BNA s VOL. 105, NO. 19 NOVEMBER 23, Unfair, Deceptive, or Abusive Acts or Practices

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1 BNA Banking Report VOL. 105, NO. 19 NOVEMBER 23, 2015 Unfair, Deceptive, or Abuive Act or Practice The author argue that the Conumer Financial Protection Bureau ilence on what exactly contitute an abuive practice under the Dodd-Frank Act proviion governing unfair, deceptive, or abuive act or practice ha proven problematic for conumer finance companie eeking to undertand their compliance obligation. BNA INSIGHTS: CFPB Quetion Unanwered What i Abue? BY BEN SAUL, KYLE TAYMAN AND ANDREW KIM Ben Saul i a Partner in Goodwin Procter Conumer Financial Service Litigation Group and a leader in the area of conumer financial ervice enforcement and fair and reponible banking. Kyle Tayman i an Aociate in Goodwin Procter Conumer Financial Service Litigation practice group, and i alo a member of the Government Invetigation, Financial Technology and Antitrut practice. Andrew Kim i an Aociate in Goodwin Procter Litigation Department and Appellate Litigation Practice and i a member of Goodwin Procter Gaming, Gambling & Sweeptake Practice. T he Dodd-Frank Act conferred broad and unprecedented power on the Conumer Financial Protection Bureau (CFPB or Bureau) to police a vat array of activity. Chief among the Bureau enforcement mechanim ha been the Act UDAAP proviion, which authorize the Bureau to bring uit for unfair, deceptive, or abuive act or practice. Congre did not pecifically define what make an act unfair, deceptive, or abuive. Yet, for unfair or deceptive act, it had no need to do o. A the Bureau ha recognized, federal enforcement action predating Dodd-Frank provide ufficient guidance a to what make conduct unfair or deceptive. 1 No uch guid- 1 CFPB Superviion and Examination Manual, UDAAP 1 (Oct. 2012) ( The principle of unfair and deceptive practice in the Act are imilar to thoe under Sec. 5 of the Federal Trade Commiion Act (FTC Act). The Federal Trade Commiion (FTC) and federal banking regulator have applied thee COPYRIGHT 2015 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

2 2 ance exit, however, to explain the contour of what contitute an abuive act. Nor doe the CFPB have any current plan to fill thi information gap. Thi lack of hitorical guidance coupled with the Bureau ilence on the matter ha proven problematic for conumer finance companie eeking to undertand their compliance obligation. Although it i true that Congre itelf provided little guidance in the text of the UDAAP tatute and ha previouly prohibited abuive conduct in only pecific context e.g., in credit deciion, debt collection, and telemarketing that doe not excue the Bureau approach to regulating abuive conduct. 2 In fact, never before ha an agency been given o much dicretion to determine the legality of conduct, and yet done o little to inform the public of how it intend to exercie that dicretion. The law ay the Bureau may declare conduct abuive only if it materially interfere with the ability of a conumer to undertand a term or condition of a conumer financial product or ervice or take unreaonable advantage of one of three conideration: (1) the conumer lack of undertanding a to the rik, cot, or condition of the product or ervice ; (2) the conumer inability to protect himelf in electing or uing a conumer financial product or ervice ; or (3) a conumer reaonable reliance that a financial ervice provider would act in the interet of the conumer. 3 But it i the Bureau itelf that ha taken advantage of the abuivene prong vaguene, bringing a erie of enforcement action covering conduct that range from the mundane to the extreme. Both the plain text of the tatute and Dodd-Frank legilative hitory trongly indicate that the Bureau authority to regulate abuive conduct i narrower than the Bureau eem to think. Unfortunately, depite the text, legilative hitory of Dodd-Frank, and trong argument againt the Bureau broad interpretation of it abuivene power, it i unlikely that the CFPB will encounter a eriou challenge to it approach to enforcing the UDAAP tatute abuivene prong, and unlikely that the Bureau will voluntarily rein in it regulate-through-enforcement approach. Thu, entitie falling within the Bureau juridiction mut take affirmative tep to enure that their action comply not only with the original intent of the UDAAP tatute but alo with the Bureau emerging undertanding of how it will enforce the law. What Doe the Statute Say? tandard through cae law, official policy tatement, examination procedure, and enforcement action that may inform CFPB. ). 