The CARLAWYER - November Legal Developments

FEDERAL DEVELOPMENTS
On September 5, the Consumer Financial Protection Bureau issued its annual report summarizing its activities, as well as activities by other agencies, in 2023 related to the Fair Debt Collection Practices Act. The introductory portion of the report focuses on medical and rental debt collection. In particular, with respect to medical debt collection, the CFPB states that its research, along with consumer complaints, indicates that debt collectors are attempting to collect medical debt that is not owed, medical bills that have already been paid by or that are eligible for non-profit hospitals’ financial assistance programs, and bills arising from patients’ use of medical payment products that should not have been offered to patients without considering whether they may be eligible for financial assistance. With respect to rental debt collection, the CFPB states that its research and consumer complaints show that landlords and management companies may have engaged in illegal pricefixing by using “revenue management software” to collect improperly inflated amounts that ultimately end up in collection and have been adding “junk fees,” including fees from rental payment processing servicers that are required as a condition for rent payment, that may not be allowed under the lease or local law. In addition to addressing medical and rental debt collection, the report offers background on the debt collection market, provides information on debt collection complaints received, discusses FDCPA violations identified during examinations, summarizes enforcement activities addressing debt collection activity brought by the CFPB and the Federal Trade Commission, identifies consumer education efforts undertaken by the CFPB, and reviews the CFPB’s rulemaking, research, and policy initiatives relating to debt collection. The report concludes with the CFPB referring to the increased financialization of various consumer financial markets, through new or increased offering of financial products and services to consumers, as a “significant trend” and stating that these new financial products may result in debt collectors collecting amounts that are not actually owed or not properly verified, in violation of the FDCPA.

On September 11, the Consumer Financial Protection Bureau announced a consent order with a national bank, resolving allegations that the bank furnished information to consumer reporting agencies in violation of the Fair Credit Reporting Act and the Consumer Financial Protection Act. Specifically, the CFPB alleged that the bank furnished inaccurate or incomplete information to CRAs about consumers’ credit card accounts. According to the CFPB’s allegations, the bank and a third-party debt collector entered into an agreement under which the bank assigned the company the right to collect a portfolio of charged-off credit card accounts. The debt collector sent the bank a monthly file showing the payments made by consumers, but the bank allegedly failed to enter that data into its system. As a result, according to the allegations, consumers’ payments were not reflected when the bank furnished information to the CRAs concerning those accounts, including in instances in which consumers had settled or paid their accounts in full. The CFPB also alleged that the bank inaccurately reported the date of first delinquency (“DOFD”) when it charged off certain credit card accounts by using the charge-off date as the DOFD, which allegedly made a delinquency on a consumer’s account look as though it had occurred more recently than it had, in fact, occurred. According to the CFPB’s allegations, this later date of delinquency could result in the delinquent information staying on the consumer’s report longer than it should. In addition, it is alleged that the bank inaccurately calculated the commencement of the delinquency for purposes of the DOFD based on the cycle date of the account (when a new billing cycle begins) rather than the account due date, when a customer’s monthly payment is due. The CFPB also alleged that the bank inaccurately furnished the account status of certain credit card accounts that had been voluntarily closed as current and open, rather than paid or closed with zero-dollar balances, and inaccurately furnished the date accounts were closed. Next, the CFPB alleged that the bank furnished inaccurate or incomplete information to CRAs about the bankruptcy status of consumers’ credit card accounts. First, the bank allegedly furnished the accounts without indicating the status of the accounts in bankruptcy, such as petition filed, discharged, dismissed, or withdrawn, and failed to promptly correct the account information after it identified the issue. Second, the bank allegedly failed to accurately furnish the correct bankruptcy chapter for certain accounts that had been discharged through bankruptcy. Third, the CFPB alleged that data concerning certain credit card accounts in a discharged status was furnished repeatedly for several months, rather than only in the month in which the discharge occurred, thereby indicating to creditors or other users of the furnished information that a bankruptcy discharge occurred more recently than it, in fact, occurred. The bank also allegedly furnished information to CRAs about deposit accounts that it knew or suspected were fraudulent and then allegedly failed to promptly correct inaccuracies in the deposit account information it furnished. Finally, the CFPB alleged that the bank did not have sufficient processes in place to investigate consumers’ disputes, failed to conduct reasonable and timely investigations of consumers’ disputes, and failed to properly notify consumers after deeming a dispute frivolous or irrelevant. The bank did not admit any of the allegations. The consent order requires the bank to pay $7.76 million in redress to affected consumers and a $20 million penalty to the CFPB’s victims relief fund.

The Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency extended until October 30, 2024, the comment period for their request for information on arrangements between banks and financial technology companies. The agencies published the RFI in the Federal Register on July 31, 2024. The RFI solicits input on the nature of bank-fintech arrangements, including their benefits and risks, effective risk management practices for these arrangements, and the implications of such arrangements, including whether enhancements to existing supervisory guidance may be helpful in addressing risks associated with these arrangements.

