensarling thinks in the Truth in Savings Act bears on the opening of bank accounts.  

More on Congress's Disapproval of the CFPB's Indirect Auto Guidance

by Jeff Sovern

Alan Kaplinsky and Chris Willis, on the one hand, and Adam Levitin, on the other, have been dueling over the impact of Congress’s use of the Congressional Review Act to disapprove of the CFPB’s Indirect Auto Lending Guidance.  Those of us interested in consumer financial law are lucky to have these titans lay out the arguments for their respective positions.  Regular readers of this blog will not be surprised to learn I agree with Adam, but I wanted to add a couple of minor observations to what Adam said (though if you haven’t read what Adam has said, you would be better off reading that than what I have to say). In brief, Alan and Chris argue that a result of Congress’s action (assuming, as seems inevitable, that the president signs the resolution) is that the CFPB would no longer be able to use its enforcement powers against a lender that gave dealers discretion to mark up the rates on the lender's loans if the result of the dealer discretion was to charge protected groups higher rates.

Here’s a thought experiment: suppose Mick Mulvaney issued a guidance saying that the CFPB was going to enforce consumer financial law (I did say it’s only a thought experiment) and Congress then invalidated that guidance using the CRA.  Would we then say that the CFPB could not enforce consumer law? Of course not; the statutes giving the CFPB the power to do so would still be in effect and Congress cannot use the CRA to repeal statutes giving the CFPB power to enforce the laws Congress has enacted.  So it is here (as Adam points out); at most, the CFPB can’t issue a new guidance or rule or one that is substantially the same as the Indirect Auto Guidance, and even that is in question for the reasons Adam notes.  The CRA says nothing about enforcement of existing statutes and regulations that have not been disapproved.

One thing that illustrates the problem with the CRA as applied to the Guidance is that the Guidance says many things.  I’m going to insert a quote from the Guidance and as you read it, ask yourself which of these things Congress disapproved of in its resolution:

In our most recent Supervisory Highlights, we set out the following features of a strong fair lending compliance program, which are applicable in the indirect auto lending context:

• an up-to-date fair lending policy statement;
• regular fair lending training for all employees involved with any aspect of the institution’s credit transactions, as well as all officers and Board members;
• ongoing monitoring for compliance with fair lending policies and procedures;
• ongoing monitoring for compliance with other policies and procedures that are intended to reduce fair lending risk (such as controls on dealer discretion);
• review of lending policies for potential fair lending violations, including potential disparate impact;
• depending on the size and complexity of the financial institution, regular analysis of loan data in all product areas for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction;
• regular assessment of the marketing of loan products; and
• meaningful oversight of fair lending compliance by management and, where appropriate, the financial institution’s board of directors.

Is the answer all of them?  CRA resolutions don’t permit Congress to pick and choose among parts of the regulation, so it appears that Congress disapproved of all of those items, and more. If so, if the CFPB has lost its enforcement power with respect to the Guidance, does that mean the CFPB can no longer require lenders to do anything on that list? Does that make sense?  The CFPB can no longer oblige lenders to maintain an up-to-date fair lending policy? Alan and Chris try to deal with this particular paradox (those who like to think about paradoxes might also speculate about what would happen if Congress used the CRA to disapprove the GAO’s determination that the Indirect Auto Guidance is a rule subject to the CRA—but I digress) by limiting application of the resolution to what they call the “substantive centerpiece” of the Bulletin. But the CRA says nothing about centerpieces, substantive or otherwise. What it says is that the disapproved rule “shall have no force or effect.” What would give the CFPB the power to enforce some of the Bulletin but not the rest of it?  And if that result strikes you as absurd, doesn’t it mean that the CRA resolution has no impact on enforcement but only on what it says it has an impact on: the ability of the Bureau to fashion rules?

House to Vote on Senate Bill Amending Dodd-Frank and Senate Agrees to Take Up House Bills

by Jeff Sovern

It sounds like the House will vote on, and presumably pass, the Senate bill as is. In return, the Senate will take up certain as-yet-unidentified House bills that passed by a margin of at least two-thirds, meaning that at least some Democrats voted for them.  It's not clear, but it looks like the CFPB structure will be unaffected, though the Senate bill is a net negative for consumers. The Hill has a report here.

Impact of House Vote to Rescind CFPB Indirect Auto Guidance Remains Unclear

Joseph Lawler reports in the Washington Examiner. Excerpt:

[T]he resolution passed Tuesday raises a tricky legal question regarding what it means for Congress to disapprove of informal guidance that an agency sends to businesses. When Congress disapproves of a rule enforced by an agency, the meaning is clear: The agency is not allowed to enforce the rule any more. But when it disapproves of guidance relating to an underlying law, the intent is murkier.

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“In the longer term, if the bureau gets leadership that wants to enforce the underlying law, I still doubt that it changes enforcement because the CRA does not say anything about enforcement,” noted Jeff Sovern, a law professor at St. John’s University, “but rather only prohibits disapproved rules from taking effect and bars the agency from issuing rules that are substantially the same.”

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Christopher Willis, a partner with the [Ballard Spahr] firm, argued that congressional disapproval meant that Congress has ruled out the legal theory the CFPB was using — that lenders could be held liable for loans arranged by auto dealers for which minorities were thought to be disproportionately overcharged.

* * * 

“The disapproval has to mean something,” he added.

The president is expected to sign the resolution.

House Expected to Vote on CFPB Indirect Auto Guidance Tuesday

Adam Levitin has written about what this means--or doesn't mean--at Credit Slips.