Debt Collection Industry Update: Recent Regulatory Changes and the Shift to Emerging Technologies

Debt Collection Industry Update: Recent Regulatory Changes and the Shift to Emerging Technologies William S. Weinstein, Esq. Weinstein, Pinson & Riley, P.S. 2001 Western Avenue, Suite 400 Seattle, Washington 98121

Table of Contents 1 Regulatory Focus Areas 2 Telephone Consumer Protection Act Final Rule 7 Consumer Finance Protection Bureau 12 FTC Increasing Enforcement under FDCPA 15 The Erosion of the Third Party Disclosure Standard 16 Emerging Technologies and the Shift to Social Media 22 Conclusion on Regulatory Environment 23 CFPB Exhibit 1 53 CFPB Exhibit 2 64 CFPB Exhibit 3 66 Exhibit A 115 Exhibit B 141 Exhibit C 189 Exhibit D 219 Exhibit E

Recent TCPA Case Law Ninth Circuit Clarifies Prior Express Consent Under TCPA Meyer v. Portfolio Recovery Associates, LLC, 696 F.3d 943 (9th Cir. 2012), amended order and op., 707 F.3d 1036 (9 th Cir. 2012) - Appellate panel wrote that: prior express consent is deemed granted only if the wireless telephone number was provided by the consumer to the creditor, and only if it was provided at the time of the transaction that resulted in the debt at issue. Thus, consumers who provided their cellular telephone numbers to creditors after the time of the original transaction are not deemed to have consented to be contacted at those numbers for purposes of the TCPA. In an amended order and opinion, however, the panel replaced the above with: prior express consent is consent to call a particular telephone number in connection with a particular debt that is given before the call in question is placed. Thus, prior express consent to call cell phone numbers in connection with a debt may be obtained from debtors at any time, as long as such consent is obtained before the call is placed. The court s revision i did not help the defendant d in that t case because the company was calling cell numbers collected through skip tracing and thus did not obtain the required prior consent. 3

Recent TCPA Case Law Sixth Circuit Affirms Deference to FCC s Interpretation of TCPA Regulations Leyse v. Clear Channel Broadcasting Inc., 697 F.3d 360 (6 th Cir. 2012) - Plaintiff alleged that he received a prerecorded telephone message on his residential telephone line from a local radio station (advertising commercial free music and a contest) and that such call violated the TCPA and the FFC s rule implementing the statute. He later filed a putative class action in the U.S. District Court for the Southern District of Ohio. The district court dismissed the suit, finding that the FCC had issued regulations exempting the type of call at issue from the TCPA s prohibitions; that the FCC was authorized by Congress to do so; that the court should defer to the resulting regulation under Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 837 (1984); and that the regulation passed muster under Chevron. The Sixth Circuit affirmed, holding that pursuant to the rule enabling authority granted to it by Congress, courts should defer to the FCC s interpretation of TCPA regulations. The court also rejected an argument that it lacked jurisdiction under the Hobbs Act, under which the Court of Appeals has exclusive jurisdiction to determine the validity of final orders of the FCC that are subject to an enjoinment or other such proceeding. 4

Impact of the FCC s Final Rule Calls to cell phones are permitted. Unless prior consent is given, the TCPA still requires all parties to adhere to the following rules: No calls may occur before 8:00 a.m. nor after 9:00 p.m. local time: Caution Because people who carry cell phones move or travel, it is often impossible to determine the local time of the recipient. A New York consumer may be in Japan at the time of the call. Callers must provide their name, the name of the person on whose behalf the call is being made, and a telephone number or address at which the person may be contacted; Artificial voices or recordings cannot be used; Calls cannot be made with artificial voices or recordings to cell phones or any service in which the recipient is charged for the call. 5

Safe Use of Text Messages and Voice Recordings Creditors and third-party debt buyers must obtain express consent: (1) Prior to contacting a debtor via text message Texts are equivalent to auto-dialed calls. Report and Order, 18 FCC Rcd 14014, 14115, para. 165 (2003). Consent may be oral or written, but failure to obtain consent may expose a debt collector to liability under TCPA. (2) Prior to initiating any call or message that includes an artificial voice or interactive voice response system. A creditor may obtain prior consent by incorporating it into the credit agreement; This consent may be used by a third-party debt collector. Debt collectors must also comply with the FDCPA. A debt collector under the FDCPA is a party who collects on the debts of another, or collects on its own debts that were purchased while the debt was in default. Confirmatory Text Message Okay Ryabyshchuck v. Citibank N.A., No. 11-CV-1236-IEG (WVG), 2012 WL 5379143 (S.D. Cal. Oct. 30, 2012) - Court ruled (in granting defendant s motion for summary judgment) that a single text message confirming that a party has opted out of a promotional text message campaign does not violate the TCPA: imposition of liability under the TCPA for a single, confirmatory text message would constitute an impermissibly absurd and unforeseen result. 6

