Bankruptcy Still Requires Periodic Statements

QUESTION 

Recently, our internal auditors found that we were not sending our borrowers periodic statements for the billing cycle. As a servicer, we are well aware that this should be done. However, what happened is the borrowers who did not receive the statements were in bankruptcy, so we stopped sending them statements. 

Our position was that there could be no more periodic statements because no more borrower payments were expected, so no more billing was needed. However, the internal auditors said we were wrong to stop billing. 

Frankly, sending periodic statements to a borrower who filed for bankruptcy makes no sense. Maybe you could shed some light on whether the auditors are correct. You may know of a situation or case where periodic statements should still be sent, even if the borrower went into bankruptcy. 

Is a servicer required to provide periodic statements for loans involving bankruptcy? 

COMPLIANCE SOLUTION

Servicing Quality Control Audits

ANSWER 

The answer to your question may surprise you. The Truth in Lending Act (TILA) requires a servicer to provide a periodic statement “for each billing cycle.”[i] A federal district court in California recently considered and rejected a servicer’s argument that it was not required to provide statements for loans it considered “matured.” 

Let's set forth some foundational information before I get to the servicer’s defense. The January 2013 Regulation Z Servicing Rule amended Regulation Z.[ii] In particular, the amendment generally requires mortgage loan servicers (other than small servicers) to provide periodic statements for any closed-end consumer credit transaction secured by a dwelling.[iii] The provision deals primarily with content requirements.[iv] 

Now, for that sample “situation or case” you requested. I have in mind the case of Naranjo v. Bank of America.[v] The moral of this story is to continue sending mortgage statements until a loan is paid off or forgiven. That said, TILA offers an exception for bankruptcy cases. But I get ahead of myself. 

In August 2006, the Naranjos obtained a secondary mortgage loan from Golden Empire and secured the loan with a Deed of Trust on their home. Bank of America, Veripro Solutions, and West Coast were successive servicers of the loan. The documents required the loan servicers to provide monthly statements. 

Sometime between 2006 and 2012, the Naranjos defaulted on their loan, and in February 2012, they filed for Chapter 7 bankruptcy protection. When the Naranjos received a notice of default and foreclosure a decade later, in January 2023, they filed a temporary restraining order application, which the court converted to a motion for a preliminary injunction. The complaint asserted claims for TILA and Real Estate Settlement Procedures Act (RESPA) violations, breach of contract, and other claims. 

However, the Naranjos alleged that they had thought their bankruptcy case had extinguished their debt. 

The court granted in part and denied in part the motion for a preliminary injunction and also granted in part and denied in part the servicers’ motion to dismiss. 

The court found that the Naranjos had properly alleged that their loan servicers had failed to send any statements since at least 2012, violating TILA. They were not required to allege causation to establish the TILA violation, a finding that the 9th Circuit had previously emphasized, stating that 

“even technical or minor violations of the TILA impose liability…to ensure that the consumer is protected.” 

The court further found that, even if there were a causation requirement, the Naranjos plausibly stated a claim because they alleged injury in the form of the threat of foreclosure and the interest that had accrued during the time they believed the loan had been discharged – both injuries the Naranjos plausibly could have avoided had they received timely statements. 

The court noted that the reasonableness of the Naranjos’ belief that their loan had been extinguished was a factual issue not properly resolved on a motion to dismiss. 

According to the court, the Naranjos had sufficiently pled that the servicers had violated Regulation Z by failing to send monthly statements. The court rejected the argument that servicer West Coast had no obligation to send statements because the loan had “matured” before it became the servicer; that is, because the loan had “matured,” no billing cycles remained within the meaning of the regulation’s requirement that a loan servicer must provide a statement “for each billing cycle.” 

However, the fact that the loan had “matured” made no difference in the obligation; such an unstated limitation would not serve the purpose of the regulation, which was to provide mortgagors with information about the amount they were expected to pay on their loans. 

The court denied the motion to dismiss a claim that the servicers’ conduct was unfair under California’s Unfair Competition Law. The Naranjos sufficiently alleged that the defendants had neglected their obligations to the Naranjos for a decade, leaving them to believe that the loan had been forgiven, only to be revived once they had built up enough equity in their home for it to be worth being foreclosed upon. 

