Archive for EFTA

MD Tenn. Holds Auto Finance Creditor’s Telephone Authorization Process Complied With EFTA

The U.S. District Court for the Middle District of Tennessee recently held that a creditor complied with the federal Electronic Funds Transfer Act when it obtained verbal authorization to accept the consumer’s electronic fund transfer and request for enrollment into an autopay system.

In so ruling, the Court held that the creditor was not required to send the consumer a copy of his electronic signature (the recording).  Instead, the Court held, the written confirmation of enrollment need only include the material terms of the autopay system, and sending the confirmation of enrollment within two business days of the date of enrollment was sufficient to meet the creditor’s duty under the EFTA, 15 U.S.C. § 1693, et seq.

A copy of the opinionin Blatt v. Capital One Auto Finance, Inc. is available at:  Link to Opinion.

The consumer purchased a vehicle and executed a retail installment contract.  The retail installment contract was assigned to the creditor, a sales finance company.  After the consumer failed to make his first payment on time, he called the creditor and (1) authorized it over the phone to make a one-time withdrawal from his checking account to cover the missed payment; and (2) requested that he be enrolled in the creditor’s monthly automatic payment system, DirectPay.

To complete the consumer’s second request, he was transferred to an interactive voice response system (IVR).  After the IVR played a message providing the terms of DirectPay system, the IVR asked the consumer to press 1 to authorize the enrollment of his account into DirectPay.  The consumer pressed 1 on his phone.

One business day later, the creditor mailed the consumer a letter confirming the one-time debit from his checking account to make his missed payment.  Two business days after enrolling in DirectPay, the creditor sent a letter containing the following information:  “the amount of the payments to [the creditor], the recurring schedule of the payments, the date on which the first withdrawal would take place, the date on which [the consumer] agreed to the terms via the IVR system, and information on how to cancel or change his DirectPay enrollment.”

The consumer alleged that the creditor violated the EFTA in two ways.  First, the creditor “did not obtain his authorization to the recurring payments in writing, as the EFTA requires.”  Second, the letter confirming his enrollment into DirectPay “was insufficient to meet the EFTA’s requirements that [the creditor] mail a copy of his authorization to him.”

The consumer and the creditor filed competing motions for summary judgment.  The parties stipulated to all the relevant facts.  The only issues that remained were issues of statutory interpretation.

As you may recall, preauthorized electronic fund transfers, such as the ones the consumer agreed to by enrolling in DirectPay, are governed by the EFTA.  “A preauthorized electronic fund transfer from a consumer’s account may be authorized by the consumer only in writing, and a copy of such authorization shall be provided to the consumer when made.”  15 U.S.C. § 1693e(a).

The EFTA is implemented by Regulation E, 12 C.F.R. § 1005, et seq., which also contains official interpretations.  Regulation E allows for the consumer’s written authorization to be provided electronically, as long as the electronic authorization complies with the Electronic Signatures in Global and National Commerce Act (“E-SIGN Act”).

As you may recall, the E-SIGN Act was enacted in recognition of the developing world of electronics, and it mandates that a signature “may not be denied legal effect … solely because it is in electronic form.”  15 U.S.C. § 7001(a)(1).  Moreover, it mandates that a “contract relating to such transaction may not be denied legal effect … solely because an electronic signature or electronic record was used in its formation.”  15 U.S.C. § 7001(a)(2).

In this case, the parties stipulated that the consumer’s telephone call was conducted by “electronic means” through an “electronic agent” (the IVR system) and that the call generated an “electronic record” and “electronic signature” as all terms are defined in the E-SIGN Act.

Turning first to the requirement for a written authorization, the consumer argued that his authorization over the phone did not equate to written authorization as contemplated by the EFTA.  The Court disagreed.

In 2015, the Consumer Financial Protection Bureau issued a Compliance Bulletin stating that the EFTA “does not prohibit companies from obtaining signed, written authorization from consumers over the phone if the E-SIGN Act requirements for electronic records and signatures are met.”

Nevertheless, the consumer argued that the creditor failed to comply with a different portion of the E-SIGN Act, § 7001(c), concerning consumer disclosures.  Section 7001(c) states that “if a statute … requires that information relating to a transaction … be provided or made available to a consumer in writing, the use of an electronic record to provide or make available … such information satisfies the requirement that such information be in writing” if the creditor provided the consumer with certain disclosures.  15 U.S.C. § 7001(c)(1).

However, the Court held, the E-SIGN Act section in question, § 7001(c), did not require the creditor to make the consumer disclosures as the consumer argued, because the creditor did not provide any information in electronic form.

The Court noted that the creditor here obtained the consumer’s signature electronically and then provided a copy of that authorization to the consumer in paper form.  If the creditor had chosen to provide the consumer with a copy of his authorization in the form of an electronic record, it may have been required to comply with § 7001(c)’s consumer disclosure requirements.  But, this was not the situation before the Court.

Therefore, the Court determined that the consumer’s phone call created an electronic signature in accordance with the E-SIGN Act, and the creditor “met the written authorization requirement as contemplated in the EFTA.”

Next, the consumer argued that the creditor violated the § 1693e(a) requirement that “a copy of such authorization shall be provided to the consumer when made.” The consumer argued that the creditor violated this provision in two ways: (1) the creditor “did not send a copy of the authorization ‘when made’ but instead waited two business days; and (2) the copy that the creditor did eventually send was insufficient, in both form and substance, for purposes of the EFTA.”

