American Bar Association Consumer Financial Services Committee Compliance Management and Federal and State Trade Practices Subcommittees

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1 A Survey of Activities Identified as Unfair, Deceptive, or Abusive Under the Dodd-Frank Act by Adam D. Maarec, Davis Wright Tremaine LLP John C. Morton, Gordon Feinblatt LLC American Bar Association Consumer Financial Services Committee Compliance Management and Federal and State Trade Practices Subcommittees I. Introduction September 17, 2015 This is our latest article in a series that surveys activities identified as unfair, deceptive or abusive (UDAAP) by the CFPB, and state attorneys general and consumer financial services regulators, using federal UDAAP powers created by the Dodd-Frank Act. 1 This article covers relevant UDAAP activity that occurred between January 1, 2015 and June 30, 2015, including enforcement actions and other statements by the CFPB in reports that discuss UDAAP violations. 2 These activities provide insight into the specific types of practices that could be considered UDAAP violations in the future. We intend to publish periodic updates to this article cataloging new CFPB UDAAP activity and related state enforcement actions using federal UDAAP powers. II. Overview: Identification of Unfair, Deceptive, and Abusive Practices by the CFPB and by the States Between January 1, 2015 and June 30, 2015, the CFPB engaged in 16 new public enforcement actions based on alleged UDAAP violations. These UDAAP actions can provide a road map for industry participants to identify and better understand acts and practices that are considered problematic by law enforcement authorities. UDAAP enforcement actions during the period of this summary involved marketing, debt collection, debt settlement, and the servicing of mortgages, other loans, deposit accounts, and payment accounts. The CFPB highlighted other UDAAP issues in its Supervisory Highlights reports involving ACH payment cancellation terms, deposit account servicing, overdrafts, student loan servicing, general waiver provisions in home equity loan agreements, and mortgage servicing loss mitigation practices. 1 Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C et seq. (the Dodd-Frank Act ); see, e.g., 12 U.S.C (2014). 2 We have attempted to make this survey as comprehensive as possible, however, it is not exhaustive and there may be other relevant actions that are not discussed in this paper. Also, it must be noted that this area of law is rapidly evolving and new actions arise frequently. 1

2 The summaries of each UDAAP action below appear in chronological order and are intended to provide a straightforward identification of the specific acts or practices that were alleged to be unfair, deceptive, or abusive by the CFPB, state attorneys general and/or state regulators. III. CFPB Enforcement Actions a. Continental Finance Company, LLC 3 - February 2015 (Marketing) Continental Finance Company originated, marketed and serviced subprime, secured credit cards on behalf of an unnamed state-chartered credit union. In a consent order, the CFPB claimed jurisdiction over the company as both a covered person because of its loan servicing activities and a service provider because it provided material services to a state-chartered credit union in connection with the offering and provisioning of consumer financial products and services. The CFPB alleged that the following acts were deceptive: Stating that consumers could elect to receive paper statements for a monthly fee of $4.95, but automatically enrolling consumers in paper statements and imposing the related monthly fee; and Stating that the cash security deposit paid by consumers to the company to open the account was FDIC Insured when the deposited funds were not actually FDIC insured. In addition, the CFPB alleged that when the $4.95 monthly paper statement fee was combined with the credit card s $75 annual fee, the total amount of fees per year exceeded Regulation Z s first-year fee cap of 25%, based on a typical consumer s $300 credit limit. The company agreed to pay $2.7 million in consumer redress and a $250,000 civil money penalty. b. Newday Financial, LLC 4 February 2015 (Marketing) NewDay Financial, LLC is a Maryland-based mortgage lender that is primarily engaged in the business of originating home loan refinancings for veterans, servicemembers, and their surviving spouses. NewDay entered into a consent order with the CFPB to settle allegations that NewDay engaged in deceptive mortgage advertising and took kickbacks in violation of the Real Estate Settlement Procedures Act. Specifically, the CFPB alleged that NewDay participated in a marketing scheme, which was facilitated by a third-party broker, where NewDay would be listed as the Exclusive Lender for a certain veterans organization in exchange for lead generation fees that were paid by NewDay to the veterans organization and the broker. This practice was considered deceptive by the CFPB because NewDay failed to disclose to consumers that it had a material financial relationship with the veterans organization. Additionally, the CFPB alleged that the lead generation fees charged by NewDay violated the Real Estate Settlement Procedures Act, as a prohibited kickback (defined as the giving or receiving of a thing of value in exchange for the referral of settlement services). 3 In re: Continental Finance Company, LLC, File No CFPB-0003 (Feb 4, 2015) 4 In re: NewDay Financial, LLC, File No CFPB-0004 (Feb. 10, 2015). 2