2 7 U.S.C. 9b (Commodity Exchange Act); 15 U.S.C. 1692d (Fair Debt Collection Practice Act). 3 See 12 U.S.C Although the UDAAP tatute abuivene proviion may eem far-reaching at firt glance, Congre election of certain word indicate that it intended for the cope of the proviion to be narrow. Indeed, part of the abuivene prong i effectively functionle becaue it i ubumed into other part of the UDAAP tatute. The firt half of the abuivene proviion allow the Bureau to bring an action if a financial ervice provider conduct materially interfere with a conumer ability to undertand a term or condition of a conumer financial product or ervice. But the better undertood unfair and deceptive prong of the UDAAP tatute cover much of the ame ground, right down to the requirement that the provider action be material. A one federal court ha noted, Dodd-Frank UDAAP proviion i virtually identical to prohibition againt unfair or deceptive act or practice in the Federal Trade Commiion Act. 4 Rightly o. It i difficult to ee how an abuive action may materially interfere with a conumer ability to undertand the term or condition of a financial product or ervice, without that action alo being deceptive or mileading. Many of the Bureau abuivene cae to date bear out thi interpretation a they tend to lean on the econd half of the abuivene proviion, which prohibit financial ervice provider from taking unreaonable advantage of conumer, while ignoring the materially interfering proviion. 5 So what doe it mean for a financial ervice provider to take unreaonable advantage of a conumer? Traditional principle of tatutory interpretation dictate that each word of a tatute mut be given effect. 6 Becaue Congre inerted the word unreaonable to 4 Illinoi v. Alta Coll., Inc., No. 14-C-3786, 2014 WL , at *4 (N.D. Ill. Sept. 4, 2014). 5 See Compl. 25, 28, CFPB v. Sec. Nat l Auto. Acceptance Co., No. 1:15-CV-401 (S.D. Ohio filed June 17, 2015); Compl. 71, 75, CFPB v. PayPal, No. 1:15-CV-1426 (D. Md. filed May 19, 2015); Compl. 62, CFPB v. Nationwide Biweekly Admin., Inc., No. 3:15-CV-2106 (N.D. Cal. filed May 11, 2015); Compl. 41, 47, 63, 65, CFPB v. S/W Tax Loan, Inc., No. 1:15-CV-299 (D.N.M. filed Apr. 14, 2015); Compl. 55, 59, CFPB v. Coll. Educ. Serv. LLC, No. 8:14-CV-3078 (M.D. Fla. filed Dec. 11, 2014); Compl , CFPB v. ITT Educ. Serv., Inc., No. 1:14-CV-292 (S.D. Ind. filed Feb. 26, 2014); Compl. 61, 63, CFPB v. CahCall, Inc., No. 1:13-CV (D. Ma. filed Dec. 16, 2013); Compl. 56, 61, 62, CFPB v. Am. Debt Settlement Solution, Inc., No. 9:13-CV DMM (S.D. Fla. May 30, 2013); Conent Order 15, 16, 17, In re Fort Knox Nat l Co., No CFPB-0008 (filed Apr. 20, 2015), available at file.conumerfinance.gov/f/201504_cfpb_regulation-fortknox-mac-ettlement.pdf; Conent Order 41, 43, In re Colfax Capital Corp., No CFPB-0009 (filed July 29, 2014), available at conent-order_rome-finance.pdf; Conent Order 28, 30, In re ACE Cah Expre, Inc., No CFPB-0008 (filed July 10, 2014), available at cfpb_conent-order_ace-cah-expre.pdf. 6 Loughrin v. United State, 134 S. Ct. 2384, 2390 (2014) ( cardinal principle of tatutory interpretation i that court mut give effect, if poible, to every claue and word of a tatute (citation and internal quotation mark omitted)). To requet permiion to reue or hare thi document, pleae contact permiion@bna.com. In your requet, be ure to include the following information: (1) your name, company, mailing addre, and telephone number; (2) name of the document and/or a link to the document PDF; (3) reaon for requet (what you want to do with the document); and (4) the approximate number of copie to be made or URL addre (if poting to a webite) COPYRIGHT 2015 BY THE BUREAU OF NATIONAL AFFAIRS, INC. BBR ISSN

