3 Major Steps to Maintain Confidence in Your Compliance

starzec michaelIn the modern compliance era, collection law veterans have become inured to seemingly relentless rounds of annual, bi-annual, and quarterly testing, certification and recertification exams that we take on a yearly basis. For us, compliance is used to improve your practice, modernize workflow and protect against audit failures. Indeed, it becomes cost-effective as you avoid risk and attract business with robust compliance controls. However, your associate attorneys often do not perceive these impacts as they wrestle with compliance on a day-to-day basis.

In the not-so-distant past, I managed our associate attorneys, that tenure ending just as the reality of CFPB oversight lead to compliance-heavy training and testing. Then, as now, the allure of collections was the promise of a steady diet of court, arguing many substantive motions and obtaining significant trial practice. At that time, after a few hours of FDCPA training and testing and a quick review of the employee manual, a new associate was with attorneys on day one, reviewing case law and learning how to prepare a court call. By day two, they were shadowing an attorney in court.

Now, an associate won’t see an attorney or think about the law (other than the FDCPA) until their fourth day at the firm. In addition, depending on the client, a new attorney may take up to 14 different tests. And these tests cover areas as diverse as Fair Lending to the American with Disabilities Act to Anti-Money Laundering. In fact, at one point, for a mortgage lender we actually had a test on the federal Flood Insurance compliance. (Not surprisingly, flood insurance was never raised by a defendant in a single case we handled for that client.)

But when we reflect on the training, it is not surprising a new associate leaves bewildered. First, they take a test on the FCRA but later are informed attorneys cannot discuss the implications of the FCRA in settlement discussions. While they never process an electronic payment, they learn about the Electronic Fund Transfer Act (EFTA). They wonder if they would confront claims of inappropriate access to bank facilities. And, from all of this testing most of the attorneys immediately realize that simple, honest mistakes can result in FDCPA lawsuits. One associate noted that as attorneys handle the case last, they are the line of last resort to prevent a lawsuit.

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This sobering realization is useful information for all of us with management roles. While we want to create a compliance culture, we do not want to have employees constantly on edge, fearing decision making. For that reason, our firm has made efforts to ensure our attorneys can practice law and compliance with confidence.

1. See the Whole Process

First, we try to ensure that we don’t let our various departments work in a vacuum. Therefore, we expose our attorneys to the entire process, from placement review to filing of post-judgment remedies. Not simply to know how a file gets to court, but to let them know that there are people and processes in place to detect mistakes or changes in the circumstances of the file.

2. Someone to Summarize

Second, because we as partners and managers are engaged more often in disseminating information rather than having to act on that information, it is critical to come up with ways to cope with the sheer volume of material that falls upon the staff. On a monthly basis, think how many times we receive client updates or are issued an entirely new client guide comprising hundreds of pages. And all of these changes are acknowledged with a simple click of the mouse. With the amount of work an attorney must perform, synthesizing that information into actionable intelligence is nearly impossible. To combat information overload, at our attorney meetings, we have an attorney who is responsible for summarizing all the changes that may impact our attorneys over the course of that month. We quickly discovered that these summaries yielded discussion, questions and feedback. Something we rarely obtained by simple email dissemination.

3. Re-Familiarize with the Workload

Finally, it is important to re-familiarize yourself with the day-to-day work your attorney performs. Walk into their offices, find out what issues they are facing, find out how much the practice of collection law has changed since we were the ones running around the court house. Having effective lines of face-to-face communication leads great benefits to staff morale and leads not simply to work satisfaction but breeds a culture of cooperative compliance and teamwork that can only enhance the effectiveness of your practice.

Michael L. Starzec is a partner with Blitt and Gaines, P.C and is vicepresident of the Illinois Creditors Bar. He is a frequent speaker, writer and litigator on creditor’s rights.