They also asserted that the activity that led them to believe the loan had been forgiven allowed interest and fees to accumulate that would not otherwise have accumulated. 

Regarding the moral of this story, on October 16, 2013, the CFPB added to Regulation Z an exemption for a servicer concerning periodic statement requirements while the consumer is a debtor in bankruptcy.[vi] 

The CFPB modified this exemption, effective April 19, 2018. The CFPB had received comments seeking more detail on statements in the original Servicing Rule’s preamble regarding bankruptcy. The preamble had acknowledged that the Bankruptcy Code might prevent attempts to collect a debt from a consumer in bankruptcy, but stated that the Bureau did not believe the Bankruptcy Code would prevent a servicer from sending a consumer a statement on the status of the mortgage loan. The CFPB had also specified that the final rule allows servicers to make changes to the periodic statement they believe are necessary when a consumer is in bankruptcy. For example, a servicer could include a message about the bankruptcy and alternatively present the amount due to reflect payment obligations determined by the individual bankruptcy proceeding.[vii] 

The exemption was part of an interim rule exempting servicers from the TILA requirements[viii] while the consumer was a debtor in bankruptcy. To exempt a mortgage loan from the normal periodic statement requirements where any consumer on the loan is a debtor in bankruptcy[ix] or has discharged liability for the mortgage loan[x], the following must take place: 

(1) the consumer requests in writing that the servicer cease providing a periodic statement or coupon book; 

(2) the consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due; 

(3) a court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay with regard to the dwelling securing the loan, or requiring the servicer to cease providing a periodic statement or coupon book; or 

(4) the consumer files a statement of intention to surrender the dwelling securing the mortgage loan with the court overseeing the bankruptcy case, and the consumer has not made any partial or periodic payment on the mortgage loan after the commencement of the bankruptcy case. 

This exemption ceases if the consumer affirms personal liability for the loan or any consumer on the loan requests in writing that the servicer provide a periodic statement (or coupon book) unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement (or coupon book).[xi] 

Instead of the normal periodic statement, while any consumer on a mortgage loan is a debtor in bankruptcy or if the consumer has discharged personal liability for the mortgage loan[xii], a servicer must provide a modified periodic statement. The modified periodic statement may omit the normally required information regarding late fees, length of delinquency, risks of delinquency, and delinquent account history, and it need not show the amount due more prominently than other disclosures. A servicer then transitions to providing the normal periodic statement when the loan ceases to be subject to discharge, the debtor exits bankruptcy, or the bankruptcy exemption no longer applies.

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

Lenders Compliance Group

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[i] § 1026.41

[ii] Including § 1026.41, which implements TILA § 128(f), added by § 1420 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

[iii] Ibid

[iv] Appendix H-30 offers sample forms, which are properly used to provide a safe harbor for compliance.

[v] Naranjo v. Bank of America, 2023 U.S. Dist. (C.D. Cal. Nov. 17, 2023)

[vi] § 1026.41(e)(5)

[vii] Commenters sought clarification on reconciling the periodic statement requirements with various bankruptcy law requirements. They expressed concerns that bankruptcy courts, under certain circumstances, might find a servicer in violation of bankruptcy’s automatic stay or discharge injunction if the servicer provided a periodic statement, whether or not it included a disclaimer. Also, servicers had expressed concern about fulfilling the Regulation Z requirements in a way that did not confuse consumers regarding their status in bankruptcy, and that servicers were not attempting to collect on accounts. Others had asked questions about possible consumer confusion depending on what “amount due” and “payment due date” servicers would disclose in a Chapter 13 case that has different pre-petition arrearage cure payments and post-petition monthly payments, which might be due on different dates.

[viii] Op. cit. i

[ix] Under Title 11 of the U.S. Code

[x] Pursuant to 11 U.S.C. § 717, 1141, 1228, or 1328

[xi] A servicer may establish an exclusive address that a consumer must use to submit a written request under this provision.

