Collecting a Debt from a Susceptible Consumer

QUESTION 

Our compliance department received a complaint from a borrower about being harassed. She is overdue in her payments, her escrow is going negative, and we have tried to get her to respond to letters and calls. Our attorney is now involved in replying to her. 

But it is very frustrating when we try to contact the borrower in every way, and then she accuses us of harassment. The main threat she has is that we intimidated her and used threatening language. I doubt it. 

We have received debt collection training and know what we’re doing, what to say and what not to say. Nevertheless, this complaint happened! 

Maybe you can provide guidance by discussing the prohibitions against harassment to collect a debt. 

What are some prohibitions regarding harassment in debt collection? 

ANSWER 

Over the years, we have handled disputes like the one you describe. Indeed, generally, your situation is rather common, though each case is reflective of particular facts. 

Some of the abusive acts my firm has encountered in connection with collecting a debt are:

 

·  using threat or use of violence or other criminal means to harm a person;

·  using obscene or profane language;

·  advertising for a debt to coerce payment of a debt;

·  repeatedly contacting a debtor with an obvious intent to annoy, abuse, or harass  them; and,

·  placing calls without any meaningful disclosure of the caller’s identity. 

And, believe it or not, we’ve encountered an attempt to collect a debt by publishing a list of consumers who allegedly refuse to pay debts! 

Proverbs (22:7) says, “the borrower is servant to the lender.” But such harassing and abusive acts are morbidly extreme and straight-out violations of the Fair Debt Collection Practices Act (FDCPA).  

The FDCPA aims to protect consumers from harassment or abuse concerning debt collections.[i] There are five specific types of prohibited conduct that constitute harassment or abuse. I’ll list them below. 

Before listing them, I will note the following provision in the FDCPA: 

“… a debt collection may not engage in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt.”[ii]

[Emphasis added.] 

You might think this is subjective, but you would be wrong. The purpose of the provision, as stated by Congress in the Senate report regarding the consideration of the FDCPA, is to “enable the courts, where appropriate, to proscribe other improper conduct which is not specifically addressed.”[iii]

Thus, a debt collector may be liable even if its actions do not fall under the five prohibitions. If you want to wind up in court, be my guest. There’s a huge body of case law that will get you focused real quickly. 

Alternatively, seek competent, professional guidance to ascertain if your plans to collect a debt are potentially liable, especially if they seem to fall outside the five specific prohibitions. 

Here are the five examples of conduct – and note the word “examples,” meaning these are not meant to be exclusively comprehensive – that fall under the prohibition:[iv]

 

1.  Threatening to contact third parties;

2.  Communicating unnecessarily with third parties when the consumer can be reached directly;

3.  Using intimidating or insulting language;

4.  Repeated and frequent personal contact with the consumer; or

5.  Continuing to collect after multiple notices of bankruptcy discharge.

The terms “harass,” “oppress,” and “abuse” are not defined under FDCPA, and so are given their plain meaning. Note the phrase quoted above – “the natural consequence of which is to harass, oppress, or abuse” – uses all three terms. Therefore, a standard is used to determine the issue, and whether or not the consumer actually believes they are being harassed, oppressed, or abused is not relevant. 

The term for a standard that courts often use is the “susceptible consumer” standard. That standard is not “subjective” and can be applied objectively. Under the “susceptible consumer” standard, courts look to a consumer who is “relatively more susceptible to harassment, oppression, or abuse” based on their circumstances.[v] 

A final point: the FDCPA applies to the harassment or abuse of not only consumers but also “any person” in connection with debt collection. Thus, a debt collector may be liable for the natural consequences of its actions on family members, friends, or others. 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director 

Lenders Compliance Group

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[i] 15 USC § 1692d

[ii] Idem

[iii] Senate Report # 382, 95^th Congress, First Session 4 at 4 (1977)

[iv] FTC Staff Commentary on FDCPA § 806

[v] Jeter v Credit Bureau, Inc., 760 F.2d 1168, 1179 (11^th Circuit 1985) 

Snollygosters and Throttlebottoms

QUESTION 

I have been reading about the CFPB coming under attacks as being unconstitutional. If it is found to be unconstitutional, we are concerned about everything it has done all these years, such as whether we are going to still be required to follow all its rules and regulations. 

It seems to me the politicians who created the CFPB should have thought of its constitutionality before setting it up in the first place. We send them to Congress, they create the CFPB, and then it is found to be unconstitutional years later. I think that could affect the whole shebang of policies my company put in place for years at a huge expense. 