The consumer argued that “when made” means at the same time as the authorization.  The Court disagreed, holding instead that two business days was an appropriate amount of time to provide a copy of the authorization based on the plain language of the EFTA and other notice requirements in the statute.

For example, the Court noted that (1) with transfers to a consumer’s account, the financial institution must provide “’oral or written notice of the transfer within two business days after the transfer occurs;’” 12 C.F.R. § 1005.10;  (2) “when a consumer notifies a financial institution about an alleged error and the financial institution investigates and determines that no error occurred, the financial institution ‘shall deliver or mail to the consumer an explanation of its finding within 3 business days after the conclusion of its investigation;’” 15 U.S.C. § 1693f; (3) “when a consumer learns of a lost or stolen card, the consumer must inform the financial institution within two business days in order to limit the consumer’s financial responsibility for unauthorized charges;” 15 U.S.C. § 1693g(a); and (4) “the issuer of a prepaid account must provide ‘the consumer a copy of the consumer’s prepaid account agreement no later than five business days after the issuer receives the consumer’s request.’”  12 C.F.R. § 1005.19.

Moreover, the Court explained, a requirement to provide all copies of authorizations “at the very moment in which they are made would be unreasonable and unworkable.”  The Court noted that this ruling did not establish a specific deadline by which a company must mail a copy of the authorization.  Instead, the Court held only that two business days was an appropriate amount of time to meet the EFTA notice requirement in § 1693e(a).

Finally, the consumer argued that the paper copy of the authorization did not meet the requirements of the EFTA in two ways.

First, because the creditor obtained his authorization via the electronic IVR system, the consumer argued that the creditor was then required to give him an audio recording of the phone call.  The consumer argued that this was required by § 7001(e) of the E-SIGN Act, which states that “the legal effect … of an electronic record … may be denied if such electronic record is not in a form that is capable of being retained and accurately reproduced for later reference[.]”  15 U.S.C. § 7001(e).

Second, the consumer argued that the paper copy of his authorization failed to make up for the creditor’s failure to send him a copy of the phone call because the letter did not contain the full terms that he agreed to when he used the IVR system.  Specifically, the consumer cited the following differences:  (1) the IVR system said he would no longer be receiving monthly statements but the paper copy in the mail did not mention this fact; and (2) the IVR system told the consumer that to change or cancel DirectPay he should call an 800 number, while the letter told the consumer that he can stop payment by notifying the creditor three business days or more before his account is charged.

Regarding the form of the confirmation letter, the Court determined that § 7001(e) of the E-SIGN Act did not apply to the consumer’s situation because he was not disputing the contents of the original phone call.

In fact, the Court noted that the consumer stipulated to exactly what the IVR message said – that he agreed to the terms in the message and pressed 1 to confirm his enrollment in DirectPay.  Moreover, the EFTA’s official interpretations allowed financial institutions to comply with the copy requirement by providing the copy of the authorization “either electronically or in paper form.”  12 C.F.R. § Pt. 1005, Supp. I. 10(b) ¶ 5.  Thus, the Court held that the letter mailed to the consumer was a correct form in which to give a copy of the electronic authorization.

As to the contents in the confirmation letter, the Court found that the terms contained in the letter were sufficient to meet the standards of 15 U.S.C. § 1639e(a), and the letter’s failure to recite the exact words in the IVR system is immaterial.

Again, the Court referenced the CFPB’s Compliance Bulletin.  CFPB Compliance Bulletin 2015-06 states that “[t]wo of the most significant terms of an authorization are the timing and amount of the recurring transfers from the consumer’s account.”

Here, the Court noted that the confirmation letter that was mailed to the consumer contained the amount of the payments to the creditor, the recurring schedule of the payments, the date of the first withdrawal, the date when the consumer agreed to the terms via the IVR system, and information on how to cancel or change his DirectPay enrollment.  These terms, according to the Court, were the material and important terms of the consumer’s DirectPay enrollment, and the letter was sufficient to meet the creditor’s duty under 15 U.S.C. § 1693e(a).

Accordingly, the Court granted summary judgment in favor of the creditor, and denied the consumer’s motion for summary judgment.

How Spokeo May Limit Consumer Financial Services Litigation

Yesterday’s decision from the U.S. Supreme Court in Spokeo v. Robins should bolster the defense of companies subject to several federal consumer protection statutes. The ruling addresses lawsuits that claim an injury created solely by the violation of a federal statute and require the plaintiff to demonstrate not only that the statute was violated, but that the plaintiff herself suffered harm.

The opinion does not go as far as many in the consumer financial services industry would have liked (not all injuries must be “tangible”), but it does close the door on civil lawsuits many have faced. The opinion was authored by Justice Alito, with a separate concurring opinion by Justice Thomas. Justice Ginsburg authored a dissent and was joined in the dissent by Justice Sotomayor.

A copy of the opinion is available here: Link to Opinion.

Standing and ‘Injury in Fact’

The decision concerns “standing” – whether a person can bring a lawsuit in a federal court. Standing, as the Court wrote, requires three elements: first, an injury in fact; second that the injury is “fairly traceable” to the conduct of the defendant at issue; and last, that the conduct can be likely redressed by the court.

