CFPB Fines Citibank and Two Law Firms over Debt Sales and Debt Collection Practices

Yesterday the Consumer Financial Protection Bureau (CFPB) announced two separate actions four separate Consent Decrees relating to Citibank’s debt sales and debt collection practices.

The First Action

In the first action, the CFPB ordered Citibank to provide nearly $5 million in consumer relief and pay a $3 million penalty for selling credit card debt with inflated interest rates and for failing to forward consumer payments promptly to debt buyers.

In making the announcement CFPB Director Richard Cordray commented “Citibank sent inaccurate information to buyers when it sold off credit card debt and it also used law firms that altered court documents. Today’s action provides redress to consumers who were victimized by slipshod practices as part of our ongoing work to fight abuses in the debt collection market.”

Background:

From 2010 to 2013, Citibank sold portfolios of charged-off credit card accounts. It typically provided debt buyers with information about the consumer and the debt, including the supposed annual percentage rate (APR). A “charged-off” account is one the bank deems unlikely to be repaid, but may sell to a debt buyer, usually for a fraction of face value. The debt buyer would try to collect on those accounts.

The Allegations of Illegal Debt Sales Practices

• The CFPB alleged that Citibank broke the law when, from February 2010 until June 2013, it provided inaccurate and inflated APR information for almost 130,000 credit card accounts it sold to 16 different debt buyers. These buyers then used the exaggerated APR in debt collection attempts. For some accounts, Citibank claimed the APR was 29 percent when it was actually 0 percent. Consumers paid about $4.89 million to debt buyers who used an APR inflated by more than 1 percent in collection efforts.
• The CFPB also alleged that Citibank failed to promptly forward to debt buyers approximately 14,000 customer payments totaling almost $1 million. This delayed the updating of account balances and subjected consumers to collection efforts from debt buyers after they had already, in reality, paid off their account.

The Consent Order

Under the CFPB’s order addressing illegal debt sales practices, Citibank must:

• Refund an estimated $4.89 million to roughly 2,100 consumers
• Accurately document the debt it sells
• Stop selling debt it cannot verify
• Include certain protections in debt sales contracts prohibiting debt buyers from reselling the debt
• Provide consumers with basic information about the debt
• Pay civil money penalty of $3 million penalty to the CFPB’s Civil Penalty Fund

A complete copy of the consent order can be found here.

The Second Action

The second action was against Citibank, two of its affiliates – Department Stores National Bank and CitiFinancial Servicing, LLC and two debt collection law firms it used. Citibank had retained Faloni & Associates, LLC, of Fairfield, N.J., and Solomon & Solomon, P.C., of Albany, N.Y. to collect credit card debt on its behalf in New Jersey state courts. The CFPB had alleged Citibank and the two law firms had falsified court documents filed in debt collection cases in New Jersey state courts.

In this second action the CFPB ordered Citibank and the law firms to comply with a New Jersey court order that Citibank refund $11 million to consumers and forgo collecting about $34 million from nearly 7,000 consumers.

The Allegations

The CFPB alleged that Citibank filed sworn statements attesting to the accuracy of the debt allegedly owed. Citibank then provided the affidavits to their attorneys to file with New Jersey courts. The CFPB then alleged that the two firms retained by Citibank altered the dates of the affidavits, the amount of the debt allegedly owed, or both, after the affidavits were executed.

The CFPB noted that in May 2011, Citibank learned that one of its law firms had altered affidavits and stopped referring new credit card accounts to it. At Citibank’s request, a New Jersey court dismissed actions pending as of Sept. 12, 2011 that Citibank identified as involving altered affidavits or incorrect information.

The Consent Orders

The CFPB’s order requires Citibank to comply with the New Jersey state court order, in which Citibank had to refund $11 million collected from consumers and stop collection of an additional $34 million in debts, both of which Citibank has done. Solomon & Solomon, P.C., must pay a $65,000 penalty to the Bureau’s Civil Penalty Fund. Faloni & Associates, LLC, must pay $15,000.

Consistent with the Bureau’s Responsible Business Conduct bulletin, the CFPB did not impose civil money penalties on Citibank for this violation, especially in light of its efforts to recompense harmed consumers.

Copies of the consent orders in the second action can be found here: Citibank Consent Order, Faloni Consent Order, Solomon Consent Order.

After the CFPB announcement, Solomon and Solomon issued the following statement:

Solomon and Solomon, P.C.  (“Solomon”)  entered into a Negotiated Settlement Agreement with the Consumer Financial Protection Bureau (the “Bureau”), which brings to an end a nearly two-and-a-half-year-long investigation into the Bureau’s allegations that Solomon altered the execution dates and outstanding consumer balance amounts listed in several of its client’s evidentiary certifications that Solomon filed in support of debt collection litigation it pursued against consumers in New Jersey state courts between 2008 and 2011.

Although the Settlement Agreement obligates Solomon to pay a small fine, the Agreement expressly acknowledges that payment of this fine and settlement of the investigation does not state or imply that either a court or a tribunal has found or that Solomon admits that it violated any law or regulation or that it engaged in any wrongdoing.  Indeed, Solomon vigorously denies the Bureau’s allegations.

Instead, Solomon entered into the Settlement Agreement merely to avoid the anticipated costs of defending itself in litigation against the Bureau, which would have likely exceeded the amount of the fine.

Solomon remains committed to providing its clients with high-quality legal services that comply with the law and treat consumers fairly.  To that end, Solomon has in place a robust compliance management system that it updates and enhances periodically to keep pace with changes in the law and industry best practices.

insideARM Perspective

The Consent Orders in these matters are consistent with earlier CFPB actions against other financial institutions regarding collection practices. It is also consistent with several elements of earlier CFPB actions against publicly traded debt buyers Portfolio Recovery Associates and Encore Capital Group.

It is also clear from this action that the CFPB remains keenly interested in collection litigation, affidavits and documentation. Finally, the fact that Citibank was proactive in May of 2011 when it discovered problems with the affidavits clearly worked in their favor in terms of civil penalties for the second action.