ARM: Compliance and Security in Review

ARM: Compliance and Security in Review

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Announcements [A]

• A few more thoughts on the FTC Settlement with EMC Mortgage as it applies to the ARM Industry.

  1. EMC Mortgage was considered a “debt collection agency” by the FTC. The FTC’s complaint applied to any mortgage purchased by Bear Stearns prior to its acquisition by JP Morgan Chase and serviced by EMC Mortgage; the mortgage servicing unit of Bear Stearns. The “debt collection agency” determination by the FTC is what should make the whole industry standup and take notice. Unfortunately, the headlines did not read “Debt Collection Agency Fined $28 million” or maybe it would have received the attention it deserved.
  2. While the complaint was addressed to mortgage debt, the practices described happen with all types of debt; especially debt like credit card debt, auto loans, and other types of consumer lending products. Only a few of the issues identified in the complaint were mortgage specific.
  3. The definition of a new requirement for all industry members - the implementation of a “data integrity program.” Since no standards body has defined quite what that is, it is a “I know it when I see it standard.” Further, the assumption in this settlement, very similar to what I have seen in data security complaints filed by the FTC against ChoicePoint, BJ’s Wholesale Club, TJ Maxx, etc., is that industry members should already have implemented a data integrity program. I am not aware of many debt buyers or collection agencies that have implemented a formal data integrity program.
  4. The violations included FDCPA, FCRA and TILA. Yes, the addition of certain fees the FTC interpreted to be the addition of principal to the loan instrument and required a new TIL Statement to be produced to the consumer.
  5. Data exchanged between data trading partners must be accurate - whether the information is exchanged between the owner of data and a credit bureau or the owner of the data and the consumer, or the debt seller and buyer - and it must be authenticated. As a result, this enables a debt buyer to file an FTC complaint against a seller who sells the buyer a portfolio which has not been properly updated with activity which occurred during the buyers ownership. Now it is not just a property dispute: it can result in regulatory sanctions. And, it requires debt buyers to ensure sellers are who they say they are and will take steps to assure the integrity of the data.
  6. Good thing this case was filed before November 1, 2008. Obviously, they would not have met the requirements of the FACTA “Red Flag Rule” and then the fines could of potentially been twice that in the settlement.
  7. The reporting penalties and the involvement of the FTC in EMC’s business operations over the next eight years may result in associated fees and expenses which could equal what they are going to pay in fines. The $28 million fine is just the first dollars of expenses associated with this case; not the last. The total cost will not be known for 8 years. The closest FTC settlement I could find was ChoicePoint. ChoicePoint had a $10 million fine and total expenses of well over $30 million.
  8. The extent to which the FTC will be involved in what EMC does is extremely broad. It touches almost every aspect of EMC Mortgage’s business including providing the FTC with lists of all consumers and documentation of activity relating to those consumers covered by the settlement.
  
• 9th Circuit Court issues ruling impacting debt collectors

  The 9th Circuit Court of Appeals issued a ruling which every collector needs to be aware - especially those entities who collect or have offices in the 9th Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington).

  The following story was written by Patrick Lunsford with insideARM

  “A ruling this week by a federal appeals court held that debt collectors must provide more than a declaration that it had “extensive procedures” to avoid errors and a reliance on accurate creditor information when mounting a bona fide error defense to violations of the Fair Debt Collection Practices Act (FDCPA).

  In a case before the U.S. Ninth Circuit Court of Appeals, Judge Mary M. Schroeder ruled late Monday that debt collection agencies could not blame errors that ran afoul of the FDCPA on creditor information, and that a collection agency must have processes in place to assure such errors do not occur.

  The case involved collector National Credit Systems, Inc. (NCS). In 2002, NCS was seeking payment of a $2,124 debt from Robert Reichert. The debt was incurred on a breach of a lease agreement Reichert signed with an apartment complex.

  Upon a request for validation of the debt, NCS sent a letter verifying amount the debt, including a $225 charge for an attorney’s letter that was sent by the apartment complex. Reichert claimed that since the fee was not expressly authorized by the lease agreement, NCS had violated the FDCPA.

  NCS argued that it had relied on the apartment complex’s representation of the debt. NCS also said that it was entitled to a defense against liability because the violation had not been intentional and the error in good faith.

  
  U.S. District Judge Roger G. Strand of the District of Arizona ruled for Reichert and the case was sent to the Ninth Circuit Court on appeal.

  In her ruling, Judge Schroeder wrote, “The fact that the creditor provided accurate information in the past cannot, in and of itself, establish that reliance in the present case was reasonable and act as a substitute for the maintenance of adequate procedures to avoid future mistakes.” She also wrote that “A debt collector is not entitled under the FDCPA to sit back and wait until a creditor makes a mistake and then institute procedures to prevent a recurrence.”

