Even after the PayPal settlement, the definition of “abusive” remains as subjective and fact specific as ever.
On May 19, PayPal agreed to a $25 million settlement with the Consumer Financial Protection Bureau (CFPB or Bureau) related to allegations that the company ultimately forced consumers to use its credit product.
The CFPB alleged that PayPal deceptively advertised promotional benefits that it failed to honor, signed consumers up for credit without their permission, made them use PayPal Credit instead of their preferred payment method, and mishandled billing disputes. The CFPB has called PayPal’s alleged behavior “abusive.” The Bureau has declined to define what it means to be “abusive” through any regulation and, instead, has painted the lines of what is and is not “abusive” through a series of enforcement actions only dating back to 2013.
Under the terms of the consent order, PayPal will do the following:
- Pay $15 million in redress to victims. PayPal will reimburse consumers who were mistakenly enrolled in PayPal Credit, who mistakenly paid for a purchase with PayPal Credit or who incurred fees or deferred interest as a result of the company’s inadequate disclosures and flawed customer-service practices.
- Pay a $10 million civil penalty. PayPal will pay $10 million to the CFPB’s Civil Penalty Fund.
- Improve disclosures. PayPal is required to take steps to improve its consumer disclosures related to enrollment in PayPal Credit to ensure that consumers know they are enrolling or using the product for a purchase. These improved disclosures will also apply to fees and deferred interest to ensure that consumers understand how their payments will be allocated.
The credit product at issue in the enforcement action was formerly known as “Bill Me Later” and was offered by Bill Me Later, Inc., which was acquired by PayPal, Inc.
The statutory definition of what is “abusive” can be found in 12 U.S.C. § 5531(d) and is defined as follows:
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.
PayPal’s Alleged Abusive Acts
What can we take away regarding what the CFPB views as “abusive” acts in this enforcement action against PayPal? We know that the Bureau alleged that PayPal chose a default payment allocation method that its customers would not have chosen. Then, PayPal allegedly failed to adequately disclose the allocation method it chose to its consumers. Finally, the Bureau alleges that PayPal made it difficult, and maybe even impossible, for consumers to change how those excess payments were allocated. When combined, the CFPB views the actions in this case as enough to rise to the level of “abusive.” Although enforcement actions are not binding on future incidents with different facts and circumstances, this peek into the Bureau’s thinking on the subject is important.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions that engage in unfair, deceptive or abusive practices. Unlike well-established consumer protection terms, such as “unfair” and “deceptive,” this action calls PayPal’s alleged actions “abusive” with only a broadly written and subjective standard available to compare them to.
PayPal is a mainstream company, and this type of action puts other companies on notice that the CFPB is not afraid to target other large companies with “abusive” enforcement actions. However, even after this settlement, the definition of “abusive” remains as subjective and fact specific as ever.
Since 2013, there have been nine CFPB enforcement actions involving allegations of abusive conduct under UDAAP [unfair, deceptive or abusive acts and practices], resulting in settlements totaling more than $130 million. Given the secretive nature of settlements generally, the public often does not know the specific facts and circumstances that gave rise to the “abusive” behavior. Additionally, even when the standard is gleaned by looking at the details that are available from previous enforcement actions, one cannot be certain that those standards will be easily transferable to a different set of facts and circumstances.
If the Bureau is trying to define what it is to be “abusive” through enforcement actions, settlements like these do not provide enough clarity as to what entities should not do. A better alternative, which the Bureau has been reluctant to do thus far, is to define what it is to be “abusive” via regulation or more robust formal guidance of some kind. Then, and only then, will the Bureau provide a bright line that can be readily understood and followed by industry.
Given the subjective interpretation of what it means to be “abusive,” it begs the question as to whether this enforcement action, and others like it, open a slippery slope for the CFPB to use the “abusive” standard as the default enforcement tool. We have seen an uptick in these types of enforcement actions in 2015 and are likely to see more in the future. Although there is some formal guidance from the Bureau, it does not reach beyond a simple restatement of the statutory language that defines what “abusive” is. Given this fact, companies must continue to apply any lessons they can learn from enforcement actions like this one until more concrete and robust guidance is available.
Some solace can be taken by those in the industry as a New York judge recentlyasked for additional support from the CFPB for a proposed $68 million settlement in the CFPB enforcement action against Sprint Corp., which alleges “abusive” behavior by the telecommunications company.1 Judge William H. Pauley III of the U.S. District Court for the Southern District of New York stated that, “This Court’s duty extends beyond that of a “rubber stamp”.2 While this may not slow down the Bureau’s efforts on this front, hopefully it will require more specific descriptions of the “abusive” standard by the Bureau.