United States: The CFPB & UDAAP: A "Know It When You See It" Standard? 2015 Mid-Year Update

The Consumer Financial Protection Bureau's (CFPB) exercise of its sweeping authority to prohibit unfair, deceptive, and abusive acts or practices (UDAAP)1 continues to command the attention of financial institutions and financial services companies regulated by the agency. As promised by CFPB Director Richard Cordray,2 the CFPB has defined UDAAP primarily through enforcement actions, along with a few agency-issued supervisory findings and guidance bulletins.

To assist regulated and potentially regulated entities in understanding how the CFPB will exercise its UDAAP authority, we issued our "Know It When You See It" Client Alert in June 2014 as well as an updated Client Alert in January 2015. Those Alerts included a chart listing the specific acts and practices that the CFPB has alleged and/or identified as unfair, deceptive, and/or abusive from its inception to the end of 2014 based on the following sources:

  • CFPB Consent Orders based in whole or in part on alleged UDAAP violations;
  • Agency enforcement actions filed in federal court;
  • Specific prohibited practices cited in the CFPB's Examination Manual, derived in part from substantive statutes and regulations and previous FTC guidance; and
  • Guidance in agency-issued bulletins and similar informal statements that reflect the CFPB's UDAAP priorities.

Given the critical need to keep up with the CFPB's ever-expanding interpretation of the scope of UDAAP, we have updated our previous "Know It When You See It" chart (attached) through the middle of 2015.3

As we've explained in the previous Alerts, neither the allegations in enforcement actions nor recitations in consent orders are binding against any party other than the respondent or defendant in the case or proceeding. Thus far, there has been only one case in which a court has ruled on the merits in finding a covered person violated UDAAP.4 The CFPB's informal bulletins or statements ordinarily are not binding legal precedent. Nevertheless, the CFPB's activities provide guideposts for regulated entities seeking to conform to industry standards and mitigate risks of being charged with UDAAP in a proceeding brought by the CFPB.

CFPB UDAAP – Regulation by Enforcement

A summary analysis of the CFPB's public UDAAP pronouncements since we issued our previous "Know It When You See It" Alert in January 2015 is provided below, along with observations about lessons learned from these actions and other CFPB activities to date.

Unfair Acts and Practices

  • Credit Cards. The CFPB continued to focus on add-on products, alleging billing consumers for credit monitoring services when the product vendors knew they had not received written consent and therefore could not provide all product benefits was an "unfair" practice.
  • Credit Products. Enrolling customers in a credit product without their consent, not allowing customers to select a different payment allocation method, and failing to accept or timely post payments were identified by the CFPB as "unfair."
  • Mortgage Servicing. Loan modification practices remained at the top of the priority list, with the CFPB alleging failure to honor loan modifications after servicing transfers was an "unfair" practice.
  • Debt Collection. Debt collection practices were at issue in a majority of the Consent Orders issued since January 2015, including several Orders in cases involving creditors collecting their own debt. The acts identified as "unfair" included placing debt collection calls to consumers at their place of work after being told such calls were prohibited by the employer and/or contacting employers without consent, debiting consumers' bank accounts without consent or using threats to obtain consent, broadcasting threatening messages to consumers on behalf of debt collectors, selling accounts the holder knew or should have known were unenforceable or had insufficient information to support the debt owed, and submitting alleged robo-signed declarations in collection litigation.

    The CFPB again took the view that actions expressly authorized by contract could be "unfair," focusing on a contractual provision allowing the creditor to contact a servicemembers' commanding officer that was allegedly buried in the credit agreement.
  • Refund Anticipation Loans (RALs). In the first enforcement action involving RALs, the CFPB alleged the lender's practice of reissuing high-cost RALs even after receiving the consumer's tax refund without disclosing to the consumer that the tax refund had been received was an "unfair" practice.
  • Wireless Carriers. The CFPB again asserted its view that wireless carriers are "covered persons" subject to its enforcement jurisdiction, filing another enforcement action alleging a wireless carrier was allowing third-party merchants to place unauthorized charges on customers' phone bills. Specifically, the CFPB alleged that allowing third-party access to customers and billing systems without sufficient compliance controls, failing to resolve customer disputes about unauthorized charges, and failing to take steps to prevent unauthorized charges despite warnings from customers, government agencies, and public interest groups are "unfair" acts and practices.

Deceptive Acts and Practices

  • Marketing of Add-On Products. We saw three more "add-on" products actions in the first half of 2015, bringing the total to 10 enforcement actions based on these products. Two of the matters involved credit card issuers and the other involved the vendors providing and marketing the products for issuers. The CFPB alleged misrepresenting the nature or extent of benefits and failing to inform consumers they likely would be ineligible for one or more benefits were "deceptive" practices.
  • Mortgage Servicing. Alleged misrepresentations regarding loan status, whether an initial payment was required to be considered for a loan modification, and the time to respond to short sale requests, that a payment method that required payment of a fee was the only available method to make a timely payment, as well as sending foreclosure notices to borrowers who were current on their loans all were said to be "deceptive" by the CFPB.
  • Debt Collection. Continuing its intense focus on debt collection activities, the CFPB alleged as "deceptive" misrepresentations that the debtor had committed a crime and that the debt collector had authority to collect the debt and/or to take legal action due to non-payment. The CFPB also alleged that affidavits in debtcollection proceedings in which the affiants did not have personal knowledge of the validity or ownership of debts were "deceptive."
  • False Impression of Affiliation. Several of the enforcement actions made public during the first half of 2015 included allegations of misrepresentations regarding affiliation. These included ads by mortgage loan originators implying the company was affiliated with federal government agencies or the product was sponsored or endorsed by those agencies, alleged misrepresentations by a company offering a mortgage payment product of an affiliation with the consumers' mortgage servicers or lenders, and advertising that a lender was the designated exclusive lender for a veterans' organization without revealing the lender had paid for the endorsement.