Meaningful Involvement Looms Daily Since Weltman

starzec michaelOur industry has celebrated the opinion and order entered on July 25 in the infamous matter of the Consumer Finance Protection Bureau v. Weltman, et al as a major victory. The efforts and determination of Weltman’s team are extraordinary and were taken at great risk to themselves in order to vindicate the practices of collection firms nationwide. At its core, the Weltman case concerned the esoteric concept of “meaningful involvement.” This is akin to Aquinas’ discussion of angels on the head of a pin or Justice Stewart’s famous line, “I know it when I see it,” as his threshold test for obscenity. Today, while no one frets about elbow room for angels and the internet has rendered obscenity tests irrelevant, the issue of meaningful involvement looms daily.

- Click Here for Summaries of Referenced Cases (Collection Advisor Professional Network Members Only) -

Meaningful Involvement’s First Appearance

This phrase first appeared in 1993 in Clomon v. Jackson. In that case, the letter falsely stated that an attorney had personally reviewed it and determined litigation was feasible. Notwithstanding its limited factual application, it is now the de jure means for the consumers’ bar to sue collection firms.

Modernly, Bock v. Pressler & Pressler applied meaningful involvement to the complaint process. Even though not a single allegation in the collection complaint was found to be false, the court held a signature on the complaint implied meaningful and professional application of legal expertise. However, no guidelines as to how to demonstrate meaningful involvement were provided. All we could discern is that an attorney could not rely on actions taken by automation or non-attorneys to insulate themselves from liability.

Into this fray stepped the CFPB with its consent decrees against creditors, debt sellers and lawyers. However, the decrees had a silver lining: By setting documentary standards, we were informed of what was necessary to bring suit. So, a review of our scrubs, venue and documentation at placement and then, a second view at the time suit is filed should suffice to defeat a meaningful involvement case, right?

Cases at Odds

Hence, Weltman provides a template for how to defeat a meaningful involvement case on a demand letter, but it is not the anecdote to Pressler. In reality, we have two district court cases which seem to take opposite positions on the same processes. The Pressler court was dismissive of scrubs and non-attorney involvement whereas the Weltman court ruled attorney involvement in creating the processes, policies and procedures by which clients were accepted and demand letters were produced was sufficient, even if some were automated or performed by non-attorneys. Additionally, while the delicious circumstance that the CFPB’s former chairperson, Richard Cordray, the man who authorized the action against Weltman, had approved Weltman’s practices when he retained them to collect state debts as Ohio Attorney General added an element of satisfying drama to the matter, this was a unique circumstance that many of us will not have in our quiver.

Thus, Weltman addresses the sufficiency of a predemand letter review, not the process for approving a complaint. Additionally, as the trial court noted, “there is not necessarily a set meaningful involvement requirement… as this is a question of what must be determined based on individual facts and totality of circumstances in each case.” In other words, a meaningful involvement action is likely to survive a motion to dismiss which means, from a litigation and cost standpoint, you will be in it for the long haul, up to at least summary judgment, and likely a jury trial to vindicate your individual process.

Precedent and Progress Made

So, yes, meaningful involvement suits are not going away but this in no way discounts the Weltman ruling. First, it vindicates that attorney created and reviewed processes matter. Second, that collection firms can rely on attorney trained and supervised non-attorney staff to perform tasks, just like every other practice of law. Third, Weltman took a stand against the most powerful agency in American history and won, not on a technicality, but after jury and judge reviewed what they do and how they did it and found it meaningful. Finally, in taking this stand, Weltman sent a message to the consumer bar that it will not be easy to prove, even to a jury, that well-crafted and administered practices lead to misleading the consumer. Put differently, despite all the resources of a federal agency, the CFPB could not prove its case. As a result, this decision is a cautionary tale for the consumer bar – yes, the fight will be long and costly for the collection firm. But, with sufficient practices in place, a creditor will win.

Michael L. Starzec is a partner with Blitt and Gaines, P.C and is vicepresident of the Illinois Creditors Bar. He is a frequent speaker, writer and litigator on creditor’s rights.