Robins claimed Spokeo compiled a report about him that contained false information in violation of the Fair Credit Reporting Act (FCRA). The trial court dismissed his case finding Robins lacked standing because he had no tangible harm — he did not allege the information compiled by Spokeo lead to, for example, the denial of a job or credit. The Ninth Circuit Court of Appeals reversed and held that the statutory violation was enough to allow Robins his day in court; first, because his claims were associated with a violation of protections afforded to him by the FCRA and, second, because his lawsuit addressed the handling of his own credit information, and these concerns are “individualized.”

Yesterday’s decision addressed whether Robins met the first element of standing – whether he had alleged an injury in fact under the FCRA. This requires pleading harm to a “legally protected interest” that is “concrete and particularized.” The harm cannot be hypothetical or conjectural; it must be “actual or imminent.” The Court held that while Robins may have pleaded a violation of a legally protected interest under FCRA that was particular harm to him, he did not plead any actual or imminent harm stemming from the alleged FCRA violation. Simply stated, all Robins alleged was a technical violation of the FCRA, which he did not allege caused him any harm beyond a hypothetical or speculative harm.

Requires a “Concrete” Injury to Assert a Claim

In the context of a statutory violation of the FCRA, one could assert like Robins did, that a credit reporting agency’s compilation of false information certainly does demonstrate a violation of a legally protected interest. That, after all, is a purpose of the FCRA:  to promote and protect the accuracy of information reported. The harm was also “particularized.” Robins’ claim concerned the handling of his information and he filed a lawsuit seeking relief to redress the wrong done in the compilation and dissemination of that information.

The problem for Robins, and now for many who seek to assert similar lawsuits, is that all of this did not lead to any “concrete” injury. The Ninth Circuit’s decision focused only on whether the harm was particularized to Robins. It did not evaluate, the Court wrote, whether the harm was “‘real’ and not ‘abstract.’ ”

Concrete Harms Not Always Tangible

The opinion points out that there are some statutory violations whose transgression can itself cause a particularized and concrete harm. An example provided is a decision where the Federal Election Commission denied a group of voters information “that Congress had decided to make public.” The violation was of a certain statutory right (mandatory access to specific information) that, in and of itself, constituted a sufficient injury in fact (denial of access to the information). In such cases, a person need not identify any “additional harm” other than the harm Congress identified in the statute.

Robins’ case is different. While the FCRA imposes procedures that must be followed in order to curb the reporting of inaccurate information, not all inaccuracies result in a real harm. The mere fact there is an inaccuracy is not itself a sufficient, concrete harm. Although the information concerning Robins was alleged to be false and in violation of the FCRA, Robins did not point to any actual or imminent harm to him stemming from Spokeo’s conduct. “A violation of one of the FCRA’s procedural requirements may result in no harm,” wrote Justice Alito in the Court’s opinion. “An example that comes readily to mind,” the opinion continues, “is an incorrect zip code. It is difficult to imagine how the dissemination of an incorrect zip code, without more, could work any concrete harm.”

The decision does not close the door on Robins’ case. “We take no position as to whether the Ninth Circuit’s ultimate conclusion—that Robins adequately alleged an injury in fact—was correct,” the Court concluded. The Ninth Circuit’s analysis supporting its decision was flawed, the Court held, and because it did not examine whether the injury was “concrete,” the Court directed the Ninth Circuit to reexamine the case once more using its Spokeo analysis.

Curbs on FCRA, FDCPA, EFTA and TILA Lawsuits

The decision has immediate impact on FCRA claims alleging the reporting and furnishing of information. A failure to simply follow FCRA procedures will likely not withstand a Spokeo analysis absent pleading an actual harm.

The impact on Fair Debt Collection Practices Act (FDCPA) claims may be extraordinary. In determining whether a communication is false or misleading in violation of the FDCPA, courts have looked to whether the communication would violate a hypothetical “least sophisticated” or “unsophisticated” consumer. Several courts of appeals have defined the standard as an evaluation of how an imaginary consumer, who is gullible and naïve, would view the letter. As the Third Circuit Court of Appeals recently put it, “[t]he standard is an objective one, meaning that the specific plaintiff need not prove that she was actually confused or misled, only that the objective least sophisticated debtor would be.” While the standard may have some life left in it, the belief that the plaintiff herself need not demonstrate she has been harmed would be contrary to Spokeo. FDCPA lawsuits alleging false and deceptive communications may well be required to plead the plaintiff herself suffered some “particularized and concrete” injury that is “actual” or “imminent.”

Businesses facing claims under the federal Electronic Fund Transfers Act (EFTA) and Truth in Lending Act (TILA) could also benefit from Spokeo. The EFTA and TILA, like the FCRA, impose procedures on companies providing financial services to consumers. However a failure to follow these procedures does not always result in an actual or imminent harm, especially if courts find the statutes do not themselves define the harm.

TCPA Impact Less Clear

Many cases involving the Telephone Consumer Protection Act (TCPA) have been put on hold pending the Court’s decision. Spokeo’s impact is certainly positive in that the demonstration of some actual or imminent harm will be necessary to allow standing to sue. But expect plaintiffs to focus on the opinion’s language concerning Congress’ ability to pass a law that both provides a statutory protection and, in doing so, identifies the harm, which is protected by the right.

