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A Survey of Activities Identified as Unfair, Deceptive, or Abusive

Under the Dodd-Frank Act by

Adam D. Maarec, Davis Wright Tremaine LLP

John C. Morton, Gordon Feinblatt LLC

American Bar Association Consumer Financial Services Committee

Compliance Management and Federal and State Trade Practices Subcommittees

September 17, 2015

I. Introduction

This is our latest article in a series that surveys activities identified as unfair, deceptive or

abusive (UDAAP) by the CFPB, and state attorneys general and consumer financial services

regulators, using federal UDAAP powers created by the Dodd-Frank Act.1 This article covers

relevant UDAAP activity that occurred between January 1, 2015 and June 30, 2015, including

enforcement actions and other statements by the CFPB in reports that discuss UDAAP

violations.2 These activities provide insight into the specific types of practices that could be

considered UDAAP violations in the future.

We intend to publish periodic updates to this article cataloging new CFPB UDAAP activity and

related state enforcement actions using federal UDAAP powers.

II. Overview: Identification of Unfair, Deceptive, and Abusive Practices by the CFPB

and by the States

Between January 1, 2015 and June 30, 2015, the CFPB engaged in 16 new public enforcement

actions based on alleged UDAAP violations. These UDAAP actions can provide a road map for

industry participants to identify and better understand acts and practices that are considered

problematic by law enforcement authorities. UDAAP enforcement actions during the period of

this summary involved marketing, debt collection, debt settlement, and the servicing of

mortgages, other loans, deposit accounts, and payment accounts. The CFPB highlighted other

UDAAP issues in its Supervisory Highlights reports involving ACH payment cancellation terms,

deposit account servicing, overdrafts, student loan servicing, “general waiver provisions” in

home equity loan agreements, and mortgage servicing loss mitigation practices.

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. §§ 5301 et seq. (the “Dodd-Frank Act”);

see, e.g., 12 U.S.C. § 5552 (2014). 2 We have attempted to make this survey as comprehensive as possible, however, it is not exhaustive and there may

be other relevant actions that are not discussed in this paper. Also, it must be noted that this area of law is rapidly

evolving and new actions arise frequently.

2

The summaries of each UDAAP action below appear in chronological order and are intended to

provide a straightforward identification of the specific acts or practices that were alleged to be

unfair, deceptive, or abusive by the CFPB, state attorneys general and/or state regulators.

III. CFPB Enforcement Actions

a. Continental Finance Company, LLC3 - February 2015 (Marketing)

Continental Finance Company originated, marketed and serviced subprime, secured credit cards

on behalf of an unnamed state-chartered credit union. In a consent order, the CFPB claimed

jurisdiction over the company as both a “covered person” because of its loan servicing activities

and a “service provider” because it provided material services to a state-chartered credit union in

connection with the offering and provisioning of consumer financial products and services. The

CFPB alleged that the following acts were deceptive:

Stating that consumers could elect to receive paper statements for a monthly fee of $4.95,

but automatically enrolling consumers in paper statements and imposing the related

monthly fee; and

Stating that the cash security deposit paid by consumers to the company to open the

account was “FDIC Insured” when the deposited funds were not actually FDIC insured.

In addition, the CFPB alleged that when the $4.95 monthly paper statement fee was combined

with the credit card’s $75 annual fee, the total amount of fees per year exceeded Regulation Z’s

first-year fee cap of 25%, based on a typical consumer’s $300 credit limit. The company agreed

to pay $2.7 million in consumer redress and a $250,000 civil money penalty.

b. Newday Financial, LLC4 – February 2015 (Marketing)

NewDay Financial, LLC is a Maryland-based mortgage lender that is primarily engaged in the

business of originating home loan refinancings for veterans, servicemembers, and their surviving

spouses. NewDay entered into a consent order with the CFPB to settle allegations that NewDay

engaged in deceptive mortgage advertising and took kickbacks in violation of the Real Estate

Settlement Procedures Act.

