CFPB's Strike Against 'Abusive' Conduct No Longer Academic

WASHINGTON — The Consumer Financial Protection Bureau is increasingly brandishing a post-crisis tool allowing it to label activities "abusive," but whether financial services firms are closer to understanding the term is still up for debate.

The Dodd-Frank Act gave the new agency powers to target firms for "unfair, deceptive, or abusive acts or practices." The measure was significant not just because of the authority it gave the CFPB, but also due to the addition of the "abusive" standard to earlier law. Previously, the statute only allowed regulators to target firms for conduct considered unfair or deceptive.

Since then, the agency has declined repeated industry requests to define abusive, instead signaling it will provide clarity via enforcement actions. Prior to this year, just five enforcement orders identified "abusive" actions, but such citations have picked up significantly in 2015. The CFPB has used the label six times this year, most recently in the $25 million PayPal settlement last week. (The CFPB brought its first action citing an "abusive" claim in May 2013.)

"They tried to be responsible in the beginning — study it, not use the new tool recklessly and wait for the right cases. They are slowly, piece-by-piece, case-by-case, building a body of precedents to define abusive, but they're still doing it carefully," said James Kim, who is counsel at the law firm Arnold & Porter LLP and a former CFPB enforcement attorney.

The PayPal order, which alleged deceptive advertising and that the company enrolled customers in a credit product without consent, also claimed it engaged in "abusive" behavior by purporting to let customers adjust payments to defer interest. Yet customers seeking details on how to do so could not reach a customer service contact or were misinformed, according to the agency's complaint. "Many such consumers were hit with deferred-interest fees that, due to the company's conduct, they could not avoid," the CFPB said.

As the agency brings more claims of abusive behavior, the CFPB may be helped somewhat by a recent judicial decision backing the CFPB's use of the Dodd-Frank authority. In the agency's case last year against ITT Educational Services over its lending practices, a judge in March rejected a claim by the company that the Dodd-Frank provision dealing with abusive behavior has constitutional problems. (The case is still pending.)

The judge's order "helps put some meat on the bones of the bureau's authority to prevent 'abusive' acts and practices," according to a client summary of the order by the law firm Reed Smith.

Experts said the PayPal enforcement action will likely revive attention to how the CFPB is using the abusive standard.

"Because of the prominence of PayPal and the fact that it's a very large, very well-respected, very well-established financial services provider, people are going to study this case more carefully as a lesson and reminder that the 'abusive' standard is available to the bureau and that the bureau is willing to apply the alleged violation of the standard even against significant financial services providers," said a financial services attorney who spoke on the condition of anonymity.

While the law defines "unfair" as conduct causing financial injury and deception deals with misleading behavior, the "abusive" provision involves activities that interfere with a customer's ability to understand a product. The new standard is also triggered when an activity takes advantage of a consumer's lack of understanding, inability to protect his or her interests or reliance on the company to act in the consumer's interest.

Bankers, concerned the new authority gave the CFPB too much discretion, had urged the agency to write rules clarifying the meaning of abusive. (Legal precedent for "Unfair" and "Deceptive" had long predated Dodd-Frank.) But in a 2012 American Banker interview, CFPB Director Richard Cordray said the law was "really clear" and that he did not "anticipate us writing a rule around UDAAP."

Years later, observers said the bureau is progressing toward building a precedent for "abusive," but uncertainty still remains. For one thing, the agency has yet to issue an enforcement action that targets only abusive activity.

"There is still a lack of guidance and understanding and consistency around: What is it exactly that 'abusive' is meant to address?" said Lucy Morris, a partner at Hudson Cook and former deputy enforcement director in the CFPB's division of supervision, enforcement and fair lending.

Some said the statute and the CFPB's recent enforcement actions citing the abusive standard suggest companies are expected not only to avoid causing injury or misleading customers, but almost to act like a fiduciary.

"It's still rather fuzzy, but the direction that it seems to be going is that it's not enough just to protect against unfair or deceptive activities but you … should be looking at, 'What can we do proactively to make this work best for the customers?'" said Mercedes Tunstall, a partner at Pillsbury Winthrop Shaw Pittman LLP.

But Morris said one obstacle to the industry's developing a consensus around what abusive means is when the agency will apply more than one of the three standards to the same situation.

"They are increasingly alleging or considering alleging abusiveness where they're also alleging that the same set of facts are deceptive or unfair," she said. "While the facts may meet the legal standard for each prong, doing a triple pleading doesn't give a lot of clarity to the outside world about what abusive itself stands for and what rises to that level."

For example, in an April complaint, the CFPB cited all three categories in a case against the owner of tax-preparation franchises, who, the agency said, steered clients into costly refund-anticipation loans. In separate counts, the complaint said S/W Tax Loans' alleged extension of credit — without the company disclosing to customers that their refunds had already been received — was unfair, deceptive and abusive.

The bureau has said that it applies the legal standards for each component of the statute separately, including in cases where certain conduct satisfies more than one category. "It is important to note that, although abusive acts or practices may also be unfair or deceptive, each of these prohibitions are separate and distinct, and are governed by separate legal standards," the bureau said in a 2013 bulletin on UDAAP enforcement for the debt collection industry.

Still, Morris said, it is difficult for consumers and institutions to distinguish the categories from each other "if everything is a violation of all three.

"It would be helpful for the bureau to be clearer about how the abusive standard is different and unique from the other two prongs of the statute," she said.

Kim said the meaning of "abusive" will be more fully known by the industry when the CFPB targets a company for alleged abusiveness without bringing claims under the other two UDAAP categories. But he added that that may not happen anytime soon.

"What does an abusive-only claim that's not deception or unfair look like? That's the question that everyone is asking," he said. "To truly understand what abusive is, you would have to know what is abusive but not unfair and not deceptive. It will take more time for them to build up the legal precedent for that kind of case to emerge. It could be several more years before we see that case."