Consumer Finance Alert – July 2018
False (and Misleading) Hope: The FDCPA and Attempting to Collect Time-Barred Debts
The law seems well-settled that a debt collector violates the Fair Debt Collection Practices Act (the “FDCPA”) by suing to collect a debt on which the statute of limitations has run and bars the suit. The law also seems well-settled that it is a violation of the FDCPA to threaten to sue to collect such a debt. The law was less well-settled on whether it is a violation of the FDCPA to attempt to collect the debt without the threat of a lawsuit and without filing suit.However, the Seventh Circuit Court of Appeals resolved the issue with Pantoja v. Portfolio Recovery Associates, LLC and the decision is gaining traction. 852 F.3d 679 (7th Cir. 2017).
In Pantoja, the debtor applied for and obtained a Capital One credit card in 1993, but never used it. He did, however, incur annual fees that he did not pay. He then incurred late fees for his failure to pay the annual fees. In total, it was alleged he owed $1,903.15 on the card. Portfolio Recovery Associates acquired the debt and began attempting to collect it in 1998.It was their attempt to collect it in 2013 that created the FDCPA issue. In April, 2013, Portfolio Recovery sent a Dunning letter to Pantoja stating he owed the money and giving him three “settlement offers” to satisfy the debt.Importantly, the letter stated “Because of the age of your debt, we will not sue you for it and we will not report it to any credit reporting agency.”
The Seventh Circuit affirmed the district court in finding that the letter was a violation of the FDCPA. The Seventh Circuit reasoned that the FDCPA prohibits the use of “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. 1692e. It found that the letter was a violation of 15 U.S.C. 1692e for two separate reasons. First, it was a violation because it did not tell the consumer that Portfolio Recovery could not sue on the time-barred debt compared to stating it would not sue.The sentence used by Portfolio was taken from a 2012 consent decree between the Federal Trade Commission and a different debt collector, but it failed to include another vital sentence: that the law limits how long you can be sued on a debt. Second, it was a violation because the letter did not tell the consumer that if he made payment or even agreed to make any kind of payment, he could restart the clock on the expired statute of limitations and bring “a long-dead debt back to life.” The Seventh Circuit found that an unsophisticated consumer could have believed Portfolio Recovery was attempting to collect a legally enforceable debt and that was a violation of the FDCPA.
Several months later, on October 4, 2017, the United States District Court for the Western District of Washington denied a motion to dismiss a class action suit against Portfolio Recovery in a similar case in Bereket v. Portfolio Recovery Associates, LLC. 2017 U.S. Dist. LEXIS 164763 (W.D. Wa. Oct. 4, 2017). There, the court allowed the class suit to move forward under the same reasoning as the Seventh Circuit in Pantoja. The Washington court also held that a person is entitled to the protections of the FDCPA even if the person does not actually owe the debt alleged to be owed by the collection agency.
Debt collectors have to be very careful when attempting to collect a debt that is time-barred. Such collection efforts, if not carefully planned and carried out, can trigger liability under the FDCPA.If you have questions about the applicability of the FDCPA to any debt you are attempting to collect or any other financial services matter, please contact the attorneys in Kaufman & Canoles’Consumer Finance Practice Group.
Fourth Circuit Defines Limitations on SCRA Protections from Foreclosure
The Servicemembers Civil Relief Act (“SCRA”), 50 U.S.C. 3901-4043, provides a number of important protections to the individuals willing to serve in the defense of our country. The statute sets forth two stated goals: (1) the strengthening of our national defense by protecting servicemembers such that they are able “to devote their entire energy to the defense needs of the Nation,” and (2) “to provide for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service.” 50 U.S.C. 3902. One of the scenarios governed by the SCRA is when a servicemember may be subject to foreclosure.