Specifically, the CFPB alleged that NewDay participated in a marketing scheme, which was

facilitated by a third-party broker, where NewDay would be listed as the “Exclusive Lender” for

a certain veterans’ organization in exchange for “lead generation fees” that were paid by

NewDay to the veterans’ organization and the broker. This practice was considered deceptive by

the CFPB because NewDay failed to disclose to consumers that it had a material financial

relationship with the veterans’ organization.

Additionally, the CFPB alleged that the “lead generation fees” charged by NewDay violated the

Real Estate Settlement Procedures Act, as a prohibited “kickback” (defined as the giving or

receiving of “a thing of value” in exchange for the referral of settlement services).

3 In re: Continental Finance Company, LLC , File No. 2015-CFPB-0003 (Feb 4, 2015)

4 In re: NewDay Financial, LLC, File No. 2015-CFPB-0004 (Feb. 10, 2015).

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NewDay was ordered to pay a $2 million civil money penalty and to cease all deceptive

marketing practices and all kickback arrangements.

c. All Financial Services, LLC5 – February 2015 (Marketing)

All Financial Services, LLC is a Maryland-based mortgage broker and lender. The CFPB

alleged that the company engaged in deceptive marketing and advertisement practices in

connection with the advertisement of reverse mortgage products.

The CFPB alleged that the following practices were deceptive:

Misrepresenting that the source of All Financial’s advertisements was, or was

affiliated with, a governmental entity by using the image of an eagle on envelopes

closely resembling that used in the Great Seal of the United States, imprinting on the

envelope “IMPORTANT DOCUMENT ENCLOSED” (followed by a citation to the

United States Code regarding tampering with the mail), reading “OPEN

IMMEDIATELY”, and including the text “Home Saver—HECM Program Eligibility

Notice”;

Representing that no monthly payments would be required “whatsoever” under a

reverse mortgage, provided that the homeowner or spouse lives in the home, when (1)

homeowners who take out a reverse mortgage are still required to pay taxes and

insurance; and (2) at the time the ads were disseminated, the reverse mortgages

advertised by All Financial could be due upon the death of the last borrower,

regardless of whether a non-borrowing spouse still lived in the home; and

Misrepresenting that the Federal Housing Act-insured reverse mortgage program was

time-limited or had a deadline when there is no scheduled expiration date or deadline

for the FHA HECM insurance program.

On June 11, 2015, a settlement order was entered dismissing the action without prejudice and

requiring each party to bear its own costs.6 No additional information about the settlement terms

appears to have been made public.

d. Flagship Financial Group, LLC7 – February 2015 (Marketing)

Flagship Financial Group, LLC, a Utah-based mortgage lender and broker, entered into an

administrative proceeding consent order with the CFPB on February 12, 2015, in connection

with certain alleged deceptive marketing practices. The CFPB alleged that Flagship

disseminated advertisements that were designed to look like a government notice and implied

that the Federal Housing Administration was responsible for the advertisement. Additionally,

Flagship disseminated advertisements that promoted Veterans Administration guaranteed loans.

5 Consumer Financial Protection Bureau v. All Financial Services, LLC, No. 1:15-cv-00420-JFM, Dkt. No. 1 (D.

Md. February 12, 2015). 6 Id. Dkt. No. 16 (June 11, 2015).

7 In re: Flagship Financial Group, LLC, File No. 2015-CFPB-0006 (Feb. 12, 2015).

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According to the CFPB, these advertisements were designed to imply that Flagship had a special

or unique relationship with the Veterans Administration, when it did not.

These advertising practices were deemed deceptive because Flagship misrepresented, expressly

or impliedly, that: (1) Flagship was, or was affiliated with, the United States government; and (2)

the nature of the advertised mortgage credit products’ affiliation with a government program.

