I. INTRODUCTION
For the first time, the Consumer Financial Protection Bureau (CFPB) recently used its powers to attempt to prohibit an “abusive” act or practice by a debt settlement service provider. The term “abusive,” which was added to the long-understood “unfair and deceptive” standard by the Dodd-Frank Act (DFA), has concerned many in the industry because it is not well-defined in statute and has yet to be thoroughly interpreted through case law. The CFPB, in this case has expressed its interpretation of the standard through enforcement actions rather than rulemakings, which are subject to notice and comment.
II. “ABUSIVE ACTS OR PRACTICES”
The DFA prohibits, and gives the CFPB authority to prevent, “any covered person or service provider” from engaging “in any unfair, deceptive, or abusive act or practice.” Under the DFA, an abusive 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.
III. ENFORCEMENT OF “ABUSIVE ACTS OR PRACTICES” STANDARD
The CFPB’s first use of its power to prohibit abusive acts or practices was against a debt settlement company and its individual owner on May 30, 2013. The CFPB alleged in a complaint in the U.S. District Court for the Southern District of Florida that the debt settlement company knew the consumers’ detailed financial condition and capacity, and despite that knowledge, enrolled them in debt relief programs with monthly payments that, as the company knew, the consumers could not pay. Moreover, the debt settlement service company collected enrollment fees that allegedly caused “consumers to spend their last savings paying [the debt settlement service company] fees for a service from which they [would] not benefit.” The CFPB also alleged that the company failed to settle or alter the terms “of a single debt for approximately 89 percent of the consumers who enrolled.”
The allegations of abusive acts or practices relied upon two aspects of the “abusive” definition: (1) taking “unreasonable advantage of” the consumers’ “lack of understanding of how long it [would take the debt settlement company] to settle their debt and therefore how much money they [would] spend before realizing any benefits;” and (2) “taking unreasonable advantage of” the consumers’ reasonable reliance on the debt settlement company’s enrollment into a debt relief program that could be completed and result in the settlement of debt.
IV. PENALTIES
The CFPB requested a $15,000 civil monetary penalty and disgorgement of the roughly $500,000 of fees collected by the debt settlement company, though the latter fee has been suspended since the company is unable to pay.
V. CONCLUSION
Banks engaged in the sale of products and services, such as insurance, should be aware of the circumstances under which acts or practices they use could be considered “abusive” by the CFPB. Issues to consider include the complexity of products and services, advertisements and solicitations, pricing and the role, if any, of third-party vendors.