On May 30, 2013, the Bureau of Consumer Financial Protection (“CFPB”) filed a complaint in federal district court against American Debt Settlement Solutions, Inc. (“ADSS”), a Florida debt-relief company, and its owner. The complaint alleges that ADSS and its owner violated the Federal Trade Commission’s Telemarketing Sales Rule, as well as certain UDAAP provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The complaint is significant because it alleges, in part, that ADSS engaged in “abusive” practices, as defined in the Dodd-Frank Act. This action is the first that relies on this prohibition on abusive acts or practices.
The CFPB found that ADSS misled consumers by charging upfront fees for debt settlement services and then failing to provide those services. This was “abusive” because ADSS specifically targeted and enrolled consumers who, according to the complaint, ADSS knew had inadequate incomes to complete the debt-relief programs in which they were enrolled. According to the complaint, ADSS (i) misled consumers by falsely promising them it would begin to settle their debts within three to six months when, in reality, it often did not; (ii) enrolled consumers despite knowing that their income level made it highly unlikely that they could complete the debt-relief programs; (iii) collected upfront “enrollment” fees from consumers who ADSS knew could not afford the monthly payments required by these debt-relief programs, causing the consumers to spend their last savings on fees for services from which they ultimately would not benefit; and (iv) failed to settle many consumers’ debts within the promised time, forcing them to drop out of the program and forfeit their “enrollment” fees without having received any debt-relief services. The CFPB estimates that ADSS charged approximately $500,000 in fees to consumers in multiple states.
The CFPB proposes to submit to the court a consent order that would halt ADSS’s operations, prevent it and its owner from providing debt-relief services in the future, and impose a $15,000 civil penalty fine. The proposed consent order would also award a judgment against the company of approximately $500,000, which would be suspended based on the company’s inability to pay, provided the company pays the civil penalty within ten days of the entry of the order, among other conditions.
As noted, this is the first time that the CFPB has accused an entity of engaging in “abusive” acts or practices. Prior to the enactment of the Dodd-Frank Act, the Federal Trade Commission Act’s bans on unfair and deceptive acts and practices with respect to business transactions generally were, from time to time, applied to consumer financial services transactions. The Dodd-Frank Act explicitly applied such bans to consumer financial services transactions and added a new prohibition on “abusive” acts and practices. An “abusive” act or practice is one that “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service” or “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.” Dodd-Frank Act, Title X, Sec. 1031(d). The Dodd-Frank Act authorizes, but does not require, the CFPB to promulgate regulations relating to the UDAAP prohibitions, including the “abusive” standard, but, to date, the CFPB has not done so. Thus, the CFPB and the courts interpret whether, for example, an act “takes unreasonable advantage of the reasonable reliance by a consumer on a covered person to act in the interests of the consumer.
In the ADSS case, the CFPB appears to have been relying on clauses (A) and (C) above. The CFPB seems to interpret these clauses as applicable to a covered person’s sale of a consumer financial product or service that the covered person knows is likely to harm rather than benefit the consumer, together with the covered person’s misrepresentations regarding its intended actions on behalf of the consumer. The case raises many questions regarding the “abusive” standard. For example, in light of the alleged misrepresentations that contributed to ADSS’s “abusive” conduct, how do deception claims interact with abusiveness claims? The action also provides no guidance regarding two prongs of the “abusive” standard – i.e., the prongs not alleged in this case: clause (B) above, and “material interference.
Richard Cordray, in a press release, stated that the CFPB “will continue to crack down on this type of harmful behavior.” Whether this means continued and even increased reliance on the “abusive” standard is unclear. However, we expect the CFPB to continue to allege from time to time that persons covered by the Dodd-Frank Act have engaged in “abusive” acts or practices. Such further actions will provide additional indications of how the CFPB interprets its broad authority.