Benefits of Legal Debt Collection on the Nation’s Economy

starzec michaelThe old cliché relating to elected officials is that “all politics are local.” However, as our industry has learned with CFPB consent decrees and regulation by federal litigation, that adage seemed to have lost its meaning. Yet, Mike Mulvaney’s appointment and his recently leaked memo where he stated a legal truism, i.e. that “the people regulated should have the right to know what the rules are before being charged with breaking them…” it seemed that era was passing. In fact, even the recent PHH v. CFPB ruling which found the CFPB constitutional also found Cordray exceeded his authority and therefore struck down a $103 million fine.

So we can breathe easy, right? Not so fast! Because just as you say that, you look at the calendar and see yet another election cycle is underway which means once again, that all politics, especially relating to debt collections, are local.

The first hint that there might be a state-level reaction to the reduced enforcement role of the CFPB was a recent campaign ad which attacked a gubernatorial candidate for voting to allow garnishment of defaulted state-backed student loans. Imagine that – in a state that is nationally known to be in extreme financial distress, with unpaid bills and unfunded pensions, the responsible decision to allow recovery on state issued loans seems a no-brainer. Not so. Politicians routinely “pick the low fruit” during elections and attract voters by slamming legal debt collections.

Perhaps coincidentally, just as I sat down to write this, our trade association lobbyist provided me a legislative report of pending bills and I was flabbergasted. Out of nowhere, there were no less than five proposed bills relating to debt collection, the most serious of which would almost eliminate the value of certain post-judgment actions. The most damaging suggestion is to reduce the garnishment rate from 15% to 10% and increase the wages exempt from garnishment to 60 times the statutory minimum wage. If that were not enough, another bill would require banks to automatically apply a $4,000 exemption to bank garnishments, eliminating the requirement for consumers to come to court and assert it. Another would see the interest rate of judgments reduced to 2%, or less than the rate of inflation. Ironically, all of these proposed bills are labeled under “debtor protection” but I think it is more accurate to call them re-election protection. In return for votes, politicians making it more difficult to collect harms the consumers they claim to protect.

In a recent law review article discussing the impact of regulation on lending, it was noted that if lenders cannot accurately price the risk of a loan, because of regulatory limits, the lender reduces exposure by lending less money to the same borrowers, or limiting to whom it loans. Without question, these proposed bills would have the exact effect. Specifically, a lender, knowing a potential borrower’s wage is less than 60 times the minimum wage is also going to know that upon default, obtaining a judgment will not protect it, as the garnishment will never recover any money. Likewise, with a reduced interest rate post-judgment, inflation will simply devour the value of the loan, causing an even more significant loss if the loan is given and defaulted. With those twin limitations, why lend to that person at all?

Moreover, what is missing from this discussion is the broader macro-economic aspect. The same article noted that 95% of debt is paid on time and of the 30 million debtors in collections the CFPB reported, there are roughly 30,000 debt collection complaints. That is the definition of statistical insignificance. Adding to that, in instances where the complaint was that the debt was invalid, the FTC found that only 1-2% of those claims are valid, even among accounts bought by debt buyers.

These statistics just scratch the surface regarding the benefits of legal debt collection on the nation’s economy. Candidly, the truth doesn’t seem to attract voters! So what do those statistics mean in the real world? It means the real question that should be asked by politicians is whether the 95% of consumers who pay on time would be willing to pay higher interest to prevent creditors from being able to garnish the wages of the 5%? Although we know facts ought not get in the way of a politician’s reelection, studies from the 1970s through a 2013 Federal Reserve Bank of Philadelphia study have consistently shown lower income consumers are most negatively affected by restricting creditor remedies and, contrary to the politicians claims – interest rates are lower where there are fewer legal restrictions. Everyone pays less when there is a fair playing field for consumers and lenders.

At a minimum, all of us need to be aware of the trends in the election cycle and the likelihood of damaging legislation. It is imperative that you and your trade organizations be armed with skilled lobbyists and proper metrics to tell the true story.

