The enactment of the Dodd-Frank Act in 2010 created the Consumer Financial Protection Bureau (“CFPB”) and, among other things, vested it with broad authority to enforce prohibitions on unfair, deceptive and abusive acts and practices (“UDAAP”). While the Federal Trade Commission has long had similar authority with respect to “unfair and deceptive” acts and practices (and precedent regarding the interpretation of these two prohibitions already exists), the addition of “abusive” acts and practices to a regulator’s rulemaking and enforcement authority was new, novel, and nebulous.
Rather than defining the meaning of “abusive” directly, the statutory text simply provides that the CFPB cannot declare an act or practice abusive unless it: (i) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or (ii) 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. 12 U.S.C. § 5531(d).
Recognizing the vagueness of the statutory language and the absence of meaningful guidance, both Congress and industry have asked the CFPB to adopt regulations clarifying the meaning of “abusive.” But the CFPB has declined to do so. Instead, CFPB Director Richard Cordray stated in 2012 that “abusive” is a “facts and circumstances” test:
[The CFPB] ha[s] been looking at it, trying to understand it, and we have determined that that is going to have to be a fact and circumstances issue . . . . [It is] [p]robably not useful to try to define a term like that in the abstract; we are going to have to see what kind of situations may arise where that would seem to fit the bill under the prongs.
The term’s vagueness is likely not accidental. As one court has recently observed, the “legislative history . . . suggests that the term was added, in part, to enable the [CFPB] to reach forms of misconduct not embraced by the more rigid, cost-benefit standard that had grown up around the terms ‘unfair’ and ‘deceptive’” and was designed to be a “more flexible” prohibition. CFPB v. ITT Educational Services, Inc., 2015 WL 1013508 (S.D. Ind. Mar. 6, 2015).
In the absence of regulations clarifying the meaning of “abusive,” consumer financial industry participants are instead left largely with CFPB enforcement actions and other indirect pronouncements as guideposts on what acts or practices might be identified as abusive by the CFPB.
During the past year, the CFPB has brought five enforcement actions involving allegations of abusive conduct under UDAAP (adding to four previous enforcement actions involving abusive allegations), resulting in more than $130 million in settlements (including more than $114 million in consumer remediation and relief and $16 million in civil money penalties). These most recent enforcement actions, as well as a recent CFPB bulletin and a ruling in an older pending enforcement action, provide some insight into the meaning of the term “abusive” and how this standard will be applied. This article summarizes these developments in order to provide some guidance on how the CPFB appears to think about the “abusive” standard and how the CFPB has used it.
The Enforcement Actions
In the CFPB’s most recent enforcement action, taken in May 2014, it alleged that PayPal, Inc. engaged in abusive conduct with respect to its “PayPal Credit” line of credit program marketed to consumers making purchases from online merchants. Consumers using PayPal Credit for multiple transactions frequently received deferred-interest offers for these transactions. According the CFPB, consumers were led to believe they could decide and direct how their account payments would be applied to their various balances, but were provided little information regarding how to allocate payments among their standard and deferred-interest balances.
According to the allegations pertinent to abusive practices, when consumers called PayPal to seek information about the deferred-interest promotion or inquire about how to direct their payments, they often could not get through to, or received incorrect information from, customer service. Further, when consumers made specific payment allocation requests, PayPal allegedly “often ignored such requests or allocated payments differently than consumers requested.” As a result, consumers could not clearly understand how their payments were applied and PayPal allocated payments in ways that consumers would not have chosen. The CFPB alleged that in this way, PayPal took unreasonable advantage of consumers’ inability to protect their interests in selecting and using the program, which resulted in many consumers being hit with deferred-interest fees that they should have been able to avoid. PayPal has agreed to pay $15 million in redress to consumers and a $10 million civil money penalty.
The CFPB’s press release regarding this enforcement action is available here.
College Education Services, LLC
In a joint enforcement action with the Florida Attorney General filed in December 2014 against College Education Services, LLC, the CFPB alleged that the company had engaged in abusive conduct with respect to its student-loan debt-relief services. Specifically, the CFPB alleged that the company created the illusion of expertise and individualized advice to induce consumers to rely on the company to act in their interests in seeking and selecting student loan debt-relief plans, even though the company did not actually undertake individualized assessment of each consumer’s student-loan situation and, to the extent it did provide any service, generally only sought to consolidate customers’ student loans. Furthermore, the company then took unreasonable advantage of resulting reliance by consumers when it enrolled consumers, for a fee, knowing that many were not eligible for consolidation or did not otherwise qualify for the promised relief. The CFPB also asserted that College Education Services took upfront fees to enroll some consumers in income-based repayment plans or loan forgiveness programs for which they were not eligible, and that it placed some consumers in repayment plans that actually increased their monthly student-loan payments.