[xii] Op. cit. x

Debt Collection: Notice to Cease Communications

QUESTION 

We are facing a potential class action suit for violating the Fair Debt Collection Practices Act. Our company originates and services residential loans. I am the company’s General Counsel. My colleague is Of Counsel. Together, we are writing for some guidance. We already have retained outside counsel to fight the suit; however, we seek some understanding for revising our policies and procedures by outlining the written notice requirements to cease communications. 

Here’s what happened, in part. For a period of approximately six months, we did not cease communications upon receiving the borrowers’ written requests to terminate communications with them. We learned about it due to a servicing quality control review. The servicing quality control reviews should never have been stopped. These audits were only reactivated after receiving consumer complaints, which thereafter led to the lawsuit. 

What are the salient guidelines for a debt collector to cease communications with a debtor upon a written request? 

ANSWER 

I have written and spoken at length about the importance of implementing servicing quality control. Here are just a few of the articles on this subject. For some reason, some servicers – and lenders who use subservicers! – do not conduct servicing quality control. Then lawsuits or regulators come knocking on their door, and they suddenly scramble to do it. 

Our highly credentialed experts provide the servicing quality control audit if you (or anyone else) want it. Regulators and investors know the excellent reliability of our work. So contact us, and we’ll send you information about our servicing quality control. 

It seems like your firm understands the importance of servicing quality control, but somewhere along the line, let the ball drop. Benjamin Franklin’s warning applies: “A little neglect may breed great mischief.” Missing one servicing QC period is a red flag; miss six of them, as in your case, and get ready for a lawsuit! 

Now, let’s zero in on your question. 

The Fair Debt Collection Practices Act (FDCPA)[i] provides that debt collectors must cease to send communications to the consumer upon the consumer’s written request. The term “consumer” is defined under FDCPA[ii]  to include both

(1) the “natural person obligated to pay the subject debt” and

 

(2) certain persons “close to the consumer-debtor,” specifically the consumer’s spouse, parent (if the debtor is a minor under applicable state law), guardian, executor, and administrator. However, other relatives, such as the consumer’s children, parents (if the consumer is not a minor), grandparents, and relatives not included in the special FDCPA definition do not constitute “consumers” under FDCPA.[iii] 

Taking into account this expanded FDCPA[iv] definition of consumer, the FDCPA decrees[v] that whenever a Debtor, et al., (“Debtor”) notifies a debt collector in writing that the consumer

 

(1) refuses to pay the debt sought to be collected or

 

(2) wishes the debt collector to cease further communication with the Debtor, the debt collector must not communicate further with the Debtor regarding the subject debt, except for the following purposes:

 

·       To advise the Debtor that the debt collector’s further collection efforts are being terminated.

 

·       To notify the Debtor that the debt collector or the creditor may invoke specified remedies that are ordinarily invoked by the debt collector or the creditor.

 

·       Where applicable, notify the Debtor that the debt collector or the creditor intends to invoke a specified remedy. 

Furthermore, the FDCPA further provides[vi] that if the notice to the debt collector to cease communications with the Debtor is sent by mail, the notification is complete upon receipt by the debt collector. 

The term “communication” is defined as the conveying of information regarding a debt, orally or in writing, either directly or indirectly, and through any medium. This term includes both oral and written transmissions of messages that refer to a debt.[vii] 

Indeed, the FDCPA expands the definition of “communication,” by stating that “the term ‘communicate’ is given its commonly accepted meaning.”[viii] Thus, “communication” means any contact with the consumer related to the collection of the debt, whether or not the debt is specifically mentioned.”[ix]  

Taking this into account, upon receipt of the notification to cease further communications, debt collectors must cease all oral and written contact with the consumer, their spouse, parent (if a minor), guardian, executor, or administrator, except for the three express exceptions previously discussed. 

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FEATURED SOLUTION

SERVICING QUALITY CONTROL

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In effect, the FDCPA requires that the debt collection show some good manners. Most of our servicing clients adopt the Golden Rule. That principle encourages us to ‘do unto others as you want them to do unto you.’ Of course, the negative reciprocal is not doing unto others as you do not want them to do unto you. Good manners are just a way of being courteous, respectful, and polite. The FDCPA enacts requirements that effectively ensure that the Golden Rule will be enforced, like it or not! 

