Lenders and servicers fortunate not to qualify as “debt collectors” under the FDCPA should nevertheless be mindful that the CFPB has an alternative weapon in its considerable arsenal to tag them with liability for behavior that the Bureau deems improper. Under the Consumer Financial Protection Act, created as part of the Dodd Frank legislation in 2010, even a first-party debt collector (a lender collecting debt on its own behalf) or that claims the FDCPA “servicer” exception to the definition of “debt collector”, may still be liable for unfair, deceptive or abusive practices with respect to the manner in which it collects or attempts to collect debt.
That fate befell Navy Federal Credit Union recently when it agreed to a consent order following administrative enforcement proceedings instituted by the Bureau: In the Matter of Navy Federal Credit Union, File No. 2016-CFPB-0024. The Bureau alleged Navy Federal violated 12 U.S.C. § 5536(a)(1)(B) (“unfair, deceptive, or abusive act[s] or practice[s]”) because of its collection practices that included sending letters and making telephone calls to its delinquent borrowers (generally, military servicemembers or their dependents) since at least January 1, 2013 that contained material representations likely to mislead reasonable consumers as to the actions Navy Federal intended to take to try to collect its debts, including:
•Threatening legal action it claimed had been “recommended” internally, when there had been no process undertaken to recommend legal actions and, in practice, fewer than 5% of the 193,000 delinquencies resulted in legal actions;
•Threatening to contact the borrowers’ commanding officers if they failed to make payments, when in fact Navy Federal never did so, and never had consent to do so;
•Warning borrowers of the adverse consequences to their credit ratings or their ability to obtain new credit, when Navy Federal had not reviewed any borrower’s particular credit situation, and representing that Navy Federal could “repair” borrowers’ credit rating if they contacted it;
•Threatening wage garnishment when such a remedy is generally available only once a judgment has been obtained; and
•Freezing delinquent borrowers’ access to other Navy Federal accounts, including disabling debit or ATM card functions and preventing borrowers from accessing online tools to check account information.
When a respondent agrees to enter into a consent order with the Bureau, particularly in an administrative proceeding, it should be aware that while it will be able to insert the statement that it neither admits nor denies the allegations, the Bureau will control the content of the order.
The use of the consent order is one of the principal means the Bureau uses to communicate to the mortgage industry which practices it believes are not acceptable. When reviewing and developing policies and procedures, lenders and servicers should study such consent orders closely so as to acquaint themselves with specific practices or behavior that the Bureau views as violative of existing laws or regulations.
What lessons may lenders and servicers draw from this latest consent order? Obviously, threatening to take legal action against customers when no consideration has been given, or decision made, whether any legal action will in fact be taken will be viewed by the Bureau as an unfair, deceptive or abusive practice. Also, the ratio of threatened to actual legal actions is a matter the Bureau will take into account, and while it is clear a ratio of less than 5% is likely to be viewed as a violation of 12 U.S.C. § 5536(a)(1)(B), the consent order does not provide a bright line as to what ratio the Bureau will consider to be acceptable. Additionally, the consent order does not provide any information on whether the low threat to actual litigation ratio was impacted by possible relevant factors, including whether: some borrowers resumed making payments or entered into a payment agreement after the debt collection communication; some borrowers had filed for, or been discharged in, bankruptcy; some borrowers had died; some accounts would have been time-barred by the time Navy Federal managed to bring suit; or, some borrowers presented a compelling reason why Navy Federal should not pursue litigation.
Another issue to consider is the labeling as unfair, deceptive or abusive the threat to inform the borrowers’ commanding officers about the delinquencies. While the Bureau may have been justified in finding these threats as false representations because, of the 115 borrowers so threatened Navy Federal did not contact the borrowers’ commanding officers in any instance, the Bureau gave as an additional reason for its finding that the borrowers had not consented to Navy Federal making contact with their commanding officers. The Bureau explained that, while the account agreements in question did give Navy Federal the right to disclose the servicemembers’ debts to their commanding officers, this clause was not consented to because it “was buried in fine print, non-negotiable, and not bargained for by consumers.” This presents a serious concern: which terms of a contract that a lender or its servicer seek to rely on might the Bureau consider un-bargained-for, non-negotiable fine print, and, realistically, what terms of a loan agreement or financial services account are truly negotiated between a lender and its customer?
The Bureau may offer more guidance on these matters in the form of additional consent orders, but until then lenders and servicers should closely monitor their collection practices so as to ensure they are not threatening actions they have not devoted the necessary time and effort to properly considering, and that if they do threaten consequences they are legally entitled to take they should commit to following through on those threats in most cases where they are legally entitled to do so.
Published by Hutchens Law Firm on December 5, 2016