Recent jury awards and government investigations indicate that previously accepted debt collection practices focusing on low-income and minority consumers may no longer be tolerated. What this means for the consumer debt collection industry and their counsel is discussed below.
Legal & regulatory decisions pave the way for a change in debt collection practices
On May 11, 2015, in Portfolio Recovery Associates, LLC v. Mejia, a jury handed down a verdict that expressed exactly how it felt about aggressive and misplaced debt collection practices by Portfolio Recovery Associates (PRA) against Maria Guadalupe Mejia, a Latina woman who was already struggling to make ends meet.[i] The Kansas City jury found that Ms. Mejia’s trouble was worth a staggering $82 million in punitive damages,[ii] sending a clear message that PRA’s malicious prosecution and violations of the Fair Debt Collection Practices Act (FDCPA) [iii] had gone too far, and that such behavior was beyond reproach. The Circuit Court noted that the PRA’s behavior was reprehensible, denying PRA’s Motion for Judgment Notwithstanding the Verdict in part because PRA refused to drop the lawsuit for fifteen months, despite repeated attempts by Ms. Mejia to show that PRA had attached the $1,137.14 debt to the wrong person.[iv] Further, once PRA dismissed the lawsuit, the company refused to dismiss it with prejudice.[v] These findings formed the basis for the punitive damages awarded by the jury.
On September 9, 2015, PRA was hit again when the Consumer Financial Protection Bureau (CFPB)[vi] took action against PRA to resolve allegations that the companies’ purchasing and collection of consumer debts violated the FDCPA and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).[vii] The CFPB alleged, inter alia, that PRA attempted to collect debt knowing (or should have known) that the debt was inaccurate or could not have been legally enforced, and that PRA misled consumers, relied on misleading robo-signed affidavits, sued or threatened to sue even after statute of limitations had expired, disregarded consumers’ disputes, made harassing collection calls to consumers with the intent to annoy, abuse or harass them into paying. The CFPB ultimately ordered PRA to pay $19 million in consumer refunds and an $8 million penalty. PRA was also ordered to stop collection on over $3 million worth of debts and to stop collecting debts the company couldn’t verify, ensure accuracy when filing lawsuits, provide consumers with notice and appropriate information about debt before filing suit, as required by FDCPA, use accurate affidavits in legal proceedings and to reform its practices regarding collection of older debts.[viii]
Many aggressive debt collection practices go undeterred, especially when targeting lower income and minority consumers. Analysis as to why this is taking place triggers questions of psychology, socioeconomic norms and racial disparities.[ix] Regardless of the root or cause of the problem, the jury verdict in Portfolio Recovery Associates and subsequent penalties awarded against PRA by the CFPD could be a sign of things to come, and that credit card debt collection practices may receive monitoring to curb such aggressive maneuvers on the part of consumer debt collectors.
The CFPB’s aggressive investigation of entities offering consumer financial products or services resulted in at least 20 enforcement actions in 2015, with the pace of filings increasing over time.[x] A 2017 survey by CFPB titled “Consumer Experiences with Debt Collection” reported:
CFBP penalties have
been on the rise as well. In July 2015, the CFPB and 47 state
attorneys general initiated enforcement against JP Morgan Chase for selling
“zombie” credit card debt to third-party debt buyers and illegally robo-signing
court documents. The CFPB ordered JP Morgan to pay at least $50 million in consumer
refunds and $136 million in penalties. The CFPB also ordered Syndicated Office
Systems to pay $5.4 million to consumers and $500,000 in civil penalties for
mishandling consumer credit reporting disputes and preventing consumers from
exercising important debt collection rights. CFPB has also sued a group of
phantom debt collection entities led by Marcus Brown and Mohan Bagga, and
initiated an investigation of the National Corrective Group and its CEO for
using deceptive threats of criminal prosecution and jail time in order to intimidate
consumers into paying debts for bounced checks. The CFPB ordered the entities to
pay a $50,000 civil penalty.[xii]
[i] Jury awards KC Woman $83 Million in Debt Collection Case, Dan Margolies, KCUR 89.3, May 14, 2015. Available at: https://www.kcur.org/post/jury-awards-kc-woman-83-million-debt-collection-case#stream/0; Portfolio Recovery Associates, LLC v. Mejia, 2015 WL 13106253 (Mo. Cir. Ct. July 20, 2015).
[ii] The jury also awarded Ms. Mejia $250,000 compensatory damages and $1,000 on her FDCPA claim and $250,000 in compensatory damages on her malicious prosecution claim. Portfolio Recovery Associates, LLC, 2015 WL 13106253.