  That is the end of the Inside ARM article.

  It appears the 9th Circuit is saying the same thing the FTC is saying. All debt must be validated before the collection process can begin. And, the debt collector/buyer cannot just rely on past performance of a the debt issuer. It has a responsibility to validate the data.

  The 9th Circuit appears to have taken it one step further. The 9th Circuit is saying debt collectors/buyers need to be able to demonstrate to the courts satisfaction it has a data integrity program in place and verify how it was implemented for individual accounts. A simple statement in a filing of “extensive procedures” is no longer sufficient.

  
• New FCRA Rule Update

  I need to post a correction regarding my previous post on the new FCRA Rule. Under the new rule, providing information to CRA’s will still be voluntary. The rule applies only to those who actually furnish information to CRA’s. If you do not provide information, it appears you are still in safe harbor.

  If you do report to the consumer reporting agencies, then you will be subject to the new rules of accuracy, integrity and being current.

  
• New FCRA Rule Will Impact Industry

  In the FTC’s recently released report on debt collection, there was an interesting footnote on page 7. This footnote referenced a
  new proposed rule published in the Federal Register on December 13, 2007. In the footnote, it stated this rule will go into effect soon. The question is what is this new rule, how will it impact the ARM Industry, and why was it included in the report?

  Background

  Under FDCPA, the FTC has no rule making authority. Rather, the FTC is required to annually present to Congress a report on the industry and make recommendations. For example, recommendations the FTC made included asking Congress to grant rule making authority and increasing FDCPA fines.

  However, under FCRA, Congress gave the FTC - along with a number of additional agencies - rule making authority. And it is under this authority the new rules has been published and will soon go into effect. The rule is relevant because the rule is intended to improve the quality of information available from CRAs. This impacts industry members both as furnishers of information to the CRAs as well as recipients of information from CRAs. And, coincidentally, it also goes to the heart of the concerns the FTC has about the industry.

  In February (2009) at the DBA International’s Annual Convention, the FTC’s Peggy Twohig spoke to industry members about legislative initiatives as well as concerns the FTC has with the industry. Specifically she mentioned the Bear Stearn/EMC Settlement as the most important enforcement action the FTC took in 2008. And, she focused her comments on two areas which were specified in the complaint and in the settlement: data integrity and dispute resolution.

  Data Integrity: Based on Ms Twohigs comments, the FTC believes the industry has a data integrity problem. If you want a better description of what the FTC means when it is talking about data integrity, substitute the word account integrity. When a consumer receives communication from the an industry member collecting a debt, the consumer has the expectation the information being used as a basis for collection activity is accurate. So does the FTC. Unfortunately, in far too many instances, the information presented to the consumer is not accurate.

  Dispute Resolution: Ms Twohig stated the FTC believes the industry does not adequately respond to consumer disputes. In practice, consumer disputes are routinely dismissed and ignored. Even when investigated adequately, the results of a dispute investigation is not passed on to downstream debt buyers and/or collectors or when the information is provided it is ignored.

  In addition to these two primary concerns, there is another issue which is listed in the Bear Stearns/EMC Mortgage which is applicable because it ties this all together. This issue is the failure to report updated information about the account to the CRAs. This would include disputes, change in ownership, and other material information about the account. Most in the industry have been reluctant to report information to the CRA’s because of the penalities which can result from reporting inaccurate information.

  So in summary, the FTC is saying the industry has account integrity issues, does not adequately respond to consumer disputes, and does not report disputes and other material changes to an account to the CRAs. With over 70,000 complaints filed with FTC annually by consumers alleging unlawful collection activity, the FTC has identified these issues as areas of primary concern. And, they have focused on these areas because they believe these issues are at the heart of why the FTC receives more complaints about the industry than any other industry.

  The New FCRA Rule

  The new rule was published in the Federal Register in December of 2007. The proposed rule was drafted by the FTC and a number of other agencies which have rule making capability under FCRA. There are three words which are key to understanding the intent and purpose the new rule: accuracy, integrity and current.

  Accuracy: The information provided to the CRAs must be accurate.

  Integrity: The information provided must present an accurate picture of the current status of an account. For example, if an account is disputed and the dispute is not notated on the account at the CRA, then the account lacks integrity even though all of the other information may be correct.

  Current: The information which the CRA provides about the consumer should be up to date. Otherwise, the information provided to third parties about the consumer does portrays a distorted view of the consumer - not an accurate view.

  This presents a problem to the industry. There are significant account integrity issues in data as it flows through the industry. Disputes are not adequately handled according to the FTC. And, it is likely the CRA will not see a report of a dispute about the account - let alone the resolution of the dispute. And as a result, a consumer could receive collection notices and calls from multiple agencies about the same debt over and over and over again. Or, consumer credit ratings could be negatively impacted because of inaccurate data stored in CRAs’ databases.

