Alston & Bird Consumer Finance Blog

Consumer Financial Protection Bureau (CFPB)

CFPB Issues Policy Statement on Dodd-Frank “Abusiveness” Standard, But Important Uncertainties Remain

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A&B ABstract:

The Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued a Policy Statement to provide a framework for how it intends to apply the Dodd-Frank Act’s “abusiveness” standard going forward in its supervision and enforcement activities. While this framework attempts to provide clarity where the Dodd-Frank Act left uncertain what acts and practices would be considered “abusive,” the Policy Statement fails to address several key issues. In particular, the Policy Statement does not identify specific conduct that would be considered abusive—leaving public statements on such issues to enforcement matters and litigation.

Background to the Policy Statement

The Dodd-Frank Act (“the Act”) added a prohibition on “abusive” acts and practices to the established prohibition on unfair or deceptive acts and practices. Over the years, the Federal Trade Commission’s policy statements, enforcement actions, and judicial precedents have defined the prohibitions on “unfair” and “deceptive.” The abusiveness standard is less developed. The Act grants the CFPB authority to declare an act or practice as “abusive” if the act or practice: (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) 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. This Policy Statement follows a symposium convened by the CFPB in 2019 where a panel of academics and regulatory and industry experts debated, among other issues, whether the CFPB should further define abusiveness.

Defining “Abusive” in Precedent

The CFPB and other agencies have seldomly alleged a standalone “abusive” claim; instead, such claims are generally paralleled by claims of “unfairness” and “deceptiveness.” When alleging abusive practices, the CFPB almost always alleged deceptive or unfair practices based on the same set of underlying facts. For example, in 2017 the CFPB alleged that a loan servicer routinely entered student loan borrowers into forbearance without adequately providing information to borrowers regarding possible income-based repayment plans. The CFPB argued that the servicer’s actions constituted both abusive practices and unfair practices under the Act, and the Court agreed.  While such decisions have provided some guidance on what constitutes an abusive practice under the Act, the courts, in reviewing such allegations, considered the statutory language but did not offer any guidance on what conduct might be construed as “abusive” but not construed as “unfair.”

The CFPB’s reticence to prosecute claims of abusive practices created a vacuum of interpretive guidance on how the abusiveness standard actually constrains businesses, beyond the black letter definition contained in the Act. For example, questions remained as to what act or practice would “materially interfere” with a consumer’s understanding of terms and conditions, or what exactly would constitute a financial service provider “taking unreasonable advantage” of a consumer seeking a product of service. These undefined terms left confusion and uncertainty for covered persons seeking to avoid violations. By contrast, the unfairness and deceptiveness standards (which were already in place before the Act’s introduction of an abusiveness standard) have been subject to decades of case law and agency interpretations, which have yielded clear guidance on what acts and practices are considered unfair or deceptive.

Content of the Policy Statement

The Policy Statement acknowledges that “[u]ncertainty remains as to the scope and meaning of abusiveness,” which “creates challenges for covered persons in complying with the law,” and it sets forth a framework regarding how the CFPB will enforce the abusiveness standard. It does not, however, describe or provide examples of precisely what conduct the CFPB would deem abusive.

The Policy Statement describes three categories of principles that the CFPB intends to apply to its supervision and enforcement actions.  The CFPB has stated that the principles reflect the standards it has applied in prior actions.