3 NewDay was ordered to pay a $2 million civil money penalty and to cease all deceptive marketing practices and all kickback arrangements. c. All Financial Services, LLC 5 February 2015 (Marketing) All Financial Services, LLC is a Maryland-based mortgage broker and lender. The CFPB alleged that the company engaged in deceptive marketing and advertisement practices in connection with the advertisement of reverse mortgage products. The CFPB alleged that the following practices were deceptive: Misrepresenting that the source of All Financial s advertisements was, or was affiliated with, a governmental entity by using the image of an eagle on envelopes closely resembling that used in the Great Seal of the United States, imprinting on the envelope IMPORTANT DOCUMENT ENCLOSED (followed by a citation to the United States Code regarding tampering with the mail), reading OPEN IMMEDIATELY, and including the text Home Saver HECM Program Eligibility Notice ; Representing that no monthly payments would be required whatsoever under a reverse mortgage, provided that the homeowner or spouse lives in the home, when (1) homeowners who take out a reverse mortgage are still required to pay taxes and insurance; and (2) at the time the ads were disseminated, the reverse mortgages advertised by All Financial could be due upon the death of the last borrower, regardless of whether a non-borrowing spouse still lived in the home; and Misrepresenting that the Federal Housing Act-insured reverse mortgage program was time-limited or had a deadline when there is no scheduled expiration date or deadline for the FHA HECM insurance program. On June 11, 2015, a settlement order was entered dismissing the action without prejudice and requiring each party to bear its own costs. 6 No additional information about the settlement terms appears to have been made public. d. Flagship Financial Group, LLC 7 February 2015 (Marketing) Flagship Financial Group, LLC, a Utah-based mortgage lender and broker, entered into an administrative proceeding consent order with the CFPB on February 12, 2015, in connection with certain alleged deceptive marketing practices. The CFPB alleged that Flagship disseminated advertisements that were designed to look like a government notice and implied that the Federal Housing Administration was responsible for the advertisement. Additionally, Flagship disseminated advertisements that promoted Veterans Administration guaranteed loans. 5 Consumer Financial Protection Bureau v. All Financial Services, LLC, No. 1:15-cv JFM, Dkt. No. 1 (D. Md. February 12, 2015). 6 Id. Dkt. No. 16 (June 11, 2015). 7 In re: Flagship Financial Group, LLC, File No CFPB-0006 (Feb. 12, 2015). 3

4 According to the CFPB, these advertisements were designed to imply that Flagship had a special or unique relationship with the Veterans Administration, when it did not. These advertising practices were deemed deceptive because Flagship misrepresented, expressly or impliedly, that: (1) Flagship was, or was affiliated with, the United States government; and (2) the nature of the advertised mortgage credit products affiliation with a government program. Flagship was ordered to pay a $225,000 civil money penalty. e. American Preferred Lending, Inc. 8 February 2015 (Marketing) American Preferred Lending, Inc., a California-based mortgage lender and broker, entered into a consent order with the CFPB stemming from allegedly deceptive marketing practices. American Preferred Lending disseminated over 100,000 direct mail advertisements that allegedly suggested that the mortgage lender was affiliated with a governmental agency and obscured that the mailings were really from American Preferred Lending. The direct mail pieces referenced the Federal Housing Administration web address and included the Federal Housing Administration Approved Lending Institution logo. However, the mailing pieces did not emphasize the mortgage lender s name and only included it in small print. The advertisements were considered deceptive because they improperly suggested that American Preferred Lending was affiliated with a governmental entity and because the advertisements suggested that the mortgage lending products were endorsed or sponsored by a United States government program. American Preferred Lending was ordered to pay a civil money penalty of $85,000 to the CFPB. f. Universal Debt & Payments Solutions, LLC et al. 9 March 2015 (Debt Collection) The CFPB filed a complaint for allegedly unfair, deceptive, and abusive debt collection practices and violations of the Fair Debt Collection Practices Act against Universal Debt & Payment Solutions, along with a series of related companies and individuals, including the debt collector s payment processors and telemarketer. The CFPB alleged that the following representations by the debt collectors, made directly or indirectly, were deceptive: That consumers had committed a crime (apparently by failing to repay), that the companies were authorized to prosecute the crime by way of legal action and arrest, and that the companies intended to take those actions; That consumers owed a debt that the companies had authority to collect; and That consumers had a legal obligation to pay the companies. In addition, the CFPB alleged that the debt collectors engaged in the following unfair practices: 8 In re: American Preferred Lending, Inc., File No CFPB-0005 (Feb. 12, 2015) 9 In re: Universal Debt & Payments Solutions, LLC et al., File No.: 1:15-cv RWS (N.D. Ga. March 26, 2015). 4

