CHAPTER 36 CONSUMER CREDIT PROTECTION ADDITIONAL CASES Pfennig v. Household Credit Services, Inc. illustrates many of the concepts discussed under TILA and Regulation Z. 36.1 Pfennig v. Household Credit Services, Inc. 295 F. 3d 522 (6th Cir. 2002) FACTS Sharon R. Pfennig holds a credit card originally issued by an affiliate of Household Credit Services, Inc. (Household) in 1993, but in which MBNA America Bank, N.A. (MBNA) acquired an interest in 1998, when MBNA bought Household‟s credit card portfolio. The companies originally established Pfennig‟s credit limit at $2,000 but subsequently allowed her to increase that limit when she attempted to make a purchase that pushed her credit limit over the originally agreed-upon credit limit. After extending Pfennig‟s credit limit, the companies assessed her an over-limit charge of $29.00 a month for every month her balance remained over the original limit. Pfennig subsequently alleged that the company had omitted this charge from the finance charge calculation on her monthly statement and instead had posted it to her account as a new purchase or debit on which the company had calculated additional finance charges. In a class action brought against Household and MBNA, Pfennig, and the named plaintiff, claimed that the resultant penalty—which often amounted to an annual percentage rate (APR) of nearly 60 percent on credit extended over the limit—violated TILA. Specifically, Pfennig argued that the defendants should have disclosed that fee as a finance charge. ISSUE Was the $29.00 over-limit fee that the defendants had charged Pfennig a finance charge that the defendants were acquire to disclose to Pfennig under TILA? HOLDING Yes. TILA states that the amount of the finance charge equals the sum of all charges payable by one to whom credit is extended as an incident to the extension of credit. Because the defendants had charged the plaintiff a $29.00 over-limit fee after they had agreed to extend her additional credit, TILA would apply. Hence, they must disclose that fee as a finance charge. Further, to the extent TILA and Regulation Z conflict in this regard, the unambiguous language of TILA would control. REASONING Excerpts from the opinion of Judge Clay: Plaintiff argues that the plain language of TILA mandates that Defendants include as a finance charge the monthly fee imposed on [Pfennig‟s] monthly statement for exceeding her credit limit. She admits that Regulation Z, promulgated by the FRB, has excluded from the definition of the term “finance charge” fees imposed for exceeding a credit limit. However, she argues that the regulation conflicts with the plain language of the statute, and in such cases, the Supreme Court has held that courts must ignore the regulation so as to give effect to the statute. She further contends that TILA is a consumer protection statute and must be constructed liberally so as to prevent the type of action in which the Defendants are now engaged. The Defendants contend that the district court properly dismissed the Plaintiff‟s complaint because Regulation Z excludes over the limit fees from the definition of finance charge. They argue that Regulation Z‟s exclusion of over-limit fees from the definition of a finance charge is rationally based and not contrary to TILA, and that the Supreme Court and this Court have stressed that courts should defer to the FRB‟s interpretation of TILA. Finally, Defendants claim that they acted in good faith compliance with Regulation Z when they failed to disclose over-limit fee as a finance charge, and that pursuant to [TILA] they are therefore immunized from liability. The purpose of TILA is “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare … the various credit terms available to him and avoid the uninformed use of credit and to protect the consumer against inaccurate and unfair credit billing and credit card practices.” … Because of TILA‟s purpose of protecting consumers in credit transactions… the statute must be construed liberally in the consumer‟s favor. … TILA, however, is not exhaustive. Congress delegated to the FRB the authority “to elaborate and expand the legal framework governing the commerce in credit.”… The Supreme Court has recognized that TILA is a highly technical act and that deference should be given to the FRB‟s interpretations of the Act as long as such interpretations are not irrational…We disagree with Defendants and the district court for several reasons… TILA, as a remedial statute, must be given a liberal interpretation in favor of consumers in order to protect them in credit transactions…. Thus, TILA must be interpreted liberally in Plaintiff's favor in the instant case. Further, despite the language in… Regulation Z, we believe the fee imposed in this case falls squarely within the statutory definition of a finance charge…. TILA defines the finance charge as the sum of "all charges" paid by the person to whom credit is extended and assessed by the creditor "as an incident to the extension of credit."