Michael L. Starzec is a partner with Blitt and Gaines, P.C and is vice president of the Illinois Creditors Bar. He is a frequent speaker, writer and litigator on creditor’s rights.

The New CFPB and Its Faith in the American People

starzec michaelIn early May, Director Mulvaney announced that the CFPB’s student loan division is being shifted to its consumer information unit in an effort to transition the agency to a vehicle that provides consumers information about their legal rights. In the ultimate act of poor timing, this decision was announced at nearly the same time as a Federal Reserve report that announced student loan debt had risen to $1.5 trillion, surpassing auto loans, which clocked in at a paltry $1.1 trillion while credit cards were reported at $977 billion.

Not surprisingly, reaction was negative. Many feared the move would negatively impact efforts to curb abuses in the student loan industry, particularly the pending action against Navient who was accused of steering borrowers into higher payment options without providing other cost-saving options. At the same time, a USA Today editorial opined that student loans were “modern-day debtors prisons,” providing an appropriately Dickensian tableau for the discussion. The writer’s proposal was to reinstate bankruptcy for student loans.

Unfortunately, many commentators, be they professional, political or pundit, who examine public policy issues, focus only on the immediate, individualized results of the status quo. While this ensures maximum emotional impact, it ignores the larger, macroeconomic reasoning for the policy and the effect change might have on millions of consumers.

Consequently, the USA Today editorial would have you believe student loans are non-dischargeable because it purposefully disadvantages students to unfairly benefit lenders. However, a little research, specifically, typing into a search engine “why are student loans non-dischargeable” garnered a Forbes article that answered that question with precision. Congress made discharge of mortgage and student loan debt more difficult because of the societal benefits to promoting home ownership and access to higher education. Without restrictions on bankruptcy, policymakers feared there would be reduced investment capital directed to mortgages or student loans, which keeps them available and affordable. If the loans were immediately dischargeable, lenders might not risk loans to students. As better educated workers command higher salaries and can compete better globally, ensuring affordable education loans would ultimately lead to a better standard of living. Hence, Victorian squalor was not the inspiration for non-dischargeability; it was greater access to the American Dream.

But consider Navient’s dilemma. They are a debt servicing company whose purpose is to recover student loan debt. In that capacity, they are charged to ensure a given debt is paid and, upon default, recover that balance as quickly as possible. However, the CFPB action alleges impropriety because Navient may have directed students into arrangements that had higher payments. Put differently, they were supposed to collect money, just not so much. To be fair, I do not know if Navient’s service agreement required them to offer the option with the lowest payments first. But, all things being equal, this encapsulates the dilemma of our not-so-new regulatory collection universe: Creditors are being asked to be both their client’s and the consumer’s advocate. As a result, we are in the untenable position of having an ethical duty to zealously represent our clients while, at the same time, being required to provide advice to consumers at odds with that ethical duty.

Moving full circle, Mulvaney’s goal to transform the CFPB’s mission into one of education of consumers recognizes this dilemma. But, to my mind, this is an intended side effect to a broader policy goal that could have a national and generational impact. The CFPB’s previous iteration portrayed collections like a black and white 1940s western: The CFPB wore the white hat, banks and attorneys were the vicious cattle rustlers and the consumer was the obligatory damsel tied to the railroad tracks. Under that world view, every consumer was the “least sophisticated consumer” and therefore all consumers were victims. Mulvaney appears to be trying to balance the scales: Not by regulation that only confers permanent victim status on consumers but by education that empowers the consumer to make informed financial decisions. In the end, isn’t that the real aim of college – education to create productive, responsible and rational adult decision-makers? For, as Jefferson famously said: “I know no safe depositary of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform their discretion by education.” Let’s hope that our lawmakers, colleges and the loans made to pay them can do the same.

Michael L. Starzec is a partner with Blitt and Gaines, P.C and is vicepresident of the Illinois Creditors Bar. He is a frequent speaker, writer and litigator on creditor’s rights.