5 Debiting consumers bank accounts without their consent; and Using threats and harassment to obtain consumers purported consent. The CFPB also alleged that the debt collector s individual officers (control persons), payment processors, and telemarketers were responsible for knowingly or recklessly providing substantial assistance to the debt collector s scheme to defraud consumers. The individuals substantial assistance to the debt collector, which formed the basis of its allegedly unfair or deceptive acts, included: purchasing debt and leads, providing skip tracing services, providing telephone lines and broadcasting services, leasing office space, providing access to payment processing services, and hiring and paying collectors. The payment processor s substantial assistance came in the form of credit and debit card processing, which the CFPB believes made the debt collector s improper actions possible. The CFPB alleged that the payment processor engaged in unfair acts or practices by: Approving applications to process payments for debt collectors that were replete with indicia of fraud and despite fraud warnings from consumers and industry; and Failing to conduct reasonable due diligence to detect the debt collectors allegedly unlawful conduct. Finally, the telemarketer s substantial assistance included broadcasting debt collection messages on behalf of the debt collectors that it knew, or should have known, were unfair or deceptive and contributed to the unlawful debt collection. The CFPB alleged that the telemarketers engaged in unfair acts by broadcasting millions of threatening collection messages to consumers on behalf of the debt collectors, which directly caused harm to consumers that was not reasonably avoidable. This case was not resolved at the time of publication. g. National Corrective Group, Inc. 10 March 2015 (Debt Collection/Settlement) The CFPB entered into a consent order with the National Corrective Group and its Chief Executive Officer for allegedly deceptive practices in connection with bad check diversion programs operated on behalf of state and local prosecutors offices. Bad check diversion programs typically require consumers to repay a merchant receiving a bad check in full; complete a financial accountability class; and pay a fee. Operators of bad check diversion programs are exempt from being considered debt collectors under the Fair Debt Collection Practices Act if certain conditions are met. The CFPB alleged that those conditions were not met and that the company improperly used its relationship with state and local prosecutors in its communications with consumers. The CFPB alleged that the following representations, made directly or indirectly, were deceptive: That communications were from an attorney; 10 In re: National Corrective Group, Inc., File No.: 1:15-cv RDB (D. Md. March 30, 2015). 5

6 That nonpayment of the debt would result in arrest or imprisonment; That legal action would be taken against the consumer; and That written communications were from an official or agency of a state (and failing to disclose that the letter was actually from a third party). Violations of the Fair Debt Collection Practices Act also were alleged. The company agreed to pay a $50,000 civil money penalty and to change its practices. h. RMK Financial Corporation April 2015 (Marketing) RMK Financial Corporation, a California-based mortgage lender, entered into a consent order with the CFPB in connection with the marketing of its mortgage origination activities. 11 According to the CFPB, RMK s advertisements included the following alleged deceptive acts or practices: Using the names, logos, and seals of the United States Department of Veteran Affairs and Federal Housing Administration in such a way that the advertisements implied that RMK s mortgage products were sent by the VA or FHA, or that the products were endorsed by the VA or FHA; The advertisements contained a phone number below the advertisement, which referred the borrower to the VA Interest Rate Reduction Department, notwithstanding the fact that RMK never had a VA Interest Rate Reduction Department ; and The advertisements contained the words Federal Housing Administration at the top of the page, along with a prominent FHA Approved Lending Institution logo. The CFPB alleged that [t]he net impressions created by the advertisements were also likely to mislead reasonable consumers about whether [RMK] was or was [not] affiliated with the FHA or VA. 12 Additionally, according to the CFPB s allegations, RMK employees falsely stated or implied that the company was part of or endorsed by the FHA or VA when potential borrowers would respond to the mailing pieces. RMK also was alleged to have violated the Truth in Lending Act (TILA) by failing to disclose certain items in its mortgage advertisements. RMK was ordered to pay a $250,000 civil money penalty as a result of its allegedly deceptive practices and TILA violations. i. S/W Tax Loans, Inc. et al. 13 April 2015 (Marketing) The CFPB, in a joint consent order with the Navajo Nation Department of Justice, alleged that S/W Tax Loans, its owner, and its president engaged in unfair, deceptive, and abusive acts and practices in connection with tax refund anticipation loans (RALs) that carried a 240% APR. The company s owner also owned H&R Block tax preparation franchises, which offered a competing 11 In re: RMK Financial Corporation d/b/a Majestic Home Loans, File No CFPB-0007 (Apr. 9, 2015). 12 Id. 13 In re: S/W Tax Loans, Inc. et al., File No. 1:15-cv JB-WPL (D.N.M. Apr. 16, 2015). 6

