Scope 2024 – February

Speaker: Colin Winkler Senior Counsel, ACA International

Colin Winkler, ACA International’s senior counsel, gave a legal update on commercial debt collection during the IACC Annual Conference, discussing recent actions from the Consumer Financial Protection Bureau and other regulators, as well as trends in business practices. Here are some highlights from his presentation on coming changes to the industry.

The CFPB Winkler said the CFPB has been very active in the consumer space, but commercial collection has remained relatively calm. In 2022, Rep. Al Lawson, D-Fla., introduced legislation to expand the Fair Debt Collection Practices Act to cover commercial collections, but that bill died in committee. “To my knowledge, we have not seen an attempt from Rep. Lawson or anyone else to resurrect it,” Winkler said. The CFPB remains very interested in demographic disparities in the small business segment.

One example of that is the CFPB’s Small Business Lending Rule, which requires lenders to disclose credit applications they receive from small businesses, lending decisions and demographic data. The resolution passed in the U.S. Senate but was voted down in the House and vetoed by President Biden in December 2023. The Senate then approved a joint resolution to override that veto, but could not muster enough votes.

“We don’t often see Congressional Review Act action on a federal rule like this,” Winkler said. “And again, because the Senate could not muster the votes to override the veto, the rule did take effect, but it remains on hold—at least as a practical matter—as a result of a couple of federal injunctions pending the SCOTUS decision in Consumer Financial Services of America v. CFPB. Federal courts in Kentucky and Texas issued injunctions that for now prevent the CFPB from enforcing this rule. Those cases rest primarily on the argument that the CFPB lacks a constitutionally appropriated funding mechanism. And that’s the argument that the Supreme Court heard in October 2023 in CFSA v. CFPB.”

A decision in that case is expected by the end of June 2024.

“That will go a long way toward determining whether and how the CFPB can take action,” Winkler said. “I think most court watchers expect that the Supreme Court is going to say the CFPB does have a constitutional funding mechanism, but that is just based on speculation of court watchers from around the web.”

Winkler said these events are important for IACC members to know about because they are indicative of the CFPB’s mindset, which might impact conversations you have with your clients.

The FTC The Federal Trade Commission enforces commercial collections violations. The enforcement cases it has pursued recently have been for egregious violations, like in FTC v. RCG Advances LLC, where the commission sued the company and its owners for unfair commercial debt collection practices when collecting on merchant cash advances, including sometimes threatening physical violence.

And in a 2022 case, the FTC said Yellowstone Capital, which was a provider of merchant cash advances, continued withdrawing money from businesses’ bank accounts after their balance had been repaid. The FTC initiated an enforcement action that resulted in nearly $10 million dollars being returned to those businesses.

“If the FTC is focusing on behavior like this, then I think from a federal regulatory perspective, the commercial collection space is in pretty good shape,” Winkler said. “Still, it remains to be seen what’s on the horizon for commercial collections in 2024 as they continue to advance their fairly aggressive agenda.”

The TCPA Determining whether a phone number is a business or residential line for Telephone Collection Practices Act purposes has become more complex, so proper consent is important.

The FCC’s “lead generator rule” requires one-to-one consent for calls related to leads, which could impact how consent is obtained and applied.

“The whole TCPA landscape has gotten significantly muddier for what I think of as business-to-business collections calls because of the integrated technology we have now, where a cellphone can have a dual purpose as a business line and also exist—in at least a court’s and the FCC’s mind—as a residential telephone line,” Winkler said. “And then again, that one-to-one consent rule muddies the waters. Some of us may have been relying on consent obtained through a lead generator, but now that’s got to be obtained on a one-to-one basis.”

Also, IACC members should keep in mind that their calls to cellphones may be blocked or mislabeled as spam. Be ready to work with your carriers through the FCC’s robocall mitigation database to address any mislabeled calls.

Personal Guarantors

Pursuing personal guarantors of commercial debts could potentially lead to FDCPA liability if not handled carefully.

“I think you need to understand how sophisticated your clients’ clients are,” Winkler said. “A lot of people who sign a personal guarantee don’t know what it is exactly they’re signing for their small business. A lot of those consumers won’t understand that you’re collecting a business debt, and that they’re not entitled to the protections of the FDCPA. And by attempting to enforce that personal guarantee, you could be creating risk for yourself. So again, I think that’s the kind of risk assessment you have to do by understanding your clients’ portfolio and who it is you’re ultimately going to be calling. Because often the small businesses are going to be defunct by the time you end up going to collect and it will be the individual guarantors you’re collecting from.”

Winkler said he does see cases like that in bankruptcy courts and in federal district courts. He said he generally sees courts asking, “What’s the [essence] of this agreement? What was it for and for what was it used?”

“And if it’s for business purposes, then you’re good,” Winkler said. “But as we just talked about, regardless of a personal guarantee, if that loan or equipment or vehicle ended up being used for personal or household purposes, that’s what the courts tend to look at under the FDCPA.”

An attorney in the audience said that her company started including a sentence in their demand letters that says: “You are receiving this letter because you have personally guaranteed a commercial debt.’”

Electronic Consent

Winkler said he is seeing more court cases on electronic consent, which has to do with understanding what sort of an agreement your client has secured from their client.

Electronic consent generally comes in two flavors: browsewrap and clickwrap.

Browsewrap assumes users have accepted an agreement if they use the website.

For example, the website might say: “If you submit this form, you’re agreeing to our Terms and Conditions.” The terms are usually hyperlinked, but the consumer doesn’t necessarily have to look at those terms and conditions in order to advance through the process of getting whatever it is they need. This matters because it affects contract formation, Winkler said.

Most lawyers and judges prefer clickwrap, which forces consumers to demonstrate assent to terms and conditions by having them check a box that indicates their consent.

“We’ve seen, particularly out of the 9th Circuit, a number of cases that have found that while browsewrap can be enforceable, it really needs to be prominent,” Winkler said. “And when we say that in the browsewrap context the terms and conditions need to be conspicuous, we’re talking at least as large, if not larger than, the surrounding font, a different color, ideally bold faced, and ideally with surrounding text that calls attention to them with a line break. You want something that a judge is going to look at and say, ‘There’s no way that whoever is being held to the agreement could have missed this.’”