3 3 modify the word advantage, it expreed it intent to allow financial ervice provider to take action of a reaonably prudent buine in it dealing with conumer, and that only the extreme or unreaonable would be unlawful. And the plain text alo ugget Congre intended to give financial ervice provider a wide berth reaonablene, a een in other context, i generally a low bar to clear. 7 Although, a the enforcing agency, the Bureau interpretation of Dodd- Frank ambiguou proviion are entitled to deference 8, no uch deference i warranted if a tatute meaning i clear and unambiguou, and here, the operative part of the UDAAP tatute are unambiguouly worded to reach only extreme type of conduct. What Did Congre Say? Dodd-Frank legilative hitory confirm what the plain text trongly ugget Congre intended for the abuivene proviion to be paringly ued in circumtance where a provider engaged in extreme conduct. Many tatute are enacted with nary a word aid about them. Not o for Dodd-Frank. Congre wa unuually pecific in the type of conduct it thought abuive. Conider the Senate Banking Committee report on Dodd- Frank, 9 which declared the following type of conduct to be abuive: Conumer credit: Double-cycle billing, univeral default, retroactive change in interet rate, over the limit fee even where the conumer wa not notified that a charge put him or her over the allotted credit limit, and arbitrary rate increae. 10 Debt collection: Debt collector threatening violence, uing profane or haraing language, bombarding conumer with continuou call, telling neighbor or family about what i owed, calling late at night,... falely threatening arret, eizure of property or deportation,... filing collection uit againt the wrong people; filing uit pat the tatute of limitation; collection attorney not having any proof of the debt ued upon and falely wearing they do; uing for more than i legally owed; and laundering a time-barred debt with a new judgment. 11 Payday lending: Conumer... being threatened with jail for paing a bad check, even when the law pecifically ay they cannot be proecuted if the check bounce See, e.g., United State v. Hurt, 527 F.3d 1347, 1356 (D.C. Cir. 2008) (in ineffective aitance cae, the bar of objective reaonablene i et rather low ); Dunkin Donut Franchied Retaurant LLC v. Sandip, Inc., 712 F. Supp. 2d 1325, 1327 (N.D. Ga. 2010) (adopting the Black Law Dictionary definition of unreaonable in the commercial context irrational or capriciou or not guided by reaon (quoting Black Law Dictionary 1679 (9th ed. 2009)) U.S.C. 5512(b)(4)(A); Chevron, U.S.A., Inc. v. Natural Reource Defene Council, Inc., 467 U.S. 837, (1984); CFPB v. Morgan Drexen, Inc., 60 F. Supp. 3d 1082, 1091 (C.D. Cal. 2014). 9 S. Rep. No (2010). 10 Id. at Id. at Id. at 21. Auto lending: Steering minoritie, lower-income borrower, and ervicemen to high-rate loan. 13 The common thread of thee action can only be decribed a coercive and extreme activity. Of coure, legilative hitory i not the end-all-be-all of tatutory analyi, epecially with a broadly worded conferral of authority like the UDAAP tatute. But given (i) the plain text of the abuivene proviion, which prohibit provider from only unreaonable conduct in dealing with conumer, (ii) the exiting prohibition of unfair and deceptive conduct, and (iii) the legilative hitory identifying only extreme conduct a abuive, the only reaonable concluion i that the Bureau hould procribe conduct and purue enforcement action that are coercive and extreme, jut a Congre intended. Unfortunately, the Bureau ha trayed from Congre mandate and intead purued a more expanive view of abuive conduct. What Doe the Bureau Say? The Bureau abuivene action to date have covered a broad range of act and practice that differ ignificantly in everity, making it difficult to get a ene of the Bureau undertanding of the meaning of the word abuive. Thi uncertainty i compounded by the fact that the Bureau continue to refrain from iuing any adviory regulation. That the Bureau ha avoided revealing it playbook hould not be urpriing; ince the Bureau early day, Director Richard Cordray ha made it clear that abuivene i a fact and circumtance iue, evading call for the Bureau to et a cognizable tandard. 14 And the little guidance that the Bureau ha provided repeat the ame refrain. For example, a September 2014 bulletin tate that [d]epending on all of the fact and circumtance, the failure to dicloe adequate information about certain material cot and condition aociated with promotional credit card offer could be deemed abuive. 