7 line of credit product at a lower interest rate of 36% APR. The agencies alleged that a number of undisclosed facts contributed to UDAAP violations, including incentive compensation paid to H&R Block tax preparers for steering consumers to the RALs, the undisclosed common ownership of the companies, and the receipt of tax proceeds by S/W Tax Loans before consumers entered a second RAL, which would have been unnecessary had consumers known that the tax proceeds were available. The agencies alleged that the company took unreasonable advantage of consumers inability to protect themselves, and thus engaged in abusive acts, by: Steering vulnerable consumers to a more expensive product and not disclosing incentive compensation paid to sales personnel and affiliated companies; and Issuing subsequent RALs to consumers whose tax refunds had already been received by the company without disclosing that the refund had been received and would be available within a few days. The company s failure to disclose that the refund had been received and would be available within a few days also produced allegations of unfairness and deception. The act was allegedly unfair since it caused unavoidable injury in the form of a high APR, and because consumers had to rely on the company to learn whether their refund was received. In addition, the agencies alleged that the company deceptively urged consumers to take out subsequent RALs when consumers made inquiries about the status of a refund and the company created a false impression that the consumer s refund proceeds had not yet been received. Finally, the agencies alleged that the company deceptively disclosed the RAL s APR by failing to indicate the APR was an estimate, and understating the APR by basing the estimate on a 45- day repayment term when most refunds were received in 12 days. The company, its owner, and its president were ordered to pay $438,000 in consumer redress and a $438,000 civil money penalty. j. Fort Knox National Company, et al. 14 April 2015 (Loan Servicing) Fort Knox National Company and its subsidiary, Military Assistance Company, managed a military allotment program that processed payroll deductions and forwarded certain amounts to creditors on behalf of servicemembers. After a creditor s obligation was terminated, excess funds ( residual balances ) would exist and trigger monthly residual balance fees. The CFPB alleged in a consent order that the companies failed to adequately disclose that residual account fees would be charged and failed to notify consumers that those fees had been charged. The CFPB alleged that these disclosure failures were unfair since they prevented consumers from avoiding the residual balance fees. The CFPB also alleged that the companies disclosure failures resulted in materially incomplete, misleading, and thus deceptive statements. Finally, the CFPB alleged the disclosure failures were abusive because: 14 In re: Fort Knox National Company, et al., File No CFPB-0008 (Apr. 20, 2015). 7

8 They limited the servicemembers ability to understand the product s material risks, costs, or conditions and, by charging the residual balance fees, the company took unreasonable advantage of the servicemembers lack of understanding of the product costs; and They prevented servicemembers from protecting their interests in selecting or using the allotment product (e.g. by taking steps to limit the residual balance fees) and the company took unreasonable advantage of this handicap. The companies agreed to pay approximately $3.1 million in equitable monetary relief to the CFPB for consumer redress. k. Green Tree Servicing LLC 15 April 2015 (Mortgage Servicing) Green Tree Servicing LLC is a national mortgage servicer. The CFPB and FTC filed a joint complaint against the company alleging a number of illegal actions in connection with Green Tree s mortgage servicing activities. The following practices were allegedly deceptive and abusive: Misrepresenting to consumers that the consumers mortgage loans have certain unpaid balances, payment due dates, interest rates, monthly payment amounts, delinquency statuses, and unpaid fees or other amounts due; Demanding payment prior to providing loss mitigation options; Failing to timely respond to consumers short sale applications and failing to complete or evaluate short sale applications; Representing that nonpayment of a mortgage loan will result in the arrest or imprisonment of consumers or the seizure, garnishment, attachment, or sale of the consumers property or wages; Deceiving consumers into using the company s pay-by-phone service, Speedpay, without disclosing that there would be a convenience fee to use the service and that there were other payment methods available that did not require a convenience fee; Causing consumers bank accounts to be debited without the consumers consent; Failing to honor in-process loan modifications when borrowers had modification agreements with a prior loan servicer; and Harassing and threatening overdue borrowers with repeated and continuous phone calls. The company entered into a stipulated order for permanent injunction and monetary judgment with the CFPB and the Federal Trade Commission and was ordered to pay $48 million in restitution to borrowers and a $15 million civil money penalty FTC and Consumer Financial Protection Bureau v. Green Tree Servicing, LLC, No. 15-cv (SRN-JSM) Dkt. No. 1 (D. Mn. April 23, 2015). 16 Id. at Dkt. No. 5 (April 23, 2015). 8