  1. Benefits vs. Harms: “The Bureau intends to focus on citing conduct as abusive in supervision and challenging conduct as abusive in enforcement if the Bureau concludes that the harms to consumers from the conduct outweigh its benefits to consumers (including its effects on access to credit).” The Policy Statement notes that incorporating this principle “not only ensures that the Bureau is committed to using its scarce resources to address conduct that harms consumers, but also ensures that the Bureau’s supervisory and enforcement decisions are consistent across matters.
  2. No Dual Pleadings: The Bureau intends to avoid “dual pleading” of abusiveness along with unfairness or deception violations which arise from all or nearly all the same facts, and alleging “stand alone” abusiveness violations that “demonstrate clearly the nexus between cited facts and the Bureau’s legal analysis.” The Bureau believes that this approach to pleading will “provide more certainty to covered persons as to the metes and bounds of conduct the Bureau determines is abusive” and “facilitate the development of a body of jurisprudence as to the conduct courts conclude is abusive.”
  3. “Good Faith” Limits on Monetary Relief: “[T]he Bureau generally does not intend to seek certain monetary remedies for abusive acts or practices if the covered person made a good-faith effort to comply with the law based on a reasonable—albeit mistaken—interpretation of the abusiveness standard. However, if a covered person makes a good-faith but unsuccessful effort to comply with the abusiveness standard, the Bureau still intends to seek legal or equitable remedies, such as damages and restitution, to redress identifiable consumer injury.”

The Policy Statement in Context

The Policy Statement is not a CFPB rulemaking. Rather, the Policy Statement merely “constitutes a general statement of policy that is exempt from the notice and comment rulemaking requirements of the Administrative Procedure Act” and is only “intended to provide information regarding the Bureau’s general plans to exercise its discretion.” It “does not impose any legal requirements on external parties, nor does it create or confer any substantive rights on external parties that could be enforceable in any administrative or civil Proceeding.” As such, while the Policy Statement is intended as a helpful guide to the Bureau’s enforcement philosophy with regard to the abusiveness standard, it is not law, and is subject to revision in the event of any change in the CFPB’s leadership, policies, or priorities.

The Policy Statement is not expected to affect ongoing litigation.  In remarks to the United States House of Representative Financial Oversight Committee on February 6, 2020, CFPB Director Kathleen Kraninger stated that “At this point, we have not amended any filings in court and don’t intend to related to this specifically,” indicating that the CFPB doesn’t anticipate repleading any of its pending court enforcement actions in light of the Policy Statement.

Takeaways:

While the principles outlined in the Policy Statement provide an indication of how the CFPB will react to conduct it deems to be “abusive,” it falls short of providing clarity on it will deem abusive, thereby continuing the uncertainty regarding the abusive standard that has existed since its inception. Moreover, the principles set forth in the Policy Statement are themselves subject to uncertainty. For example, it is unclear what exactly constitutes consumer benefits or harms and how those factors are weighed to determine whether conduct is abusive; likewise, it is unclear what types of actions are sufficient to demonstrate a good-faith effort to comply with the law under a mistaken interpretation of the abusiveness standard.

Notably, however, the Policy Statement expressly left open “the possibility of engaging in a future rulemaking to further define the abusiveness standard,” which presumably may take the form of enforcement actions, CFPB advisories or other guidance, or updates to the CFPB examination manual.

Seventh Circuit Declines to Adopt FDCPA “Benign Language” Exception

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A&B ABstract:

The Seventh Circuit’s ruling in Preston v. Midland Credit Mgmt. departs from other circuits that have considered whether there is a “benign language” exception under the Fair Debt Collection Practices Act (“FDCPA”). The Seventh Circuit, ruled, as the Consumer Financial Protection Bureau (“CFPB”) urged in an amicus brief, that the FDCPA does not contain a “benign language” exception.

FDCPA Section 1692(f)

Section 1692(f) of the FDCPA broadly prohibits a debt collector from using unfair or unconscionable means to collect or attempt to collect any debt, and enumerates specific examples of prohibited conduct. Section 1692(f)(8) prohibits a debt collector from using any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails or by telegram. However, the section provides that a debt collector may use his business name if such name does not indicate that he is in the debt collection business.

The “Benign Language” Exception

Although Section 1692(f)(8) does not include any exceptions to the prohibition discussed above, courts have found that certain types of “benign language” do not run afoul of the prohibition.  As recognized by the Fifth Circuit and the Eighth Circuit, the “benign language” exception allows words such as “personal and confidential,” “immediate reply requested,” and “forwarding and address correction requested,” and other innocuous language and corporate logos that do not identify the sender as a debt collector to appear on a debt collector’s envelope to a consumer.