… Plaintiff alleges that Defendants imposed the $ 29.00 over-limit fee after she requested and was granted additional credit. Had Defendants not granted Plaintiff's request for additional credit, which resulted in her exceeding her credit limit, they would not have imposed the over-limit fee. Thus, under a plain reading of § 1605(a) and the general rules of statutory interpretation, the $ 29.00 fee was imposed incident to the extension of credit to Plaintiff, and pursuant to TILA, Defendants were obligated to disclose the fee as a finance charge on her monthly statement…. Similar to ... TILA, Regulation Z defines “finance charge” as “the cost of consumer credit,” including “any charge payable directly or indirectly by the consumer” and imposed by the creditor as a result of the extension of credit. … Regulation Z excludes from this definition of finance charge “charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.” [T]he district court found that it was bound to give deference to the FRB‟s interpretation of the term finance charge and dismissed [Pfennig's] complaint because of Regulation Z‟s exclusion of over-limit fees from the definition of finance charge. … TILA defines finance charge as the sum of „all charges’ paid by the person to whom credit is extended and assessed by the creditor “as an incident to the extension of credit” … [Pfennig] alleges that Defendants imposed the $29.00 over-limit fee after she requested and was granted additional credit… Thus, under a plain reading of §1605(a) and the general rules of statutory interpretation, the $29.00 fee was imposed incident to the extension of credit to [Pfennig,] and pursuant to TILA, Defendants were obligated to disclose the fee as a finance charge on her monthly statement…. Defendants could have declined her request. Instead, they granted it, and then charged her a $29.00 fee for doing so. [Pfennig] would have breached the terms of her original credit agreement but for the Defendants' willingness to renegotiate the agreement. Because the Defendants knowingly allowed [Pfennig] to exceed her credit limit and charged her a fee incident to this extension of credit, that fee is by definition a finance charge. … On its face, Regulation Z expressly states that charges imposed for exceeding credit limits are excluded from the “finance charge.” Consequently, even if the statute required the Defendants to disclose this fee as a finance charge, unequivocally Regulation Z did not. … Thus, pursuant to TILA, Defendants may not be held liable for damages for such omission; however Plaintiff may proceed with her claim against Defendants for equitable relief upon remand… Business Considerations Why would a business want to exclude a charge such as this from the category of “finance charges”? What benefit would accrue to the business if this was excluded as a finance charge? Ethical Considerations Is it ethical for a credit-granting business to agree to extend additional credit to a customer and then to charge that customer a service charge for so doing, without disclosing the charge prior to the extension of such additional credit? Is it ethical for a customer to request additional credit and then to complain when there is a fee attached to the extension asked for by the customer? *** In Riethman v. Berry, the judge addressed many of the ECOA principles. *** 36.2 Riethman v. Berry 287 F. 3d 274 (3d Cir. 2002) FACTS Harold C. Riethman had retained Berry & Culp, a law firm, to represent him in his divorce proceedings. He then retained the firm in connection with an ensuing child custody battle with his former wife. The initial fee agreement between Riethman and counsel dated February 20, 1995 (the 1995 agreement) provided for billing on a monthly basis. In 1998, at Riethman's request, the parties modified their 1995 agreement to permit Riethman to make smaller progress payments instead of paying the full amount due each month. Although Vicki Hagel, Riethman's new wife, had not been a party to the 1995 agreement, she signed the 1998 agreement. During the custody trial, a fee dispute between Berry & Culp and Riethman and Hagel culminated in Berry & Culp‟s withdrawing as counsel. Riethman and Hagen subsequently sued Berry & Culp on the grounds that the firm‟s fee agreement failed to comply with various requirements of the Equal Credit Opportunity Act (ECOA) and the Truth in Lending Act (TILA). ISSUE Was the law firm a “creditor” under ECOA and TILA? HOLDING No. Because the law firm‟s fee agreements did not allow its clients to defer payment for a monetary debt, property, or services, ECOA and TILA were inapplicable to the parties‟ business relationship. REASONING Excerpts from the opinion of Judge Sloviter: In enacting the ECOA, Congress found that “there is a need to insure that the various financial institutions and other firms engaged in . . . extensions of credit exercise their responsibility to make credit available with fairness, impartiality, and without discrimination on the basis of sex or marital status” . . . The congressional statement of purpose continues: “Economic stabilization would be enhanced and competition among the various financial institutions and other firms engaged in the extension of credit would be strengthened by an absence of discrimination on the basis of sex or marital status, as well as by the informed use of credit which Congress has heretofore sought to promote” . . . The Act makes it unlawful for any creditor to discriminate against any applicant with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status or age; because all or part of the applicant's income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act . . . ECOA defines a “creditor” as “any person who regularly extends, renews, or continues credit” . . . (Regulation B). “Credit,” in turn, is defined as “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefore” . . . Riethman and Hagel contend that Berry & Culp were creditors because they regularly extended credit by providing legal services without requiring immediate payment . . . [A] random cross-section of Berry & Culp's billing