The Consumer Financial Protection Bureau (CFPB) Established as part of the Dodd-Frank Act in 2010. Richard Cordray appointed as Director on January 4, 2012 (reappointed on January 24, 2013 following legal challenge related to Noel Canning v. NLRB, 705 F.3d 490 (D.C. Cir. 2013)). Rulemaking authority began July 21, 2011. CFPB took over this authority from the Federal Trade Commission. Regulatory and Supervisory Authority includes and covered person under the Dodd-Frank Act: Deposit Instituions Mortgage lenders, brokers, and services Education loan and payday loan providers And any larger participant of a market for other consumer financial products or services 7

The CFPB s Final Rule Regulating g Debt Collectors October 31, 2012 Final Rule effective January 2, 2013 brings certain larger participant p debt collectors under CFPB supervision. See 77 Fed. Reg. 65775 (final rule). *Please see attached Exhibit B The Final Rule defines a larger participant i t in the debt collection industry as a person whose annual receipts exceed $10 million. Id. at 65778. Receipts are defined as total income plus cost of goods sold as used by the Small Business Administration. Roughly 175 of largest debt collectors would like fit that definition. Id. at 65788 - These collectors earn roughly 63% of all annual receipts in the industry. Id. 8

The Impact of the Final Rule Supervision represents a significant shift to any larger participant debt collector. While all debt collectors are subject to enforcement by a federal agency, debt collectors that are not bank affiliates were previously not under the general supervision of any federal agency. The Final Rule subjects debt collectors to routine examinations similar to traditional bank examinations. Inquiries into the business practices of any larger participant debt collector, regardless of the existence of an FDCPA 9

Inherent Problems in the Final Rule Final Rule will cause a divided industry. Debt collectors subject to supervision will face obstacles that unsupervised debt collectors will not, and ma create arbitrary and ad hoc rules on all collectors while minimizing their role in credit markets. Because the Rule will only affect roughly 4% of the nation s debt collectors (and about 67% of the volume of consumer collection), the remaining debt collectors will not be subject to the Bureau s supervision. Subjective decisions by examiners may allow unsupervised debt collectors to avoid compliance issues faced by those under CFPB supervision. The definition of Debt Collector is broader than under the FDCPA. Anyone, even creditors, may be considered to be debt collectors, which broadly defines the debt collection market and can affect how the large participant determination is made. Such uncertainty in application counters the stated goal of the CFPB. 10

A Challenge to CFPB s Authority Recent challenges to recess appointments made by President Obama may alter the authority of the CFPB. Lawsuits filed by various business associations have challenged certain recess appointments made the National Labor Relations Board in January 2012. Richard Cordray became director of the CFPB as a recess appointment during this time. After suit was filed against the NLRB (Noel Canning v. NLRB, 705 F.3d 490 (D.C. Cir. 2013)), he was reappointed Director a year later (January 24, 2013). On January 25, 2013, a unanimous panel of the D.C. Circuit ruled that President Obama s NLRB appointments were unconstitutional. The NLRB decision calls into question the recess appointment of Cordray and, arguably, all of the actions taken by the CFPB since then. Cordray s appointment is being contested in the D.C. District Court as part of a broader lawsuit challenging the constitutionality of other aspects of the CFPB, as well as of the Financial Stability Oversight Council and Title II of the Dodd-Frank Act. *Please see attached Exhibit C 11

Federal Trade Commission Extending Its Reach Under the FDCPA Recent cases exhibit a trend towards higher penalties and broader enforcement of the FDCPA by the Federal Trade Commission (FTC) and the newly formed CFPB. Allen ex rel. Martin v. LaSalle Bank, N.A., 629 F.3d 364 (3d Cir. (N.J.) 2011), Cert. denied, (U.S. Jan. 23, 2012). Even when a communication is directed solely to a debt s attorney, a debt collector may be laible for the communication if it violates the FDCPA. Exhibits increased scrutiny on debt collectors for communications with a debtor s attorney. United States v. Asset Acceptance, LLC, No. 8:12-cv-182-T-27EAJ 182 2 (M.D. Fla. Jan. 31, 2012) The $2.5 million settlement is the second highest civil penalty settlement for FDCPA violations. FTC v. Payday Fin., LLC, No. 3:11-cv-03017-RAL (D.S.D. March 1, 2012) (Ongoing) The FTC is challenging debt collections on short term and payday loans, as well as wage garnishment authority on these loans. 12