Fifth Circuit

The Fifth Circuit (in Goswami v. American Collections Enterprise, Inc.), believed that the text of section 1692(f)(8) was ambiguous and could be read two ways. In isolation, it could be read as barring “any markings on the outside of… [the] envelope other than the name and addresses of the parties. However, if it was read together with the prefatory language of section 1692f it could be read as “only prohibiting markings… that are unfair on unconscionable.” To resolve the ambiguity, the court created the “benign language” exception to allow for language on an envelope that “would not intimate that the contents of the envelope relate to collection of delinquent debts.”

Eighth Circuit

Similarly, the Eighth Circuit (in Strand v. Diversified Collection Service, Inc.) found that a literal reading of the statutory text would “create bizarre results.” Specifically, the Eighth Circuit found under Section 1692f(8) would “a debtor’s address and an envelope’s pre-printed postage would arguably be prohibited, as would any innocuous mark related to the post, such as ‘overnight mail’ and ‘forwarding address correction requested.’” The court examined the legislative history of the FDCPA and found that benign language or other corporate markings and logos on an envelope would not thwart the purpose of the FDCPA.  As a result, it opined that a “benign language” exception should exist for this type of language on a debt collector’s envelope.

Preston v. Midland Credit Management

Factual Allegations

In Preston, the plaintiff appealed the district court’s finding that the “benign language” exception applied to a collection letter the defendant sent the plaintiff. The collection letter was enclosed in an envelope bearing the words “TIME SENSITIVE DOCUMENT.” The internal envelope was enclosed in a larger envelope with a glassine covering, so that the words on the internal envelope were visible to the recipient. The plaintiff argued that the defendant’s use of the words “TIME SENSITIVE DOCUMENT” violated section 1692f(8) of the FDCPA.

CFPB Amicus Brief

The CFPB filed an amicus brief in Preston, petitioning the court to rule that there is no “benign language” exception to the FDCPA. The CFPB argued: (1) that the statutory text of the FDCPA was clear, and (2) there was no statutory ambiguity between the prefatory language of section 1692f and the explicit prohibition in section 1692f(8). The CFPB noted that the “benign language” exception was unnecessary because the FDCPA already provides that debt collectors may “make use of the mails” in communicating with a consumer. The CFPB argued that the FDCPA’s text allowing a debt collector “use of the mails” rendered the “benign language” exception moot, because the language and symbols the courts analyzed would all be allowed by the FDCPA as “use of the mails.”

Interpretation of Eighth and Fifth Circuit Case Law

In analyzing the plaintiff’s claims in Preston, the Seventh Circuit examined the opinions of the Fifth and Eighth Circuits in creating the “benign language” exception. Ultimately, the court declined to recognize any such “benign language” exception in the FDCPA.

The Seventh Circuit found that adhering to the plain wording of the statute would not prohibit the use of a debtor’s address on a debt collection letter, or of pre-printed postage. Rather, the court agreed with the CFPB, finding that because the FDCPA allows for debt collectors to communicate by “use of the mails,” it authorizes any language or symbol needed for communicating by mail to appear on an envelope, but not more. That is, “the use of the mails” provision permits the inclusion of language and symbols that are required to ensure the successful delivery of communications through the mail, but in Preston, the court found that that the inclusion of “TIME SENSITIVE DOCUMENT” was not required to ensure the successful delivery of the communication though the mail, and therefore was in violation of the FDCPA.

Takeaway

The Seventh Circuit’s ruling in Preston casts uncertainty on the status of the “benign language” exception. Although the Seventh Circuit addressed the printed language at issue in the Fifth and Eighth Circuit cases, the Seventh Circuit did not address the use of corporate logos that were not the debt collector’s name. Debt collectors that do business in the Seventh Circuit, comprising Illinois, Indiana, and Wisconsin, should ensure that any letters sent to consumers do not contain any extraneous language that is not used in the ordinary course of sending mail.

