CFPB Exercises Authority to Censure “Abusive” Practices; More Enforcement Actions Pending
The Consumer Federal Protection Bureau (CFPB) recently settled an abusive practices enforcement action with American Debt Settlement Solutions, Inc. (ADSS), a Florida for-profit corporation. The settlement marks the first time the CFPB has exercised its new authority to censure “abusive” practices in addition to those that are deemed unfair or deceptive. Under the terms of the settlement, ADSS agreed to pay nearly $500,000 in damages and fees. In addition, ADSS no longer is permitted to advertise, market, or sell debt-relief products or services to consumers.
Historically, the prudential banking regulators had a UDAP mandate, which prohibited only unfair and deceptive acts and practices. However, abusive acts or practices also were made unlawful under Sections 1031 and 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, thus resulting in the new “UDAAP” acronym. Section 1031 now grants the CFPB the authority to “prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice.” In addition, Section 1036 says that is it unlawful for any covered person “to engage in an unfair, deceptive, or abusive act or practice.”
Section 1031(d) defines the term “abusive,” stating that an act or practice is abusive if it:
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“materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
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takes unreasonable advantage of—
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a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
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the inability of the consumer to protect the interests of the consumer in selecting or using a consumer
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the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”
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The “abusive” standard is found in the Telemarketing Sales Act and serves as a basis for the Federal Trade Commission’s Telemarketing Sales Rule (TSR), which also played a role in the ADSS settlement.
In the recent settlement between the CFPB and ADSS, the Bureau charged the company with multiple violations of the TSR and the Dodd-Frank Act. The Bureau alleged that the company charged consumers fees for debt-relief services before the company had actually settled the consumers’ debts. In addition, the company also allegedly made multiple misrepresentations about its debt relief services. Among the misrepresentations listed in the settlement are: failure to disclose that it was almost impossible for ADSS to assist consumers with debts under $700; misrepresentation of the time required to assist consumers with debts; and the general misrepresentation that ADSS would be able to assist consumers with debts at all. The Bureau also charged the company with knowingly enrolling consumers whose financial situations made it highly unlikely they would be able to complete the ADSS program.
To date, the CFPB has provided little guidance on how it will exercise the new authority and on which products it will focus its attention. Because the ADSS settlement marks the first time the CFPB has used its new, broad authority, it provides a window into how the Bureau may exercise its authority in the future. More actions are widely anticipated, which will provide more guidance as to what the new UDAAP standard means for banks, but unfortunately, will come at a steep cost.