Pay Attention to Incoming and Outgoing Mail!

mug blittIn passing the FDCPA 40 years ago, Congress found that there was “abundant evidence” of the use of abusive, deceptive and unfair debt collection practices. Later case law clarified that the purpose was to protect consumers victimized by unscrupulous debt collectors while allowing collectors efficient, reasonable and ethical practices in pursuit of their profession.

Fast forward to today, and while so many things in our lives have changed like cell phones, email and electric cars, the FDCPA remains mired in a collection reality that no longer exists. Moreover, consumer advocates (and I use that phrase guardedly) now seek to use the FDCPA shield as a sword for their financial benefit; to manipulate protective language into profits.

Nowhere is this more prevalent than in the required lettering under the FDCPA. Most of us will recall when our clients required we provide notice of the tax consequences of settlements. I can tell you that not a single one of these clients added this language to trick the consumer into thinking the IRS was involved in their case. The client thought they were allowing the consumer to make an informed decision at settlement. Yet, soon thereafter, an act of consumer empowerment was the subject of lawsuits that transformed into an abusive practice. Oscar Wilde’s adage that “no good deed goes unpunished” was particularly resonant here.

With the passage of four decades, FDCPA case law no longer defines what is or is not a violation: Consent Decrees play that role. While I believe the regulators tread too heavily, they set bright line rules for everyone to follow. This, I believe did not please the consumers bar who prefer to deal in the gray areas of the law. As a result of these clear guidelines, consumer lawyers are now pursuing theories that contort the intended purpose of the FDCPA.

Recent FDCPA filings bear this out. More and more, consumer lawyers are not having clients come to them with collection abuses. Rather, they are intentionally taking actions to generate violations. Let me give a couple examples. In one recent lawsuit, a consumer firm changed names but the attorneys remained the same. The court ordered the “new” consumer firm to file an appearance. They never did and never came back to court. After the case languished for months, a notice letter as to the next court date was sent to the attorney and his client to ensure someone appeared at the next court date. Lo and behold, an FDCPA lawsuit was filed for improper notice to the consumer. The FDCPA case was dismissed because the state’s rules required an attorney to appear to receive notice. However, the case became more interesting when the decision was circulated to our state creditors bar. It was discovered that several practitioners had been hit with the same set of facts, by the same law firm, and they had paid out settlement monies. This switching names was a pattern and practice of this firm.

More recently, clients have been sued for untimely updates of disputes on credit reports. Here, a consumer firm utilizes a form letter that announces their representation but, buried in the letter was the word “dispute.” If the dispute was not recorded by the 14th day, they were suing debt collectors. Then, as clients began training employees to look for the keyword “dispute” the form letter miraculously changed its language to eliminate the word “dispute” and replace it with “balance not accurate.” To date, tens of cases have been filed on that theory. Hence, a purposefully generated violation not consumer victimization.

The same is happening with demand letters. With many clients no longer charging interest, the consumer bar suddenly could not sue for so-called balance inaccuracies or that the interest disclosures were improper. With that avenue foreclosed, their recent tactic is a claim an FDCPA violation because a pre-suit demand letter did not disclose we might incur costs, if we file suit and if we win. Why? Because we are misrepresenting the potential exposure to the consumer. Sound vaguely familiar to the 1099 language issue? There we warned about potential exposure and still were sued. Here, if we were to take them up on their suggestion, the same firm would claim we were misrepresenting that costs were already awarded.

Candidly, these actions by the consumer bar are troublesome to say the least. If you do the research, you will see that in many jurisdictions, there are many of these type letter disputes being filed in quantity. Some are settled, some are being fought and some are being taken to a higher court. As always, you need to determine your pain threshold for the cost of fighting these claims.

Internally, training is the best approach. Make sure your staff knows the players, what to look for and how to handle these common tactics. Further, your compliance staff should be looking at recent case law to determine the trends in your location.

Fred N. Blitt, Esq., is a partner with Blitt and Gaines, PC in Illinois and Couch, Conville and Blitt in Louisiana. He is past president of NARCA.