Impact on Class Actions

Spokeo has benefits to those defending class claims under these statutes. Even if the plaintiff can demonstrate a particularized and concrete injury that is actual or imminent, that same harm injury may not easily carry over to the class. The injury may be so unique to the class representative’s individual circumstances that even if the defendant’s conduct violated the statute, persons who do not share similar or specialized circumstances are not harmed.

State Court Litigation Option

The Court’s decision is limited to standing in federal courts. Many of the federal laws impacted, such as the FDCPA, TCPA, FCRA and EFTA, can also be brought in state courts. It will be up to each state to decide whether their courts can hear claims where there is no actual or imminent harm (tangible or statutorily identified) to the plaintiff. Comments from Justice Breyer during the Spokeo oral argument touched on states having “public action” statutes that allow persons to bring claims for statutory violations even where they have suffered no injury.

Moving Ahead with Spokeo

While Spokeo does not require only real, tangible harms in all cases, it does limit a wide array of claims and makes clear that not all alleged statutory violations are accompanied by a cognizable, statutory harm. Expect Spokeo to quickly make its way into consumer financial services litigation. The next few months should see several trial court decisions that will flesh out whether certain statutory protections themselves identify harms sufficient alone for standing or whether those violations require additional, real world harms. Also, because a lack of standing can be raised at any time during the life of a case, several appeals courts may right now be looking at Spokeo’s application to matters before them.

 

Parsing the CFPB’s EFTA Bulletin

The Consumer Financial Protection Bureau issued a bulletin on Nov. 23, 2015 “intended to remind entities of their obligations under the Electronic Fund Transfer Act (EFTA) and Regulation E.” A careful read is needed, as Bulletin 2015-06 can be easily misinterpreted. A copy is available at:  Link to Bulletin 2015-06.

Electronic transfers become subject to the EFTA and Regulation E when they are made from a consumer’s “account.” Credit cards will typically not cause a transfer from a consumer’s account, but debit cards would cause a transfer from a consumer’s account. Much of the bulletin’s focus is directed at the preauthorized electronic fund transfer, referred to as an “electronic fund transfer authorized in advance to recur at substantially regular intervals.”  See 12 CFR § 1005.2(k). For brevity’s sake, I refer to these as PATs.

E-Sign and the EFTA Guidance

Bulletin 2015-06 provides favorable guidance on the interplay between the EFTA and the Electronic Signatures in Global and National Commerce Act (“E-Sign”).

EFTA and Regulation E require PATs to be in writing and “signed or similarly authenticated” by the consumer. The bulletin confirms that if an entity uses E-Sign, it can obtain a consumer’s signature by use of an oral recording of a consumer’s agreement to a PAT.

Under E-Sign, provided all E-Sign disclosures and other requirements are satisfied, recording a consumer’s statement of, for example, “I agree to the agreement . . .” would qualify as an electronic signature. The bulletin provides other examples of electronic signatures.

The problem for many is that EFTA and Regulation E require the PAT agreement to be “in writing.” As the bulletin itself notes, E-Sign draws a distinction between an “electronic record” and an “electronic signature.” In the above example, we have only obtained an “electronic signature” under E-Sign.

‘Electronic Record’ PATs Cannot Be Oral Recordings

While the oral recording of the consumer’s voice in my example could go on to include the terms of the agreement, E-Sign expressly prohibits creating an “electronic record” solely by “. . . a recording of an oral communication . . . except as otherwise provided under applicable law.”  That “under applicable law” exception does not work under the EFTA since it expressly requires a PAT to be in writing.

As noted by the bulletin, E-Sign would prohibit an oral recording of an agreement as an “electronic record” where a statute or regulation (such as the EFTA and Regulation E) requires that the agreement “be provided or made available to a consumer in writing.”  But the bulletin then goes on to say in footnote 20 that the E-Sign prohibition does not extend to a PAT “authorization,” because “Regulation E does not specify that entities must provide a writing to consumers when obtaining the authorization.”

The wording used in footnote 20 is not well versed. It could easily be misunderstood to mean that the “writing” requirement may be satisfied by an oral recording of an agreement based upon the bureau’s interpretation of Regulation E. That construction, though, is contrary to EFTA section 1693e(a), which requires the PAT agreement be made “only in writing, and a copy of such authorization shall be provided to the consumer when made.” (emphasis added).

E-Sign prohibits the creation of an electronic record by an oral recording of an agreement, which the bulletin, prior to footnote 20, does not dispute. But the wording of footnote 20 could be construed to mean an electronic record can be made by simply making a recording of the “document” during a telephone call.  Such an interpretation would, at the minimum, require rulemaking, which the bulletin does not do.

Elements of a PAT Authorization

It is likely that footnote 20 is addressing other elements of the PAT authorization. First, it is noting the distinction between “electronic records” and “electronic signatures” under E-Sign and is speaking only to the “electronic signature.” Second, it may also be speaking to the timing of the delivery of the authorization to the consumer.

On the elements necessary for an electronic signature, the bulletin correctly notes that EFTA and Regulation E require clear assent to the PAT agreement: the “authorization must be readily identifiable as such to the consumer and the terms of the preauthorized EFTs must be clear and readily understandable to the consumer. The authorization process should evidence the consumer’s identity and assent to the authorization.” That sounds more like a concern for the electronic “signature” than the electronic record.

