Welcome to the second issue of All Consuming for 2023.

We are excited to announce Spilman's official entrance into the Sunshine State! We recently opened an office in Jacksonville, Florida, our 8th office in total. This new office is a strategic expansion to better meet the needs of our growing client base in the southeastern United States.

The Jacksonville team’s focus areas include labor and employment law, complex civil litigation, health care law, and business law, both in Florida and well beyond. They also have a strong background in corporate and transactional work. Read more about our expansion here.

As always, thanks for reading.

Nicholas P. Mooney II, Editor of All Consuming

Bruce M. Jacobs, Chair, Spilman Consumer Finance Litigation Practice Group

Why this is important: The Consumer Financial Protection Bureau (CFPB) is beginning to monitor financial institutions’ use of chatbots as an alternative to person-to-person customer service. Most of us have probably experienced a chatbot, which may use a person’s name to ask if it can answer any questions. It then attempts to provide the answer based on the question asked. This type of system has lent itself to consumer complaints for not providing straightforward answers to customer inquiries. The CFPB is monitoring chatbots for the following:

The CFPB expects financial institutions to use chatbots in a manner consistent with their legal obligations. --- Bryan S. Neft

Why this is important: Two recently released Consumer Financial Protection Bureau (CFPB) reports examine financial opportunities and challenges facing U.S. southern regional communities regarding banking access and consumer finance. The states covered in this report are Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee.

“Consumer Finances in Rural Areas of the Southern Region” offers a comparison of consumer financial experiences and outcomes in rural communities in southern states with other regions while “Banking and Credit Access in the Southern Region of the United States” offers a deeper dive into banking access and credit access in rural and non-rural areas in the region.

Several of the findings in the reports indicate that southern consumers often have more difficulties accessing credit and face higher interest rates; initial analyses determined credit scores alone do not explain lower levels of lending; unbanked rates in the region remain high despite gains; and consumers face challenges in auto lending.

The CFPB noted in the reports that there has been progress with regard to improvements in the percentage of people with bank accounts, both overall and among specific communities; there are some mortgage lenders possessing strong records of reaching historically underserved markets within the region that include rural communities, low-income borrowers, and borrowers of color; and residents of southern states with higher rates of medical debt are more likely to benefit from the recent changes to how medical debt collections will be reported on consumers’ credit reports.

The reports are intended to provide a starting point in better understanding the financial situations, needs and challenges of consumers in rural areas in the southern region. CFPB Director Rohit Chopra summed up the purpose and the findings in the reports stating that “The rural South faces distinct challenges when it comes to fair access to banking. Understanding regional differences across the country will help us determine where financial marketplaces can work better for all.” --- Bryce J. Hunter

Why this is important: The Fair Credit Reporting Act will be examined in the next U.S. Supreme Court term. The case comes to the court through a consumer who challenges the federal government’s alleged errors in reporting his debts. Reginald Kirtz had obtained a loan through a U.S. Department of Agriculture program, which he alleged was paid off, but continued being reported as unpaid on his credit report. The government asserted that it was immune to suit under the FCRA through sovereign immunity. This case, and similar cases in other jurisdictions, has resulted in a significant split among the U.S. Circuit Courts of Appeals, with the 3rd Circuit joining the 7th and D.C. Circuits in finding that sovereign immunity does not prevent suit under the FCRA, while the 4th and 9th Circuits had previously held that immunity was not waived under the FCRA. This will be an important case to follow for consumer protection advocates. A specific date for oral argument has not yet been set. --- Brian H. Richardson

Why this is important: In Lord, et al., v. Senex Law PC, the law firm claimed its clients were the only “debt collectors” regulated by the FDCPA because each landlord reviewed and electronically signed the notices sent to tenants. The plaintiffs each rented apartments from landlords who retained Senex. In early 2020, each tenant received monthly notices demanding payment of various amounts of overdue rent, late fees and attorneys’ fees. Individually and as a class, the tenants sued Senex for violations of the FDCPA in September 2020. Senex moved to dismiss on grounds that it was not a debt collector subject to the FDCPA. The Court rejected the argument that, as a matter of law, Senex was not a debt collector.

Senex Law is a Virginia law firm that provides services to landlords, including those associated with tenant rent delinquency. Either using Senex’s email, fax or online portal, landlords submitted delinquent rent reports. The reports included the tenant’s name and address and charges due, as well as the landlord’s name and contact information. Senex receives these reports each month and uses them to fill out their notice templates. Unsigned copies of each notice are sent to the landlords, who review and electronically sign them before Senex conducts its “attorney review.” Senex charges for each attorney review, which the landlords passed along to the tenants as “attorney’s fees.” The notices were dated according to when Senex attorneys finished their review. Each notice was printed on the landlord’s letterhead with their contact information and instructions to make payments to the landlord.

The FDCPA defines “debt collector” as “any person who uses an instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” The Court agreed with some courts in the 2nd U.S. Circuit Court of Appeals that the landlord’s electronic signature did not immunize Senex from FDCPA liability.