agreements and invoices . . . provided for outstanding charges to be paid in full within thirty days, with an interest charge to be imposed on unpaid balances. Riethman and Hagel concede that “these fee agreements, . . . were almost identical to the [the 1995 agreement].” Of the ten clients whose bills the District Court considered, Berry & Culp continued to perform legal services for at least half despite the failure of some clients to pay bills as they became due. The District Court rejected the contention that Berry & Culp were creditors because, other than Riethman and Hagel under the 1998 agreement, none of Berry & Culp's defaulting clients had a “right” to defer payment . . . We agree with the District Court. The hallmark of „credit‟ under . . . ECOA is the right of one party to make deferred payment. The courts have consistently so held . . . “Absent a right to defer payment for a monetary debt, property or services, . . . ECOA is inapplicable.” Riethman and Hagel appear to contend that Berry & Culp's failure to enforce their right to prompt payment gave their clients a unilateral right to defer payments. This position is inconsistent with ordinary principles of contract interpretation . . . Even if Berry & Culp failed to strictly enforce their rights against tardy clients, the express terms of their fee agreements plainly manifest their right to prompt and full payments. Contrary to Riethman and Hagel's suggestion, the fact that counsel permitted . . . clients to pay by check or credit card, or provided legal services prior to receiving a retainer, does not alone bring them within . . . ECOA. Riethman and Hagel have not identified any language in the legislative history of . . . ECOA that suggests that Congress was thinking about payment of legal fees when it enacted . . . ECOA . . . We do not suggest that lawyers are ipso facto exempt from the statute. [However, imposing] a requirement of simultaneous performance would transform into credit transactions “countless transactions in which compensation for services is not instantaneous… Such indiscriminate application of … ECOA is not appropriate.”… Similarly, in addition to attorneys' fees, Riethman and Hagel's interpretation of the ECOA would embrace doctors' fees, dentists' fees, accountants' fees, psychologists' fees and virtually all other professional fees. In view of the statutory purpose underlying the ECOA, it seems implausible that Congress intended to cover not only banks and other such financial institutions but also all professions. The Federal Reserve Board's Regulation B defines “extending credit” and “extension of credit” as… “the continuance of existing credit without any special effort to collect at or after maturity”… Riethman and Hagel suggest that this regulation demonstrates that Berry & Culp's leniency toward enforcing their contractual rights subjects them to . . . ECOA. But this provision of Regulation B presupposes an already existing credit relationship between the parties. Unless the fee agreements themselves are credit transactions, the failure of Berry & Culp to collect after “maturity” cannot be an extension of credit. Because the fee agreements do not themselves extend credit, failure to enforce them was not the continuance of existing credit. Even assuming [the] 1998 agreement did extend credit, it is clear that [the] 1995 agreement did not. Nor did the agreements of the other clients reviewed by the District Court. Therefore, the defendant law firm cannot be equated with one “who regularly extends, renews, or continues credit”… The other statute on which Riethman and Hagel base their claim, the Truth in Lending Act (TILA), is designed to strengthen the national economy by enhancing the informed use of credit. It requires creditors to accurately and meaningfully disclose all credit terms…. Under the TILA, a "creditor" is, in relevant part, a person or entity which regularly extends consumer credit…. Similarly to the ECOA, the TILA defines "credit" as "the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment."… In addition, the Federal Reserve's TILA regulation… specifically defines the TILA statutory term "regularly" as extending credit within the last twelve months "more than 25 times." Riethman and Hagel concede that the "ECOA applies to a broader category of cases than [the TILA]."… Berry & Culp did not grant clients the right to defer payment. It follows that the TILA is inapplicable. Business Considerations Could Barry & Culp have drafted its agreements in such a fashion as to foreclose the kinds of arguments Riethman and Hagel made here? Explain fully. Ethical Considerations At Riethman's request, the 1998 agreement permitted him to make smaller progress payments instead of paying the full amount due each month, an outcome that presumably benefited him financially. Given these facts, did he and his new wife behave unethically in instituting this litigation against Berry & Culp? Why or why not? *** Consider the principles found in the Fair Debt Collection Practices Act as you analyze Veillard v. Mednick. 