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A year in debt collection

Toyota Resolves CFPB/DOJ Joint Action Alleging Discriminatory Loan Practices

On February 2, following a joint investigation of the Consumer Financial Protection Bureau and the Civil Rights Division of the Department of Justice, Toyota Motor Credit Corporation, the financing arm and subsidiary of the Japanese auto giant, agreed to pay up to $21.9 million in restitution to thousands of minority borrowers who allegedly were charged higher interest rates than white borrowers for auto loans without regard to their creditworthiness.

The administrative action, In the Matter of Toyota Motor Credit Corporation, and a civil lawsuit filed the same day in the United States District Court for the Central District of California, resulted in a Consent Order between the CFPB, DOJ, and Toyota.  The CFPB and DOJ charged Toyota with violating the Equal Credit Opportunity Act and its implementing regulation “by permitting dealers to charge higher interest rates to consumer auto loan borrowers on the basis of race and national origin.”

The CFPB and DOJ alleged that, in comparison to the average borrower over the course of the loan, affected African-American borrowers paid at least $200 more and were charged approximately 27 basis points higher, and Asian and Pacific Islander borrowers paid $100 more and were charged approximately 18 basis points higher.

Notably, a CFPB statement released concurrently with the Consent Order said that “the investigation did not find that Toyota Motor Credit intentionally discriminated against its customers, but rather that its discretionary pricing and compensation policies resulted in discriminatory outcomes.”  No civil money penalties were assessed, and in a press release, Toyota denied any wrongdoing.

As part of the settlement, Toyota will pay $19.9 million to compensate affected borrowers whose auto loans Toyota financed between January 2011 and the entry of the Consent Order on February 2, 2016.  Toyota is also responsible for up to $2 million to compensate any similarly affected borrowers in the interim period until Toyota “implements its new pricing and compensation structure.”  This structure includes, alongside other restrictions, a substantial reduction in its dealers’ discretion to mark up interest rates.  The DOJ’s statementnoted that these new policies must be in place by August 2016.

Troutman Sanders LLP has extensive experience representing lenders in the auto finance industry, and will continue to monitor CFPB and other regulatory activity in this area.

Coalition of State Attorneys General Urges Passage of the HANGUP Act

As we previously reported, on November 4, 2015, U. S. Senator Edward Markey (D-Mass.) introduced the Help Americans Never Get Unwanted Phone calls Act of 2015—or HANGUP Act for short.  The legislation, which has 14 Democratic co-sponsors, would repeal section 301(b) of the Bipartisan Budget Act of 2015, which permitted an exception to the Telephone Consumer Protection Act of 1991 (“TCPA”) for calls and text messages “made solely to collect a debt owed to or guaranteed by the United States.”

Section 301(b) is scheduled to take effect by August 2016 following guidance from the Federal Communications Commission.  The amendment to the TCPA was applauded by trade groups, including ACA International, which stated that “it shows an understanding in government that limiting dialing technology for legitimate debt collection doesn’t make sense.”

On February 10, a coalition of state attorneys general, spearheaded by Indiana Attorney General Greg Zoeller, a Republican, and Missouri Attorney General Chris Koster, a Democrat, sent a letter urging passage of the HANGUP Act to Senators John Thune (R-S.D.) and Bill Nelson (D-Fla.), the chairman and ranking member, respectively, of the U.S. Senate Committee on Commerce, Science, and Transportation.  The letter is signed by 25 state attorneys general in total, including 19 Democrats and six Republicans.  It claims that the recent enactment of section 301(b) “is a step backward in our law enforcement efforts” and is an inappropriate distinction permitted “simply because the debt has a nexus to the federal government.”

With Republicans in the majority in the Senate and election season heating up, the bill is unlikely to gain traction in the current legislative session.  However, in the 2016 election, Republicans will be defending 24 Senate seats, including many in traditionally blue states, compared to just 10 for Democrats.  If Democrats retake the Senate, one can reasonably expect the same or similar legislation to be reintroduced in the next Congress.  Holders of government-backed debt should continue to monitor this situation and stay tuned for relevant guidelines from the FCC later this year regarding implementation of the new exception.

Troutman Sanders LLP has unique industry-leading expertise with the TCPA, with experience gained trying TCPA cases to verdict and advising Fortune 50 companies regarding their compliance strategies.  We will continue to monitor legislative developments and regulatory implementation of the TCPA in order to identify and advise on potential risks.

District Court Dismisses FCRA Background Check Class Action Claim on Statute of Limitations Grounds

On November 9, 2015, Terria Harris filed an Amended Complaint against Home Depot U.S.A., Inc. in a Fair Credit Reporting Act (“FCRA”) background check class action lawsuit.  In this complaint, she alleged that Home Depot violated the FCRA’s background check disclosure requirement because the disclosure she signed was allegedly “embedded with extraneous information.”  As a result, the plaintiff argued, the disclosure was not a “stand-alone document,” in violation of the FCRA.

In response to the complaint, Home Depot moved for summary judgment, arguing the claim was barred by the FCRA’s statute of limitations.  The applicable statute of limitations requires a plaintiff to bring a claim either two years after the date of discovery by the plaintiff of the violation, or five years after the date on which the violation occurs, whichever is earlier.  Because the plaintiff viewed and signed the allegedly offending disclosure in February of 2011, Home Depot argued the claim brought in 2015 was untimely.