Put simply, there is a time when further communications between a debt collector and the Debtor should halt. According to the statute establishing legal protection from abusive debt collection practices, published all the way back in 1977, consumer witnesses who related their personal experiences at the congressional hearings testified that they had been innocent third parties wrongly assumed to be the consumer merely because of a slight similarity of names. Also, stories reportedly were presented of abnormally rude and persistent collectors who refused to listen to the consumers’ valid reasons for nonpayment.[x] 

The FDCPA is intended to give relief to consumers being ‘harassed cruelly and relentlessly’ by a few independent debt collectors; it does not, however, enable consumers to avoid payment of just and honest debts. 

Thus, the mandate to debt collectors could not be more clear. 

To draft your policy, I suggest you include a section given to your employees involved in debt collection. Importantly, you must monitor their actions regularly. The section should be in the form of written instructions on implementing the FDCPA requirements. You may want them to sign a receipt for it and require periodic training. 

We are now ready to discuss the salient guidelines to cease communications with a debtor upon a written request. 

Collection procedures manuals should emphasize the following salient points:

 

·       Written Notice Required

In order for the notice requiring the debt collector to cease communications with the Debtor to be enforceable, it must be furnished to the debt collector in writing. Thus, an oral request made by a Debtor in person or over the telephone does not trigger the requirement to terminate all communications.

 

·       No Formal Notice Required

The FDCPA does not require that the written notice be signed. Since the FDCPA does not indicate how formal the notice must be, debt collection employees should be alerted to watch for written notations on returned dunning letters, envelopes, bills, and scraps of paper stating that

 

(1) The consumer refuses to pay the debt, or

 

(2) The consumer wants the debt collector to cease making any further contacts. Upon receipt of any such written messages, a proper cease communications notice is deemed to have been received by the debt collector.

 

·       Notices Permissible from Multiple Persons

The notice to cease communications may be sent to the debt collector not only by the individual who actually or allegedly owes the debt but also by the consumer’s spouse; parent if the consumer is a minor under applicable state law (viz., each state law must be examined on point); legal guardian; and the executor or administrator if the consumer is deceased.

 

·       Effective Date of Notices

Whether the notice to cease communications is delivered by hand or by mail to the collector, it becomes binding on the debt collector and all of the collector’s employees upon receipt in the collection agency’s office.

 

·       All Contact Halted

Upon receipt of the notice to cease communications, the debt collector must cease all contact with the individual consumer and the consumer’s spouse, parent (if the consumer is a minor), or legal guardian. If the notice is received from the executor or the administrator of a deceased consumer’s estate, no further communications may be sent to those officials or the family members of the deceased consumer.

 

·       Some Disputes Not “Notices” 

Debt collectors are not required to cease communicating with the Debtor simply because the consumer disputes the amount or character of the debt or the quality of goods purchased or financed. A cease communications notice is received only when the Debtor writes a note to the debt collector stating either that the consumer

 

(1) refuses to pay the subject bill or

 

(2) wishes the debt collector to cease all further communications. Written statements such as (a) “I won’t pay your bill” or (b) “I don’t want you to call or write me any more letters” would each serve as the requisite cease communications notice.

 

·       Notice as to Multiple Accounts

Debt collectors who handle multiple claims against an individual must cease their communications with the Debtor solely regarding the particular debts or accounts referred to in the notice to cease communications. If the notice relates exclusively to one particular delinquent account, the debt collector may continue debt collection efforts on the other claims. However, if the notice states that the Debtor wants the debt collector to cease future communications concerning all claims the collector is handling or that the consumer refuses to pay all of the debts that the debt collector is seeking to collect, all contacts should be terminated concerning all claims being handled.

I have not discussed here the actions the debt collector should take in response to a cease communications notice; however, the FDCPA allows but does not require the collector to send one final letter or notice that advises the consumer of the following:

·       The debt collector is terminating further efforts to collect the debt from the consumer;

 

·       The debt collector or the creditor may invoke certain clearly specified remedies that are ordinarily invoked by either the debt collector or the creditor; and/or

 

·       Where a clearly specified remedy is available to the debt collector or the creditor and applicable to the debt and the consumer, the debt collector or the creditor actually intends to invoke this remedy. 