Four elements are necessary to any complete PAT authorization: 1) that the transfers are recurring; 2) the timing of each transfer; 3) the amount of each transfer and 4) that the consumer is authorizing the PAT. The bulletin is focused on the fourth element – the consumer’s authorization or electronic signature. The first three elements would be part of the electronic record.

But following the bulletin’s guidance in this case may not be wise. Simply incorporating requirements 1 through 3 into a form may not satisfy EFTA and Regulation E. If the amounts of the transfers vary, that imposes a different set of requirements. If this will be accomplished under E-Sign, E-Sign carries with it its own set of mandatory disclosures in consumer transactions, which are detailed and may be cumbersome for some to implement.

Delivery of Written Authorization, Electronic or Paper, Can Follow Assent to Authorization

It will not be enough to make a copy of the authorization “available” to the consumer; instead a copy of the authorization must be provided to the consumer. But what has plagued many under the EFTA is the timing of the delivery of the “written agreement” authorizing the PAT. Must it be provided before the PAT begins, at the time of the “authorization,” or afterwards?

The bulletin answers the question by saying that you can obtain an E-Sign signature and then provide the writing separately, either in paper or as an E-Sign electronic record. According to bulletin footnote 20, “Regulation E does not specify that entities must provide a writing to consumers when obtaining the authorization.”

Bulletin Does Not Alter E-Sign Requirements for Electronic Records

Now, as far as the PAT written agreement is concerned, the bulletin correctly states it may be either in paper or E-Sign compliant electronic record form. The bulletin’s statement “Regulation E requires persons that obtain authorizations for preauthorized EFTs to provide a copy of the terms of the authorization to the consumer,” can be read as demonstrating that the “written agreement” requirement does not authorize the use of oral recordings to satisfy the writing requirement.

It is probably best to read the bulletin as the bureau’s attempt to clarify that E-Sign does work in EFTA PAT transactions and that PAT agreements can be provided to the consumer after the agreements become effective.

To learn more about the EFTA and Regulation E, sign up to view our webinar here.

Could Spokeo Mean Rough Road Ahead for FCRA, TCPA, FDCPA Plaintiffs?

ScotusYesterday’s oral argument before the U.S. Supreme Court in Spokeo v. Robins suggests a struggle to fashion an understanding of what can constitute an “injury in fact.” It pitted the issue of whether a plaintiff’s standing to sue requires a tangible, concrete injury (loss of money, a job or property right) against the concept that the law can identify a “harm” (in this case, inaccurate information in a credit report) which itself is a real injury.

Finding the Injury

Spokeo v. Robins concerns an alleged violation of the Fair Credit Reporting Act. Robins claimed Spokeo compiled a report about him that contained false information and so he sued under the FCRA in federal court. The trial court dismissed his case finding Robins had no tangible harm — he wasn’t denied a job or credit because of the false information. The Ninth Circuit Court of Appeals reversed and held that the statutory violation was enough to allow Robins his day in court.

Justices Elena Kagan and Sonia Sotomayor focused on “harm,” and the concept that Congress can identify a “harm” and make it tangible injury. For them, the concrete harm Robins suffered exists because of FCRA and the false information in the Spokeo report.  Justice Antonin Scalia countered by noting that FCRA is not triggered by false information, but the failure to follow procedures. The concern Justice Scalia had was that under FCRA, anyone can sue for the failure to follow procedures, even if they suffered no concrete injury. But Justice Stephen Breyer quickly pointed out that Spokeo is alleged to have published false information and to have violated FCRA procedures. Comments from Justice Breyer were directed at highlighting that Robins’ case is more than simply false information, but false information coupled with the failure to follow FCRA procedures. The failure to follow the procedures is the violation and the false information is the harm that allows standing to sue.

Chief Justice John Roberts posed an interesting hypothetical: Suppose a person had an unpublished telephone number and did not want that number released to the public. A credit reporting agency published a telephone number, but it was the wrong telephone number. It is clearly false information, but has the person been harmed to the extent they now have standing to sue? The hypothetical supports Justice Scalia’s issue and points out that the injury-at-law harm, the “false information,” is subject to absurd results.

In response Justice Sotomayor offered,”[i]sn’t there always a materiality question: What is the falsehood? Is it material to anything?” That comment should cause concern for many plaintiff’s attorneys, particularly because the “materiality” argument is a powerful defense that has found favor, most recently in the Third Circuit’s opinion in Jensen v. Pressler & Pressler.

Impact on FCRA and Other Consumer Protection Statutes

Many consumer protection statutes raise the same standing issues the Court is addressing in Spokeo. The federal Fair Debt Collection Practices Act, the Electronic Funds Transfer Act, the Telephone Consumer Protection Act and the Truth in Lending Act come to mind.

The Court may find that the simple existence of false or inaccurate information in a credit report can be an injury. But the justices’ comments suggesting that certain false information plainly poses no harm and Justice Sotomayor’s remark that false statements should be “material,” suggest a decision that could limit claims to those who have or will cause non-speculative harm to the plaintiff. Having to demonstrate such harm would change the way FDCPA, TILA and EFTA lawsuits are litigated, particularly in the context of claims arising from failed disclosures. It could also make it more difficult to certify classes in certain cases where the injury analysis could require assessment of individualized facts. That could bring some relief to the financial services industry.