Flagship was ordered to pay a $225,000 civil money penalty.

e. American Preferred Lending, Inc.8 – February 2015 (Marketing)

American Preferred Lending, Inc., a California-based mortgage lender and broker, entered into a

consent order with the CFPB stemming from allegedly deceptive marketing practices. American

Preferred Lending disseminated over 100,000 direct mail advertisements that allegedly suggested

that the mortgage lender was affiliated with a governmental agency and obscured that the

mailings were really from American Preferred Lending. The direct mail pieces referenced the

Federal Housing Administration web address and included the Federal Housing Administration

Approved Lending Institution logo. However, the mailing pieces did not emphasize the

mortgage lender’s name and only included it in small print.

The advertisements were considered deceptive because they improperly suggested that American

Preferred Lending was affiliated with a governmental entity and because the advertisements

suggested that the mortgage lending products were endorsed or sponsored by a United States

government program.

American Preferred Lending was ordered to pay a civil money penalty of $85,000 to the CFPB.

f. Universal Debt & Payments Solutions, LLC et al.9 – March 2015 (Debt

Collection)

The CFPB filed a complaint for allegedly unfair, deceptive, and abusive debt collection practices

and violations of the Fair Debt Collection Practices Act against Universal Debt & Payment

Solutions, along with a series of related companies and individuals, including the debt collector’s

payment processors and telemarketer. The CFPB alleged that the following representations by

the debt collectors, made directly or indirectly, were deceptive:

That consumers had committed a crime (apparently by failing to repay), that the

companies were authorized to prosecute the crime by way of legal action and arrest, and

that the companies intended to take those actions;

That consumers owed a debt that the companies had authority to collect; and

That consumers had a legal obligation to pay the companies.

In addition, the CFPB alleged that the debt collectors engaged in the following unfair practices:

8 In re: American Preferred Lending, Inc., File No. 2015-CFPB-0005 (Feb. 12, 2015)

9 In re: Universal Debt & Payments Solutions, LLC et al., File No.: 1:15-cv-00859-RWS (N.D. Ga. March 26,

2015).

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Debiting consumers’ bank accounts without their consent; and

Using threats and harassment to obtain consumers’ purported consent.

The CFPB also alleged that the debt collector’s individual officers (control persons), payment

processors, and telemarketers were responsible for “knowingly or recklessly” providing

“substantial assistance” to the debt collector’s scheme to defraud consumers. The individuals’

substantial assistance to the debt collector, which formed the basis of its allegedly unfair or

deceptive acts, included: “purchasing debt and leads, providing skip tracing services, providing

telephone lines and broadcasting services, leasing office space, providing access to payment

processing services, and hiring and paying collectors.”

The payment processor’s substantial assistance came in the form of credit and debit card

processing, which the CFPB believes made the debt collector’s improper actions possible. The

CFPB alleged that the payment processor engaged in unfair acts or practices by:

Approving applications to process payments for debt collectors that were “replete with

indicia of fraud” and despite fraud warnings from consumers and industry; and

Failing to conduct reasonable due diligence to detect the debt collectors’ allegedly

unlawful conduct.

Finally, the telemarketer’s substantial assistance included broadcasting debt collection messages

on behalf of the debt collectors that it knew, or should have known, were unfair or deceptive and

contributed to the unlawful debt collection. The CFPB alleged that the telemarketers engaged in

unfair acts by “broadcasting millions of threatening collection messages to consumers” on behalf

of the debt collectors, which directly caused harm to consumers that was not reasonably

avoidable.

This case was not resolved at the time of publication.

g. National Corrective Group, Inc.10

– March 2015 (Debt Collection/Settlement)

The CFPB entered into a consent order with the National Corrective Group and its Chief

Executive Officer for allegedly deceptive practices in connection with bad check diversion

programs operated on behalf of state and local prosecutors’ offices. Bad check diversion

programs typically require consumers to repay a merchant receiving a bad check in full;

complete a financial accountability class; and pay a fee. Operators of bad check diversion

programs are exempt from being considered “debt collectors” under the Fair Debt Collection

Practices Act if certain conditions are met. The CFPB alleged that those conditions were not met

and that the company improperly used its relationship with state and local prosecutors in its

communications with consumers.