The FDCPA states that the debt collector’s response to a written notice to cease communication from a consumer is limited to the three statutory exemptions, as noted above. The response specifically may not contain a demand for payment. 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director 

Lenders Compliance Group

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[i] Fair Debt Collection Practices Act (FDCPA) § 805(c), 15 USC § 1692c(c)

[ii] § 805(d),15 USC § 1692c(d); for all portions of FDCPA § 805

[iii]  See § 805(d)

[iv] Idem

[v] § 805(c), 15 USC § 1692c(c)

[vi] Idem

[vii] Comment 803(2)-1

[viii] Comment 805(c)-1, for purposes of implementing § 805(c)

[ix] Op. cit. i

[x] Public Law 95-109, 91 Stat. 874, approved September 20, 1977, and subsequently amended, the statute is a consumer protection amendment that establishes legal protection from abusive debt collection practices; it is in the Consumer Credit Protection Act, as Title VIII thereof.

Material Interference in UDAAP Lawsuit

QUESTION 

We are being sued for a violation of UDAAP. The lawsuit is based on the allegation that we materially interfered with the ability of a consumer to understand our terms and conditions. As far as I know, we have never intentionally misled a consumer. Our legal counsel is fighting back, but our reputation is already getting hit with negative press. 

I am the Chief Operating Officer, and with permission of our Board, I am writing you to ask for some history involving this kind of allegation. Your response could help us broaden our perspective and assist us in making sure this incident never happens again. 

We recently signed up for your UDAAP Tune-up, but it will not start for a few weeks. In the meantime, a word from you about some facets of this allegation would be appreciated. 

What is "material interference" involving terms and conditions in the context of UDAAP? 

ANSWER 

Thank you for your interest in our UDAAP Tune-up. Our UDAAP review is in demand. When it comes to Unfair, Deceptive, or Abusive Acts or Practices (UDAAP), it is essential to be proactive. Don’t wait for a regulatory investigation; certainly, don’t think you can wiggle your way out of a lawsuit, which often metastasizes into class action litigation. 

You can have your counsel contact me to discuss your case explicitly if they want expert witness support. 

There are many litigious access points to allege UDAAP violations, given that many regulatory frameworks are implicated.[i] You mentioned that you never intended to mislead the consumer; however, it is important to recognize that intent is not required to show material interference. 

Brief History

In 2010, Congress passed the Consumer Financial Protection Act of 2010 (CFPA) and banned abusive conduct.[ii] The CFPA's prohibition on abusive conduct was the most recent congressional tailoring of the Federal prohibitions to ensure fair dealing and protect consumers and market participants in the United States. 

The 2007-2008 financial crisis tested consumer protection laws, government watchdogs, and the ability of the existing authorities to address predatory lending, considered to be a primary cause of the collapse. The financial crisis was set in motion by avoidable interlocking forces. At its core were mortgage lenders profiting (by selling on the secondary market) on loans that set people up to fail because they could not repay. 

Consequently, Congress concluded that federal agencies' enforcement of the prohibitions on unfair and deceptive acts or practices was too limited to be effective at preventing the financial crisis. Therefore, it amended existing law. This is the point at which the FDIC, in 2007, said the term “unfairness” is a restrictive legal standard and the term “abusive” should be added because it is more legally flexible.[iii] In the CFPA, Congress granted authority over unfair or deceptive acts or practices to the states, the Federal banking agencies, and the newly created Consumer Financial Protection Bureau (CFPB). Congress also added a prohibition on abusive acts or practices. 

There have been numerous updates to the regulatory supervision and enforcement of UDAAP over the years. Indeed, since the enactment of the CFPA, government enforcement and supervisory agencies have taken dozens of actions to condemn prohibited abusive conduct. Earlier this year,  the CFPB issued a Policy Statement to summarize those actions and explain how the Bureau analyzes the elements of abusiveness through relevant examples. This Policy Statement is the CFPB’s first formal issuance that summarizes precedent on abusive acts or practices and provides an analytical framework for identifying abusive acts or practices.[iv] 

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For information about our UDAAP Tune-up, please contact us here.