36.3 Veillard v. Mednick 24 F. Supp. 2d 863 (N.D. Ill. 1998). FACTS Doctors Service Bureau, Inc. (DSBI) has been a licensed collection agent in Illinois since 1989. Richard Mednick, an attorney licensed in Illinois, is listed in the telephone book, Sullivan’s Law Directory, Index to Law Firms, Martindale-Hubbell Law Directory, and directory assistance as an attorney. Mednick employs non-attorneys to collect debts. Patrick Veillard is a resident of New York who became indebted to Nations Credit Commercial Corporation (Nations) through the use of a credit card. Nations sent Veillard‟s debt to DSBI, which in turn retained Mednick to collect the money. Mednick‟s office then sent Veillard an unsigned collection letter, dated 6 October 1997, seeking to obtain the money owed to Nations. The letterhead used in the letter was from “RICHARD M. MEDNICK AND ASSOCIATES”, but the letter itself did not explicitly mention that Mednick and Associates is a law firm or that Mednick is an attorney. The body of the letter stated: DEAR PATRICK VEILLARD: Your seriously past-due account has been placed with us for collection. Unless you notify this office within 30 days after receiving this notice that you dispute the validity of the debt or any portion thereof, this office will assume this debt is valid. If you notify this office in writing within 30 days from receiving this notice, this office will obtain verification of the debt or obtain a copy of a judgment and mail you a copy of such judgment or verification. If you request this office in writing within 30 days after receiving this notice, this office will provide you with the name and address of the original creditor, if different from the current creditor. Your best interest will be served by resolving this matter as soon as possible as our client shows this obligation to be due immediately. Yours truly, J. Dancer for Richard M. Mednick Debt Collector THIS IS AN ATTEMPT TO COLLECT A DEBT. ANY INFORMATION OBTAINED WILL BE USED FOR THAT PURPOSE. Veillard claimed that Mednick and DSBI had violated the FDCPA because the letter created the false impression that the communication had originated with Mednick, a lawyer who was not actually involved in the collection of the debt. Although the letter does not expressly state that Mednick is an attorney, Veillard argued that the letter conveys this impression because it is on letterhead, a convention generally associated with the legal profession. According to Veillard, by using letterhead that suggests the letter is from a law firm, Mednick and DSBI were being deceptive in violation of the Act. Veillard also submitted that the letter overshadows and contradicts the validation notice requirement. Specifically, Veillard contended, the statement “Your best interest will be served by resolving this matter as soon as possible as our client shows this obligation to be due immediately” is likely to induce the debtor to pay within the validation period so as to avoid legal action. Mednick and DSBI asserted that, because the letter fails to mention the word “attorney” in the letter, an unsophisticated consumer would not be misled or deceived into believing anything other than that the letter stemmed from a collection agency. They contend that only a very sophisticated and extremely suspicious consumer would track down whether Mednick has a law license. In addition, they maintained, professionals such as architects, engineers, and realtors use letterhead, as well as the phrase “and associates;” and therefore an unsophisticated consumer would not believe this communication had come from a law firm. They also argued that because the letter refrains from threatening legal action, the letter was not a violation of the FDCPA, either. ISSUE Did the dunning letter at issue here violate the FDCPA? HOLDING Yes. A dunning letter written on a law firm‟s letterhead could have led an unsophisticated consumer to be deceived or misled into thinking an attorney was involved in the matter. Moreover, the statement urging the debtor to pay the debt as soon as possible overshadowed the notification that the debtor had 30 days in which to challenge the validity of the debt and thus was violative of the FDCPA as well. REASONING Excerpts from the opinion of District Judge Ruben Castillo: Congress enacted the FDCPA in 1977 "to eliminate abusive debt collection practices by debt collectors."…To this end, the Act sets certain standards for debt collectors' communications with debtors. Among them is a requirement that debt collectors advise debtors of their rights to dispute the debt and demand verification… a ban on false and misleading statements in collection letters… and a prohibition against collecting a debt through "unfair or unconscionable fees beyond the amount in arrears,"… Additionally, it is unlawful to "design, compile, and furnish any form knowing that such form would be used to create the false belief in a consumer that a person other that the creditor of such consumer is participating in the collection of or in an attempt to collect a debt such consumer allegedly owes such creditor, when in fact such person is not so participating."… The Seventh Circuit evaluates communications from debt collectors "through the eyes of the unsophisticated consumer."… The unsophisticated consumer is a hypothetical consumer whose reasonable perceptions will be used to determine if collection messages are deceptive or misleading…. This standard presumes a level of sophistication that "is low, close to the bottom of the sophistication meter,"… and "protects the consumer who is 'uninformed, naive, or trusting,'"… Still, the standard "admits an objective element of reasonableness," which "protects debt collectors from liability for unrealistic or peculiar interpretations of collection letters."