On September 24, the Consumer Financial Protection Bureau’s Office of Servicemember Affairs issued its annual report, which provides an overview of complaints about consumer financial products and services submitted to the CFPB by servicemembers, veterans, and military families in 2023. The report first identifies the top complaints submitted by the military community in 2023. Credit or consumer reporting remained the top complaint category among the military community, followed by complaints about debt collection and checking or savings accounts. Of note, among active duty servicemembers, from 2022 to 2023, complaints about mortgages (47 percent increase), credit cards (41 percent increase), and checking or savings accounts (41 percent increase) saw the largest increases. Among veterans, from 2022 to 2023, complaints about vehicle loans or leases (47 percent increase), checking or savings accounts (34 percent increase), credit and consumer reporting (31 percent increase), and credit cards (30 percent increase) saw the largest increases. Another key finding in the report is that the military community submitted a significant number of complaints about federal student loan servicers and about educational institutions withholding student transcripts. With respect to student loan servicing, the complaints reflect issues the military community has experienced with contacting their student loan servicer, including long wait times, frequent disconnections, waiting for call backs that never occurred, and inconvenient call center hours for servicemembers stationed overseas. The complaints also reflect issues with enrollment in income-driven repayment plans, as well as complaints about incorrect calculations of monthly payment amounts once enrolled in income-driven repayment plans. In addition, deployed servicemembers have submitted complaints about servicers’ failure to properly process requests for interest rate reductions during the deployment period. The military community also reports problems related to the withholding of transcripts by colleges and universities as a means to collect debts allegedly owed to those institutions. Finally, the report focuses on complaints submitted to the CFPB by older veterans, highlighting that this community is often the target of fraud or scams, particularly with respect to unaccredited companies that charge high fees for assistance in processing veterans’ benefits claims.

On September 25, the Federal Trade Commission announced “Operation AI Comply,” an enforcement sweep by the agency that is focusing on deceptive and unfair claims by companies regarding their use of artificial intelligence. As part of its initial announcement of the enforcement sweep, the FTC announced settlements with five companies allegedly making deceptive and unfair AI claims. The companies subject to the enforcement actions included: (1) a company that provided an online subscription service that claimed to use AI to generate legal documents and perform other legal services; (2) a company that sold an AIenabled writing assistant service designed for a number of uses, one of which allowed customers to generate online consumer reviews and testimonials; and (3) three companies that claimed that their AIpowered services would help consumers earn passive income by opening online storefronts. The FTC’s corresponding blog post regarding Operation AI Comply offers some guidance to companies regarding AI. The blog post first advises that companies should not mention in their advertisements that they use AI if they don’t, noting that companies should “[b]e aware that just using an AI tool when you’re developing your product is not the same as offering your customers a product with AI inside.” The blog post also advises that the same advertising principles apply to companies’ claims about the use of AI in connection with their products and services, and the FTC expects companies to have a reasonable basis for any claim they make about their products or services in their advertisements. Finally, the blog post notes that the FTC is “examining whether AI and other automated tools are being used for fraud, deception, unfair manipulation, or other harmful purposes. On the back end, [it is] looking at whether automated tools have biased or discriminatory impacts.”

CASE(S) OF THE MONTH
Court Refused to Dismiss Borrower’s TILA and State Law Claims that Lender Understated Finance Charge for Loan Transaction by Not Including Cost of Mandatory Car Club Membership in Finance Charge: An individual obtained a loan and gave the lender a security interest in her vehicle in connection with the loan. The borrower later sued the lender, alleging that it violated the Truth in Lending Act, the Illinois Consumer Installment Loan Act, and the Illinois Consumer Fraud Act by understating the finance charge for the loan transaction because the cost of a car club membership she purchased was not included in the finance charge. The borrower alleged that she was required to purchase a car club membership as a condition of the loan and that the car club membership was a contract of insurance under Illinois law. TILA permits certain types of insurance agreements to be excluded from the finance charge if, among other requirements, the consumer is not required to purchase them and is informed of that fact. The lender moved to dismiss all of the claims. The U.S. District Court for the Northern District of Illinois denied the motion to dismiss. The court found that the borrower plausibly alleged that the car club membership was insurance under Illinois law, despite the fact that she attached as an exhibit to her complaint the application for the car club membership that expressly stated that it was not insurance. Next, the court found that the borrower plausibly alleged that the car club membership was mandatory by alleging that she was “specifically told that the car club membership was a condition for the extension of credit,” despite the fact that she attached as an exhibit to her complaint the application for the car club membership that expressly stated that the purchase of the membership was not a required condition of the loan. The court also noted that whether the insurance was mandatory was a factual dispute that it could not resolve on a motion to dismiss. Therefore, the court concluded that the borrower plausibly alleged that the lender violated TILA by understating the finance charge. It also allowed the ICILA and ICFA claims to proceed. See Perez v. Consumer Financial Services Corporation, 2024 U.S. Dist. LEXIS 149532 (N.D. Ill. August 21, 2024).

COMPLIANCE TIP
The case above illustrates some of the challenges with a “he said/she said” type case where the consumer claimed that the creditor required the purchase of a membership as a condition of the extension of credit, but the paperwork specifically stated that its purchase was not a required condition of the extension of credit. In this case, the consumer argued that the cost of the car club membership was not included in the finance charge (because it was required) and as it was not included, it understated the finance charge for the transaction. The case survived the creditor’s motion to dismiss, which means that the case will continue as will the attorneys’ fees. Think about this case in terms of any Voluntary Protection Products you might sell to your customers – how will you be able to prove that you did not require your customer to purchase the VPP as a condition of the transaction? What does your consumerfacing documentation say in this regard? If you haven’t had your documents looked at in a while, it’s time for a check-up!

So, there’s this month’s roundup! Stay legal, and we’ll see you next month.