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I will provide a cursory overview of the CFPA prohibitions. Thereafter, I’ll briefly explain the prohibition regarding “material interference” as it relates to terms and conditions.

Overview 

Under the CFPA, there are two abusiveness prohibitions.[v] An abusive act or practice: 

(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or 

(2) Takes unreasonable advantage of: 

·       A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; 

·       The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or 

·       The reasonable reliance by the consumer on a covered person to act in the consumer's interests. 

The statutory text of these two prohibitions may be summarized at a high level as:

 

(1) obscuring important features of a product or service, or

 

(2) leveraging certain circumstances to take an unreasonable advantage. The circumstances, or three prongs, that Congress set forth generally concern gaps in understanding, unequal bargaining power, and consumer reliance.[vi] 

Unlike unfairness but similar to deception, abusiveness requires no showing of substantial injury to establish liability but is focused on conduct that Congress presumed to be harmful or distorts the proper functioning of the market. Put otherwise, an act or practice need only fall into just one of the categories above to be abusive, but an act or practice could fall into more than one category.[vii] 

Material Interference in Terms and Conditions 

The first abusive act or practice that takes unreasonable advantage of consumers, gaps in understanding, concerns situations where an entity “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.”[viii] Material interference may be shown when an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes understanding. 

Acts or omissions may be material interference. Material interference may include actions or omissions that obscure, withhold, de-emphasize, render confusing, or hide information relevant to the ability of a consumer to understand terms and conditions. Interference can take numerous forms, such as “buried disclosures,” physical or digital interference, “overshadowing,” and various other means of manipulating consumers’ understanding. 

What is a buried disclosure? It is a disclosure that limits people’s comprehension of a term or condition, including, but not limited to, fine print, complex language, jargon, or the timing of the disclosure. There could be an oral component, too.[ix] Entities can also interfere with understanding by omitting material terms or conditions. 

There may be physical interference, where physical conduct impedes a person’s ability to see, hear, or understand the terms and conditions, including, but not limited to, physically hiding or withholding notices.[x] 

Digital interference may occur where there are impediments to a person’s ability to see, hear, or understand the terms and conditions when presented to someone in an electronic or virtual format. This form of interference includes, but is not limited to, user interface and user experience manipulations, such as the use of pop-ups or drop-down boxes, multiple click-throughs, or other actions or “dark patterns” that have the effect of making the terms and conditions materially less accessible or salient.[xi] 

Material interference includes a process of overshadowing, which is the prominent placement of certain content that interferes with the comprehension of other content, including terms and conditions.[xii] 

Facing Litigation 

There are several methods to prove material interference with a consumer’s ability to understand terms or conditions. My response focuses on the prong of leveraging certain circumstances to take unreasonable advantage of consumers, to wit, gaps in understanding, but the other two prongs, unequal bargaining power, and consumer reliance, may also be implicated in material interference litigation.     

First, while intent is not required to show material interference, it is reasonable to infer that an act or omission materially interferes with consumers’ ability to understand a term or condition when the entity intends it to interfere.[xiii] 

Second, material interference can be established with evidence that the act or omission's natural consequence would impede consumers’ ability to understand. 

And third, material interference can also be shown with evidence that the act or omission did, in fact, impede consumers’ actual understanding. 

While evidence of intent would provide a basis for inferring material interference under the first method, it is not a required element to show material interference. 

Certain transaction terms are so consequential that when not conveyed to people prominently or clearly, it may be reasonable to presume that the entity engaged in acts or omissions that materially interfere with consumers’ ability to understand. That information includes, but is not limited to, pricing or costs, limitations on the person’s ability to use or benefit from the product or service, and contractually specified consequences of default. 

An entity’s provision of a product or service may interfere with consumers’ ability to understand if the product or service is so complicated that material information about it cannot be sufficiently explained or if the entity’s business model functions in a manner that is inconsistent with the apparent terms of its products or services. 

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

Lenders Compliance Group

Credit Repair Services – Cautioning the Consumer

QUESTION 

Our CEO has notified our loan officers that she will not accept any applications where credit repair has taken place. Some of our loan officers now threaten to leave the company because they view credit repair as a legitimate business. 