I'm no lawyer but most of these Congress critters are lawyers. They should know how to write a constitutional law. I am frustrated. I am concerned about CFPB enforcement, too. Especially at this time, I do not have the money to reset our policies to pre-CFPB conditions if the CFPB's authority is destroyed. 

I have read your articles for years. I know you can explain what is going on. 

What are the implications of the CFPB being considered unconstitutional? 

ANSWER 

I have received many questions along the lines of your inquiry. Quit paying so much attention to snollygosters who prey on your fears. Fear gets people fired up, which is the point of it all. Then they get all charged up, go out to vote, and, lo and behold, they elect the fearmongering throttlebottoms who proceed to screw up the machinery with anfractuous, circuitous, serpentine, and tortuous crepitations of impending apocalypse. 

Let's dispense with the realm of signs, portents, and omens. 

So, first and foremost, take a deep breath. The CFPB's rules are not going anywhere for now. However, there are some litigation challenges along the way that will need to be vetted. 

A few weeks ago, on October 19, 2022, three judges in the Fifth Circuit Court of Appeals ruled that the funding mechanism of the Consumer Financial Protection Bureau (CFPB) is unconstitutional.[i] Specifically, the court found it was a violation of the Appropriations Clause[ii] of the Constitution for the CFPB to receive funds upon the CFPB Director's request to the Federal Reserve instead of through Congressional appropriations. 

The instant case involves a challenge to the validity of the payment provisions of the CFPB's 2017 Payday Lending Rule ("Rule"). Under the Rule, lenders are prohibited from making payment transfers from consumer accounts after two consecutive failed attempts due to insufficient funds unless the consumer authorizes such attempts. 

The district court granted summary judgment in favor of the CFPB. But, on appeal, the plaintiffs challenged the CFPB's promulgation of the Rule, alleging that the Rule was promulgated by a Director who could not be removed, which means the Director is "insulated" from removal. (I'll come back to the implications of the Director being "insulated" momentarily.) The plaintiffs further alleged that the CFPB's rulemaking itself is violative of the non-delegation doctrine and that the CFPB's means of receiving funds violates the Appropriations Clause. 

The non-delegation doctrine stems from the Constitution's vesting clause and separation of powers. The doctrine is an interpretation derived from Article I, Section I of the Constitution that declares all legislative power granted by the Constitution is vested in the Congress, the legislative branch. Thus, it's a principle in administrative law that holds Congress cannot delegate its legislative powers to other entities, such as delegating its power to administrative agencies or private organizations. 

The court said that the way the CFPB receives funds allows the CFPB to have a "double insulation" from the Congressional appropriation power: the CFPB Director's requesting funds from the Federal Reserve, which the Director deems "to be reasonably necessary," violates Congress's appropriations power. 

Furthermore, the court reasoned that the Federal Reserve itself falls outside of Congress's appropriations power because it receives funds from bank assets not subject to review by the House or Senate Committee on Appropriations. 

Therefore, the court found that Congress's authorization of the CFPB to promulgate the Rule was not unconstitutional, but the CFPB improperly used unappropriated funds to engage in the rulemaking process. In its reasoning, the court clarified that the CFPB lacked the ability to exercise the power to promulgate the Rule through constitutionally appropriated funds. 

In my view, this ruling will not have much or any impact on the structure of the CFPB. The court's ruling focuses on how the CFPB receives its funding and its violation of the Appropriations Clause. I think it's unlikely that this case will have any effect on the CFPB's enforcement powers as a regulatory agency. 

That word "unlikely" is doing a lot of work there. I happen to think the CFPB's funding mechanism is constitutional under the Appropriations Clause; in fact, the CFPB must ask Congress for any money it receives out of the Treasury, which goes for several other federal agencies operating similarly, including the FDIC. 

The court must recognize the potentially devastating consequences that could result from interfering with the funding practices of all independently funded government agencies. We know this because the court specifically limited its reasoning to the CFPB. It did this juridical prestidigitation by claiming that the CFPB's authority is unlike those of other federal regulators and that its funding independence "goes a significant step further." How it goes a "significant step further" is somewhat of a mystery. 

I fail to see the difference. And if there is a difference, the court does not bother to explain why those differences are constitutionally significant, as far as I can tell. 

