The Dodd-Frank Act granted the Consumer Financial Protection Bureau (CFPB or Bureau) the authority to combat “unfair, deceptive, or abusive” practices in the consumer finance industry.[i] “Unfair and deceptive” acts and practices have long been prohibited by the Federal Trade Commission Act, so the legal meaning of those terms is now reasonably clear.[ii] But the proscription against “abusive” practices is Dodd-Frank’s novel invention. As Director Richard Cordray told Congress, the term is “a little bit of a puzzle.” Solving that puzzle is crucial for industry participants, as the CFPB’s enforcement authority allows it to seek a broad range of remedies, including civil penalties of up to $1 million per day.
Dodd-Frank does not define “abusive” practices, but it does state that the Bureau cannot declare an act to be abusive unless the act:
- Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or
- Takes unreasonable advantage of:
- a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
- the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
- the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.[iii]
An earlier version of Dodd-Frank would have added a major limitation: that an act could not be abusive unless it contributed to systemic risk in the financial system.[iv] Such a limitation might have provided a safe harbor that would have been readily discernible through the use of generally accepted methods of economic analysis. But that provision was, unfortunately, removed.
Although the CFPB has the power to issue regulations defining abusive practices, it has so far declined to do so. The guidance that the CFPB has published contributes only the quixotic advisory that the definitions of unfair, deceptive and abusive acts are separate yet overlapping.[v] Cordray explained that the determination of what practices are abusive “is going to have to be a fact and circumstances issue,” and that it would “not be useful to try to define a term like that in the abstract.”[vi]
This “I know it when I see it” approach naturally grants the CFPB the maximum flexibility to bring enforcement actions, while granting industry participants the minimum level of notice about what is required of them. The industry is left to wonder: What is “material interference?” What is “unreasonable advantage?” When is it reasonable for a consumer to rely on the covered person to act in their interest? How does one determine whether a consumer is able to protect its own interests? And how does one determine “the interests of the consumer?”
The CFPB has brought only a handful of enforcement actions alleging abusive practices, but these cases offer the best clues to understanding the CFPB’s interpretation of the “abusiveness” standard:
- In CFPB v. American Debt Settlement Solutions, the Bureau sued a debt-relief company in federal district court in Florida, alleging that the company had falsely promised consumers that it would renegotiate their debts with third parties in exchange for certain up-front fees and commissions. Unsurprisingly, the Bureau concluded that the alleged false promises were “deceptive.” But the Bureau also maintained that it was “abusive” to enroll consumers in debt-relief programs that the consumers would be unlikely to finish due to their limited incomes. The complaint alleged that because the customers had submitted detailed financial worksheets, the company knew its customers’ financial circumstances before it collected any fees from them. If such information were not already in hand, however, it is unclear to what extent the CFPB expects industry participants to undertake a proactive investigation to ensure that potential customers can afford their services. It is also unclear at what point the likelihood of repayment becomes “too low.” The company settled on June 6, 2013, agreeing to pay $500,000 in damages and to stop offering debt-relief services.
- On July 8, 2014, the CFPB entered a consent order in In re ACE Cash Express, over allegations that the payday lender had engaged in a number of unfair, deceptive and abusive practices. In particular, the Bureau alleged that ACE and its third-party debt collectors created “an artificial sense of urgency” to convince delinquent borrowers to refinance their loans. The Bureau said it was abusive to induce borrowers to take out new loans (and incur new fees) when ACE knew that the borrowers were unlikely to be able to pay off the new loans, again intimating an obligation on the part of industry participants to determine what consumers can reasonably afford. ACE agreed to pay $5 million in restitution and $5 million in penalties.[vii]
- On July 25, 2014, the CFPB entered a consent order in In re Colfax Capital. The case concerned a company that provided financing—primarily to military service members—to purchase retail consumer goods. Partnering with Attorneys General in 13 states, the CFPB alleged that Colfax had entered into financing agreements that imposed interest rates and terms that violated various state usury laws, and that Colfax’s attempts to collect the full balance on loans from borrowers who lived in those states, and who “typically lacked an understanding that” the loans were illegal, constituted abusive conduct. Colfax agreed to offer $92 million in debt relief to affected customers. This action suggests that state enforcement authorities will seek to piggyback on the CFPB’s authority to enjoin abusive conduct.
- On December 18, 2014, The CFPB announced a settlement in CFPB v. Freedom Stores, which concerned a retailer that specializes in selling furniture and electronics on installment plans to military members. Although the Bureau alleged that many of Freedom Stores’ practices were illegal, the abusiveness claim focused on the practice of filing debt-collection lawsuits in Virginia courts against consumers who had signed their contracts, and lived, well-outside of Virginia. The financing agreements contained a venue-selection clause, but the CFPB said that because the clause was contained in a “non-negotiable” form contract that many consumers did not read, it was ineffective. According to the CFPB, filing lawsuits in Virginia was almost certain to lead to default judgments and wage garnishments. The substantive enforceability of the clause, as a matter of contract law, apparently was beside the point.[viii]
The Bureau’s theory of abusiveness in this case has the potential to dramatically change the enforceability of form contracts. In every other enforcement action, it was necessary to look beyond the four corners of the contract to determine if the conduct at issue was abusive according the CFPB’s theory. A crucial consideration was whether the defendants had knowledge of the consumers’ financial situations. In the Freedom Stores complaint, however, the CFPB essentially alleged that it is per se abusive to try to enforce venue selection clauses in consumer form contracts, regardless of whether the clauses are enforceable as a matter of contract law. There is reason to think that the CFPB has set its sights on other aspects of form contracts as well. In particular, the Bureau has been conducting an ongoing study of pre-dispute consumer arbitration contracts.