The Court agreed with Home Depot, stating that “a reasonably diligent person would have discovered the facts giving rise to Harris’ FCRA … claims by March 1, 2011.”  It concluded that the plaintiff’s FCRA claim was time-barred.  The Court’s decision should serve as a reminder to employers hit with FCRA lawsuits to analyze the timeliness of a plaintiff’s claim.  Even the most meritorious FCRA claim may not be actionable if the plaintiff fails to assert his or her rights until it is too late.

Troutman Sanders LLP has substantial experience in counseling employers on disclosure form documents under the FCRA, as well as experience in litigating challenges to such claims.  We will continue to monitor this and similar cases.

Why Regulators Should Ease Up on Debt Collectors

With complaints against debt collectors rising every year, regulators, including the Federal Trade Commission and the Consumer Financial Protection Bureau, have made debt collection a top priority. In fact, back in June, the FTC began holding “Debt Collection Dialogues” to better understand the dynamics between creditors, consumers, debt collectors and other regulators.

The main point I wanted to get across to everyone in attendance was that there is a difference between legitimate debt collectors and criminals. It seems every day there is a story in the news about a debt collector doing something harmful to consumers, but most of these pieces, including ones that involve federal and state enforcement actions, pertain to bad actors. And little to no efforts are made to distinguish between law-abiding companies and criminals committing theft or fraud. To be clear, when I speak of a legitimate debt collector I am referring to one that is:

• Legally authorized to do business in the particular state they are collecting consumer debts from.
• Licensed, bonded and insured in those states that require them to be.
• A member of ACA International, the trade association for the credit and collection industry (of which I am a board member).

Regulators at the panel did acknowledge that because of the inconsistency in state licensing and lack of federal licensing, it is difficult for them to clearly identify legitimate debt collectors from criminals using the industry to perpetrate their crimes. One of the ideas I floated during the discussion was the possibility of creating a national registry of debt collectors that would identify legitimate debt collectors through a pre-determined process. Overall, the regulators were very receptive to the idea and felt this registry would help them make important distinctions. The FTC was also interested in what recent state regulations and enforcement actions the debt collection industry found important. It’s imperative to keep in mind three things when discussing regulations:

• What is the intended purpose of the regulation?
• What is the expected outcome the regulation hopes to achieve?
• What are the potential unintended consequences?

Most people may not realize that debt collection is one of the most extensively regulated activities in the country. There are overarching federal regulations that address collection activity and more than 30 states require licensing for debt collection agencies, adding more layers of protection.

The Wild West mentality the media often portray regarding the debt collection industry appears to necessitate more stringent laws, but that image is simply untrue. A 2014 study from the Urban Institute found one in three adults in America have a debt in collection — a pervasiveness that draws attention to industry practices. However, according to stats from the CFPB’s consumer complaint database, less than 5% of the 75 million consumers with a collection account have filed a complaint with the CFPB in the past three years. Furthermore, over 65% of these complaints are related to a dispute of the debt — not poor treatment.

Any new regulation considered should aim to fix the issues consumers are complaining about: disputes about the existence or balance of debts. (It’s important to note that attempting to collect on a debt the consumer does not owe or for an amount that is not owed is already illegal.) But new laws may focus instead on the types and frequency of communication debt collectors are permitted to have with consumers. The Fair Debt Collections Practice Act already imposes these types of limitations and further restrictions would likely lead to additional adverse consequences for consumers.

Debt collectors, first and foremost, desire to resolve debts with consumers on a voluntary basis, as this resolution is the most cost effective and mutually beneficial. However, when debt collectors are unable to communicate with a debtor either due to that consumer’s unwillingness or regulation barriers, involuntary debt collection action becomes the only other option to recoup what is owed. Involuntary debt collection action refers to negative credit bureau reporting, judgments, wage garnishments, liens, bank levies, or other measures state laws allow for recovery of unpaid debts. The reality is, as regulation grows, the level of involuntary measures to collect debt will likely grow as well.

Consider, for instance, the statutes of limitations states place on how long a creditor has to enforce legal action on a debt. These statutes vary from state to state, but generally range from three to 10 years. Some states have moved to shorten their statutes of limitations on debt collection lawsuits. The prevailing thought is that doing so will help consumers and prevent creditors from suing on “zombie debts” — debts that are very old and/or no longer owed.

But as an unintended consequence of shortening these timeframes, creditors may be forced to seek involuntary legal action against consumers sooner than they would like. Creditors understand consumers face hardships and that sometimes it could take several years for them to re-establish their finances and regain the ability to repay delinquent debts. Unfortunately, reducing statutes of limitations could easily increase the likelihood that collectors won’t wait for the consumer to rebound or agree to negotiate a repayment plan. Instead, they will simply move to legal action.

It’s important that regulators take these and other issues into account as they seek to better understand the debt collection industry. The FTC’s panels are a good start; free-flowing dialogues between all parties can help root out bad actors, which would benefit consumers more than additional regulations would.