Be Careful What You Wish For

It is also possible that Spokeo will prevail. If the Court finds there is no standing in federal courts for claims asserting only a statutory violation where no actual “injury-in-fact” occurred, it still might not spell the end of such claims under the FCRA and other statutes. Many of these statutes allow claims to be brought in state courts as well. It will be up to each state to decide whether their courts can hear such claims. Comments from Justice Breyer during the Spokeo oral argument touched on states having “public action” statutes that allow persons to bring claims for statutory violations even where they have suffered no injury.

The Court has no timetable to hand down its decision, but it is likely to be delivered between April and June 2016.

U.S. Supreme Court to Take Up Whether Complete Relief to Class Litigant Moots Class Claims

Statutory damage claims, like those under the TCPA and the FCRA, will be scrutinized in the next session of the U.S. Supreme Court and its decisions could have broad implications for the financial services industry.

ScotusToday we look at one of the cases the court will consider, Gomez v. Campbell-Ewald Co. The case considers whether an offer of complete relief to a litigant will extinguish both her individual claims and, prior to class certification, render her class claims moot. A decision will likely impact litigation under the FDCPA, TILA, EFTA and other federal laws, which can expose financial services companies to extraordinary liability even though the injured party has suffered no real loss.

Mooting Individual Claims by Offering Judgment

Rather than engage in costly litigation to obtain a pyrrhic victory, some defendants choose not to fight and instead offer the plaintiff a judgment, usually exceeding the amount the plaintiff could recover if she were successful on her claim. Under the TCPA where only one communication is alleged to be a violation, a plaintiff with no actual loss might still be entitled to up to $1,500 in statutory damages. And that was the case in Gomez where Gomez alleged a violation of the TCPA from a single text message. The defendant offered Gomez a judgment of $1,503, plus costs. Gomez, though, sought to certify a class of other persons who had received a similar text message from the defendant, so he never accepted the offer and it lapsed.

The trial court denied the defendant’s request to dismiss Gomez’s case on the basis that it had offered him more than he could receive if he were successful at trial.  The Ninth Circuit affirmed the trial court’s decision, holding that unaccepted offers of judgment do not “moot” a plaintiff claim, pointing to its 2013 decision in Diaz v. First Am. Home Buyers Prot. Corp.

Circuit Law Conflicts 

Last week, the Second Circuit Court of Appeals handed down a decision in Tanasi v. New Alliance Bank, holding that an unaccepted offer of judgment, alone, does not moot a claim, siding with the Ninth Circuit and a similar holding from 2014 in the Eleventh Circuit decision Jeffrey M. Stein, D.D.S., M.S.D., P.A. v. Buccaneers L.P.

Tanasi does depart from the Ninth and Eleventh Circuits and suggests that a matter could be rendered moot by an unaccepted offer. Quoting the dissent from the Supreme Court’s 2013 decision Genesis Healthcare Corp. v. Symczyk, the Second Circuit wrote that an unaccepted offer of judgment will moot a case where the defendant “unconditionally surrenders . . . [such that] only the plaintiff’s obstinacy or madness prevents her from accepting total victory.” This second route sets in motion the potential for interesting lawyering.

These three Circuits are at odds with decisions from the Third, Fourth, Fifth, Seventh, Tenth, and Federal Circuits, which all have held that an unaccepted offer, alone, does moot the case and divest the federal court of jurisdiction.

Impact on Class Actions

Even in those Circuits which hold that an unaccepted Rule 68 offer of judgment can moot an individual’s claims, it does not necessarily follow that federal courts will find it divests them of jurisdiction over class claims, although the Fourth and Seventh Circuits have found a class can be mooted (Warren v. Sessoms & Rogers, P.A. and Damasco v. Clearwire Corp., respectively).

The Genesis decision threw a wrench into the majority view that pre-certification class claims cannot be mooted by unaccepted offers. Genesis found that a plaintiff’s refusal to accept such an offer of judgment in a “collective action” under the Fair Labor Standards Act rendered the plaintiff with “no personal interest in representing putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness.” You could read Genesis to mean that by mooting the individual class representative claims, the class claims are mooted as well.

But FLSA collective actions are not the same as class actions under federal rule 23, leaving some to strictly read Genesis as having no impact on class action litigation, as the Ninth Circuit wrote in Gomez. But the Second Circuit’s opinion in Tanasi suggests it sees otherwise and also left open the door to moot class claims if an offer is made before class certification.

Supreme Court Outlook

Gomez presents an opportunity for the Supreme Court to resolve whether an unaccepted offer of judgment of complete relief moots individual claims as well as whether it moots class claims prior to certification. If it does not moot either, the fallout is likely to mean Rule 68 offers of judgment will see less use. Defendants will be forced to litigate cases even when they have offered to give the plaintiff all that she seeks. It will mean litigation can occur solely for the purpose of litigation.

A ruling that unaccepted offers moot individual claims will likely increase the use of complete relief offers in the Ninth and Eleventh Circuits, promoting a quick end to pointless litigation. It would have less impact in the remaining Circuits.