The CPFB’s application of “abusive” in this enforcement action is similar to that used in its earlier enforcement action against American Debt Settlement Solutions Inc., which involved allegations that consumers were enrolled in debt-relief programs even when it was highly unlikely that the consumers could complete the program, and that the company collected fees from consumers who had inadequate income to complete their debt-settlement program.
The CFPB’s press release regarding the enforcement action is available here.
Freedom Acceptance Corporation
Also in December 2014, a complaint filed jointly by the CFPB and two state attorneys general accused Freedom Stores, Inc., Freedom Acceptance Corporation, and Military Credit Services LLC of abusive conduct in the filing of debt-collection lawsuits. At issue in this action was the companies’ practice of filing collection suits in the Virginia courts based on the venue-selection clauses contained in its consumer contracts, despite the fact that many borrowers had no contacts with Virginia and were unaware of the existence of the venue-selection clause, had little opportunity to review the underlying contract before signing, or had no ability to bargain for the removal of this clause even if they read and understood it.
According to the CFPB, the use of the venue-selection clause to file lawsuits in Virginia was “almost certain to produce default judgments” against consumers “unable to appear and assert a defense” and took unreasonable advantage of their inability to protect their interests when using or choosing credit agreements. The companies agreed to pay $2.5 million in consumer relief and a $100,000 civil money penalty.
The CFPB’s press release regarding the enforcement action is available here.
Ace Cash Express, Inc.
In July 2014, the CFPB entered into a consent order with Ace Cash Express, Inc., which resolved allegations that Ace used illegal debt collection tactics with respect to its payday lending services. The CFPB alleged that Ace engaged in abusive conduct by creating an “artificial sense of urgency” in order to pressure delinquent consumers to pay off their existing payday loans and then immediately take out a new payday loan, with accompanying fees, even though borrowers had already demonstrated an inability to repay.
The CFPB asserted that Ace used a number of tactics to create this false sense of urgency, including excessive calls to the borrowers’ home, work and cellular telephone numbers (and continuing to call borrowers’ workplaces even after being told such calls were prohibited), disclosing the existence of debts to non-liable third parties, misrepresenting the acts third-party debt collectors would take if Ace transferred borrowers’ accounts (e.g., threatening to add collection fees or make reports to national credit bureaus, even though these measures were actually prohibited by Ace’s vendor contracts) and falsely threatening borrowers with litigation or criminal prosecution. According to the CFPB, these tactics took unreasonable advantage of the inability of consumers to protect their own interests in selecting or using a consumer financial product or service. As part of the consent order, Ace agreed to pay $5 million in consumer refunds and a $5 million civil money penalty.
The CFPB’s press release regarding this enforcement action is available here.
Colfax Capital Corporation
In another CFPB enforcement action in July 2014 (taken jointly with thirteen state attorneys general), the CFPB alleged that Colfax Capital Corporation and Culver Capital, LLC failed to comply with state licensing laws and usury limits, which voided or limited the debt collectible by the companies. According to the CFPB, the companies failed to inform consumers that some or all of their debt was void or did not have to be repaid and, by doing so, took unreasonable advantage of borrowers’ lack of understanding about the impact of applicable state laws on the validity of their debts.
The CFPB’s theory of “abusive” in this enforcement action is very similar to the theory used in the CFPB’s December 2013 enforcement action against CashCall, Inc., in which the CFPB also alleged that attempting to collect debts from consumers that were void under state usury or licensing laws was abusive.
Colfax Capital Corporation and Culver Capital, LLC agreed to pay approximately $92 million in consumer debt relief and a $1 million civil money penalty.
The CFPB’s press release regarding the Colfax Capital Corporation enforcement action is available here.
The CFPB appeared to offer some additional indications regarding the elements of abusive conduct in a bulletin it released in September 2014 entitled “Marketing of Credit Card Promotional APR Offers.” In this bulletin, the CFPB addressed credit card offers that include promotional annual percentage rates and its concern that these offers often do not alert consumers that, once the promotion is accepted, they will be unable to maintain a grace period on new purchases if they do not repay their entire balance (including any promotional balance and any new purchase balance) by the statement due date. While the bulletin states that failing to provide adequate information in this regard is likely a deceptive practice, it notes that issuers also risk engaging in an abusive act or practice because, “depending on all of the facts and circumstances, an issuer may take unreasonable advantage” of consumers “by exploiting their lack of understanding to impose additional costs.”
A recent ruling in a pending federal court case also provides some additional insight into the abusive standard. In March, the U.S. District Court for the Southern District of Indiana denied ITT Education Services, Inc.’s motion to dismiss a CFPB complaint, which included allegations that ITT engaged in abusive conduct. CFPB v. ITT Educational Services, Inc., 2015 WL 1013508 (S.D. Ind. Mar. 6, 2015).