9 l. Regions Bank 17 April 2015 (Deposit Account Servicing) The CFPB entered into an administrative consent order with Regions Bank to resolve allegations that it unlawfully charged overdraft fees to consumers who had not elected to opt-in for overdraft coverage. The opt-in rule under Regulation E requires that depository institutions obtain consumers affirmative consent before charging overdraft fees when a consumer s transaction would otherwise be denied due to insufficient funds. When executives at Regions Bank learned of the ongoing overdraft practices, the bank self-reported to the CFPB and agreed to reimburse overdraft fees to hundreds of thousands of consumers, totaling over $48 million. The CFPB alleged that the following practices were deceptive: Misrepresenting that it would not assess overdraft fees in connection with ATM or onetime debit card transactions unless the consumer opted-in; and Charging consumers both a NSF fee and an overdraft charge due to a programming error, notwithstanding language contained in a frequently asked question that the consumer would not be charged overdraft fees. In addition to $48 million in reimbursements already provided to consumers, Regions Bank agreed to pay the CFPB an additional civil money penalty of $7.5 million. m. Nationwide Biweekly Administration, Inc. 18 May 2015 (Marketing) Nationwide Biweekly Administration, Inc. provided a biweekly mortgage payment program, whereby it would transmit funds from consumers to their mortgage servicers in bi-weekly, rather than monthly, payments (e.g. 26 bi-weekly payments in a year versus 12 monthly payments). The CFPB filed a lawsuit against the company and its owner for allegedly deceptive and abusive acts and practices in connection with the sale of the mortgage payment program. The following practices were considered deceptive: Misrepresenting, directly and indirectly: o that consumers would save money and when they would achieve those results; o that savings would be achieved without increasing the amount the consumer pays each month; o that the savings could not be achieved without the program; o the amount and existence of a $995 program setup fee; o that the company was affiliated with mortgage servicers; and Violating the Telemarketing Sales Rule by failing to disclose the total cost of the service, the central characteristics of the service, affiliations with mortgage servicers, and making misrepresentations to induce a person to pay for the services. The CFPB alleged that the company took unreasonable advantage of consumers lack of understanding of the material risks, costs, or conditions of the program, and thus engaged in abusive conduct, by guaranteeing consumers they would save money by enrolling in the 17 In re: Regions Bank, File No CFPB-0009 (Apr. 28, 2015). 18 In re: Nationwide Biweekly Administration, Inc., File No. 3:15-cv RS (N.D. Cal. May 11, 2015) 9

10 program, when, in fact, consumers would pay more in undisclosed fees during the first several years than they would save. In addition, the company allegedly knew that a substantial number of consumers [would] leave the program prior to saving any money and that consumers were unlikely to know that they would pay more in fees than they would save (because the fees weren t disclosed). This case was not resolved at the time of publication. n. Verizon Wireless 19 - May 2015 (Payment Account Servicing) Verizon Wireless entered a settlement agreement with the CFPB for cramming, which involved placing unauthorized third party charges onto wireless telephone bills. In the CFPB s complaint, it alleged that merchants offered coupons or free giveaways to trick customers into providing their telephone numbers, and then enrolled consumers in unrelated monthly subscriptions for premium text messaging services, such as ring tones and jokes. In some cases, the third parties allegedly didn t provide any services at all. In its complaint, the CFPB alleged that the following practices, together, were unfair: Automatically enrolling consumers in third-party billing without consent, thereby reducing consumers ability to identify unauthorized charges; Permitting third-party merchants to access customer billing systems without: (1) requiring merchants to have customer authorization for purchases or comply with industry guidelines; and (2) adequately overseeing these activities; Failing to adequately resolve customer disputes by refusing to provide complete refunds for unauthorized charges and only offering to stop future charges or referring consumers to the offending merchants; Ignoring or consciously avoiding red flags identifying flaws in its third-party billing system, including tracking of customer complaints, and continuing to outsource billing activities to companies that were subject to settlements for improper billing activities; and Failing to differentiate first-party and third-party charges on its bills, the non-payment of which would result in late fees, service termination, collections, and adverse credit reporting, all of which was exacerbated by the company s refusal to provide full refunds. The company reached a settlement with the CFPB and related parties (which included the 50 state attorneys general and the District of Columbia) for $70 million in restitution. 19 In re: Verizon Wireless, File No. 3:15-cv PGS-LHG (D.N.J. May 12, 2015). 10