… Veillard claims that Mednick and Bureau violated §§ 1692e, 1692e(3), 1692e(5), 1692e(10), and 1692f of the FDCPA, and Bureau violated § 1692j, when they sent a letter out purporting to be from an attorney who was not actually involved in handling the file. Section 1692e states that a debt collector "may not use any false, deceptive, or misleading representation . . . with the collection of any debt." Section 1692e(3) prohibits any "false representation or implication that any individual is an attorney or that any communication is from an attorney." Section 1692e(5) bars debt collectors from threatening "any action that cannot legally be taken or that is not intended to be taken." Collectors violate § 1692e(10) when they use "any false representation or deceptive means to collect . . . any debt." Under § 1692f, a debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. Finally, § 1692j states that "it is unlawful to design, compile, and furnish any form knowing that such form would be used to create the false belief in a consumer that a person other than the creditor . . . is participating in the collection of . . . the debt."… An attorney sending dunning letters must be directly and personally involved in the debt collection to comply with the strictures of FDCPA…. the use of an attorney's letterhead and his signature on collection letters could give consumers the false impression that the letters are communications from an attorney… and that an unsophisticated consumer, getting a letter from an 'attorney,' knows the price of poker has just gone up. And that clearly is the reason why the dunning campaign escalates from the collection agency, which might not strike fear in the heart of the consumer, to the attorney, who is better positioned to get the debtor's knees knocking…. The… court held that using the term "attorney" without an attorney actually working on the file was confusing as a matter of law….Although the letter is unsigned, it comes from "J. Dancer for Richard M. Mednick." Dancer is referred to as a debt collector; however, by stating that Dancer wrote letter on behalf of Mednick, the unsophisticated debtor could logically conclude that Mednick supervised the file. Thus the question is whether an unsophisticated debtor would be misled into believing that Mednick is a lawyer. Mednick and Bureau argue that, because the word "attorney" is not in the letter, the unsophisticated consumer would not be misled or deceived into believing anything other than that the letter came from a collection agency. They contend that only a very sophisticated and extremely suspicious consumer would investigate whether Mednick has a law license. In addition, they argue that because other professionals such as architects, engineers, real estate, and life insurance people use "and associates," an unsophisticated consumer could not reasonably believe the letter came from a law firm. The defendants' arguments are unpersuasive. In today's world, a person does not need to have a Sullivan's Directory or other legal publication to determine that Richard Mednick and Associates is a law firm. The unsophisticated consumer need only request a telephone number from directory assistance to determine that Mednick and Associates is a law firm. In addition, it would be unusual for a non-lawyer, using the connotation "and Associates," to be involved in the business of collecting debts. The circumstances surrounding the disputed letter could lead an unsophisticated consumer to believe that Richard Mednick and Associates is a law firm prepared to take legal action on the debt…. Accordingly, we hold as a matter of law that Mednick and Bureau violated §§ 1692e, 1692e(3), and 1692(10). We grant Veillard's motion for summary judgment on these issues. In addition, we conclude that Bureau violated § 1692j and grant Veillard's motion for summary judgment on that issue…. To ensure that consumers have a fair chance to dispute and demand verification of their debts, § 1692g requires debt collectors to send debtors a "validation notice". A validation notice must explain that the debtor has 30 days to dispute the validity of all or a portion of the debt…. If the debtor disputes the debt, the collector must cease collection efforts until it sends information verifying the debt…. If the debtor does not dispute the debt, the collector may assume it is valid…. A validation notice that explains the debtor's right to contest a debt nevertheless violates § 1692g if the notice is somehow overshadowed or otherwise contradicted by accompanying or subsequent messages…. The court found the letter did just that because it left the debtor without "a clue as to what he was supposed to do before real trouble begins."… Veillard contends that the letter's 30-day notification information conflicts with the sentence "your best interest will be served by resolving this matter as soon as possible as our client shows this obligation to be due immediately," and creates confusion in violation of § 1692g. We see no distinction between "make payment immediately" and "this obligation to be due immediately." Both phrases convey the same message: a payment is due immediately on the debt. The confusion here is that Mednick does not explain what will happen if Veillard disputes the validity of the debt. One sentence could have cleared up the confusion: "If you should dispute this debt, we will discontinue collection efforts immediately until we verify that the debt is accurate."… BUSINESS CONSIDERATIONS Why would rational, profit-maximizing firms conduct themselves as Mednick and DSBI did here? How should firms in this type of situation transact business? ETHICAL CONSIDERATIONS Was the conduct of the defendants ethical? How should debt-collection firms, from an ethical perspective, act?