Under Virginia statute, foreclosures in the Commonwealth are non-judicially and may be conducted after a borrower defaults and the lender complies with certain prerequisites. The SCRA nonetheless requires that mortgage lenders obtain a court order prior to foreclosing on or selling property owned by a current or recent servicemember where the mortgage obligation “originated before the period of the servicemember’s military service.” 50 U.S.C. 3953(a). Importantly, these protections do not extend to a mortgage obligation obtained during military service. The Fourth Circuit recently confirmed this in holding that the SCRA’s safeguards do not further extend to mortgage obligations incurred during a prior period of military service.
In Sibert v. Wells Fargo Bank, N.A., a split Fourth Circuit panel affirmed the Eastern District of Virginia’s finding that SCRA protections against foreclosure do not apply to a servicemember who re-enters active military service after a period of non-active duty with regard to a mortgage debt he incurred during a prior period of active military service. 863 F.3d 331, 332 (4th Cir. 2017).
The Sibert appellant obtained a mortgage loan while serving in the U.S. Navy. Id. at 332-33. Soon after his discharge from the Navy, he defaulted on the loan, and the lender began foreclosure proceedings. Id. During those proceedings, however, and before any foreclosure sale was held, the appellant enlisted in the U.S. Army, once again going on active duty. Id. The lender continued to pursue foreclosure and eventually sold the property. Id. at 333. The appellant filed suit five years later (after obtaining a Chapter 7 bankruptcy discharge) alleging that his lender violated the SCRA by foreclosing without a court order.
Affirming the lower court’s grant of summary judgment for the lender, the Fourth Circuit found that SCRA protections did not apply to the appellant because the SCRA “grants protection to obligations incurred outside of military service, while denying protection to obligations originating during the servicemember’s military service.” Id. at 334. The Fourth Circuit reasoned that the SCRA is meant to protect an individual from changes in his or her status upon entry into service, versus obligations incurred already with an understanding of life as a servicemember:
In choosing to protect obligations incurred during civilian life, Congress recognized that those obligations could unexpectedly be impacted by entry into military service and the changes in the servicemember’s income and status, which were not contemplated at the time the obligation was incurred. Conversely, it chose not to protect obligations incurred during military service because both the servicemembers and lenders would be aware of the servicemember’s income and military status.
Id. (citing statutory history in support). The Fourth Circuit rejected the appellants contention that he should obtain retroactive protection based on his later enlistment, determining that such an interpretation would “lead to inconsistent treatment of substantially identical obligations and would introduce arbitrariness into Congress’distinction between protected and unprotected obligations.” Id. at 335. The court reiterated the point providing that “[a]dditional military service does not retroactively erase the servicemember’s and lender’s knowledge of the risks attending an obligation incurred during service or alter the substance of the risks for which the SCRA provides protection.” Id.
Despite the SCRA’s limitations, mortgage lenders must be careful to ensure that protocols are in place to ensure compliance with the statute when it does apply. If you have a question about your company’s regulatory compliance with the SCRA or other financial services matters, please contact the attorneys in Kaufman & Canoles’ Consumer Finance Practice Group.
Proceed with Caution: Bitcoin and The UCC
The almost unprecedented rise in the value of Bitcoin and other virtual currencies have captured the imagination of investors, policy makers, businesses, and consumers alike; sparking intense debates and interest in emerging payment systems. Although its value has plummeted as of late, it did temporarily rise more than ten-fold in 2017, leaving some creditors interested in its long-term potential use as a source of collateral. However, while recent regulatory developments have addressed Bitcoin’s treatment for federal income tax purposes and securities regulations, creditors should remain cautious as the legal landscape with respect to the perfection of security interests and recovery of collateral remains largely unresolved. From Bitcoin To Blockchain: How Laws And Regulations Are Conforming To And Impacting The Use Of Virtual Currency, 20160428P NYCBAR 1.
Bitcoin, a decentralized, peer-to-peer system that enables its users to transfer payments to one another without the aid of a financial intermediary, presents unique challenges in the world of secured transactions. Id. Bitcoin’s potential use in secured transactions is an open question because “virtual currency” does not fit neatly into any one of the different types of collateral defined in Article 9 of the Uniform Commercial Code (the “UCC”). UCC 9-101 709. Under the UCC, the rights and obligations of parties to a collateral are governed by the different set of rules that apply to different types of collateral. Therefore, a different set of rules will govern the perfection of a security interest in Bitcoin and priority in the case of default, depending on how it is categorized as a type of collateral.