CFPB Director Provides Update Relating to QM Patch Expiration

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A&B ABstract: A recent letter from Consumer Financial Protection Bureau (“CFPB”) Director Kathleen Kraninger provides clues about the potential future of the so-called “QM Patch.”

Discussion:

In  a December 17, 2020 letter to Senator Mike Rounds (“Letter”), CFPB Director Kathleen Kraninger, revealed a number of interesting insights about the CFPB’s ongoing evaluation of the reformation of the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule, including the phase-out of the “QM Patch”.

Background:

The CFPB enacted the QM Patch as a temporary provision of the ATR/QM regulations promulgated pursuant to the Dodd-Frank Act.  It exempts lenders from having to underwrite loans with debt-to-income ratios not exceeding 43% in accordance with the exacting standards of Appendix Q to Regulation Z if the loans otherwise meet the definition of a qualified mortgage and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.

On July 25, 2019, the CFPB issued an advance notice of proposed rulemaking (“ANPR”) seeking public comment regarding the fate of the “QM Patch”, which is scheduled to expire no later than January 10, 2021.  In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently.

The Letter:

Based on public comments submitted in response to the ANPR, Director Kraninger indicated that the CFPB, in amending the definition of what constitutes a qualified mortgage, will issue a Notice of Proposed Rulemaking (“NPRM”) by no later than May 2020.

The Letter provides further detail on the NPRM.  First, the CFPB will propose to eliminate the current 43% debt-to-income requirement and impose an alternative measure such as a pricing threshold (“i.e., the difference between the loan’s APR and the average prime offer rate for a comparable transaction”).  Director Kraninger asserted that the pricing threshold would help facilitate the offering of “responsible, affordable mortgage credit”.   Second, the CFPB will propose to extend the expiration of the QM Patch for a short period pending the effective date of the proposed alternative.

Perhaps even more significantly, Director Kraninger indicated that the CFPB in a separate NPRM may adopt a new “seasoning” mechanism that would confer QM Safe Harbor treatment to certain loans that have a history of timely payments.  This mechanism would greatly facilitate the sale and securitization of non-QM loans that may have missed being classified as QM due to some blemish prior to consummation.

Takeaway:

Director Kraninger’s brief comments in the Letter indicate that the CFPB is determined to eliminate the QM Patch after a short extended transition period.   Further, the CFPB has demonstrated its commitment to reforming the definition of a qualified mortgage in a manner that will enhance credit availability to a broader spectrum of the credit markets—or so it is thought—and give a lifeline to seasoned highly performing loans that have previously been excluded from the gold standard QM Safe Harbor  category.   The credit markets anxiously await the promulgation of these anticipated proposed rulemakings.

 

CFPB Releases Policy Statement on Compliance Aids

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A&B Abstract:

On January 27, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) published a policy statement announcing a new designation for CFPB guidance, known as “Compliance Aids,” and explaining the legal status and effect of any Bureau guidance labeled as such (the “Policy Statement”).

CFPB Policy Statement

The Policy Statement announces the Bureau’s intent to establish a new category of materials similar to prior compliance resources, but which will now be designated as Compliance Aids. The Bureau noted that Compliance Aids “will provide the public with greater clarity regarding the legal status and role of these materials.”  The Policy Statement does not alter the status of CFPB materials that were previously issued, but the Bureau indicated that it may reissue certain existing materials as Compliance Aids “if it is in the public interest and as Bureau resources permit.”

Notably, the Policy Statement provides that the Bureau does “not intend to use Compliance Aids to make decisions that bind regulated entities.” Rather, Compliance Aids “present the requirements of existing rules and statutes in a manner that is useful for compliance professionals, other industry stakeholders, and the public” and “may also include practical suggestions for how entities might choose to go about complying with those rules and statutes.” However, the Bureau acknowledges that Compliance Aids may not address all situations and that where there are multiple approaches to compliance that are permitted by the applicable rules and statutes, an entity can make its own business decisions regarding which method to use, which may involve methods not addressed in a Compliance Aid. While entities are not required to comply with Compliance Aids, such aids are designed to accurately summarize and illustrate the underlying rules and statutes. Accordingly, the Bureau indicated that in exercising its enforcement and supervisory discretion, it does not intend to sanction, or ask a court to sanction, entities that reasonably rely on Compliance Aids.