As the Constitutional Accountability Center has stated:

"Despite the court's attempt to carve out a special rule for the CFPB, its reasoning would seemingly apply to the host of other financial regulators that are independently funded, including the Federal Reserve Board, which supervises and regulates numerous banking institutions."[iii]

So, the court has put the CFPB and many similarly funded agencies into a reductio ad absurdum conundrum since it now calls into question the rules, guidance, and orders that the CFPB and the other agencies have issued, inasmuch as they are similarly funded like the CFPB. For instance, agencies similarly funded outside the congressional appropriations process are the Federal Reserve, Federal Deposit Insurance Corp (FDIC), Office of the Comptroller of the Currency (OCC), National Credit Union Administration (NCUA), and Federal Housing Finance Agency (FHFA). 

The ruling attempts a surgical clip but winds up taking a machete to many agencies. 

Indeed, the CFPB has already stated that the Fifth Circuit's decision is "neither controlling nor correct" and "mistaken." The CFPB has stated, "there is nothing novel or unusual about Congress's decision to fund the CFPB outside of annual spending bills."[iv] 

This past Monday, November 14^th, the CFPB petitioned for a writ of certiorari to the U. S. Supreme Court, saying that the Fifth Circuit’s decision "threatens to inflict immense legal and practical harms on the CFPB, consumers, and the nation’s financial sector.”[v] 

The CFPB should now request a stay from the Fifth Circuit pending the Supreme Court decision, or, if denied by the Fifth Circuit, it should ask for a stay from the Supreme Court. If the CFPB doesn’t get a stay, it is not unreasonable to conclude that the Fifth Circuit’s decision could impede the CFPB’s litigating of current cases while also potentially impacting past enforcement actions and rulemaking.[vi]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director

Lenders Compliance Group

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[i] Community Financial Services Association of America, Limited; Consumer Service Alliance of Texas v Consumer Financial Protection Bureau; Rohit Chopra, in his official capacity as Director, Consumer Financial Protection Bureau, United States Court of Appeals for the Fifth Circuit, Case 21-50826

[ii] Article I, Section 9, Clause 7, U. S. Constitution: “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”

[iii] As Wrong as It is Dangerous: The Fifth Circuit’s Decision Holding the CFPB Funding Structure Unconstitutional, Constitutional Accountability Center, https://www.theusconstitution.org/blog/blog-as-wrong-as-it-is-dangerous-the-fifth-circuits-decision-holding-the-cfpb-funding-structure-unconstitutional

[iv] Appeals court finds CFPB funding unconstitutional, Katy O'Donnell, October 19, 2022, statement to Politico from CFPB spokesperson Sam Gilford. https://www.politico.com/news/2022/10/19/appeals-court-cfpb-unconstitutional-00062626

[v] Consumer Financial Protection Bureau, Et Al, v Community Financial Services Association of America, Limited, Et Al, Petition for a Write of Certiorari, November 14, 2022, section Reasons for Granting the Petition, p. 10

[vi] Ibid. Reasons for Granting the Petition, Section B. The Decision Below Warrants Review, And The Court Should Hear The Case This Term, p. 28

Prohibited Acts or Practices Violations in Advertisements

QUESTION 

Yesterday, we received the results of an examination. The part dealing with advertisement violations has our Chairman on a major warpath. The examiners found violations of prohibited acts or practices under Regulation Z. He’s already kicked out somebody in the marketing department. But the marketing people always submit their plans and disclosures to the Compliance Department for approval. I think letting go of her was unfair. 

I want to understand how prohibited acts and practices are involved in Regulation Z. I had always thought of it as a straight-out UDAAP issue. Apparently, there are also violations of Regulation Z based on prohibited acts and practices. I hope you can enlighten me since I am confused. 

What are prohibited acts or practices in advertisements under Regulation Z? 

ANSWER 

Getting an adverse report from a banking department can often feel disruptive. Once the corrective measures are put in place to the satisfaction of the regulator, you should be able to feel more sure about implementing protective policies and procedures. Sometimes, practices change over time without updating the process document, or procedures are not properly followed. 

Regulation Z, the implementing regulation of the Truth-in-Lending Act[i] (TILA), imposes restrictions on the advertising of closed-end consumer credit plans.[ii] I can’t tell from your question what aspect of Regulation Z caused your regulator to issue particular adverse findings relating to prohibited acts or practices. However, I think it is valuable to ensure we’re clear about certain aspects that could factor into the analysis. 

As provided in Regulation Z,[iii] all advertisements are subject to the same “clear and conspicuous” standard Regulation Z applies to all disclosures. In July 2008, the Federal Reserve Board amended Regulation Z to expand its standards for this clear and conspicuous standard. Still, TILA and Regulation Z do not prescribe specific rules for the format, such as type size or placement, of the necessary closed-end disclosures,[iv] other than the format requirements that apply to the disclosure of rates and payments.[v] 

Regulation Z addresses electronic advertisements[vi] Internet advertisements[vii] satisfy the clear and conspicuous disclosure standard if the required disclosures are not obscured by techniques such as graphical displays, shading, coloration, or other devices and comply with all the other requirements for clear and conspicuous disclosures applicable to closed-end advertisements generally. 

