Abusiveness: Muddying the Waters

A little more than a month after rescinding its prior Policy Statement on abusive acts or practices, the Consumer Financial Protection Bureau (CFPB) has brought its first post-rescission abusiveness claim. In a complaint against a debt settlement company, the CFPB alleged that the company’s alleged practice of prioritizing the settlement of debts owed to affiliated lenders constituted an abusive act or practice. The complaint against the company quotes its website as stating that the company’s “‘skilled negotiators work to get your creditors to agree to discounted lump sum payoff amounts’” and quotes its sales scripts as saying that the company is “‘not owned or operated by any of your creditors.’” In reality, according to the complaint, the company’s owner was also the owner of one of the prioritized creditors and the owner of the other prioritized creditor was a former employee of the company’s owner. Taking these facts together, the CFPB alleged that the company violated the prong of the abusiveness prohibition that prohibits acts or practices that take unreasonable advantage of a consumer’s reasonable reliance on a company to act in the interests of the consumer.

The CFPB’s abusiveness claim is notable for several reasons. First, although the rescission of the Policy Statement indicated that the CFPB believes that “articulating abusiveness claims” will “help clarify the statutory abusiveness standard,” the CFPB’s pleading in this case serves only to muddy the water. The Dodd-Frank Act sets forth four separate standards for what constitutes abusive conduct. Two of those are relevant here—conduct that takes unreasonable advantage of either:

• “the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service,” 12 U.S.C. § 5531(d)(2)(B) (“Prong 2(B)”); or
• “the reasonable reliance by the consumer on a covered person to act in the interests of the consumer,” § 5531(d)(2)(C) (“Prong (2)(C)”).

The CFPB’s complaint cites to Prong (2)(C), but states that the statute defines a practice as abusive “if it takes unreasonable advantage of the reasonable reliance by a consumer on the person to protect the consumer’s interests in selecting or using a consumer-financial product or service.” That is, the CFPB has taken part of Prong 2(C) (“the reasonable reliance by the consumer”) and part of Prong 2(B) (“protect[ing] the interests of the consumer in selecting or using a consumer financial product or service”) and mushed them together to articulate an abusiveness standard that does not actually exist.

To the extent that CFPB intended to assert a Prong 2(C) claim—as its citation to subsection (d)(2)(C) suggests—its formulation of the abusiveness standard raises two questions: (i) does the CFPB believe that reasonable reliance extends not only to acting in a consumer’s interest (the actual language of Prong 2(C) in the statute) but also to affirmatively “protecting” the consumer’s interest (the language of Prong 2(B)), and (ii) whether there is a difference between acting in a consumer’s interest and protecting that interest. It is not clear if the CFPB is trying to send a message here, or simply garbled its pleading.

The complaint also raises questions as to when it is reasonable for a consumer to rely on a third party acting in its interest. As we’ve previously noted (here, here and here), the CFPB has traditionally relied on Prong 2(C) in circumstances where companies took affirmative action to induce consumer reliance, particularly in instances where the target population or other circumstances suggest such reliance is reasonable—for example, where student borrowers are led to believe that their school’s financial aid staff is looking out for their interests. In this most recent complaint, however, the CFPB did not plead any specific facts in the body of the complaint that indicated such inducement. As noted above, the complaint quotes the company’s website’s statement that the company told consumers its “skilled negotiators” would work to reduce consumers’ debts. That is not the same thing as saying the company would act in the consumers’ interests. But in the part of the complaint where the CFPB sets out the abusiveness claim, the CFPB states—without specific attribution or quotation—that the company told consumers that it “would work in their interests only”. It is not clear if the CFPB is referring to other unpled facts or if it believes that the statement about “skilled negotiators” is the equivalent of telling consumers that the company will act in their interests. If it is the former, one wonders why the CFPB did not specifically allege the statements at issue to put industry on notice of what kind of conduct it views as inducing reasonable reliance. If it is the latter, it suggests an expansion of the Bureau’s use of this prong of abusiveness and the circumstances in which it believes consumers might reasonably rely on third parties to act in their interest.

To the extent that the CFPB wants its enforcement actions to send a signal to the market and deter problematic conduct, it does itself no favors when it fails to accurately plead abusiveness claims and clearly articulate the facts that lead it to conclude that a particular practice violates the statutory prohibition. Whatever one thinks of other aspects of the rescinded Policy Statement, it had provided that “the Bureau intends to plead [abusiveness] claims in a manner designed to clearly demonstrate the nexus between the cited facts and the Bureau’s legal analysis of the claim.” The CFPB’s latest complaint fails to meet this standard, and thus fails to further the CFPB’s goal of “clarify[ing] the statutory abusiveness standard.”