Maybe it is and maybe it isn’t. I am not in a position to know. But I do know that the CFPB has been very litigious against credit repair companies for all sorts of violations. And the CFPB has been getting some hefty settlements. 

We have been tasked with drafting a pamphlet to give applicants about the hazards involving credit repair. We are supposed to say that our company will not process applications if a credit repair company is used. 

Since you have written about the scams to consumers and challenges to lenders from credit repair companies, I hope you can provide a brief outline for our pamphlet. 

What should our pamphlet say about the scams and dangers of credit repair? 

ANSWER 

I think there is a tendency to take the whole credit repair industry to task because of the frauds perpetrated by several of its members, large and small. It is better to educate consumers about the risks than to tar all credit repair services with the nefarious actions of bad counselors. Many credit repair companies make a positive contribution to consumers’ financial welfare. 

Generally, credit repair organizations[i] sell, provide, or perform any service in return for the payment of money or other valuable consideration for the express (or implied) purpose of improving a consumer’s credit record, credit history, or credit rating or providing advice or assistance to a consumer with respect to any such activity or service.[ii] 

You are correct in stating that there have been substantial settlements involving credit repair companies, two of the largest being CreditRepair.com and Lexington Law. The settlement was reached in litigation with the Consumer Financial Protection Bureau (CFPB). Both companies are now bankrupt, each owned by PGX Holdings, Inc., which is reorganizing in bankruptcy.[iii] The settlement, among other things, states that the companies collected illegal advance fees for credit repair services through telemarketing in violation of federal law.[iv] 

The stipulated judgment will impose more than $64 million in civil monetary penalties and a $2.7 billion judgment for redress. Plus, it will require notices about the settlement to be sent to enrolled consumers, including information about canceling the service. Finally, for ten years, the settlement bars these companies from doing business with certain marketing affiliates and bans them from telemarketing any credit repair services or others marketed through telemarketing. 

I won’t second-guess the reasons why your CEO has decided not to take a loan application if the applicant used a credit repair company, but considering the case of CreditRepair.com and Lexington Law, and the CFPB’s far-reaching the CFPB’s examination and enforcement authorities, she may be mindful of the legal, regulatory, and operational risks. 

Providing a pamphlet about credit repair to the applicant is a good idea. It is proactive. If you offer a pamphlet but do not accept loan applications from people who use or plan to use credit repair, it would be helpful to state the company’s position in the pamphlet and appropriate disclosures. But this is not just a business decision. 

Suppose you take the application but discover that the applicant used a credit repair service, and you have a blanket policy that rejects such applications. In that case, you may need to reject the application, possibly based on an inability to verify credit eligibility. That decision would cause the issuance of Regulation B disclosure (i.e., Adverse Action), which requires you to disclose why you rejected the application. The Equal Credit Opportunity Act (ECOA)[v] and Fair Credit Reporting Act (FCRA)[vi] would likely apply. In fact, there are several moving parts, regulatory, legal, credit underwriting, and operational, to the decision not to accept applications where credit repair is used. The decision to implement a blanket policy to ban all applications where consumers have used credit repair or credit relief guidance is fraught with risk. Before implementing these plans, I suggest you discuss them with competent counsel or compliance professionals. 

However, in general, issuing a pamphlet to applicants is worthwhile. You don’t have to discourage an applicant from using credit repair services if you offer the pamphlet to warn applicants about potential scams, frauds, ripoffs, shams, deceptions, swindles, and telemarketing crimes. The warning may be enough! 

Legitimate credit repair services follow numerous federal laws, including the Credit Repair Organizations Act[vii] and, as applicable, the Telemarketing Sales Rule,[viii] both of which forbid credit repair organizations from using deceptive practices and accepting up-front fees. 

The CFPB has provided substantial guidance to consumers. Several years ago, the CFPB issued a Consumer Advisory called Don’t Be Misled By Companies Offering Paid Credit Repair Services.[ix] The Bureau also published an article on How To Avoid Credit Repair Service Scams, which is easy to adapt to a pamphlet format.[x] A fine pamphlet on credit repair fraud, entitled Consumer Pamphlet: Credit Repair Fraud, is provided as a public service for consumers by The Florida Bar.[xi] In drafting your pamphlet, consider including these publications in your review. 