Abusive Acts and Practices

  • Servicemember Debt Collection. The CFPB alleged a creditor's threat to exercise its contractually authorized right to contact servicemembers' commanding officers and in some cases actually contacting the commanding officer constituted an "abusive" act, as did allegedly burying the contractual authorization for this practice in the lending contract without giving the servicemember an opportunity to bargain or an understanding of the anticipated frequency of contacts. The CFPB further identified as "abusive" misrepresentations that an unpaid debt could have negative consequences for servicemembers' careers and/or could result in an action brought under the Military Code. A servicemember lender that allegedly failed to adequately disclose fees before collecting them from the servicemembers' allotment accounts also found itself the target of "abusive" allegations.
  • Mortgage Servicing. The CFPB alleged an "abusive" claim based on a mortgage servicer's guarantee that consumers would save money if they enroll in a biweekly payment program even though servicer knew fees would exceed savings in the first several years and that many consumers would leave the program before obtaining any savings.
  • Credit Product. Deferred interest promotions were deemed "abusive" by the CFPB because the lender allegedly provided little information regarding how it would allocate payments among standard and deferred-interest balances and did not honor its representation to consumers that they could control payment allocation. As a result, consumers allegedly could not understand how payments were applied or allocated.
  • RALs. Alleged financial incentives to tax preparers to steer consumers to higher APR RALs originated by a sister company and failure to disclose these incentives or the relationship between the tax preparer and the RAL lender formed the basis of an "abusive" claim against the RAL lender.

CFPB UDAAP – What Have We Learned?

The CFPB's UDAAP-related activity in the first half of 2015 continued to build a much-needed roadmap for regulated entities:

  • The CFPB has continued to focus its UDAAP authority on its hot-button issues, including debt collection, addon products, mortgage servicing, student lending, and any lending targeted at servicemembers. The CFPB added RALs to the types of products and services it does not believe are in the best interests of consumers and therefore will be subject to agency scrutiny.
  • The CFPB continued to build on its use of UDAAP to bring wireless carriers within the scope of its jurisdiction by pursuing another enforcement action targeting alleged unauthorized thirdparty charges. It similarly relied on UDAAP to expand the scope of federal law by bringing UDAAP claims against creditors collecting their own debts even though federal debt collection law applies only to third-party debt collectors and even though its anticipated debt collection rules have not yet been issued. We also saw the CFPB "federalize" state common-law unconscionability analysis once again by alleging a contract term "buried" in a lending agreement was an "unfair" and "abusive" practice.
  • The CFPB has begun using the aider and abettor liability authorized by Dodd-Frank. Aiders and abettors are those who "knowingly or recklessly provide substantial assistance" to a Covered Person or Service Provider committing an unfair, deceptive, or abusive act or practice.5 The CFPB relied on this provision to impose responsibility on creditors who sell debt for the acts of the debt purchasers. It similarly relied on this authority to reach payment processors and a telephone broadcast company the CFPB alleged were facilitating "unfair" and "deceptive" debt collection practices. The CFPB requested comment on which types of entities provide "substantial assistance" to debt collectors in its Advanced Notice of Proposed Rulemaking, but it has begun pursuing claims based on this provision without waiting to issue these rules.
  • For the most part, the CFPB continued to reserve "abusive" claims for products aimed at customers it considers vulnerable. Some of the allegations supporting "abusive" claims overlapped with the allegations supporting "unfair" or "deceptive" claims, and some were stand-alone allegations not repeated in support of other claims. The "abusive" claims shared an element of alleged surprise or inability of consumers to understand credit features or contractual rights due to the Covered Person's alleged inadequate disclosures.
  • Certain of the Consent Orders contained detailed injunctive relief provisions, which provide insight into the CFPB's views on appropriate conduct. These lists of requirements appear to be as close as the CFPB will come to issuing rules advising regulated entities how to avoid UDAAP enforcement for add-on and other types of products and practices.
  • The CFPB has continued to team with other state and federal government actors in bringing UDAAP enforcement actions. Since January, the OCC, 47 state attorneys general, the Navajo Nation, and the FTC have joined the CFPB in enforcement actions. The CFPB continues to put teeth into its broad informationsharing agreements with state and federal agencies, meaning regulated entities should be prepared for multiagency scrutiny.

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Footnotes

1 12 U.S.C. §§ 5531, 5536.

2 See, e.g., Kate Davidson, "Trying to Stay Above Politics: A Conversation with Richard Cordray," The American Banker (Mar. 23, 2012).

3 New entries in the chart, representing CFPB activities in the first half of 2015, are highlighted in blue.

4 CFPB v. Chance Gordon et al., CV 12-6147 RSWL

(MRWx), Minute Order (C.D. Cal. June 26, 2013).

5 12 U.S.C. § 5536(f)(3).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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