Other Recent FDCPA Decisions Class Action Settlement Denied Vassalle v. Midland Funding LLC, 708 F.3d 747 (6 th Cir. 2013), reh g denied, (Apr. 19, 2013) In case alleging violations of the FDCPA and state law, based on the practice of robo- signing affidavits in debt collections, Sixth Circuit overturned a $5.2 million settlement in part based upon its finding that the disparity in the relief afforded under the settlement to the named plaintiffs (exoneration of debts, $2000, and prospective injunctive relief) and the unnamed class members ($17 and prospective injunctive relief) made the settlement unfair. The court held that the class notice was inadequate and, although the class satisfied four of the six certification requirements (numerosity, commonality, typicality and predominance), the representation was not adequate under Rule 23(a) nor was the class action vehicle superior for resolution than numerous individual suits. Caller ID Calls Deemed Communications under FDCPA Cerrato v. Solomon & Solomon, No. 3:11-cv-623 (JCH), 2012 WL 6621339 (D. Conn. Dec. 18, 2012), motion for reh g denied (Jan. 28, 2013) Court, in denying debt collector s motion to reconsider denial of its motion for partial summary judgment, ruled that unanswered collection calls that display the collector s name and phone number on the consumer s caller ID may constitute communications under the FDCPA. (In that case over 100 calls were made by debt collector, at least eight of which appeared on the consumer s caller ID display.) 13

Other Recent FDCPA Decisions Skip Tracer Deemed Debt Collector Thompson v. National Credit Adjusters, LLC, No. CV-2307 SRN/FLN, 2012 WL 5372577 (D. Minn. Oct. 31, 2012), final judgment approving settlement, Dec. 19, 2012 In a class action lawsuit, the court held that defendant skip-tracer was a debt collector under the FDCPA and that a letter advising consumer to call a number that in turn captured the consumer s number, which the skip tracer then forwarded to the collection agency, was deceptive under the FDCPA. The court also held that the skip tracer could not seek a return call without disclosing its status as a debt collector. The parties settled for $134,600 to the class counsel and $10,000 to the plaintiff as a class representative award. Bona Fide Error Defense Applied Young v. Thieblot Ryan, P.A., No. ELH-11-01562, 2012 WL 6698632 (D. Md. Dec. 21, 2012) Court held that a law firm debt collector was not liable under the bona fide error defense in the FDCPA after finding that (a) the law firm was entitled to rely upon statements and an affidavit provided by the creditor in support of the collection referral and claim, and (b) the law firm was not informed by the creditor or consumer about the consumer s exculpatory evidence i.e., fraudulent activity (forged checks) on his account -- until after the consumer filed suit. 14

Erosion of Third Party Disclosure Standard and Award of Fees under FDCPA However, some courts have actually eroded the standard for FDCPA violations. The court in Marx v. General Revenue Corp., 668 F.3d 1174 (10 th Cir. 2011) held that the debtor failed to meet the burden of proving a fax sent to her employer actually conveyed information regarding a debt. The standard is not whether the facsimile could have had such an implication. The court also decided that recovery of costs under Federal Rule 54 is always allowed in an FDCPA suit and is not superseded by the FDCPA cost recovery provision. FDCPA allows for recovery of fees to the prevailing defendant only upon a showing of bad faith and harassment. Federal Rule 54, however, allows for recovery of costs whenever a party prevails. The United States Supreme Court affirmed the 10 th Circuit s holding in Marx v. General Revenue Corp., 568 U.S., 133 S. Ct. 1166 (Feb. 26, 2013, Thomas, J.). The Court concluded that the cost recovery provision of the FDCPA is not contrary to Rule 54, and, thus, does not displace a district court s discretion to award costs under the Rule. *Please see attached Exhibit D 15

The FDCPA and Social Media Emails and social media are a permitted method of contact under the FDCPA, as the FDCPA specifically regulates any medium used to convey information regarding a debt. See 15 U.S.C. 1692a. Social media websites, such as Facebook, Twitter, LinkedIn, and Google+ are increasing in subscribers and are more integrated into a debtor s life than ever. As of April 2013, roughly 159 million users in the U.S. subscribe to Facebook, and 277 million users are on Twitter. Information taken from: SocialBakers. United States Facebook Statistics, available at http://www.socialbakers.com/facebook-statistics/united-states. Beevolve. An Exhaustive Study of Twitter Users Across the World, available at http://www.beevolve.com/twitter com/twitter-statistics/#a3. 17

Conclusion on Regulatory Environment The current regulatory climate presents an uncertain future for banks, debt collection companies, debt buyers, and service providers to their entities. The potential ti for stricter t regulations and oversight by the CFPB requires debt collectors to ensure that heir procedures comply with the FDCPA and their applicable laws, rules, and regulations. Along with the uncertainty comes opportunity. Electronic communications can take advantage of emerging and untapped resources to find and recover against a debtor. Because the law has not yet caught up to these emerging technologies, the debt collector who can communicate within the bounds of the FDCPA may reap the benefits of this new technology to reach out to debtors. Please visit the CMC website for additional guidance on how to take advantage of this future. 22

CFPB Exhibit 1 Confidential 23 Weinstein & Riley, P.S.

Exhibit A Confidential 66 Weinstein & Riley, P.S.

Exhibit B Confidential 115 Weinstein & Riley, P.S.

Exhibit C Confidential 141 Weinstein & Riley, P.S.

Exhibit D Confidential 189 Weinstein & Riley, P.S.

Exhibit E Confidential 219 Weinstein & Riley, P.S.