The CFPB filed a complaint earlier this week in a New York federal district court against three companies that purchase defaulted debts (Corporate Defendants) and three individuals who are owners and/or officers of the Corporate Defendants (Individual Defendants). (Click here to read the statement from United Holding Group, LLC, one of the Corporate Defendants, about the lawsuit.)
The Bureau alleges that the Corporate Defendants (1) placed consumer debts directly with debt collectors that collected the debts on their behalf or with “master servicers” who then placed the debts with debt collectors that collected the debts on their behalf, and (b) sold consumer debts to debt collectors, some of whom were contractually required to make ongoing payments to the Corporate Defendants. The CFPB alleges that both debt collectors who collected debts on the Corporate Defendants’ behalf and debt collectors to whom the Corporate Defendants sold debts used deceptive collection tactics, including false threats of lawsuits, arrest, and jail, and false statements about credit reporting. The CFPB’s claims against the defendants consist of claims for direct violations of the CFPA and FDCPA and claims for substantially assisting CFPA violations by debt collectors.
Direct Violations. The CFPB alleges that the Corporate Defendants and the Individual Defendants violated the CFPA’s UDAAP prohibition by falsely representing through debt collectors with whom they placed debts that consumers would be sued if they did not settle their debts or that repayment (or not repaying) would affect their credit scores. According to the CFPB, the defendants did not authorize these debt collectors to sue consumers, did not intend to sue consumers imminently, and did not furnish information to consumer reporting agencies. It also alleges that two of the Corporate Defendants violated the FDCPA by making these false representations and that such FDCPA violations also constituted CFPA violations.
Substantial Assistance. The CFPB alleges:
- Debt collectors with whom all of the Corporate Defendants placed debts and debt collectors to whom they sold debts violated the CFPA UDAAP prohibition by making false threats of lawsuits and false statements about credit reporting. All of the defendants knowingly or recklessly provided substantial assistance to the debt collectors in violation of the CFPA because they knew, or should have known, of the debt collectors’ deceptive practices and continued to place debts with or sell debts to the debt collectors. In the complaint, among the allegations made by the CFPB to support its allegation that the defendants “knew or should have known” is the defendants’ receipt of hundreds of complaints about false threats and statements by debt collectors and recordings of phone calls in which debt collectors made such threats or statements.
- Debt collectors to whom one of the Corporate Defendants sold debts violated the CFPA UDAAP prohibition by making false threats of arrest or jail. This Corporate Defendant and one of the Individual Defendants (who owned and managed the Corporate Defendant) knowingly or recklessly provided substantial assistance to these debt collectors in violation of the CFPA because they knew, or should have known, of the debt collectors’ false threats and continued to sell debts to them.
The CFPB’s claims in this enforcement action strike us as particularly aggressive because rather than taking action against the debt collectors used by the Corporate Defendants or the debt buyers to whom they sold debts, it is seeking to hold the Corporate and Individual Defendants directly and separately responsible for the violations committed by these third parties. As such, the takeaway for debt sellers (including first-party creditors) is that they should perform appropriate due diligence when selecting debt collectors or debt buyers, monitor debt collectors and debt buyers for compliance with applicable consumer protection laws and regulations, and take appropriate action promptly when compliance issues arise to ensure full remediation of any issues.