Editor’s Note: This article, written by By Consumer finance monitor and is republished here with permission.by Ballard Spahr, previously appeared on Ballard Spahr’s
The FTC has announced the settlement of its first enforcement action targeting the practice of “debt parking.” As described in the FTC complaint Filed in Missouri Federal District Court against Midwest Recovery Systems, LLC and its owners, this practice, also known as “passive debt collection,” involves placing purported debts on consumer credit reports without first attempting to communicate with consumers about debt.
In its lawsuit, the FTC alleged that since 2015, Midwest has reported more than $ 98 million in suspected debt to credit bureaus. These debts would have included debts for unauthorized or counterfeit payday loans, debts subject to unresolved fraud claims, bankrupt debts, debts being re-billed to consumer health insurance and debts. already paid to defendants. According to the complaint, the defendants continued to attempt to collect these debts despite various red flags as to their validity, including numerous consumer complaints and disputes and an inability to validate many debts.
The FTC alleged that on the basis of their practice of “parking the debt”, the defendants engaged in the following unlawful behavior:
- Deceptive conduct in violation of Section 5 of the FTC Act due to false or unsubstantiated claims that consumers were in default on reported debts or had a legal obligation to pay defendants
- False or misleading statements in violation of the FDCPA due to misrepresentation of the character, amount or legal status of the debts, the communication of credit information which is known or should be known to be false and the use of false statements or deceptive means to collect debts
- Unfair collection practices in violation of the FDCPA due to the use of unfair means to collect debts, including providing information to a consumer information agency before communicating with the consumer about the debt
- Failure to provide validation notice in violation of the FDCPA
- Providing inaccurate information to consumer news agencies in violation of the FCRA because defendants knew or had reasonable grounds to believe that the information was inaccurate
- Failing to conduct reasonable investigations into direct disputes in violation of the FCRA and the FCRA Furnisher Rule
- Failure to report investigation results to consumers in violation of the FCRA and FCRA Furnisher Rule
In addition to prohibiting the defendants from engaging in the conduct that is the subject of the prosecution, the Stated order of permanent injunction and pecuniary judgment requires defendants, when a consumer disputes that a debt is owed or the amount, to (1) report the debt as disputed or request its removal within 30 days, and (2) promptly cease collection and not transfer or sell the debt or conduct an investigation in accordance with the stipulated order. The settlement imposes a monetary judgment of $ 24.3 million, which is partially suspended due to defendants’ inability to pay. In addition, Midwest and one of its owners must pay $ 56,748, that owner must sell their stake in another debt collection firm and transfer the proceeds of the sale to the FTC, and Midwest Recovery must transfer all funds. remaining at the FTC.
In a blog post on the rules, the FTC highlights “some tips to take away for other members of the collections ecosystem.” He notes that the settlement is one of the FTC’s first issues to deal with medical debt and that the accuracy issues related to medical debt “are of particular concern.” The FTC also warns debt collectors to “exercise caution at the intersection of debt collection and credit reporting” in order to avoid “a steaming alphabet soup of FDCPA and legal violations. FCRA ”. He observes that prudent debt collectors “review bad debt categories and bad creditors debts” and “also contact consumers and listen to what they have to say before providing information to credit bureaus “.
Commissioners Rohit Chopra and Rebecca Slaughter issued settlement statements in which they urged the FTC to cooperate more closely with the CFPB in debt collection actions. The two commissioners noted that the power of the CFPB to obtain civil penalties would allow victims to be entitled to monetary compensation from the CFPB Civil Sanctions Fund, even if the penalty in one case was only $ 1. . Commissioner Chopra observed in his statement that the FTC has not put the various legal authorities granted to it by Congress since 2010 “to use in any meaningful way.” These powers include the FTC’s regulatory power over certain auto finance and sales practices and the FTC’s enforcement power under the Military Loans Act and related congressional direction for the FTC to coordinate. with the Federal Reserve and the CFPB to combat abuses against military families in the automotive sector. sector. It is likely that the CFPB, under the leadership of a new director appointed by Joe Biden, will be receptive to greater cooperation with the FTC. Additionally, in a Biden administration, the FTC could become more aggressive in its use of authorities cited by Commissioner Chopra.
Finally, debt collectors should also note that the collection rule proposed by the CFPB considered “debt parking” to be “another prohibited practice” under the FDCPA, with the sending of the validation notice satisfactory to the requirement to communicate with the consumer before coming to the office. Although this subject was not addressed in the final rule adopted by the CFPB in October 2020 and recently published in the Federal Register, it should be addressed in the final disclosure-driven rule that the CFPB announced it would release this month., and the debt parking ban will likely be adopted as proposed.