Takeaways

We applaud the Bureau for recognizing that enforcement should be based on compliance with applicable statutes and regulations.  Since its inception, the Bureau has provided guidance to the industry through a variety of means.  The Policy Statement provides a list of examples, including small entity compliance guides, instructional guides for disclosure forms, executive summaries, summaries of regulation changes, factsheets, and compliance checklists.  Notably missing from the Bureau’s list are compliance bulletins, through which the Bureau has previously provided its interpretation of certain statutes and/or regulations within its purview.  While the Bureau does not specify what categories of guidance would receive a Compliance Aid designation moving forward, it noted that it may reissue prior guidance as a Compliance Aid.  It will be interesting to see whether this list of examples is a signal of the types of resources that the Bureau may reissue as Compliance Aids.

California Governor Moves to Strengthen State Consumer Protection Enforcement in 2020

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A&B ABstract:

On January 10, 2020, California Governor Gavin Newsom released his budget summary for 2020 to 2021. Fearing that the Trump administration will further roll back consumer financial protections, Gov. Newsom proposed the California Consumer Financial Protection Law, which would provide the state’s primary financial services regulator with additional authority to enforce consumer protection laws.

Discussion

In his budget summary for 2020 to 2021 (“Budget”), Gov. Newsom expressed concern that “[t]he federal government’s rollback of the [Consumer Financial Protection Bureau (“CFPB”)] leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” Seeking to protect Californians from the effects of such rollbacks, Gov. Newsom proposed that state funds be allocated to enact and administer the California Consumer Financial Protection Law (“CCFPL”).

A draft of the CCFPL is not yet available.  However, as described in the Budget, the CCFPL would expand the authority and capacity of the state’s primary financial services regulator, the Department of Business Oversight (“DBO”), “to protect [California] consumers and foster the responsible development of new financial products.”

Change in Regulatory Structure

The DBO, which would be re-named the Department of Financial Protection and Innovation (“DFPI”), would be responsible for:

  • Offering services to empower and educate consumers, especially older Americans, students, military service members, and recent immigrants;
  • Licensing and examining new industries that are currently under-regulated [including, but not limited to, debt collectors, credit reporting agencies, and financial technology companies];
  • Analyzing patterns and developments in the market to inform evidence-based policies and enforcement;
  • Protecting consumers through enforcement against unfair, deceptive, and abusive practices;
  • Establishing a new Financial Technology Innovation Office that will proactively cultivate the responsible development of new consumer financial products;
  • Offering legal support for the administration of the new law; and
  • Expanding existing administrative and information technology staff to support the DFPI’s increased regulatory responsibilities.

The statements on the DFPI indicate that it will be another “mini-CFPB” (i.e. a state version of the CFPB) that will protect California consumers in a way that Gov. Newsom believes the CFPB cannot. Former CFPB Director Richard Cordray is reportedly working with California to develop the DFPI.

DFPI Funding and Staffing

The Budget includes a $10.2 million Financial Protection Fund and the creation of 44 new positions at the DFPI between 2020 and 2021. This will grow to $19.3 million and 90 new positions at the DFPI between 2022 and 2023, to establish and administer the CCFPL. According to the Budget, initial costs for the DFPI and the CCFPL “will be covered by available settlement proceeds in the State Corporations and Financial Institutions Funds, with future costs covered by fees on any newly-covered industries and increased fees on existing licensees.”

Takeaway

Gov. Newsom’s comments in the Budget suggest that California will be more active in investigating regulated financial services entities and enforcing California’s existing consumer protection laws. Additional regulations may be passed as part of this initiative. Action by California is consistent with a growing trend among the states to be more active in their oversight of regulated industries in response to a less active CFPB. Industry participants should be mindful of this trend, assessing their compliance programs to manage oversight from multiple entities under multiple regulatory schemes.