Under the FDCPA, a debt collector is defined by using one of two tests: the principal purpose test and the regularly collects test. The Court used the “regularly collects” test and noted that the U.S. Supreme Court has “understood that to mean that ‘Congress intended that lawyers be subject to the Act whenever they meet the general “debt collector” definition.”’ Given Senex’s pattern of sending out frequent notices, its patterns indicating an ongoing relationship with the landlords and its online systems to facilitate debt collection, the Court found that “it is clear that Senex regularly engages in debt collection activity.”

The Court rejected that Senex was only acting in a ministerial capacity finding, among other things, that Senex’s retention of delinquent tenant information for subsequent debt collection could not be deemed ministerial. The Court also rejected Senex’s argument that under the Uniform Electronic Transactions Act (UETA) the electronic signatures of the landlords be given legal effect such that the landlords’ signatures established the notices to be their own acts.

The Court ultimately concluded that the FDCPA applied stating that “Instead of merely serving as a mailing service, [Senex] provides a turn-key delinquent rent processing system for its landlord clients. Importantly, [Senex] retains the delinquent tenant’s information for follow-up collection and eviction proceedings. In no sense can the integrated … delinquent rent collection system be deemed ministerial.” --- Bryce J. Hunter

Why this is important: Auto loan delinquencies – particularly among subprime borrowers – is increasing as inflation makes it more difficult for borrowers to keep up with monthly payments. In addition, loan-to-value ratios are increasing as borrowers borrow more relative to the value of their current vehicles. This creates a situation where borrowers owe more than the value of the car at time of trade-in. The bottom line is that borrowing power is diminishing in the face of inflation, and loans that come due may not have a secured asset worth as much as the loan, therefore compounding the lender’s losses. This trend will cause tightening of credit because of the imbalance. --- Bryan S. Neft

Why this is important: The recovery from the COVID-19 pandemic is proving to be slow to reach the used auto lending industry. The previous record high for delinquency was set during the Great Recession in 2009-2010 when 1.46 percent of loans were 60 days or more past due. Industry professionals were not necessarily surprised when, in 2021 that metric reached 1.43 percent – particularly because the country was just beginning to emerge from the COVID-19 pandemic. Data for Q1 2023 are out, and show that higher interest rates, accompanied with increased prices for used vehicles, are squeezing the budgets of borrowers with subprime loans.

A new record high for loans 60 days or more past due has been set at 1.69 percent. There is little on the horizon to indicate that this number will go down during Q2 or Q3 for 2023. In response, lenders are imposing stricter requirements for underwriting on used car loans, and some are also extending the loan terms out as far as 84 months. Lenders such as banks and credit unions should regularly review their auto loan portfolios and take steps to ensure their collateral is properly secured. Because auto loans are typically part of a borrower’s core debt obligations (i.e., among the first to be paid), seeing increased delinquency and default rates on these loans can be a significant indicator that borrowers are simultaneously seeing unsustainable pressure from other financial obligations. --- Brian H. Richardson

Why this is important: This survey paneled more than 1,000 U.S. adults in an effort to glean insight into credit card debt levels and trends. When Debt.com ran a similar survey in 2021, 42 percent of respondents indicated they planned to permanently cut back on credit card spending. Also in the 2021 data, only 20 percent of respondents indicated they had reached the maximum on their cards during the prior year. Unfortunately, those responses have been proven to be overly optimistic.

By contrast, the 2023 report indicates that now upwards of 30 percent have reached the maximum on their cards since 2021. That is a significant increase, and reflects a growing trend for borrowers to be more reliant on credit cards, and simultaneously less informed about the costs associated with them (as 28 percent of respondents did not know their current APR). It is noteworthy, however, that respondents indicate that only one-third to one-half of their credit card spending is attributable to budget shortfalls or emergency spending. Debt.com attributes the increase in credit card debt as an indication that consumers are “too dependent on debt.” But perhaps that assessment misses the mark. Reliance is not the same as dependence. Consumers may view the costs associated with credit card usage simply as the price they pay for security and privacy in conducting transactions. This survey did not ask about borrower motivations for using credit cards, and similarly did not ask about delinquency or whether borrowers were falling behind on their payments.

Consumer credit card delinquency rates, which have only recently begun to increase again, are still relatively low at 2.4 percent. While other forms of consumer debt (such as auto loans) have recently exceeded their historic high marks set during the Great Recession in 2009-2010, consumer credit card delinquency remains a far cry from the 2009 peak, which was almost 7 percent. Researchers would do well do explore shifting trends in consumer motivations for debt utilization. The distinction between dependence and reliance may be a critical factor in consumer risk assessment in the coming years. --- Brian H. Richardson

We have included a listing of pertinent U.S. House and Senate Committee meetings for your reference.

These are events scheduled at press time for the months of July and August 2023.

U.S. House Committee on Small Business

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