Television advertisements[viii] comply with the clear and conspicuous disclosure requirement if they are not obscured by techniques such as graphical displays, shading, coloration, or other devices, are displayed in a manner that allows a consumer to read the information required to be disclosed, and comply with all the other requirements for clear and conspicuous disclosures applicable to closed-end advertisements generally, as described in the materials that follow. For example, very fine print in a television advertisement would not meet the clear and conspicuous requirement if consumers cannot “see and read” the information required to be disclosed. 

This brings up the subject of oral advertisements. How the oral advertisement is delivered is critical: clear and conspicuous disclosure in the context of an oral advertisement, whether by radio, television, or other medium, means the required disclosures are given at a speed and volume sufficient for a consumer to hear and comprehend them.[ix] For instance, disclosure of information stated very rapidly at a low volume in a radio or television advertisement would not meet the clear and conspicuous standard if consumers cannot hear and comprehend the information required to be disclosed. 

A little more history is in order. In July 2008, the Federal Reserve Board turned to TILA[x] as the basis for additional authority (sometimes referred to as the Board’s – now the CFPB’s – “unfair trade practice” authority) to impose restrictions on the misleading and deceptive advertising of mortgage loans, including closed-end credit.[xi] The authority is broad,[xii] allowing the CFPB to prohibit acts or practices in connection with mortgage loans it finds unfair, deceptive, or designed to evade the provisions of TILA, and refinancing of mortgage loans it finds to be associated with abusive lending practices or otherwise not in the interest of the borrower. 

Indeed, Regulation Z[xiii] asserts both the CFPB’s authority under the specific advertising provisions of TILA and its unfair trade practice authority regarding mortgage loans under TILA.[xiv] 

The goals of the July 2008 amendments to the advertising requirements, as well as to the other requirements affected by the amendments, were to protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices while preserving responsible lending and sustainable homeownership, ensure that advertisements for mortgage loans provide accurate and balanced information and do not contain misleading or deceptive representations, and provide consumers transaction-specific disclosures early enough to use while shopping. 

I have been asked about the fact that compliance with the July 2008 Regulation Z revisions was not required before specified effective dates raises an interesting question: If the Federal Reserve Board was saying certain practices are unfair or deceptive, presumably they were unfair from the start, were they not? Therefore, can an advertiser afford not to implement them as soon as possible? 

The Board said, in its preamble to the regulations: 

Accordingly, nothing in this rule should be construed or interpreted to be a determination that acts or practices restricted or prohibited under this rule are, or are not, unfair or deceptive before the effective date of this rule.[xv] 

Notice that the Board stated, “are, or are not, unfair or deceptive.” It was conceivable that, prior to the effective date, a court might be asked to consider whether any of the acts or practices were unfair or deceptive. In fact, it was conceivable that a regulatory agency might bring an enforcement action against a specific institution, alleging that the institution had acted unfairly or deceptively based on all the facts and circumstances surrounding that conduct. 

Presumably, in these situations, the Board (now, the CFPB) would be taken at its word, with its statement treated with deference, that is, its adoption of the Regulation Z amendments did not judge the acts or practices as unfair or deceptive prior to their implementation dates. Accordingly, acts or practices occurring before the effective dates of revised rules should be judged on the totality of the circumstances under other applicable laws or regulations, not under the Truth-in-Lending Act. 

Let’s turn to the prohibited acts or practices in advertisements. Seven prohibitions are foundational. 

Specifically, Regulation Z prohibits[xvi] the following seven acts or practices in advertisements for credit secured by a dwelling: 

1. Misleading advertising of “fixed” rates and payments. 

An advertisement for a variable-rate transaction or other transaction in which the payment will increase must not use the word “fixed” to refer to rates, payments, or the credit transaction, unless:

Niche Product that violates ECOA

QUESTION

Most of our loan products are geared toward consumers of all ages. But we linked a person's age to the eligibility criteria for one of our products and then correlated it to income from public assistance. The aim was to offer a loan product that would benefit older adults on public assistance. 

This did not sit well with our regulator. We're now in hot water for violations of ECOA. Our compliance team reviewed this loan, and our attorneys reviewed it, too. Yet, here we are, facing down the barrel of a regulatory nightmare. 

