The Dodd-Frank Act provides that the Consumer Financial Protection Bureau ("CFPB") may take action against certain persons who engage in unfair, deceptive or abusive acts or practices.

The unfair or deceptive act or practice ("UDAP") standard has been around for a long time under the FTC Act and similar state laws, and merchants (i.e., retailers and other nonbanking companies) and their legal advisors have a good understanding as to what may be a UDAP. The additional "abusive" standard in Dodd-Frank (resulting in the new term "UDAAP") has caused significant concern, because it is undefined beyond language in the Dodd-Frank Act, and so the scope of what may or may not be abusive is unclear.

The CFPB has said that it likely would define the term through enforcement actions rather than by issuing regulations or similar guidance. Until recently, the CFPB had only used the "deceptive" prong of UDAAP when taking enforcement actions.

However, on May 30 the CFPB took its first action alleging that a particular act or practice was "abusive." It filed a complaint in federal district court against a debt-relief company in Florida, in which the CFPB alleged that the company and its owner charged consumers substantial up-front fees for debt-relief services that were not provided. In addition to asserting that the company's conduct was deceptive, the CFPB said that the conduct was abusive because the company enrolled consumers "who the defendants knew had inadequate incomes to complete the debt-relief programs in which they were enrolled" and collected the up-front fees "from consumers who [the company] knew could not afford the monthly payments required by these debt-relief programs." Applying the definition of "abusive" in Dodd-Frank, the CFPB asserted in the complaint that the company's actions took unreasonable advantage of a consumer's lack of understanding of the debt relief process and that consumers reasonably relied on the company to act in the consumers' interests. At the same time, the CFPB filed a proposed consent order.

To read a copy of the complaint, click here.

To read a copy of the proposed consent order, click here.

Why it matters: The uncertainty regarding the scope of what activities may be deemed to be "abusive" has caused substantial anxiety among merchants, especially those involved in financial services. The CFPB complaint is a first step in clarifying how the CFPB interprets the standard. Merchants that offer a product or service that, by its nature, provides the merchant with information regarding the consumer's ability to pay and/or is one where the consumer may reasonably believe the merchant is looking out for the consumer's interests should pay particular attention to this development.