The CFPB alleged that the following representations, made directly or indirectly, were deceptive:

That communications were from an attorney;

10

In re: National Corrective Group, Inc., File No.: 1:15-cv-00899-RDB (D. Md. March 30, 2015).

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That nonpayment of the debt would result in arrest or imprisonment;

That legal action would be taken against the consumer; and

That written communications were from an official or agency of a state (and failing to

disclose that the letter was actually from a third party).

Violations of the Fair Debt Collection Practices Act also were alleged. The company agreed to

pay a $50,000 civil money penalty and to change its practices.

h. RMK Financial Corporation – April 2015 (Marketing)

RMK Financial Corporation, a California-based mortgage lender, entered into a consent order

with the CFPB in connection with the marketing of its mortgage origination activities.11

According to the CFPB, RMK’s advertisements included the following alleged deceptive acts or

practices:

Using the names, logos, and seals of the United States Department of Veteran Affairs and

Federal Housing Administration in such a way that the advertisements implied that

RMK’s mortgage products were sent by the VA or FHA, or that the products were

endorsed by the VA or FHA;

The advertisements contained a phone number below the advertisement, which referred

the borrower to the “VA Interest Rate Reduction Department,” notwithstanding the fact

that RMK never had a “VA Interest Rate Reduction Department”; and

The advertisements contained the words “Federal Housing Administration” at the top of

the page, along with a prominent FHA Approved Lending Institution logo.

The CFPB alleged that “[t]he net impressions created by the advertisements were also likely to

mislead reasonable consumers about whether [RMK] was or was [not] affiliated with the FHA or

VA.”12

Additionally, according to the CFPB’s allegations, RMK employees falsely stated or

implied that the company was part of or endorsed by the FHA or VA when potential borrowers

would respond to the mailing pieces.

RMK also was alleged to have violated the Truth in Lending Act (TILA) by failing to disclose

certain items in its mortgage advertisements.

RMK was ordered to pay a $250,000 civil money penalty as a result of its allegedly deceptive

practices and TILA violations.

i. S/W Tax Loans, Inc. et al.13

– April 2015 (Marketing)

The CFPB, in a joint consent order with the Navajo Nation Department of Justice, alleged that

S/W Tax Loans, its owner, and its president engaged in unfair, deceptive, and abusive acts and

practices in connection with tax refund anticipation loans (RALs) that carried a 240% APR. The

company’s owner also owned H&R Block tax preparation franchises, which offered a competing

11

In re: RMK Financial Corporation d/b/a Majestic Home Loans, File No. 2015-CFPB-0007 (Apr. 9, 2015). 12

Id. 13

In re: S/W Tax Loans, Inc. et al., File No. 1:15-cv-00299-JB-WPL (D.N.M. Apr. 16, 2015).

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line of credit product at a lower interest rate of 36% APR. The agencies alleged that a number of

undisclosed facts contributed to UDAAP violations, including incentive compensation paid to

H&R Block tax preparers for steering consumers to the RALs, the undisclosed common

ownership of the companies, and the receipt of tax proceeds by S/W Tax Loans before

consumers entered a second RAL, which would have been unnecessary had consumers known

that the tax proceeds were available.

The agencies alleged that the company took unreasonable advantage of consumers’ inability to

protect themselves, and thus engaged in abusive acts, by:

Steering vulnerable consumers to a more expensive product and not disclosing incentive

compensation paid to sales personnel and affiliated companies; and

Issuing subsequent RALs to consumers whose tax refunds had already been received by

the company without disclosing that the refund had been received and would be available

within a few days.