[iii] The Fair Debt Collection Practices Act (FDCPA) is a strict liability, consumer protection statute that prohibits certain abusive, deceptive and unfair debt collection practices. Marz v. General Revenue Corp., 568 U.S. 371 (2013); Tourgeman v. Collins Financial Services, Inc., 775 F.3d 1109 (9th Cir. 2014). The FDCPA’s private-enforcement provision authorizes any aggrieved person to recover damages from “any debt collector who fails to comply with any provision” of the FDCPA. Id. The purpose of the FDCPA is to eliminate abusive debt collection practices by debt collectors and protects all consumers – the shrewd as well as the gullible – from practices that would mislead the reasonable unsophisticated consumer, one with some level of understanding, and one willing to read the document with some care. In re Broadrick, 532 B.R. 60 (M.D. Tenn. 2015). Liability depends on whether a lesser sophisticated debtor would likely be misled. Tourgeman, 775 F.3d 1109.
[iv] Order Denying Motion for Judgment Notwithstanding the Verdict, Portfolio Recovery Associates, LLC v. Mejia, 2015 WL 6751055 (Mo. Cir. Ct. November 4, 2015).
[vi] The Consumer Financial Protection Bureau assumed primary supervisory and enforcement authority over certain financial institutions that engage in debt collection with the passage of the Dodd-Frank Act. Under Dodd Frank, the following entities are subject to CFPB supervision: Banks, thrifts and credit unions with over $10 billion in assets, non-bank covered persons, such as those engaged in residential mortgages, payday or private education lending, regardless of size, service providers of the above-covered entities, and debt collectors and their service providers if their annual receipts resulting from consumer debt collections are more than $10 million (this can include originating creditors that attempt to obtain payment from the consumer, third party collection agencies, collection attorneys and debt buyers). Consumer Regulations Governing Debt Collection, Practical Law Finance, Thomson Reuters (2019).
[vii] CFPB Takes Action Against Two Largest Debt Buyers for Illegal Debt Collection Practices, Practical Law Finance 1-538-2786, Thomson Reuters (2015).
[ix] Racism in the Credit Card Industry, 95 N.C.L. Rev. 1071, 1076 (2017) (“In a social and financial climate characterized by deep racial and socioeconomic divide, racism against credit card applicants and consumers is a core piece of the systematic, structural inequality that perpetuates dramatic disparities in wealth, employment, health and education.”)
[x] CFPB Enforcement, Practical Law Article 5-583-2725, Thomson Reuters 2019.
[xi] CFPB Publishes Two Debt Collection Reports, Metavante Regulatory Services: Hot Issues, 2017 WL 475836 (2017).
[xii] CFPB Enforcement Summary for 2015, Practical Law Finance W-000-9981, Nov. 4, 2015.
What does a changing legal landscape mean for Debt Collectors and their counsel?
Debt Collectors and their counsel must be aware that they can be the subject of litigation from both the consumers as well as the CFPD. Counsel should be wary of the FCDPA and Dodd-Frank provisions and be prepared to quickly develop a course of action when facing an inquiry from the CFPB. CFPB has a wide breadth of authority, and it is critical to understand the procedures it follows when conducting investigations and initiating enforcement actions.[i] Specifically, the CFPB guidance warns against debt collection practices threatening action that the debt collector does not have the authority to pursue; falsely representing the character, amount or legal status of the debt; misrepresenting that a consumer’s debt can be saved or forgiven; failing to properly post payments or credit to a consumer’s account and then charging late fees to that consumer; misrepresenting that consumer’s payments of the debt can improve the consumer’s credit report or credit score, where the debt collector knows that the consumer reporting agency is prohibited from including information about the debt in the consumer report (such as in the case of obsolete debt).[ii]
The CFPD has issued Debt Collection Examination Procedures, which categorize into modules similar legal requirements. It has also provided bulletins about practices in the debt collection market that may raise Unfair or Deceptive Acts or Practices (UDAAP) concerns. To minimize regulatory risk, Debt Collectors should also improve customer disclosures related to credit reporting, enhance record retention and data integrity, review scripts and marketing materials to ensure customers are not pressured or misled and monitor service providers more diligently.[iii]
detailed information on the CFPB’s principles
of supervision and standard examination procedures, see the CFPD’s Supervision and Examinations webpage.
[i] CFPB Supervision and Enforcement Procedures, Practical Law Finance 1-567-2106, Thomson Reuters (2019); Preparing for a CFPB Examination Checklist, Practical Law Finance 5-583-2725, Thomson Reuters (2019).
[ii] Consumer Regulations Governing Debt Collection, Practical Law Finance 1-538-2786, Thomson Reuters (2019).