The Consumer Financial Protection Bureau (CFPB) has brought its first enforcement action for alleged abusive acts or practices under the Consumer Financial Protection Act of 2010. The CFPB's allegations relate to misrepresentations commonly associated with deceptive acts claims, but also emphasise elements in the statutory definition of 'abusive', including the reasonable reliance of vulnerable consumers on the debt-settlement company.
The act prohibits unfair, deceptive or abusive acts or practices by entities offering or providing consumer financial products or services – but the CFPB had thus far not explained how it would apply the abusive standard under the act. On May 30 2013 the CFPB filed a complaint in federal court in Florida against a company providing debt settlement services, alleging that the company had violated the act by misleading consumers and charging illegal fees for its debt-relief services.
In addition, Count 5 of the CFPB's complaint alleged that American Debt Settlement Solutions, Inc (ADSS) engaged in abusive acts in violation of the act. Under the act, an act is abusive if it:
"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 the 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."(1)
The case also involves alleged violations of the Federal Trade Commission's Telemarketing Sales Rule, which implements the Telemarketing and Consumer Fraud and Abuse Prevention Act. The overlap with the rule may be significant, as the rule also prohibits abusive telemarketing practices.(2) However, historically the FTC has defined 'abusive' under the rule in substantially the same way as it has defined 'unfair' under Section 5 of the Federal Trade Commission Act.
In its promotional materials, ADSS promised to renegotiate or settle the terms of at least one unsecured debt for each consumer who enrolled in one of ADSS's debt-relief programmes. However, according to the CFPB's complaint, ADSS failed to do so for 89% of the consumers who enrolled in its programmes. Although consumers deposited nearly $10 million into accounts designated for debt repayment since ADSS's inception in 2008, ADSS has directed less than $2 million in payments to creditors.
The CFPB further alleged that ADSS enrolled consumers in debt-relief programmes whose income ADSS knew was inadequate to complete the debt-relief programme. These consumers would be forced to drop out and, because of ADSS's fee structure, would not realise any benefit from enrolling in the debt-relief programme. ADSS charged an enrolment fee - typically 15% of the consumer's debts - that it collected in the first three to six months of enrolment. Consumers also paid a monthly service fee, usually $99, for the duration of the 24 to 48-month programme. ADSS collected these and other fees in advance of settling a consumer's debt.
The CFPB's allegations relate to misrepresentations commonly associated with deceptive acts claims, but also emphasise the financial vulnerability of the consumers signing up for ADSS's debt-relief services, ADSS's superior knowledge about the likelihood of success under the programme and the consumer's reasonable reliance on ADSS. Specifically, the CFPB's complaint alleges that ADSS's actions were abusive because:
- ADSS knowingly enrolled and collected enrolment fees from consumers whom it knew could not afford the monthly payments under the debt-relief programmes, causing these consumers to spend their last savings paying ADSS fees for a service from which they would not benefit;
- during the first six months of enrolment, ADSS collected enrolment fees rather than negotiating debts with creditors;
- ADSS took unreasonable advantage of consumers' lack of understanding of how long it would take ADSS to settle their debts; and
consumers reasonably relied on ADSS to act in their interest by:
- enrolling them in debt-relief programmes that they could be reasonably expected to complete; and
- settling their debts as soon as possible, and within the three to six months of enrolment as represented by ADSS.
The CFPB's allegations that ADSS knowingly misrepresented the benefits of the debt settlement programme to vulnerable consumers would support a claim for deceptive acts or practices, and thus most likely unfair conduct as well. In this respect, the CFPB also brought various claims against ADSS and its owner for deceptive conduct in violation of the Consumer Financial Protection Act, as well as violations of the Telemarketing Sales Rule.
According to a CFPB press release, the agency plans to file a consent order with the court that would end ADSS's operations, prevent the company or the owner from providing debt-relief services in the future and impose a $15,000 fine.
For further information on this topic please contact James Huizinga, John K Van De Weert or Kristen Mann at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
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