The company’s failure to disclose that the refund had been received and would be available

within a few days also produced allegations of unfairness and deception. The act was allegedly

unfair since it caused unavoidable injury in the form of a high APR, and because consumers had

to rely on the company to learn whether their refund was received. In addition, the agencies

alleged that the company deceptively urged consumers to take out subsequent RALs when

consumers made inquiries about the status of a refund and the company created a false

impression that the consumer’s refund proceeds had not yet been received.

Finally, the agencies alleged that the company deceptively disclosed the RAL’s APR by failing

to indicate the APR was an estimate, and understating the APR by basing the estimate on a 45-

day repayment term when most refunds were received in 12 days. The company, its owner, and

its president were ordered to pay $438,000 in consumer redress and a $438,000 civil money

penalty.

j. Fort Knox National Company, et al.14

– April 2015 (Loan Servicing)

Fort Knox National Company and its subsidiary, Military Assistance Company, managed a

military allotment program that processed payroll deductions and forwarded certain amounts to

creditors on behalf of servicemembers. After a creditor’s obligation was terminated, excess

funds (“residual balances”) would exist and trigger monthly residual balance fees. The CFPB

alleged in a consent order that the companies failed to adequately disclose that residual account

fees would be charged and failed to notify consumers that those fees had been charged. The

CFPB alleged that these disclosure failures were unfair since they prevented consumers from

avoiding the residual balance fees. The CFPB also alleged that the companies’ disclosure

failures resulted in materially incomplete, misleading, and thus deceptive statements. Finally,

the CFPB alleged the disclosure failures were abusive because:

14

In re: Fort Knox National Company, et al., File No. 2015-CFPB-0008 (Apr. 20, 2015).

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They limited the servicemembers’ ability to understand the product’s material risks,

costs, or conditions and, by charging the residual balance fees, the company took

unreasonable advantage of the servicemembers’ lack of understanding of the product

costs; and

They prevented servicemembers from protecting their interests in selecting or using the

allotment product (e.g. by taking steps to limit the residual balance fees) and the

company took unreasonable advantage of this handicap.

The companies agreed to pay approximately $3.1 million in equitable monetary relief to the

CFPB for consumer redress.

k. Green Tree Servicing LLC15

– April 2015 (Mortgage Servicing)

Green Tree Servicing LLC is a national mortgage servicer. The CFPB and FTC filed a joint

complaint against the company alleging a number of illegal actions in connection with Green

Tree’s mortgage servicing activities. The following practices were allegedly deceptive and

abusive:

Misrepresenting to consumers that the consumers’ mortgage loans have certain unpaid

balances, payment due dates, interest rates, monthly payment amounts, delinquency

statuses, and unpaid fees or other amounts due;

Demanding payment prior to providing loss mitigation options;

Failing to timely respond to consumers’ short sale applications and failing to complete or

evaluate short sale applications;

Representing that nonpayment of a mortgage loan will result in the arrest or

imprisonment of consumers or the seizure, garnishment, attachment, or sale of the

consumers’ property or wages;

Deceiving consumers into using the company’s pay-by-phone service, Speedpay, without

disclosing that there would be a convenience fee to use the service and that there were

other payment methods available that did not require a convenience fee;

Causing consumers’ bank accounts to be debited without the consumers’ consent;

Failing to honor in-process loan modifications when borrowers had modification

agreements with a prior loan servicer; and

Harassing and threatening overdue borrowers with repeated and continuous phone calls.

The company entered into a stipulated order for permanent injunction and monetary judgment

with the CFPB and the Federal Trade Commission and was ordered to pay $48 million in

restitution to borrowers and a $15 million civil money penalty.16

15

FTC and Consumer Financial Protection Bureau v. Green Tree Servicing, LLC, No. 15-cv-02064 (SRN-JSM)

Dkt. No. 1 (D. Mn. April 23, 2015). 16

Id. at Dkt. No. 5 (April 23, 2015).