I am an underwriter and just following the guidelines. But even I knew this loan was going to be risky. 

How should we figure a person's age in evaluating the application? 

And, is there a rule for considering income from public assistance of an applicant? 

ANSWER

I wish you had contacted me before getting into such a debacle. Combining age eligibility with public assistance criteria is like mixing water and oil. Under the Equal Credit Opportunity Act (ECOA), that's two strikes – not three! – and you're out. 

Let's keep it real. With limited exception, a creditor may not take into account an applicant's age (provided that the applicant has the capacity to enter into a binding contract).[i] 

There are primarily three criteria that a creditor can use to take the age of an applicant into account. 

They are: 

1. In an empirically derived, demonstrably and statistically sound credit scoring system, a creditor may use an applicant's age as a predictive variable, provided that the age of the elderly applicant is not assigned a negative factor or value. With respect to an "empirically derived, demonstrably and statistically sound credit scoring system," prepare to be seriously challenged on its validity! I'll comment more about the "negative factor or value" assignation below. 

2. In a judgmental system of evaluating creditworthiness, a creditor may consider an applicant's age only to determine a pertinent element of creditworthiness. Read on for my comment on a "pertinent element of creditworthiness." 

3. In any system of evaluating creditworthiness, a creditor may consider the age of an elderly applicant when such age is used to favor the elderly applicant in extending credit.[ii] 

Regulation B, the implementing regulation of ECOA, provides in its Commentary additional details on the consideration of age in the evaluation of an applicant.[iii] 

Concerning a "negative factor or value," as these elements pertain to the age of elderly applicants, you need to be very careful in such evaluations. The use of such features means utilizing a factor, value, or weight that is less favorable regarding elderly applicants than the creditor's experience warrants or is less favorable than the factor, value, or weight assigned to the class of applicants that are not classified as elderly and are most favored by a creditor on the basis of age.[iv] 

A "pertinent element of creditworthiness" is complex in theory and even more labyrinthine, complicated, circuitous, and tortuous in practice. In relation to a judgmental system of evaluating applicants, it means any information about applicants that a creditor obtains and considers and that has a demonstrable relationship to a determination of creditworthiness.[v] I know that sounds convoluted, and in a sense, it seems so (but it's not). Here is an example. Many lenders know that they may not reject an application because an applicant is sixty years old, but they do not know that they may relate the applicant's age to other information about the applicant that the creditor considers in evaluating creditworthiness, such as the applicant's occupation and length of time to retirement to ascertain whether the applicant's income (including retirement income) will support the extension of credit to its maturity.[vi] This scenario may have been the chute that your compliance people fell through into a regulatory crisis. If not structured properly and narrowly, your loan product was ripe for adverse regulatory findings, all things considered. 

I'll get over to the public assistance part of your question momentarily. But should you ask if any other prohibited basis factor in an empirically derived, demonstrably and statistically sound, credit scoring system may be applied, the answer is unequivocally no. Period. A creditor may not take a prohibited basis into account in any system of evaluating an applicant's creditworthiness, except as provided in ECOA and Regulation B.[vii] And this is why you must get competent and experienced guidance from a compliance professional that actually has substantial familiarity with ECOA and Regulation B. 

Now, about public assistance income in the evaluation of an applicant. Generally, a creditor may not consider whether an applicant's income derives from any public assistance program.[viii] However, when considering income derived from a public assistance program, a creditor may take into account certain primary factors, such as: 

1. The length of time an applicant will likely remain eligible to receive such income; 

2. Whether the applicant will continue to qualify for benefits based on the status of the applicant's dependents. An example here would be Temporary Aid to Needy Families or Social Security payments to a minor); and

 3. Whether the creditor can attach or garnish the income to ensure payment of the debt in the event of default.[ix]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] 12 CFR § 202.6(b)(2)

[ii] 12 CFR § 202.6(b)(2)(ii)-(iv); 12 CFR Supp. I to pt. 202 – Offical Staff Interpretations § 202.2(p)-1

[iii] 12 CFR Supp. I to pt. 202 – Official Staff Interpretations § 202.6(b)(2)

[iv] 12 CFR § 202.2(v)

[v] 12 CFR § 202.2(y)

[vi] 12 CFR Supp I to pt 202 – Official Staff Interpretations § 202.6(b)(2)-3

[vii] 12 CFR § 202.6(b)

[viii] 12 CFR § 202.6(b)(2)(iii)

[ix] 12 CFR Supp. I to pt. 202 – Official Staff Interpretations § 202.6(b)(2)-6