While Bitcoin operates as a payment system that can be used to purchase goods or services, virtual currency is not “money” as defined by the UCC. In order for a medium of exchange to count as money, it must be authorized or adopted by a domestic or foreign government as a unit of account. UCC 1-201(a)(24). To date, no domestic or foreign government has established Bitcoin or any other virtual currency as a unit of account. Similarly, Bitcoin is not an “instrument” as defined by Article 9, because “instruments” only exist in written form and involve the payment of money. UCC 9-102(a)(47). Likewise, accounts in which Bitcoins are held are not “deposit accounts,” because only accounts maintained by a bank are included within that definition. UCC 9-102(a)(29). Left without any clear regulatory guidance, the general consensus is that Bitcoin is most appropriately categorized as a “general intangible.” UCC 9-102(a)(42).Categorizing Bitcoin as a general intangible presents a number of practical risks for secured creditors on account of its unique mechanism.
Perfecting a security interest in general intangibles is accomplished by filing a UCC 1 financing statement with the Secretary of State, sufficiently identifying the collateral. UCC 9-310. Although a relatively straightforward process, there are legitimate questions as to whether Bitcoin can be described with enough specificity to create and perfect a security interest. For while each Bitcoin is unique, the anonymity of the wallet (computer storage system) in which they are held, makes it difficult to properly identify the specific Bitcoins to which a creditors security interest attached. It is also an open question as to whether a secured creditor would be able to realize upon its collateral after a default. Because Bitcoin transactions are recorded on a decentralized public ledger, its users anonymous and the transactions irreversible, it is very likely that a secured creditor would be left without any real mechanism to prevent the debtor from transferring any or all of its Bitcoins upon the event of default.
Given the uncertainty involved with Bitcoin’s use as collateral, creditors should approach this issue with extreme caution. Creditors can protect themselves in traditional financing agreements with carefully drawn provisions reflecting Bitcoin’s uncertainty as a source of collateral. In addition, creditors could also require covenants or warranties precluding or limiting Bitcoin ownership or utilization by the borrower.
If you have any questions about your company’s regulatory compliance with respect to the UCC or any other financial services matter, please contact the attorneys at Kaufman & Canoles’Consumer Finance Practice Group.
CFPB Arbitration Agreements Rule Eliminated
On October 24th, 2017, Vice President Mike Pence cast a tie-breaking vote in the Senate to pass a joint resolution nullifying the CFPB’s Arbitration Agreements Rule. This rule, issued in July, would have prohibited the use of mandatory pre-dispute arbitration clauses preventing consumers from participating in or filing class action lawsuits in consumer financial services and products contracts. The CFPB rule would have also instituted information filing and disclosure requirements. However, because regulations instituted by the CFPB are subject to disapproval under the Congressional Review Act (“CRA”), Congress had the power void the rule by majority vote.
The first step in the rule’s demise was the House of Representatives’vote to pass a resolution disapproving of the CFPB’s rule on July 25, 2017 (231-190). The Senate’s vote to overturn the rule marked the next step in ending the arbitration rule.
On November 1, 2017, President Trump signed the joint resolution, finalizing the elimination of the CFPB’s arbitration rule. Subsequently, the CFPB published a notice removing the rule from the Code of Federal Regulations. President Trump’s action was unsurprising, given the White House’s previously released statement that “[b]y repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions instead of the trial lawyers, who would have benefitted the most from the CFPB’s uninformed and ineffective policy.”
According to the CFPB, the “final rule [wa]s based on the Bureau’s findingsthat pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.” However, reactions to both the CFPB rule and its revocation varied strongly.
These actions by Congress and the White House demonstrate the need for financial institutions and their counsel to remain alert to regulatory changes as the CFPB grapples with its role under President Trump’s administration.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2020.