  Impact

  In the Bear Stearns/EMC Mortgage settlement, the FTC does not seem to be indicating the rule is a new requirement. Rather, it is a requirement which has always been part of FCRA but has not been fully documented. Why, because all three points were addressed in the Bear Stearns/EMC Mortgage settlement. Bear Stearns/EMC Mortgage was required to implement a data integrity program, actively respond and investigate consumer disputes, and report the information to the CRAs. The settlement was announced in September of 2008. The same requirements basically apply to industry members: implement a data integrity program, diligenty work to resolve disputes, and report material changes in the account to the CRAs.

  This begs the question: Will the FTC use this new FCRA rule as an enforcement tool to ensure compliance with the FDCPA and the abuses which the FTC sees in the industry. The answer to this question is it already has.

  So does this mean the industry should wait for the ruling to be come final before acting? The answer to this questions is no. The FTC through Bear Stearns/EMC Mortgage has already let the industry know what is expected. It is now time for the industry to take steps to correct the identified issues.

  
• Release Date of the New FCRA Rule

  A birdie told us we should expect to see the final version of the new FCRA Rules impacting “furnishers” of information to CRAs to be announced around April 21, 2009.

  In essence, the new rule will require a debt collector and/or debt buyer who reports debts to the CRAs to the keep the information current with material changes to the account.

  So what is the definition of material? At a minimum it includes the following:

  1. The debt is sold to another debt buyer.
  2. The debt is placed with a different collection agency.
  3. The consumer disputes the debt.
  4. Resolution of consumer disputes.
  5. Bankruptcy
  6. Deceased
  7. Debt is paid in full

  The information which is reported to the credit bureau need to be accurate and represent the account and the debtor with integrity.

  However, if you are reporting debts but not keeping them updated, the FTC has already brough a complaint against an industry member - Bear Stearns/EMC Mortgage - for not keeping the information at the CRAs accurate.

  I have attached a link to a white paper written by Jennifer Maisano, President and CEO of Credit Bureau Strategy Consulting. This white paper discusses a number of issues impacting industry members under the new rule. Ms Maisano’s firm works with organizations reporting to the CRAs to ensure they have the appropriate policies, processes, and procedures in place to be in compliance with FCRA and other applicable federal guidelines.

  
• West Virginia AG announces landmark settlement with Illinois collection agency

  Today, the West Virginia Attorney General’s office announced a settlement with Financial Credit Services (FCS), an Illinois based collection agency. The settlement resulted in the cancellation of over $6.6 million in consumer credit card debt. The debt included cards issued by Bank One, Citifinancial, Chase, GE Capital, Household, MNBA, and Providian.

  To me the most important issue in the settlement was this line from the press release, “The Attorney General also alleged that FCS did not
  have any verifiable proof of the debts that it sought to collect other than computer spreadsheets.”

  Isn’t this how the entire industry works - the transfer of data on a spreadsheet? Isn’t this the exact same thing courts across the country have been complaining about - verifiable data?

  What would happen if attorney generals in California, Texas, New York, Florida or any other state followed West Virginia’s lead? Would any debt buyer and/or collector be able to collect any account which based on a spreadsheet?

  Click here to download the press release from the West Virginia AG.

  

News

• FTC settlement with EMC Mortgage impacts ARM Industry

  The settlment announced last week between the FTC and EMC Mortgage, a division of Bear Stearns (now owned by JP Morgan Chase), at first glance appears to have broad ramifications to the debt buyers and debt collection agencies. So what is so important about the settlement.

  EMC is services mortgages purchased by Bear Stearns. In the complaint, the FTC declared EMC a debt collection agency for any debt which was in default when it was acquired by EMC. As such, the settlement found violations of FDCPA, Fair Credit Reporting Act (FCRA), and Truth in Lending Act (TLA).

  Further, the FTC appears to have established a new requirement for debt buyers and debt collection agencies: the establishment of a “data integrity” program. What is a data integrity program you may ask?

  Good question. I did some research on the internet and could not find any standards body which have published guidelines for data integrity which are applicable in this circumstance. Rather, you have to go to the settlement itself and read between the lines to determine what it is the FTC is expecting in a data security program.

  Over the next week I will explore what the basis for the complaint filed by the FTC against EMC, what the settlment agreement stated, and what the impact will be to the industry including what is meant by a data integrity program.

  David Mertz

  
• FTC Settles with EMC Mortgage

  The FTC has settled with EMC Mortgage, the mortgage servicing unit of Bear Stearns, over FDCPA, FCRA, and TLA allegations prior to JP Morgan Chase’s acquisition of Bear Stearns earlier this year. In addition to a $28 million fine, EMC was required to implement a data integrity program and accept FTC oversight of many of EMC’s business operations for the next 8 years.