It would help if you listed some caveats in the pamphlet that can assist consumers in evaluating credit counselors. A well-known resource for finding a credit counselor is the National Foundation for Credit Counseling. Contact information about it can be offered in the pamphlet.[xii] 

Whatever caveats you choose, such a list should at least include these five Red Flags:[xiii] 

1.     They demand payment upfront. 

The company wants you to pay before it provides any services. Under the Credit Repair Organizations Act, credit repair companies can’t request or receive payment until they’ve completed the services they’ve promised. Some companies will structure monthly payment plans to avoid this requirement, and you should know that no form of upfront payment is legal. 

A simple rule to follow is “Don’t pay upfront.” If the company uses telemarketing such that the Telemarketing Sales Rule applies, the company may not request or receive fees until it has provided you with a credit report generated more than six months after the promised results that shows the results. 

2.     It sounds too good to be true. 

The company tells you it can get rid of the negative credit information in your credit report in a short period, even if that information is accurate and current. Also, if they promise a specific increase in your credit score or guarantee a certain result. 

No one can guarantee this. It simply takes time to repair your credit file. 

3.     They can’t answer questions.

The company representative can’t explain the specifics of the services they are offering you or the total cost for those services. 

Asking a few simple questions can help you determine if you are dealing with a reputable organization. 

4.     They hold back or provide misinformation. 

The company doesn’t inform you of your rights, including your right to obtain a written contract outlining the details of your arrangement, as well as having the ability to cancel your contract with the company within three business days. The company does not disclose the full cost of its services, and/or the company suggests that you should not (or cannot) contact any of the nationwide credit reporting companies directly (you can). 

5.     They ask you to misrepresent information. 

The company suggests that you try to invent a “new” credit identity – resulting in a new credit report – by applying for an Employer Identification Number instead of your Social Security Number. 

 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

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[i] See §1679a(3)(A)(i)-(ii), 15 USC Chapter 41, Subchapter II-A: Credit Repair Organizations, From Title 15: Commerce and Trade, Chapter 41—Consumer Credit Protection

[ii] Ibid. §1679a(3)(A), Credit repair organizations include entities that can or will sell, provide, or perform credit repairs.

[iii] Credit repairer PGX begins bankruptcy with $12 million loan, Knauth, Dietrich, June 6, 2023, Reuters. PGX also owns Credit.com.

[iv] CFPB Reaches Multibillion Dollar Settlement with Credit Repair Conglomerate, Press Release, August 28, 2023, Consumer Financial Protection Bureau; Bureau of Consumer Financial Protection v Progrexion Marketing, Inc.

[v] Equal Credit Opportunity Act

[vi] Fair Credit Reporting Act

[vii] 15 USC §§ 1679-1679j, FTC; Title IV of the Consumer Credit Protection Act, prohibits untrue or misleading representations and requires certain affirmative disclosures in the offering or sale of "credit repair" services. The Act bars companies offering credit repair services from demanding advance payment, requires that credit repair contracts be in writing, and gives consumers certain contract cancellation rights.

[viii] 16 CFR 310, FTC; The Telemarketing Sales Rule requires telemarketers to make specific disclosures of material information; prohibits misrepresentations; sets limits on the times telemarketers may call consumers; prohibits calls to a consumer who has asked not to be called again; and sets payment restrictions for the sale of certain goods and services.

[ix] Don’t Be Misled By Companies Offering Paid Credit Repair Services, Consumer Advisory, Consumer Financial Protection Bureau, issued September 20, 2016, updated December 3, 2019.

[x] How To Avoid Credit Repair Service Scams, Brown, Desmond, September 23, 2016, updated July 30, 2019, Blog, Consumer Financial Protection Bureau

[xi] Consumer Pamphlet: Credit Repair Fraud, The Florida Bar, updated June 2023, https://www.floridabar.org/public/consumer/tip005/. Note, the article appears to be copyrighted, so contact the organization for permission to publish it in whole or in part.   

[xii] The nonprofit National Foundation for Credit Counseling has a website at https://www.nfcc.org. Its telephone is 800-388-2227.

[xiii] Op. cit. x