15 In the abence of meaningful propective guidance from the Bureau, conumer finance provider mut intead look to the Bureau enforcement action. Thoe enforcement action provide limited data point and analogue for the type of conduct that financial ervice provider hould aim to avoid to remain off the Bureau ight. Thee include: Colfax Capital Corporation: In an agency conent order, the Bureau concluded that attempting to collect on debt with interet rate higher than thoe allowed under tate uury law wa abuive becaue it take unreaonable advantage of... a lack of undertanding on the part of the conumer 13 Id. at How Will the CFPB Function Under Richard Cordray: Hearing Before the Subcomm. on TARP, Fin. Serv., and Bailout of Pub. And Private Program, 112th Cong. 69 (2012) (tatement of Richard Cordray, Director, Conumer Financial Protection Bureau). 15 Marketing of Credit Card Promotional APR Offer, CFPB Bull. No , at 4 (Sept. 3, 2014), available at file.conumerfinance.gov/f/201409_cfpb_bulletin_marketingcredit-card-promotional-apr-offer.pdf. BANKING REPORT ISSN BNA

4 4 of the material rik, cot, or condition of the product or ervice. 16 Security National Automotive Acceptance Company: The Bureau contended that an auto-finance company threat to contact the commanding officer of delinquent military borrower took unreaonable advantage of [a] conumer inability to protect hi or her interet in electing or uing a conumer financial product or ervice. 17 ACE Cah Expre: The Bureau tated that inducing delinquent borrower to take out new loan with fee in order to pay for the old debt take unreaonable advantage of... the inability of the conumer to protect the interet of the conumer in electing or uing a conumer financial product or ervice. 18 College Education Service: The Bureau claimed a financial adviory firm that enrolled and took fee from conumer who were ineligible for loan conolidation engaged in abuive conduct becaue it took unreaonable advantage of... the reaonable reliance by the conumer on a covered peron to act in the interet of the conumer. 19 ITT Educational Service, Inc.: The Bureau argued that teering tudent into private tudent loan product took unreaonable advantage of conumer inability to protect their interet in electing or uing the... Private Loan. 20 PayPal: The Bureau conidered PayPal alleged failure to dicloe how payment were allocated to conumer balance to be abuive becaue the company took unreaonable advantage of... the inability of the conumer to protect the interet of the conumer in electing or uing a conumer financial product of ervice. 21 Freedom Store: The Bureau aerted that a contract of adheion containing a venue-election claue wa abuive becaue it took unreaonable advantage of the inability of conumer to protect their interet while uing or chooing credit agreement. 22 While thee action give lender limited inight into what contitute abuive conduct to the Bureau, it remain too early to fahion a et of bet practice baed on the catterhot of enforcement action the Bureau ha undertaken. Part of that i attributable to the fact 16 Conent Order 41-44, In re Colfax Capital Corp., No CFPB-0009 (filed July 29, 2014), available at file.conumerfinance.gov/f/201407_cfpb_conent-order_ rome-finance.pdf. 17 Compl , CFPB v. Sec. Nat l Auto. Acceptance Co., No. 1:15-CV-401 (S.D. Ohio filed June 17, 2015). 18 Conent Order 28-31, In re ACE Cah Expre, Inc., No CFPB-0008 (filed July 10, 2014), available at file.conumerfinance.gov/f/201407_cfpb_conent-order_acecah-expre.pdf. 19 Compl , CFPB v. Coll. Educ. Serv., No. 8:14-CV (M.D. Fla. Dec. 11, 2014). 20 Compl. 170, CFPB v. ITT Educ. Serv., Inc., No. 1:14- CV-292 (S.D. Ind. filed Feb. 26, 2014) 21 Compl , CFPB v. PayPal, Inc., No. 1:15-CV-1426 (D. Md. filed May 19, 2015). 22 Compl , CFPB v. Freedom Store, Inc., No. 2:14- CV-643 (E.D. Va. filed Dec. 18, 2014). that the CFPB overall approach to dicerning abuivene eem to be in flux. Conider, for example, the Bureau treatment of the attempted collection of debt void under tate law. In CFPB v. NDG Financial Corp., the CFPB argued that the provider action materially interfered with conumer ability to undertand that they were not under legal obligation to repay the loan amount that were void under tate law, 23 a violation brought under 12 U.S.C. 5531(d)(1). But, nearly two year earlier, the CFPB had previouly claimed in CFPB v. CahCall that a provider imilar action took unreaonable advantage of conumer lack of undertanding about the impact of applicable tate law on the partie right and obligation regarding... loan, 24 a violation of a different proviion, 12 U.S.C. 5531(d)(2)(A). The Bureau ha provided no explanation for thi change in legal theory, and it eem unlikely that one i forthcoming. One thing that i apparent from the Bureau fluctuating undertanding of abuivene i that it i widening it net to cover a broader range of offene. Depite the Bureau initial poition that abuive conduct mut be outrageou enough, 25 the agency ha ince gone to court over mundane and technical offene. 