If the Supreme Court were to hold that an unaccepted Rule 68 offer moots class claims prior to class certification, the effect would be dramatic, particularly upon those cases that seek only statutory damages, which are often asserted against financial services companies. By offering to make the individual plaintiff whole, regardless of the merits of the claim, defendants may avoid the cost and expense of class action litigation driven primarily, if not solely, by a desire for a large award of plaintiff’s attorneys fees.

There’s Guidance in CFPB’s Supervisory Highlights Report

The Consumer Financial Protection Bureau’s May 22 Supervisory Highlights report offers a rare glimpse into the CFPB’s thoughts on its first two years of supervision of nonbank entities, particularly debt buyers and debt collectors. Although the report contains several of the bureau’s standard talking points (data integrity in debts sales, for example) it does reveal new issues that have drawn the regulator’s attention and new guidance on pre-existing areas of concern.files.consumerfinance.gov_f_201405_cfpb_supervisory-highlights-spring-2014_Page_01

Compliance Management Systems

It’s hard to believe, but according to the bureau some credit reporting agencies had no compliance management systems in place. Where it found a CMS, there were several instances uncovered where neither the agency’s board of directors nor senior management had adequate oversight of the compliance process. Other problems uncovered were in the development and documentation of policies and communicating changes throughout the organization. Other deficiencies included creditors having inadequate procedures for assessing their debt buyers.

Electronic Funds Transfer Act

The report identified a lack of compliance with the rules governing pre-authorized transfers under the Electronic Funds Transfer Act, noting deficiencies in both the creation of pre-authorized transfers and their execution.

Debt Collection

The bureau reported one instance where a debt collector made 17,000 telephone calls “outside the appropriate calling hours set forth in the FDCPA.” The same entity was reported to have called “some consumers” more than 20 times over two days. Dismissing lawsuits where a consumer filed an answer also drew scrutiny from the bureau. This entity would cause the dismissal in 70 percent of its contested cases, “because it was unable to locate documentation to support its claims.” The report also cited improper third-party contacts and having made telephone calls following do-not-call requests, among other things.

Credit Reporting

The bureau criticized the practice of deleting tradelines in response to credit reporting disputes. By deleting the tradeline, instead of investigating the dispute, a supervised entity ignores “a critical check on the accuracy of furnished items [that] can identify systematic problems with furnishers’ data,” the bureau concluded.

June 5 Webinar – Understanding The CFPB’s Supervisory Highlights Report

The CFPB’s report presents an opportunity to look closer at your procedures and fix them before your organization appears in the next Highlights report. So on June 5, we will take you through the report’s finer details. We’ll have an in-depth discussion of the topics outlined here, but we’re also going to reveal some others and why your procedures may now need adjustment. There’s plenty to learn from the report for creditors, debt buyers, collection agencies and collection attorneys. Topics include:

  • Leadership involvement in the CMS – why is the CFPB pushing it and what are the risks to leadership if they are not engaged?
  • Do you have a weak service provider assessment process?
  • Addressing the CFPB’s “hot button” debt collection practices
  • Credit Reporting – is deleting no longer an adequate response to a dispute?
  • EFTA troubles — find the problems and fix them fast

The program is 1.5 hours and is accredited for 1.5 hours of DBA International Continuing Education.  Application is pending for 1.5 hours of attorney CLE for California, Delaware, New Jersey, Pennsylvania* and Virginia. New York attorneys have reciprocity with Virginia CLE. *PA attorneys must attend the presentation in our NJ office to receive credit.

Cost: $105.00
Time: 2:00 p.m. Eastern / 11:00 a.m. Pacific
Date: June 5, 2014

Lattes, Pajamas, E-Sign and EFTA – Verbal Recordings Are Electronic Signatures

There is no better way to authenticate a person’s assent to a contract then to record their statement, “I agree to this contract.”  A recording of a person’s voice is far more persuasive evidence to authenticate not only consent, but the identity of the individual who gave consent to the transaction.

If you agree, we are in good company.  At the advent of the Internet Age, our federal legislators believed electronic transactions would benefit commerce, and so we have The Electronic Signatures in Global and National Commerce Act (“E-Sign Act”), 15 U.S.C. §§ 7001, et seq.  

E-Sign makes consumer financial transactions far more efficient and accessible. It encourages the development of consumer-friendly technologies like remote deposit of checks using a smartphone. Today, we pay your bills, transfer funds from savings to checking and do all those things in a mouse click or two while sipping a latte in the comfort of our pajamas. Two decades ago, it would all require a visit to your local bank branch.

I hated visiting my local bank branch. I love the convergence of technology and lattes.

Recently, there has been some confusion concerning how E-Sign and the Electronic Funds Transfer Act (“EFTA”) work together — particularly the use of a voice recording as a signature in consumer transactions. So, here’s my endeavor to clear up that confusion.

The EFTA 

The Electronic Funds Transfers Act (“EFTA”) 15 U.S.C. §§ 1693, et seq.,  enacted in 1968 desires “to provide a basic framework establishing the rights, liabilities, and responsibilities of participants in electronic fund and remittance transfer systems. The primary objective of this title, however, is the provision of individual consumer rights.” § 1963(b). The EFTA authorizes the Fed (and now the Consumer Financial Protection Bureau (“CFPB”)) to make regulations furthering its objectives.