11 o. PayPal, Inc. and Bill Me Later, Inc. 20 May 2015 (Marketing and Loan Servicing) PayPal, Inc. and Bill Me Later, Inc. offered consumers an online credit product, PayPal Credit. The CFPB filed a complaint against the companies in connection with their activities in establishing PayPal Credit as the default payment method when consumers were attempting to enroll in a regular PayPal account and were thereby enrolled in PayPal Credit without their consent. The companies allegedly engaged in the following unfair practices: Enrolling consumers in PayPal credit without the consumers consent or authorization; Processing payments through PayPal Credit without the consumers consent or authorization; Failing to accept, process, or timely post consumers payments made toward their PayPal Credit account, including: (1) failing to take reasonable steps necessary to maintain the online platform provided for consumers to make payments; and (2) failing to take necessary steps to assure that the companies could process and post, or timely process and post, consumer payments; and Failing to adequately or timely address billing disputes, including disputes about crediting payments, processing refunds, honoring advertised promotions, unauthorized charges, and double billing. Additionally, the companies allegedly engaged in deceptive advertising by representing that consumers would receive promotional offers, such as $5 or $10 back on a purchase, or no interest for six to twelve months, when in fact no such benefits were provided. Finally, the CFPB alleged that the companies engaged in abusive practices by failing to provide sufficient information to consumers about how payments were allocated to and among standard and multiple deferred-interest balances. The companies allegedly failed to explain that PayPal Credit s practice was to apply amounts in excess of the minimum payment proportionally to most, or all, promotional balances. These activities were considered abusive because consumers were unable to control the allocation of their payments and incurred additional fees as a result, notwithstanding the companies representations that consumers could control the allocation of their payments. The companies entered into a stipulated final judgment and order with the CFPB. 21 PayPal was ordered to pay $15 million in redress to its victims and the CFPB imposed a $10 million civil money penalty. 20 Consumer Financial Protection Bureau v. PayPal, Inc., et al., Civ. No. 1:15-cv RDB, Dkt. No. 1 (D. Md.). 21 Id. at Dkt. No. 8 (May 21, 2015); refiled to correct filing error at Dkt. No. 9 (August 3, 2015). 11

12 p. Security National Automotive Acceptance Company, LLC 22 June 2015 (Debt Collection) Security National Automotive Acceptance Company, LLC (SNAAC) is an auto-finance company primarily serving members of the United States military. The CFPB filed a complaint against the company alleging various unfair, deceptive and abusive acts and practices in connection with its collection activities. In its complaint, the CFPB alleged that that the following practices were unfair: Threatening to: o contact servicemembers commanders concerning debts and delinquencies, and o notify commanders that the servicemember is in violation of various military regulations and subject to potential action under the Uniform Code of Military Justice (UCMJ); Representing to a servicemember that he or she could suffer damage to his or her military career for failing to pay a debt; and Disclosing details of servicemembers debts to their commanders. The CFPB alleged that it was deceptive to represent, directly or indirectly: An intention to take legal action against a servicemember when the company had no such intention; That a servicemembers failure to pay a debt could result in action by the UCMJ and potentially impact ones military career when such an outcome was extremely unlikely; That the company could commence an involuntary allotment or wage garnishment for repayment of a debt without first obtaining a judgment; and That a servicemember s failure to pay a deficiency judgment could result in the servicemember being held in contempt of court or the imposition of other penalties, including the taxability of the debt. Finally, the CFPB alleged that the company engaged in abusive acts or practices by taking unreasonable advantage of servicemembers inability to protect their interests in connection with [1] their selection of SNAAC to finance vehicle purchases and [2] SNAAC s collection of debt arising from such financing. 23 Specifically, the CFPB alleged that the following acts together resulted in abusive conduct: At the time servicemembers obtained the loans, the servicemembers did not know that upon default the company would threaten to or actually contact the servicemember s commander, nor could a servicemember have anticipated the nature and frequency of threatened and actual contacts; 22 Consumer Financial Protection Bureau v. Security National Automotive Acceptance Company, LLC, Civ. No. 1:15-cv WOB, Dkt. No. 1 (D. Md. Feb. 11, 2015, 2015). 23 Id. 12

13 Servicemembers were not aware of contractual language in the loan agreement purporting to authorize that contact and, in any case, would not have been in a position to negotiate the agreement; The company continued to contact the commanders of servicemembers even after servicemembers had requested that such contact stop; and The company exaggerated claims concerning the potential impact of delinquent debt on a servicemember s military career, threats to inform commanders about such debts, and claims of potential action under the UCMJ that resulted in additional pressures on servicemembers (that civilian borrowers would not face) in the context of debt collection activities. This action was not resolved at the time of publication. IV. Updates on past cases a. Union Workers Credit Services, Inc. Settlement February The CFPB filed a complaint against Union Workers Credit Services, Inc. in December 2014 alleging that the company falsely advertised its cards as general use credit cards, when, in fact, the cards could only be used to access closed-end, purchase-specific credit from the company. In February 2015, the company entered into a settlement agreement with the CFPB whereby it agreed to cease engaging in any activities relating to providing credit or to receive any consideration in connection with the provision of credit and to pay a civil money penalty of $70,000. b. ITT Educational Services Order on Motion to Dismiss March The CFPB filed a civil complaint against ITT Educational Services, Inc. 26 in 2014 alleging unfair and abusive acts and practices in connection with its offering and provision of private student loans. In April 2014, ITT filed a motion to dismiss based on several theories, which, in March 2015, was denied in part (with respect to the counts involving alleged unfair and abusive acts or practices) and granted in part (with respect to the dismissal of the CFPB s claim of a violation of the TILA and Regulation Z). The court s ruling on the motion to dismiss - while not ultimately dispositive at this stage as to whether the alleged acts and practices are indeed abusive - provides several interesting insights into how courts are dealing with claims of abusive acts or practices in the context of pleading such claims. First, ITT challenged the Consumer Financial Protection Act s (CFPA) prohibition on abusive acts or practices as being unconstitutionally vague alleging that the statutory language fails to give fair notice of the standard required and therefore violates the Due Process clause of the Fifth Amendment of the U.S. Constitution. The court denied this challenge, holding that: 24 Consumer Financial Protection Bureau v. Union Workers Credit Services Inc, Civ. No. 3:14-cv L, Dkt. No. 11 (D. N. Tex. Feb. 10, 2015). 25 Order on Defendant s Motion to Dismiss, Consumer Financial Protection Bureau v. ITT Educational Services, Inc., Case No. 1:14-cv SEB-TAB (S.D. Ind., March 6, 2015) ( Order ). 26 Consumer Financial Protection Bureau v. ITT Educational Services, Inc., Case No. 1:14-cv Dkt. No. 1 (S.D. Ind., February 26, 2014). 13

