The Consumer Financial Protection Bureau resolved an enforcement action this month that for the first time ever invokes the “abusive practices” provision of the Dodd-Frank Act, renewing questions about how exactly the CFPB intends to use its vast enforcement powers.

Section 1031 of the Dodd-Frank Act authorizes the agency to take action against any act or practice that it deems not only “unfair” or “deceptive”—familiar terms to most companies—but now “abusive” as well. The law defines abusive practices as those that:

“Materially interfere” with a consumer's ability to understand a term or condition of a consumer financial product or service; or

“Takes unreasonable advantage of” a consumer's lack of understanding; a consumer's inability to protect his or her own interests when selecting or using a product or service; or a consumer's reliance on a covered person.

Some say the definition is overly broad. “Almost any conduct can be characterized as abusive,” says Richard Gottlieb, director of the financial industry group for law firm Dykema and chair of its national consumer financial services practice. “The industry fear—and it's an appropriate fear—is that the term ‘abusive practice' will itself be the subject of abuse by the Bureau.”

Adding to these concerns, the CFPB has indicated that it will not issue any additional guidance to clarify what is meant by “abusive practices.” Instead, the agency said it will proceed by taking action against practices they deem to be abusive on a case-by-case basis.

“These standards are designed to be flexible,” says Benjamin Olson, former deputy assistant director for the Office of Regulations at the CFPB and now a counsel in the law firm BuckleySandler. “While more clarity would always be desirable to help companies comply, it's probably not realistic to expect that we'll ever get completely clear guidance.” 

Some lawyers are also concerned that companies don't get much warning that the CFPB is scrutinizing their business practices or much chance to correct problems. “The first time you'll know something might be deemed abusive is when you have a complaint or knock on the door from the CFPB alleging something you've done is abusive,” says Gregory Jacob, a partner with the law firm O'Melveny & Myers. “The fact lightning can strike anywhere without you knowing in an advance of what the CFPB may consider to be abusive injects a significant amount of risk for everybody in the industry.”

“While more clarity would always be desirable to help companies comply, it's probably not realistic to expect that we'll ever get completely clear guidance.”

—Benjamin Olson,

Counsel,

BuckleySandler

Earlier this month a federal district court judge in Florida approved a consent order filed by the CFPB against debt-collection company American Debt Settlement Solutions (ADSS) and its owner Michael DiPanni over violations of the Federal Trade Commission's Telemarketing Sales Rule and the Dodd-Frank Act.

According to the complaint, ADSS routinely charged consumers illegal upfront fees for debt-relief services that rarely, if ever, materialized. The complaint further alleged that the defendants engaged in abusive acts or practices by “signing up and charging fees to vulnerable consumers who the defendants knew had inadequate incomes to complete the debt-relief programs in which they were enrolled.” Among the allegations, CFPB charged that ADSS:

Misled consumers by falsely promising them it would begin to settle their debts within three to six months when, in reality, services rarely materialized;

Enrolled consumers despite knowing that their income level made it highly unlikely that they could complete the debt-relief programs;

Collected upfront “enrollment” fees from consumers who ADSS knew could not afford the monthly payments required by these debt-relief programs, causing the consumers to spend their last savings on fees for services from which they ultimately would not benefit; and

Failed to settle these consumers' debts within the promised time, forcing many consumers to drop out of the program and forfeit their “enrollment” fees without having received any debt-relief services.

Under the terms of the final consent order, ADSS will pay nearly $500,000 in damages and a civil penalty of $15,000. According to the company's Website, ADSS has closed down operations and “is no longer able to service its clients.”

In announcing the enforcement action, CFPB Director Richard Cordray stressed that the Bureau will “continue to crack down on this type of harmful behavior.”

Unanswered Questions

Many companies had hoped for more insight into what the CBPB deems to be abusive practices with the first enforcement action. Instead, the judgment seems to illicit more questions than answers, say attorneys.

BANNING DECEPTIVE PRACTICES

Below is an excerpt from the Dodd-Frank Act's Sec. 1031: Prohibiting Unfair, Deceptive, or Abusive Acts or Practices:

A.In General - The Bureau may take any action authorized under subtitle E to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.

B. Rulemaking - The Bureau may prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. Rules under this section may include requirements for the purpose of preventing such acts or practices.

C.Unfairness -

  (1) IN GENERAL- The Bureau shall have no authority under this section to declare an act or practice in connection with a transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service, to be unlawful on the grounds that such act or practice is unfair, unless the Bureau has a reasonable basis to conclude that—

    (A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and

    (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.

  (2) CONSIDERATION OF PUBLIC POLICIES- In determining whether an act or practice is unfair, the Bureau may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

D. Abusive - The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice—

  (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

  (2) takes unreasonable advantage of—

    (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

    (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or

    (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

E. Consultation - In prescribing rules under this section, the Bureau shall consult with the Federal banking agencies, or other Federal agencies, as appropriate, concerning the consistency of the proposed rule with prudential, market, or systemic objectives administered by such agencies.

F. Consideration of Seasonal Income - The rules of the Bureau under this section shall provide, with respect to an extension of credit secured by residential real estate or a dwelling, if documented income of the borrower, including income from a small business, is a repayment source for an extension of credit secured by residential real estate or a dwelling, the creditor may consider the seasonality and irregularity of such income in the underwriting of and scheduling of payments for such credit.

Source: Dodd-Frank Act.

Based on the facts of this case, it's not surprising that the CFPB would bring an enforcement action against activities that are “plainly outrageous,” says Gottlieb. “It would make no sense for the Bureau, when enforcing something for the first time, to choose the most controversial subject and then have it struck down by a court.”

Richard Riese, senior vice president for the Center for Regulatory Compliance at the American Bankers Association, says what is “troubling” about this initial case is “not so much the allegations,” but rather “what the court ultimately deemed adequate to demonstrate abusive.”

The court through its consent order did not clearly articulate how Section 1031 of Dodd-Frank was violated. “The court in this case made no such finding about what misconduct proved the requirements in the statute,” says Riese. “Which is interesting because the only way the Bureau can declare something abusive is to meet those standards.”

What's not been answered by this particular case is how abusive practices can be applied more broadly to other situations. How will abusive practices apply to companies that are engaging in practices that historically have been considered within the boundaries of the law?

Average interest rates of payday loans run about 400 percent. “So does that make payday lending abusive?” asks Gottlieb.  He offers another example in which a mortgage provider charges a 5 percent interest rate when today's mortgage rates hover around 3.5 percent. “Is that considered abusive?”

Under the law, lenders and providers will have to reasonably assess whether they're taking “unreasonable advantage” of a consumer. The CFPB could take the view that mortgage providers or credit card issuers will always know more than a consumer about how a consumer likely will perform on a product, based on their experience with loan performance in their portfolio, says Olson. That creates a gray area.

If the CFPB concludes that lenders and providers are in a position where they have that “superior knowledge,” Olson says, it could have concerns about those providers taking “unreasonable advantage” of consumers.

Anybody who is subject to the CFPB's jurisdiction, Jacob says, “needs to pay very close attention not just to the regulatory actions of the agency, but also the enforcement actions they take and every speech they make, “because all those things signal where the CFPB may be going on this.”

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