FYI:: NJ App Ct Holds Debt Purchaser Not Liable Under NJ Consumer Fraud Act for Failing to Obtain State License

A recent decision from the New Jersey Appellate Division comes as welcome relief for purchasers of defaulted debt.

 

The decision (Link to Opinion) concerns the New Jersey Consumer Finance Licensing Act (CFLA), and whether a debt buyer who failed to have such a license could be liable under the state's consumer protection law.

 

After she defaulted on two credit-card accounts with the original creditors, the plaintiff's accounts were charged-off and sold to a third-party debt purchaser who then placed the accounts with a law firm debt collector for servicing.

 

Thereafter the plaintiff paid one of the debts in full to the debt collector and no other entity sought to collect that account. On the other account the law firm sued the plaintiff and the parties entered into a consent judgment pursuant to which the plaintiff made payments on the account.

 

Over three and a half years later, the plaintiff filed suit against the debt buyer as it was not licensed under the CFLA and sought a declaratory judgment that her consent judgment was "void." The plaintiff also sought damages under the New Jersey Consumer Fraud Act (NJCFA) again based on collecting the accounts without having the CFLA license. The plaintiff also had a count for unjust enrichment based on collecting the accounts without the CFLA license.  The plaintiff's complaint was filed on behalf of a putative class and sought damages, including disgorgement of all funds collected from proposed class members.

 

Regarding the account that had the consent judgment, the trial court previously found that res judicata and the entire controversy doctrine barred the plaintiff's claims. However, since the other account was settled without a judgment, neither res judicata nor the entire controversy doctrine applied.

 

The trial court granted summary judgment to the debt purchaser on all of the plaintiff's claims, finding that the debt buyer was not a consumer lender and thus did not require the CFLA license. The trial court also held that the plaintiff's claims were not covered by the NJCFA because the purchaser did not offer to sell the plaintiff any services or merchandise and because she had not suffered the requisite "ascertainable loss."

 

The Appellate Division affirmed the CFLA dismissal but for reasons other than those found by the trial court. As the Appellate Division saw it, the CFLA does not provide for a private right of action, and the plaintiff cannot use the Uniform Declaratory Judgments Act to circumvent that lack of a private right of action. Instead, violations of the CFLA are enforceable only by the Commissioner of Banking and Insurance.

 

Regarding the NJCFA, the Appellate Division agreed with the trial court that the statute did not apply to the debt purchaser.

 

To state a claim under the NJCFA, the offending conduct must be "in connection with the sale or advertisement of merchandise and real estate."  The New Jersey Supreme Court has also held that the NJCFA applies to "the provision of credit."  Ultimately, the offending misrepresentation must be material to the transaction and "made to induce the buyer to make the purchase." 

 

There was no allegation that the debt purchaser sold credit or offered anything to the plaintiff. Instead, the offending conduct was misrepresenting "that it had the legal right to collect on the account when it lacked the proper license to do so."  However, as this conduct was not made in connection with the origination of the debt, it could not constitute a violation of the NJCFA.

 

In addition, the Appellate Division found that the plaintiff did not sustain an ascertainable loss, another prerequisite to recovery under the NJCFA. Here, the plaintiff acknowledged that she owed the debt to the original creditor, and her payment of that valid debt to the debt purchaser did not constitute an ascertainable loss.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: CFPB Announces Rulemaking on Use of Medical Debt in Credit Reporting

Continuing on its mission to curb "abusive" collection efforts related to medical debt that began to take life in 2022, the CFPB recently announced its initiation of a rulemaking process to remove medical bills from credit reports entirely.

 

Motivated by "research" which the CFPB identifies as showing that "medical bills have little predictive value in credit decisions" the agency outlined several proposals under consideration "that would help families financially recover from medical crises, stop debt collectors from coercing people into paying bills they may not even owe, and ensure that creditors are not relying on data that is often plagued with inaccuracies and mistakes."

 

A copy of the CFPB's  proposal is available at:  Link to Proposal

 

Under consideration for the CFPB's rulemaking are the following proposals:

 

Remove medical bills from consumers' credit reports:

 

Consumer reporting companies would be prohibited from including medical debts and collection information on consumer reports that creditors use in making underwriting decisions.

 

Stop creditors from relying on medical bills for underwriting decisions:

 

The proposal would narrow the 2005 exception under the federal Fair Credit Reporting Act, and prohibit creditors from using medical collections information when evaluating borrowers' credit applications.

 

As you may recall, the FCRA restricts creditors' ability to use medical information in making credit decisions and places limits on the inclusion of medical information on credit reports. The FCRA granted financial regulators authority to create regulatory exemptions to this restriction. In 2005, an exception was created to allow creditors to rely on medical data if it could be characterized as "financial information."

 

Stop coercive collection practices:

 

As unpaid medical bills would no longer appear on consumers' credit reports used by creditors in making underwriting decisions, debt collectors would no longer be able to use the credit reporting system as leverage to pressure consumers into paying questionable debts.

 

Importantly, the CFPB notes, the proposals would not prohibit creditors from obtaining medical billing information for other purposes, such as evaluating loan applications intended to fund medical services and for determining if a consumer qualifies for medical forbearance programs available.

 

The proposed rulemaking comes on the tails of the CFPB identifying medical debt, and specifically its credit reporting, as a priority beginning in 2022. Specifically, and as a refresher, early 2022 saw the CFPB issue its bulletin regarding the collection and credit reporting of medical debt which concluded that medical debt posed a "special risk" to consumers because medical debt is typically an unanticipated indebtedness, consumers are not always advised of the costs of medical services in advance, there is no real "marketplace" for medical services where consumers can shop around for the best value, and there exists a lack of education among consumers regarding the insurance process and how to identify potential billing errors.

 

Next, in March of 2022, the CFPB issued its "official report" regarding the burden on consumers created by medical debt. The report's key findings were that there was approximately $88 billion in medical debt reflected on consumer credit records as of June 2021 with most of the related tradelines being $500 or less and that 58% of all consumer tradelines as of 2021 were medical debt. The CFPB concluded that the current practices related to the collections and credit reporting of medical debt can cause "significant harm" to consumers.

 

Relatedly, also in March of 2022, the CRAs responded to the CFPB's official report, by identifying certain consumer-conscious changes they were implementing. Specifically, beginning July 1, 2022, defaulted medical debt placed for collections and which had subsequently been paid no longer appears on a consumer credit report, and defaulted medical debt is not reported until one year after default. Beginning March 30, 2023, the CRAs also ceased placing medical debts with furnished balances below $500 on a consumer report.

 

Given the CFPB's posture towards medical debt and its presence on consumer credit reports, the proposed rulemaking is simply the culmination of its efforts to limit the impact of medical debt on consumers while also limiting available remedies for industry members who work with medical debt. The frustration for the industry most certainly lies with the CFPB's repeated labeling of medical debt as "questionable" and "inaccurate," although failing to present data to support these claims save for reliance upon consumer complaints received and summarized in the CFPB's complaint bulletin in April of 2022 which concluded that the nature of the consumer complaints being received in relation to medical debt "strongly suggest that many medical bills reported on credit reports are disputed, inaccurate, or not owed."

 

Regardless of whether some or all the proposals ultimately result in rulemaking, the accuracy and propriety of medical debt balances being collected upon will continue to face heightened scrutiny from state and federal regulators.

 

As we progress towards the end of 2023 and into 2024, the attorneys at Maurice Wutscher LLP will continue to monitor and provide updates on all developments in the medical debt space.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

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and

 

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