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l. Regions Bank17

– April 2015 (Deposit Account Servicing)

The CFPB entered into an administrative consent order with Regions Bank to resolve allegations

that it unlawfully charged overdraft fees to consumers who had not elected to opt-in for overdraft

coverage. The “opt-in rule” under Regulation E requires that depository institutions obtain

consumers’ affirmative consent before charging overdraft fees when a consumer’s transaction

would otherwise be denied due to insufficient funds. When executives at Regions Bank learned

of the ongoing overdraft practices, the bank self-reported to the CFPB and agreed to reimburse

overdraft fees to hundreds of thousands of consumers, totaling over $48 million. The CFPB

alleged that the following practices were deceptive:

Misrepresenting that it would not assess overdraft fees in connection with ATM or one-

time debit card transactions unless the consumer opted-in; and

Charging consumers both a NSF fee and an overdraft charge due to a programming error,

notwithstanding language contained in a “frequently asked question” that the consumer

would not be charged overdraft fees.

In addition to $48 million in reimbursements already provided to consumers, Regions Bank

agreed to pay the CFPB an additional civil money penalty of $7.5 million.

m. Nationwide Biweekly Administration, Inc.18

– May 2015 (Marketing)

Nationwide Biweekly Administration, Inc. provided a biweekly mortgage payment program,

whereby it would transmit funds from consumers to their mortgage servicers in bi-weekly, rather

than monthly, payments (e.g. 26 bi-weekly payments in a year versus 12 monthly payments).

The CFPB filed a lawsuit against the company and its owner for allegedly deceptive and abusive

acts and practices in connection with the sale of the mortgage payment program.

The following practices were considered deceptive:

Misrepresenting, directly and indirectly:

o that consumers would save money and when they would achieve those results;

o that savings would be achieved without increasing the amount the consumer pays

each month;

o that the savings could not be achieved without the program;

o the amount and existence of a $995 program setup fee;

o that the company was affiliated with mortgage servicers; and

Violating the Telemarketing Sales Rule by failing to disclose the total cost of the service,

the central characteristics of the service, affiliations with mortgage servicers, and making

misrepresentations to induce a person to pay for the services.

The CFPB alleged that the company took unreasonable advantage of consumers’ lack of

understanding of the material risks, costs, or conditions of the program, and thus engaged in

abusive conduct, by guaranteeing consumers they would save money by enrolling in the

17

In re: Regions Bank, File No. 2015-CFPB-0009 (Apr. 28, 2015). 18

In re: Nationwide Biweekly Administration, Inc., File No. 3:15-cv-02106-RS (N.D. Cal. May 11, 2015)

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program, when, in fact, consumers would pay more in undisclosed fees during the first several

years than they would save. In addition, the company allegedly knew that “a substantial number

of consumers [would] leave the program prior to saving any money” and that consumers were

unlikely to know that they would pay more in fees than they would save (because the fees

weren’t disclosed).

This case was not resolved at the time of publication.

n. Verizon Wireless19

- May 2015 (Payment Account Servicing)

Verizon Wireless entered a settlement agreement with the CFPB for “cramming”, which

involved placing unauthorized third party charges onto wireless telephone bills. In the CFPB’s

complaint, it alleged that merchants offered coupons or free giveaways to trick customers into

providing their telephone numbers, and then enrolled consumers in unrelated monthly

subscriptions for premium text messaging services, such as ring tones and jokes. In some cases,

the third parties allegedly didn’t provide any services at all.

In its complaint, the CFPB alleged that the following practices, together, were unfair:

Automatically enrolling consumers in third-party billing without consent, thereby

reducing consumers’ ability to identify unauthorized charges;

Permitting third-party merchants to access customer billing systems without: (1)

requiring merchants to have customer authorization for purchases or comply with

industry guidelines; and (2) adequately overseeing these activities;

Failing to adequately resolve customer disputes by refusing to provide complete refunds

for unauthorized charges and only offering to stop future charges or referring consumers

to the offending merchants;

Ignoring or consciously avoiding red flags identifying flaws in its third-party billing

system, including tracking of customer complaints, and continuing to outsource billing

activities to companies that were subject to settlements for improper billing activities; and

Failing to differentiate first-party and third-party charges on its bills, the non-payment of

which would result in late fees, service termination, collections, and adverse credit

reporting, all of which was exacerbated by the company’s refusal to provide full refunds.

