After a year and a half, the CFPB suit against debt collection law firm Frederick J. Hanna & Associates has come to a close. A consent order resolving the suit has been submitted to the court which will lay the ground work for future CFPB actions against debt collection law firms. The suit, which was brought in July 2014, alleged that Hanna violated both the FDCPA and Dodd Frank’s unfair and deceptive provisions. The CFPB contended they had jurisdiction over the law firm because the CFPB’s regulatory authority extends to persons engaged in the collection of debt related to any consumer financial products or services.
Essentially, the CFPB focused in on two facets of Hanna’s practice. First, the CFPB alleged that because Hanna relied upon staff and automated practices to generate thousands of law suits, its attorneys were not meaningfully involved in the suits they filed. The CFPB took issue with the fact that Hanna filed form complaints drafted by staff where the only significant changes were to the name of the consumer and the amount owed, and relied upon its staff to ascertain dates of last payment, whether or not there was sufficient documentation to proceed to suit, or to draft the lawsuits etc. Put more crassly, the CFPB contended that Hanna should have spent more time on each and every law suit it filed. Secondly, the CFPB alleged that Hanna should have known that the persons executing affidavits on behalf of their clients did not have the requisite knowledge to affirm the validity of the debts.
The Consent Order requires that Hanna and its principals pay a civil penalty of $3.1 million dollars and sets forth specific remedial policies and procedures that Hanna must adopt, including setting forth specific documentation which must be in place before Hanna may file suit and making Hanna responsible for the accuracy of affidavits executed by its clients.
The Hanna saga should grab the attention of law firms engaged in consumer debt collection and provides some key lessons and warnings:
Collection law firms are not exempt from the provisions of the FDCPA or Dodd Frank.
While that fact came as no surprise under the FDCPA, many in the industry, including myself, do not believe that the CFPB has the authority to regulate the practice of law. Unfortunately, the District Court disagreed and held that the Dodd Frank exemption for lawyers did not apply and that Dodd Frank provided a “carve out” for attorneys engaged in debt collection activity, including the filing of suit.
Collection law firms may be held accountable for the sins of their clients.
As noted above, the CFPB complaint against Hanna involved a two prong attack and took issue with the filing of affidavits executed by Hanna’s clients which the CFPB contended were unfair and deceptive and not based upon the personal knowledge of the affiant. The CFPB notes in its press release the Hanna Consent Order “is part of the Bureau’s work to address illegal debt collection practices across the consumer financial marketplace, including companies who sell, buy, and collect debt” and notes the consent orders previously entered into with JPMorgan Chase, Portfolio Recovery Associates, and Encore Capital Group. The Consent Order specifically requires Hanna vet the affidavit it submits to ensure that:
- The persons submitting the affidavits have personal knowledge of the validity, truth, or accuracy of the character, amount, or legal status of the underlying debt;
- The affidavits are notarized by persons who are in the presence of the affiant when the affiant signs the affidavit;
- The affidavits are accurate and that the documentation attached to the affidavits relate to the specific Customer sued;
- The affidavits do not misrepresent the affiant’s review of the account documentation; and
- The affidavits do not misrepresent that the affiant personally reviewed the affidavit when that is not the case.
The terms of the Consent Order set forth the CFPB’s expectation that collection law firms are responsible for ensuring their clients’ affidavit practices do not include robo signing and that they are familiar with their client’s practices and policies for executing affidavits.
The CFPB has a Heightened Expectation of the Meaning of “Meaningful Involvement”.
The Consent Order makes clear that the CFPB expects consumer debt collection lawyers to place less reliance upon their staff. The consent order requires that Hanna:
- Have the following documents in hand prior to engaging in collection efforts:
- Account documentation which includes documentation the creditor provided to the consumer about the debt, a complete transactional history of the debt created by the creditor or its servicer or a copy of the judgment. The Consent Order sets forth the expectation that the account documentation include, at a minimum, the consumer’s name, the last four digits of the account number associated with the debt at charge off, the claimed amount, and any contractual terms and conditions applicable to the debt;
- In addition, where the collection efforts are on behalf of a debt buyer, a chronological listing of all prior owners of the debt, the date of each transfer of ownership, a certified or otherwise authenticated copy of each bill of sale and such documentation must contain a specific reference to the particular debt being collection; and
- Any one of the following:
- A document signed by the consumer evidencing the opening of the account; or
- Original account-level documentation reflecting the purchase, payment, or other actual use of the account by the Consumer.
- Document their meaningful involvement by:
- Documenting the attorney’s review of the electronic record of each account prior to filing suit;
- Documenting the attorney’s review the account documentation including the consumer’s name, last four digits of the account number, the claimed amount and contract terms;
- Documenting the attorney’s confirmation that the statute of limitations has not run;
- Documenting the attorney’s confirmation that the debt has not been discharged in bankruptcy or is not the subject of a pending bankruptcy; and
- Documenting the attorney’s confirmation of the consumer’s correct identity and current address to insure the correct venue for suit.
Debt collection law firms should assess risk in light of the CFPB consent order. The consent order sets forth the CFPB’s expectations as to what constitutes meaningful involvement and should provide parties with some guidance as to the same moving forward. All firms are encouraged to review their policies and procedures in light of the Consent Order.