- In CFPB v. ITT, the Bureau sued a national, for-profit college in federal district court in Indiana. The CFPB asserted authority over the college because ITT provided some private student loans and because its business model largely depended on students obtaining federal loans to pay for tuition. The CFPB’s complaint alleged two counts of abusiveness. The first was that ITT had a practice of offering students short-term, interest-free loans, but that when the loans came due, ITT required the students to either refinance immediately into an interest-paying loan, or else lose their academic credits. This tactic, according to the CFPB, was abusive because ITT “pushed” students into these loans, and “few students had the resources, particularly in the time permitted, to repay…[their debt] or to obtain private loans elsewhere.” This theory of abusiveness suggests that the question whether a consumer is unable to protect his or her interests is a subjective inquiry, looking at the particular consumer at issue.
The second count of abusiveness alleged that the students had reasonably relied on ITT’s financial aid staff to act in their best interests, when the advisors were, in reality, just sales staff paid on commission. The private loans were, according to the CFPB, “expensive, high risk … [and] likely to default.” As in ACE and American Debt Settlement Solutions, the CFPB emphasized that industry participants have an obligation to consider whether their customers can afford the financial products they are selling. Notably, in ITT, the Bureau has also aggressively questioned the value of an ITT education in the first instance. Although the complaint does not clarify the legal relevance of these allegations, they suggest that the CFPB is willing to consider whether lenders are extending financing for causes that the Bureau deems “worthwhile.” ITT is actively litigating this case.
- In CFPB v. CashCall, a case currently being litigated in Massachusetts federal district court, the Bureau has made allegations similar to those in Colfax—that a loan servicer had been abusively attempting to collect interest to which it was not entitled under applicable state law. Notably, however, because the loan originator was owned by an American Indian tribe, there is a legitimate question as to whether the state usury laws at issue actually apply to the loans in question. CashCall suggests that the CFPB will aggressively bootstrap the “abusive” standard onto violations or even potential violations of state laws.
As these cases demonstrate, the “abusive” standard is far from fleshed out, but a few themes are beginning to emerge. First, rather than assuming that with full and fair disclosure, both parties to a transaction can be expected to look after their own interests, the CFPB believes that industry participants have an affirmative duty to look out for consumers’ best interests. The breadth of this perceived duty is unclear, but, according to the CFPB, it includes a duty to refrain from enforcing or attempting to enforce agreements whose legal validity is questionable. Further, the CFPB appears to want to impose on industry participants suitability requirements that Congress expressly rejected—i.e., the obligation to assess the consumer’s ability to meet the contractual terms. Finally, the CFPB will attempt to use its authority to try to regulate the permissible contents of consumer contracts. In short, the CFPB will seek to use the “abusive” standard to require providers of consumer credit to undertake new obligations or else risk incurring substantial penalties.
Avoiding the Bureau’s scrutiny naturally should be the objective for most industry participants, but when the CFPB does bring enforcement actions, the courts may have the final say about the meaning of the term “abusive.” There will almost always be narrow arguments, specific to each case, about whether the agency has interpreted the term in a manner that exceeds the scope of its permissible discretion. But the statute may have broader constitutional vulnerabilities as well. Because the statute provides very little notice of what kind of conduct is prohibited, at least one enforcement target, ITT, has raised the notion that the abusiveness proscription may be “void-for-vagueness” under the Due Process Clause.[ix] Although the void-for-vagueness doctrine is more robustly enforced in criminal cases than in civil cases, it does still apply in civil cases.
Additionally, because Congress has given the CFPB so little guidance about what “abusive” means, the statute may violate the “non-delegation doctrine.” Under this separation-of-powers doctrine, the Supreme Court has held that when Congress delegates power to executive agencies, it must lay down an “intelligible principle” to guide the agency’s discretion.[x] The non-delegation doctrine is, admittedly, a low bar, but there is a colorable argument that Congress did not meet it here, and the Supreme Court and lower courts have recently indicated their increasing interest in the doctrine.[xi] When industry participants do become targets for the CFPB, they should develop and preserve such constitutional arguments from the outset with an eye toward judicial review.
Finally, although the definition of “abusive” is, at least nominally, a purely legal question, a court’s determination will in practice be heavily informed by the factual context. For example, if the Bureau argues that it is abusive to lend to borrowers who are likely to default, lenders should try to establish the countervailing, pro-consumer benefits of extending credit to people who might otherwise not have access. It will be important to develop this record in as specific a manner as possible, addressing the particular industry and particular consumers at issue. Industry participants can thus reframe the essential question, rather than ceding half the fight to the CFPB.