President & Managing Director
Lenders Compliance Group
Financial institutions and other market participants have
struggled to understand how the Consumer Financial Protection Bureau defines
"abusive" conduct, but a series of enforcement actions has shown that
the bureau intends to go beyond the terms of a loan contract to wield its broad
and unique power.
Dodd-Frank poked the financial services industry with an
expansion of an age-old acronym, acronyms being the mnemonic that enables us to
remember dozens and dozens of mortgage acts and practices and their abundant,
multifarious regulations. I have actually kept count of the acronyms involving
residential mortgage loans, and by my tally the current number is a whopping 345
acronyms of various stripes and sizes.
In Dodd-Frank, a new word – and, therefore, a new letter –
was added to Unfair or Deceptive Acts or
Practices; that word being “Abusive,” which parachuted down and nudged
itself disjunctively between “Deceptive” and “Acts.” So, the new term is Unfair, Deceptive, or Abusive Acts or
Practices, and the acronym has asymptotically expanded from UDAP to UDAAP.
Back in July 2013,[i]
the Bureau set forth a whole set of guidelines on UDAAP, some of which told us
what we already know, some of it new, and some of which did not enlighten us at
all. Amongst regulatory compliance nerds and cognoscenti the need for the word
“Abusive” seemed like an arcanum for Dodd-Frank to prime the litigation pump.
Defining “Abusive” has been a task for the Bureau. Director
Cordray has stated that figuring out what is and is not ‘abusive’ is “a little
bit of a puzzle.” Reminds me of Justice Potter Stewart’s observation for an
obscenity test in Jacobellis v. Ohio: “I shall not today attempt further to
define the kinds of material I understand to be embraced within that shorthand
description ["hard-core pornography"], and perhaps I could never
succeed in intelligibly doing so. But I know it when I see it …”[ii]
When it comes to abusive conduct, we know it by the
litigation it causes!
Going by the Bureau’s involvement in enforcement actions and
litigation, it’s possible to draw some understanding – I reiterate, some
understanding – of how the Bureau seems to set up certain criteria for
pinpointing the potential dissymmetry between creditors and consumers. But the
process is steadily and always evolving, meaning that Dodd-Frank requirements
may be only a baseline threshold.
Let’s get this conundrum into the schematic that the Bureau
actually derives mutatis mutandis
from Dodd-Frank, with respect to determining various conditions as being
‘abusive.’ There are but four prongs, it would seem. Think of them as four
sharp tentacles with deep claws. Or, like gangplanks: walk far enough out on
them and you know what will happen!
Here they are, in brief: a financial institution
"materially interferes" with consumers' ability to understand a
product's terms or conditions; it "takes unreasonable advantage" of
consumers' lack of understanding regarding a product's material risks, costs or
conditions; it exposes consumers' to the risk of inability to take steps to
protect themselves; and last, but not least, it causes consumers to believe
that the company is putting its interests above theirs.
Of such material are litigation and administrative
settlements made!
You might think that the Bureau has clearly, concisely, and
conspicuously defined what constitutes an abusive practice. You would be
correct to think that, but wrong to conclude that there are guidelines to
follow. The fact is the Bureau does have the authority to define abusive acts
or practices. However, it simply has not done so to date.
Why? Because, quite obviously, by not defining abusive
conduct the Bureau gains a significant advantage in enforcement and, by
extension, in the ability to prevail in litigation. Perhaps it will define
rules for abusive conduct eventually in the forthcoming rules that apply to
debt collection and payday lending. But those rules are still in the hopper
awaiting the Bureau’s annunciation.
That leaves divination and enforcement actions. Setting
aside divining rods and other dowsing methodologies – though a double-blind
study might yield the same outcome as any construal provided by the Bureau’s current,
litigious consuetude – we might look to some enforcement actions as a guide.
For instance, using abusive conduct as leverage, the Bureau has
obtained a $25 million settlement with PayPal. New York’s Department of
Financial Services and the Bureau, working jointly, used abusive practices in
its enforcement action against two pension advance companies. So there’s gold
in them there hills!
CashCall and NDG Financial matters are good examples of
enforcement at its finest. Both cases involved offshore, online payday lenders
that offered loans in states where usury laws or interest rate caps made the
loans illegal. Neither complaint has gone to trial yet. While many of the
allegations in the cases are similar, the ways that the Bureau interpreted
"abusive" are different.
In CashCall,[iii]
the Bureau alleged that the company took “unreasonable advantage of consumers’
lack of understanding about the impact of applicable state laws on the parties’
rights and obligations” to recover the full amount of loans they obtained
despite a lack of enforceability.
In NDG Financial,[iv]
the Bureau used a broader reading of an ‘abusiveness standard,’ alleging that
NDG “materially interfered” with consumers’ ability to understand that they
were not required to repay the loans under state laws and took “unreasonable
advantage” of consumers' lack of understanding by repeatedly telling borrowers
they were exempt from state law.
Note the difference in standards. In CashCall, “unreasonable
advantage of consumers’ lack of understanding” places the emphasis on what the
consumer understood; in NDG Financial, “materially interfered” puts the onus on
the lender. In litigation, the latter is much easier to prove than the former.
Let’s consolidate the two matters into one term common to both: entrapment. It
would seem that the Bureau is aiming its sights on entrapment. Or so it would
seem. Except for the fact that the approach differs somewhat from the way other
consumer protection agencies, such as the Federal Trade Commission, have
enforced the abusiveness standard on statutes they oversee.
These two complaints also may show how the Bureau intends to
use its broad reading of abusiveness and what may constitute a “material term” in
order to circumvent the bar against the Bureau enforcing state law claims, since
enforcement under state law is broader with respect to the meaning of a “material
term.”
Absent a divining rod, these claims seem to illustrate the
Bureau’s interpretation of its authority to prevent abusive conduct. Decisions
in the two foregoing matters could entrench the Bureau’s interpretation of the
abusiveness provision and see its use in other areas of consumer financial
protection. Or, possibly, the Bureau may be constricted in its interpretive
venue.
We’ll give Director Cordray the last word. In a congressional
hearing in 2012, he said “for something to be an abusive practice, it would
have to be a pretty outrageous practice.”
Well then, that's clear enough, wouldn't you say?
[i]
CFPB Bulletin 2013-07, Prohibition of Unfair, Deceptive, or Abusive Acts or
Practices in the Collection of Consumer Debts, July 10, 2013
[ii]
Jacobellis v. Ohio, 378 U.S. 184 (1964), 378 U.S. at 197 (Stewart, J., concurring)
[iii]
Consumer Financial Protection Bureau v. CashCall Inc. et al, U.S. District
Court for the District of Massachusetts
[iv]
Consumer Financial Protection Bureau v. NDG Financial Corp. et al, U.S.
District Court, Southern District of New York.
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