14 The CFPA itself provides significant guidance for defining abusive conduct (see 12 U.S.C. 5531(d)); and Agencies and courts have successfully interpreted and applied the term in other closely related matters. Similar challenges based on claims of vagueness also have been denied. 27 Second, ITT challenged the CFPB s claims that ITT took unreasonable advantage of (i) the inability of consumers to protect their own interests and (ii) the reasonable reliance by consumers on ITT to act in the consumers interests. The court ruled against ITT s motion to dismiss on both counts, noting the following pertinent points: Unreasonable advantage ITT alleged as a threshold matter that the CFPB did not state a claim that ITT took unreasonable advantage of its students. The court disagreed, construing the meaning of the statute according to its plain language, referencing the ordinary meaning of to take advantage of as to make use of for one s own benefit, to use to advantage, or to profit by. 28 Based on that definition, the court held that the CFPB s claims that ITT received a benefit by removing doubtful assets from its balance sheet by having students sign up for private loans in connection with the CFPB s allegations about the unfair nature of the students predicament were sufficient to plead that ITT derived an unreasonable advantage from its conduct. 29 Consumers inability to protect their interests ITT argued that the CFPB failed to assert facts sufficient to support a claim that students had an inability to protect their interests. In denying this argument the court noted that [r]egardless of who caused the students vulnerability, the [CFPB s] burden here is to show that they were, in fact, unable to protect their own interests. 30 The court held that ITT s argument was based on a too formalistic reading of the statutory requirement and that while students [may have] never lost the theoretical power to defend their interests (e.g., a student could theoretically walk away from ITT and refuse to take out new debt), that a more reasonable reading of the relevant statutory language is that it refers to oppressive circumstances when a consumer is unable to protect herself not in absolute terms, but relative to the excessively stronger position of the defendant. 31 Consumers reasonable reliance on ITT Referring to general concepts of tort law, the court held that reasonable reliance is a question of fact that is not generally appropriate for resolution on a motion to dismiss. 32 The court noted that the CFPB alleged both that ITT students relied upon staff members representations as to the private loans, and that 27 See, e.g., Illinois v. Alta Colleges, Inc., No. 14-C-3786, 2014 WL at *3 4 (Sept. 4, 2014) (rejecting defendant s claim that UDAAP standard is unconstitutionally vague). 28 Id. at 57 (quoting Webster s Third New Int l Dictionary 2331 (3d ed. 1993). 29 Id. at Id. at Id. at 59 (citing Ting v. AT&T, 319 F.3d 1126, (9th Cir. 2003) (noting that, under the doctrine of procedural unconscionability, a literal, physical lack of consumer choice is not necessary to show oppressiveness); Carey Alexander, Abusive: Dodd-Frank Section 1031 and the Continuing Struggle to Protect Consumers, 85 St. John s L. Rev. 1105, (2011) (discussing the legislative history of the abusive standard as consistent with the understanding that it is a statutory codification of the common-law doctrine of unconscionability)). 32 Id. at