The EFTA regulates “electronic fund transfers” (“EFT”) which are “. . . any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer’s account.” 12 CFR 205.3(b)(1). An “account” is a

demand deposit, savings deposit, or other asset account (other than an occasional or incidental credit balance in an open end credit plan as defined in section 103(i) of this Act [15 USCS § 1602(i)]), as described in regulations of the [CFPB], established primarily for personal, family, or household purposes, but such term does not include an account held by a financial institution pursuant to a bona fide trust agreement;[1]

When you establish a payment plan to make recurring debits from a consumer account, you have created what the EFTA terms a “preauthorized transfer.” “Preauthorized transfers” are be agreed to by the consumer in advance and take place “on a recurring basis, at substantially regular intervals, and will require no further action by the consumer to initiate the transfer.” [2] The EFTA and Regulation E impose certain requirements when establishing preauthorized transfers; namely, they must be obtained in a writing that the consumer signs or “similarly authenticate[s].”  [3]

E-Sign, Electronic Records and Electronic Signatures 

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E-Sign provides that electronic records and electronic signatures have the same validity as paper documents and handwritten signatures. If the EFTA calls for a writing to be made in connection with a transaction, the writing can be satisfied by an electronic record. If the EFTA requires a writing to be “signed or similarly authenticated,” the requirement can be satisfied through an electronic signature.

E-Sign expressly prohibits creating an electronic record solely by “. . .a recording of an oral communication . . . except as otherwise provided under applicable law.” Unfortunately, some have failed to recognize the E-Sign’s distinction between electronic records and electronic signatures,  simply, but mistakenly, believing they are one and the same. This misunderstanding has resulted in reckless claims that the prohibition against creating electronic records through “a recording of an oral communication” means voice recordings cannot be an electronic signature capable of satisfying the EFTA’s or other consumer statute’s requirement that a document be “signed or similarly authenticated.” The interpretation is wrong.

If you pay careful attention to the structure and language of E-Sign’s definitions of electronic records and electronics signatures, and consider the Congressional Record made at the adoption of E-Sign, it is obvious that a voice recording is an electronic signature and valid for satisfying any consumer statute, like EFTA, that requires a signed document.

Electronic records are “. . . a contract or other record created, generated, sent, communicated, received, or stored by electronic means.”[4] Where a consumer protection statute, regulation or “rule of law” requires that a document or information be provided or available to a consumer, “in writing,” the E-Sign Act allows the document to be provided as an electronic record.[5] But, E-Sign expressly prohibits the electronic record being created by an oral communication or a recording of an oral communication.[6]

Electronic signatures are “. . . an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.”[7] Electronic signatures are not electronic records and nothing prevents their creation by an oral communication or a recording of an oral communication.

The legislative history of the E-Sign Act demonstrates that Congress intended that a voice recording is not only an electronic signature, it is a very effective electronic signature:

It should be noted that Section 101(c)(6) [of E-Sign] does not preclude the consumer from using her voice to sign or approve that record. Proper voice signatures can be very effective in confirming a person’s informed intent to be legally obligated. Therefore, the consumer could conceivably use an oral or voice signature to sign a text record that was required to be given to her “in writing.” Moreover, the person who originated the text record could authenticate it with a voice signature as well. The spoken words of the signature might be something like “I Jane Consumer hereby sign and agree to this loan document and notice of interest charges.”[8]

To suggest, as some mistakenly have, that an audio recording of the consumer’s verbal consent is arguably not a sufficient electronic signature, is simply contrary to the express definition of an an electronic signature under E-Sign and the Congressional Record made at its enactment.

I refused to accept that pajama-clad, latte-sipping banking from the comfort of home might be over. Many in the consumer financial services sector, who regularly authenticate consumer financial transactions using voice recordings, were very concerned to hear that voice recordings might not qualify as an electronic signature. Did we all, in the nearly 20 years since E-Sign’s passage, misunderstand that a person’s voice, captured electronically, giving consent to a consumer financial service is not a valid electronic signature?

No – enjoy your coffee at home while banking online. You can sign your consumer financial transaction documents with your voice recording. That’s what Congress wants you to do.


1. 15 U.S.C. § 1693a(2).
2. 52 F.R. at 15193.
3. 12 C.F.R. 205.10(b).
4. 15 U.S.C. § 7006(4)
5. Id.
6. 15 U.S.C. § 7001(c)(6) (“Oral communications. An oral communication or a recording of an oral communication shall not qualify as an electronic record for purposes of this subsection except as otherwise provided under applicable law.”) This does not mean that voice technology cannot be used to create an electronic record. “By way of clarification, the intent of this clause is to disqualify only oral communications that are not authorized under applicable law and are not created or stored in a digital format. This paragraph is not intended to create an impediment to voice-based technologies, which are certain to be an important component of the emerging mobile-commerce market. Today, a system that creates a digital file by means of the use of voice, as opposed to a keyboard, mouse or similar device, is capable of creating an electronic record, despite the fact that it began its existence as an oral communication.” 146 Cong Rec S 5281, 5284 (June 16, 2000)(Senate Conference Report on the E-Sign Act)
7. 15 U.S.C. § 7006(5)
8. 146 Cong Rec S 5281, 5284 (June 16, 2000)(Senate Conference Report on the E-Sign Act)