Brian Goodrich, Associate at Holland & Knight, also contributed to this piece
On January 6, 2016, the Federal District Court for the Northern District of Georgia entered the Consumer Financial Protection Bureau’s proposed consent order in the CFPB’s lawsuit against Frederick J. Hanna & Associates, P.C. The CFPB brought suit against Hanna & Associates in July 2014, alleging that the law firm and its three principal partners were operating an illegal debt collection lawsuit mill. The CFPB alleged that the law firm’s operations violated both the Fair Debt Collection Practices Act and Dodd-Frank Wall Street Reform and Consumer Protection Act.
The consent order requires Hanna & Associates to:
1) End “intimidating” collection tactics. The Order prohibits Hanna & Associates from threatening and filing lawsuits to enforce debts unless there is hard evidence documenting the debt. This requirement is a reaction to Hanna & Associates’ practice of mass filing lawsuits without verifying the amount of the debt or whether the debt was still enforceable.
2) Increase attorney involvement before suit is filed against consumers. The Order prohibits Hanna & Associates from filing or threatening lawsuits unless the firm’s attorneys have reviewed the documentation that supports the legal claim.
3) Cease the use of “deceptive” court filings. The CFPB alleged that the firm filed sworn statements from its clients even though in many cases the signers did not know the details they attested to. Under the Order, Hanna & Associates is no longer permitted to use affidavits as evidence to collect debts unless the statements specifically and accurately describe the signer’s knowledge of the facts and the documents attached.
4) Pay a $3.1 million dollar penalty. The firm and its principal partners are jointly required to pay a $3.1 million penalty to the CFPB’s Civil Penalty Fund.
Two major themes emerge from the terms of the Order that the industry would do well to take heed, according to the CFPB: (1) all actions taken with respect to consumer debt must be based on substantiated evidence; and (2) all representations made to consumers about debt they owe must be actionable, as opposed to empty threats or threatening action that collectors are unable to follow-through on.
What does this mean for the debt collection industry?
The terms of the Order should be viewed by the industry as a rule-making issued by the CFPB. When placed within the context of other consent orders the CFPB has recently entered into with other players in the debt collection industry, new industry-wide standards emerge.
1) First, all debts must be substantiated before collection activity begins. The consent orders entered against Hanna & Associates, Midland Funding, and Portfolio Recovery Associates make clear that documentation and account review is required before collections begins. A new standard aspect of due diligence for debt purchasers, and prior to acceptance for collection by third-party collectors, should be review of substantiating documents such as contracts and monthly account statements. While the FDCPA does not require such documentation, the industry should incorporate these practices now in advance of the CFPB’s forthcoming rule-making.
2) Second, the CFPB will scrutinize any tactics that exert pressure upon consumers to enter into repayment arrangements. Prior to the Order, the CFPB ordered three of Hanna & Associates’ clients, JPMorgan Chase, Portfolio Recovery Associates, and Encore Capital Group, to cease making false statements in support of lawsuits filed against consumers with little or no review prior to filing. In the earlier proceedings against Hanna & Associates, the CFPB made clear its position that filing lawsuits exerts extra pressure on consumers to repay their debts. Accordingly, entities that file suit against consumers must ensure they have evidence to support the claims and that the claims are legally viable (such as, for example, ensuring that the debt is within the statute of limitations for collections).
3) Third, the CFPB does not approve of the mass filing of debt collection lawsuits. The CFPB has taken several actions against entities that “robo-signed” complaints and affidavits against consumers without any meaningful attorney review. Players in the debt collection industry that rely on outside counsel should ensure that attorneys are engaged in personal review of every lawsuit before a complaint is filed.
The CFPB’s interest in the debt collection industry is not likely to wane. The Bureau has aggressively pursued a number of actors in the industry, and announced that there will be rule-making in the near future. Consumer complaints about debt collectors are often featured in the CFPB’s quarterly reports and the debt collection industry as a whole is generally highlighted as an area needing more oversight.
How can your company be prepared for the CFPB?
Companies should monitor and observe the CFPB-issued guidance as to which acts the Bureau believes to violate the FDCPA and Dodd-Frank. CFPB Bulletins speak to many aspects of the industry, including, for example, the CFPB’s position on what representations a debt collector can make to consumers with respect to the benefits paying off a debt will have on their credit report. Law enforcement actions, such as that taken against Hanna & Associates, provide actors in the industry with further guidance as to what practices the Bureau believes to be illegal. Lastly, a robust and comprehensive Compliance Management System designed in accordance with CFPB standards is a “must-have” for all actors.
Interested in discussing this article live? Join The Compliance Professionals Forum for a webinar with attorneys Anthony Diresta and Brian Goodrich for a Q & A session specifically about this article and the Hanna Consent Order.
Date: 17 March 2016
Time: 2.00 p.m. Eastern