15 students acted in reasonable reliance on the school s misrepresentations as to the nature and role of the financial aid staff. 33 The court held that these allegations by the CFPB were sufficient to plead a claim that ITT took unreasonable advantage of the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. 34 c. Sprint Corporation Settlement May The CFPB filed a complaint against the Sprint Corporation in December 2014, in conjunction with the Federal Communications Commission (FCC) and 50 state attorneys general, alleging that the company outsourced certain compliance and billing practices to a third-party billing aggregator that allowed fees for premium text messaging services to be unfairly placed on customers wireless telephone service bills. In May 2015, Sprint entered into settlement agreement with the CFPB under which it was ordered to pay $50 million in consumer redress (in addition to fines paid to the FCC and states, and to reform its third-party billing practices. V. Joint Enforcement Actions The following enforcement actions summarized above were filed by the CFPB in conjunction with other government actors: a. S/W Tax Loans A joint action with the Navajo Nation. b. Green Tree Servicing A joint action with the Federal Trade Commission. c. Verizon Wireless An action conducted in coordination with 50 state Attorneys General and the Federal Communications Commission. VI. CFPB Supervisory Highlights The CFPB periodically issues Supervisory Highlights reports that summarize its supervisory activity over a period of time. Its latest reports identified UDAAPs that were resolved through supervisory actions that did not always result in a public enforcement action. a. Winter The CFPB identified the following UDAAPs: A risk of deception was created by statements that a recurring ACH payment option could be adjusted or canceled with 24 hour notice, when later monthly periodic statements provided that a minimum 72 hours notice was required. 33 Id. at Id. at 60 (citing 12 U.S.C. 5531(d)(2)(C). 35 Consumer Financial Protection Bureau v. Sprint Corporation, Civ. No. 1:14-cv WHP, Dkt. No. 25 (D. S. N.Y. June 30, 2015). 36 See Supervisory Highlights, Consumer Financial Protection Bureau (Winter 2015), available at (last visited August 28, 2015). 15

16 Deception may occur if, without notifying customers, deposit account management is switched from a ledger-balance method to an available-balance method for purposes of deciding: (1) whether to authorize signature-based debit transactions and other electronic transactions; and (2) whether to post or return checks and ACH transactions, when such change could result in an overdraft (and the imposition of related fees). Unfairness may occur when a series of transactions pushes an account into overdraft status and fees are charged for each subsequent overdraft. Deception occurred in connection with the disclosure of overdraft processing logic for electronic transactions. Specifically, the disclosures created a misrepresentation that the institution would not charge an overdraft fee with respect to an electronic transaction if authorization of the transaction did not push the customer s available balance into overdraft status. However, the institutions assessed overdraft fees for electronic transactions in a manner inconsistent with the overall net impression created by the disclosures. The disclosures were also deemed unfair because customers were injured or likely to be injured by the overdraft fees. b. Summer The CFPB identified the following UDAAPs: Student loan servicers engaged in deception by inaccurately suggesting on statements that borrowers could not deduct student loan interest unless they paid more than $600 in interest when no such limitation exists. Home equity loan agreements with general waiver provisions were considered deceptive because they implied that the borrower agreed to a waiver that was actually unenforceable with respect to claims based on federal law. Mortgage servicers were found to have: o Engaged in unfair practices by failing to acknowledge loss mitigation applications where the failure caused delays in converting trial modifications to permanent modifications, resulting in harm to borrowers ; o Deceptively described how deferred interest under a mortgage repayment plan would be repaid, suggesting that deferred interest would be repayable at the end of the loan term when, in fact, it would be collected from the consumer immediately after the deferment ended; o Engaged in unfair practices by not honoring the terms of trial modifications and causing injury in the form of accrued interest; o Unfairly and deceptively sent foreclosure notices to consumers that were approved for trial modifications but before the first payment was due, which discouraged consumers from carrying out the modification; and o Deceptively sent foreclosure notices to borrowers that were current on their loans. 37 See Supervisory Highlights, Consumer Financial Protection Bureau (Summer 2015), available at (last visited September 15, 2015). 16

17 About the Authors Adam Maarec Davis Wright Tremaine LLP Washington, District of Columbia John Morton Gordon Feinblatt LLC Baltimore, Maryland Adam Maarec concentrates his practice on consumer financial services, primarily advising financial institutions on regulatory compliance matters regarding credit product structures, marketing, and servicing. Adam has experience with a broad range of financial services laws, including the Dodd-Frank Act, the Truth in Lending Act, the CARD Act, the Gramm- Leach-Bliley Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act, as well as state-based lending and insurance regulations. Adam s regulatory practice involves helping companies comply with various laws and regulations, drafting rulemaking comment letters, meeting with government agencies, and responding to regulatory investigations. Adam is active in the American Bar Association s Consumer Financial Services Committee. John Morton is a Member of Gordon Feinblatt s Financial Services Practice Group. He provides legal advice to an extensive range of financial institutions, including: nationwide, regional and community banks; credit unions; consumer lending companies; sales finance companies; mortgage lenders and brokers; investment advisers; and other regulated businesses. John provides counsel regarding multijurisdictional compliance issues, including advising clients on federal and state credit statutes and regulations; UDAAP and the CFPB; interaction with state and federal regulators; licensing and registration matters; due diligence and transactional matters; and general corporate governance issues. 17