The CFPB’s complaint, filed in February 2014, alleged that ITT, a for-profit college, engaged in predatory lending in offering its private student loans. To supplement federal financial aid, ITT provided a zero-interest “Temporary Credit” loan which typically had to be paid in full at the end of the first academic year. ITT then pressured students to repay their Temporary Credit loan and fund further tuition gaps through ITT’s high-cost private student loan programs. According to the CFPB, ITT knew many students were unable to protect their interests in selecting or using these private loans because few had the resources to pay out-of-pocket or obtain private loans elsewhere and, since ITT credits were virtually non-transferable, students were forced to take the ITT private loans or forfeit their investment. The CFPB also alleged that students relied on ITT and its financial aid staff to act in students’ best interests when they signed up for their financial aid packages, including ITT’s private loans, and that this reliance was reasonable because ITT represented it would help students better their lives and held its financial aid staff out as subject matter experts.
Among other things, ITT argued that the CFPB’s pleadings with respect to abusive conduct were inadequate. The court disagreed and, in doing so, addressed various elements of the abusive standard and the CFPB’s allegations with respect to these elements. Regarding the “unreasonable advantage” component, the court found it was enough that the CFPB alleged ITT derived economic advantages from its conduct (largely ignoring the “unreasonable” portion of the element). Regarding the “inability to protect interests” element, the court found it was not necessary for the CFPB to allege ITT itself caused the students’ vulnerability (though noted the CFPB did allege this), and the CFPB’s only burden was to show that students “were, in fact, unable to protect their own interests.” The court noted that while students may have “never lost the theoretical power to defend their interests, in the sense that they could have walked away from ITT entirely,” this element refers to “oppressive circumstances” in which “a consumer is unable to protect herself not in absolute terms, but relative to the excessively stronger position of the defendant.” Finally, with respect to “reasonable reliance,” the court opined that this element is a “familiar concept in tort law” and found that the CFPB’s allegations that ITT and its staff represented to students that they would work in their interests and that many students accepted ITT’s private loans because they reasonably believed (based on ITT’s misrepresentations) that ITT was acting in their interests were sufficient to withstand the motion to dismiss.
Although the recent enforcement actions, CFPB bulletin, and federal court ruling do not provide a clear definition of what the abusive standard means or how it will be applied, they do provide some warnings and takeaways:
- Aggressive debt collection tactics, particularly those that could violate the Fair Debt Collection Practices Act if used by third-party debt collectors, may be viewed as abusive (even if taken by original creditor collecting its own debts).
- Though “ability to repay” requirements are not (yet) applicable by law to many types of consumer lending, the CFPB may nonetheless view lending to borrowers it deems vulnerable to be abusive if a lender has reason to believe consumers lack an ability to repay the debt. The CFPB has also repeatedly indicated that certain types of lending practices may be abusive, even when not expressly prohibited by law.
- Though there is no federal law imposing usury limits on consumer loans or requiring lenders to be licensed, attempting to collect loans that may be void in whole or in part due to failures to comply with state usury or licensing laws may be considered abusive. Thus, while the CPFB is unable to directly enforce state usury limits or licensing requirements, it may use the “abusive” standard to do so.
- Objectionable clauses in adhesion contracts, even when not prohibited by law, may be viewed as abusive. It is particularly important to note that the CFPB views consumers as having inferior bargaining power and as unable to protect their interests even if they are aware of and understand the contract’s terms (with the primary focus being on the ultimate impact of such terms on consumers).
- The CFPB may scrutinize any instance in which a business states or implies to consumers that the business is acting in their best interests, particularly when the business is providing a product or service that will likely provide little or no benefit (either because the business fails to provide promised services or because the consumer’s circumstances make it unlikely that any benefit will be realized).
- If a business offers promotional programs to consumers (e.g., those allowing the deferment of interest or offering promotional prices or rates), failing to fully explain how such programs work or failing to implement a program consistent with the explanation, if followed by unfavorable outcomes for consumers, may be viewed as abusive.
- The CFPB’s interpretation of “unreasonable advantage” element might require little more than receipt of a financial benefit from the allegedly abusive act or practice.
- The CFPB’s interpretation of “inability to protect interests” element may only require that the consumer has inferior bargaining power, and the financial services provider need not be the cause of the consumer’s vulnerability.
While the CFPB is unlikely to release any regulations clarifying the “abusive” standard, further enforcement actions by the CFPB that include allegations of abusive conduct, and future court decisions with respect to such enforcement actions, will continue to be a useful source of insight into the meaning of “abusive” acts and practices. Businesses subject to the CFPB’s UDAAP authority (and their counsel) should closely track these developments in order to stay informed and check their compliance with this evolving standard.