26 For now, financial ervice provider would do well to cloely monitor the CFPB mot recent enforcement action and avoid analogou conduct, at leat until a cognizable and coherent tandard of abuivene emerge. What Should the Bureau Say? Congre intended for the Bureau to promulgate rule defining abuivene, and the Bureau cae-bycae approach contravene thi intent. In enacting the UDAAP tatute, Congre pecifically intructed the Bureau to precribe rule to identify [unfair, deceptive, and abuive] act or practice. 27 Congre expreed it deire to top regulatory arbitrage i.e., to write rule and enforce thoe rule conitently, without regard to the type of ervice or provider. 28 But no workable framework eem to be on the horizon. The Bureau cannot utain it current tack for much longer. A the Supreme Court ha made eminently clear, agencie cannot announce a new interpretation of 23 Compl. 140, CFPB v. NDG Fin. Corp., No. 1:15-CV CM (S.D.N.Y. filed July 31, 2015). 24 Compl. 63, CahCall, Inc., No. 1:13-CV (D. Ma. filed Dec. 16, 2013). 25 How Will the CFPB Function Under Richard Cordray, 112th Cong. at One mundane example can be een in Freedom Store, a cae where the Bureau alleged that forum-election claue were abuive becaue they forced conumer to litigate dipute related to their debt far from where they lived. Compl , CFPB v. Freedom Store, Inc., No. 2:14-CV-643 (E.D. Va. filed Dec. 18, 2014). Yet court have routinely upheld imilar forum-election claue, abent evidence of fraud, undue influence, or, a one court put it, overweening bargaining power. See, e.g., Titan Indem. Co. v. Hood, 895 So.2d 138 (Mi. 2004). Depite the fact that forum election claue are preumed to be valid, Doe 1 v. AOL LLC, 552 F.3d 1077, 1083 (9th Cir. 2009), and that there typically i a high fact-intenive bar to clear for declaring them invalid, the Bureau ha claimed all forum election claue that may burden conumer with ditant travel a abuive. 27 S. Rep. No , at Id. at COPYRIGHT 2015 BY THE BUREAU OF NATIONAL AFFAIRS, INC. BBR ISSN

5 5 29 See Chritopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 2168 (2012) (no agency deference where agency announce it interpretation for the firt time in an enforcement proceeding ). 30 Petr. Br. at 24-32, PHH Corp. v. CFPB, No (D.C. Cir. filed Sept. 28, 2015) (arguing that the Bureau new interpretation of RESPA, announced for the firt time during the adjudication, deprived Petitioner of fair notice). Diclaimer: The author law firm, Goodwin Procter LLP, repreent the PHH Petitioner. a tatute for the firt time in an enforcement proceeding and attempt to enforce that interpretation in the ame proceeding. 29 It i epecially troubling if the Bureau continue to try and do o by litigating and deciding cae at the agency level, rather than in federal court. The Bureau ha already been everely criticized for announcing new interpretation in it firt conteted adminitrative proceeding. 30 It eem imprudent a a matter of law and policy, therefore, for the Bureau to continue the cae-by-cae approach to dicerning abuivene, particularly at the agency level and away from federal court where conumer finance companie likely tand on a more level playing ground with the Bureau. The Bureau and regulated conumer finance entitie would be far better off if it etablihed the meaning of abuive by rulemaking. The Bureau enforcement action would then be on more olid legal footing, and regulated entitie would have ome degree of certainty a to whether their policie comply with the Bureau viion of the law. But until the Bureau often it poition that abuivene may be dicerned only on a cae-bycae bai, financial ervice provider have limited option for guarding againt abuive practice. Regulated provider can at mot monitor new CFPB abuivene action, either internally or with the aitance of outide counel, and amend exiting policie to avoid conduct that i analogou to what legilative hitory reveal Congre intended to target, a well a the conduct actually purued by the Bureau. BANKING REPORT ISSN BNA