  Details of the original complaint and settlement agreement can be found at: http://www.ftc.gov/os/caselist/0623031/index.shtm.

  
• FTC's Peggy Twohig speaks to the DBA Convention

  The FTC’s Peggy Twohig spoke to the DBA International Conference in Las Vegas the first week of Feburary 2009. Key points which are relevant to industry members includes the following:

  1. Fines and penalties are going to continue to escalate until industry makes changes which result in significant reductions in FDCPA complaints.
  2. Fines and penalties will be directed at people in addition to monetary penalties. Academy Collection Services was the example that was used. Click here to see details of the settlement.
  3. The most important action taken last year by the FTC toward the ARM Industry was Bear Stearns/EMC Mortgage. And, the issues identified in this compliant are the areas the FTC is most concerned about.
  4. The number one item to focus on in the Bear Stearns/EMC Mortgage settlement was the need for a data integrity program. The FTC believes problems with data are at the root of most of the complaints received by the FTC. The FTC is concerned about what happens with account data from the time the account is charged off until the account is retired either through it being paid or the debt is no longer pursued. Each account needs to maintain its integrity for its entire lifecycle.
  5. It will be another two months before the FTC is going to publish findings, recommendations, requirements or whatever you want to call them arising out of the information they collected in the fourth quarter of 2007 and since then. However, the need for a data integrity program will be part of the report. Update: The report has been published and account integrity was a key area of focus for the report.
  6. For the most part a self-regulatory model for any industry including the ARM Industry will not be well received in DC. The only way it could be well received is if the penalties for non-compliant activities have real teeth. And, I believe the penalties the FTC is implementing in their settlements with Academy Collection Services, LTD and Bear Stearns/EMC Mortgage provide a roadmap to what the FTC believes are real teeth in a self-regulatory model. Expect the FTC’s enforcement actions against the industry to intensify.
  
• Introduction

  Welcome to ARM: Complance and Security in Review

  ARM: Compliance and Security in Review is focused on data security and compliance issues impacting the ARM Industry.

  David Mertz, Managing Partner for Compliance Security Partners, a compliance and security consulting firm, provides commentary on the leading data security and compliance issues impacting the industry.

  
• Two recent blogs from a Michigan debtor attorney

  Two recent blogs from an attorney out of Michigan are important for everyone in the debt collection industry to read.

  Both are from an attorney by the name of Gary Nitzkin. One deals with his advice to people and/or companies interested in entering the debt buying space. His advice is do not do it. While it appears to be a great opportunity - paying pennies on the dollar with the opportunity collect 100 percent of the debt. He states he believes it is nothing more than a scam!

  As an industry member, you may take issue with Mr. Nitzkin’s characterization of debt buying as a scam. However, the courts, the FTC, various state attorney generals, and the courts are moving more and more toward Mr Nitzkin’s position and farther away from the industry’s postion.

  Bottom Line: If a debt collector and/or buyer cannot prove both the ownership of an account and prove the amount of debt owed, the FTC’s position is you cannot make any communication with the debtor (see FTC vs Bear Stearns/EMC Mortgage). This includes both the initial notification notice and the first phone call to the debtor!

  The second deals with how easy it is to contest debt in court. He talks about the spreadsheet as the only proof of debt and how this is not sufficient evidence in court. This is the same postion the West Virginia Attorney General took in its settlement with Financial Credit Services, Inc. Whereas Mr Nitzkin is talking about an individual debtor. The settlment in West Virginia included the elimination of over $6.6 million in debt.

  What would happen if Mr Nitzkin on behalf of his client files a class action lawsuit against the debt buyer? What would happen if Mr Nitzkin files a complaint on behalf of his client - and if possible - his class of clients with the Attorney Generals in each state which his clients reside? What would happen if Mr Nitzkin files a complaint on behalf of his client and/or clients with the FTC? Would this result in the next West Virgina and Bear Stearns/EMC settlement? What would happen to the value of debt portfolios?

  
  The industry serves an important role in the accounts receivable management industry. However, there is a responsibility which comes with participating in the industry - that is maintaining the integrity of the data associated with each account. As long as the industry continues to fail in protecting the integrity of its data assets, the Mr Nitzkin’s of the world are going to continue to win in court and the value of debt portfolios are going to continue to decrease. There are numerous pressures on the price of porfolios including both the glut of accounts as well as economic pressures facing consumers. However, before these two factors begain raising their head, something else was was negatively impacting portfolio values: The silent killer - the lack of data integrity.

  Just like high blood pressure is what they call the “silent killer” because of its lack of symptoms, so the lack of integrity of data is silently killing the debt buying industry. If you do not believe, go read the complaint and settlement documents at the FTC’s website.

  

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