The company reached a settlement with the CFPB and related parties (which included the 50

state attorneys general and the District of Columbia) for $70 million in restitution.

19

In re: Verizon Wireless, File No. 3:15-cv-03268-PGS-LHG (D.N.J. May 12, 2015).

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o. PayPal, Inc. and Bill Me Later, Inc.20

– May 2015 (Marketing and Loan

Servicing)

PayPal, Inc. and Bill Me Later, Inc. offered consumers an online credit product, PayPal Credit.

The CFPB filed a complaint against the companies in connection with their activities in

establishing PayPal Credit as the default payment method when consumers were attempting to

enroll in a regular PayPal account and were thereby enrolled in PayPal Credit without their

consent. The companies allegedly engaged in the following unfair practices:

Enrolling consumers in PayPal credit without the consumers’ consent or authorization;

Processing payments through PayPal Credit without the consumers’ consent or

authorization;

Failing to accept, process, or timely post consumers’ payments made toward their PayPal

Credit account, including: (1) failing to take reasonable steps necessary to maintain the

online platform provided for consumers to make payments; and (2) failing to take

necessary steps to assure that the companies could process and post, or timely process

and post, consumer payments; and

Failing to adequately or timely address billing disputes, including disputes about

crediting payments, processing refunds, honoring advertised promotions, unauthorized

charges, and double billing.

Additionally, the companies allegedly engaged in deceptive advertising by representing that

consumers would receive promotional offers, such as $5 or $10 back on a purchase, or no

interest for six to twelve months, when in fact no such benefits were provided.

Finally, the CFPB alleged that the companies engaged in abusive practices by failing to provide

sufficient information to consumers about how payments were allocated to and among standard

and multiple deferred-interest balances. The companies allegedly failed to explain that PayPal

Credit’s practice was to apply amounts in excess of the minimum payment proportionally to

most, or all, promotional balances. These activities were considered abusive because consumers

were unable to control the allocation of their payments and incurred additional fees as a result,

notwithstanding the companies’ representations that consumers could control the allocation of

their payments.

The companies entered into a stipulated final judgment and order with the CFPB.21

PayPal was

ordered to pay $15 million in redress to its victims and the CFPB imposed a $10 million civil

money penalty.

20

Consumer Financial Protection Bureau v. PayPal, Inc., et al., Civ. No. 1:15-cv-01426-RDB , Dkt. No. 1 (D.

Md.). 21

Id. at Dkt. No. 8 (May 21, 2015); refiled to correct filing error at Dkt. No. 9 (August 3, 2015).

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p. Security National Automotive Acceptance Company, LLC22

– June 2015 (Debt

Collection)

Security National Automotive Acceptance Company, LLC (SNAAC) is an auto-finance

company primarily serving members of the United States military. The CFPB filed a complaint

against the company alleging various unfair, deceptive and abusive acts and practices in

connection with its collection activities.

In its complaint, the CFPB alleged that that the following practices were unfair:

Threatening to:

o contact servicemembers’ commanders concerning debts and delinquencies, and

o notify commanders that the servicemember is in violation of various military

regulations and subject to potential action under the Uniform Code of Military

Justice (UCMJ);

Representing to a servicemember that he or she could suffer damage to his or her military

career for failing to pay a debt; and

Disclosing details of servicemembers’ debts to their commanders.

The CFPB alleged that it was deceptive to represent, directly or indirectly:

An intention to take legal action against a servicemember when the company had no such

intention;

That a servicemembers’ failure to pay a debt could result in action by the UCMJ and

potentially impact ones military career when such an outcome was extremely unlikely;

That the company could commence an involuntary allotment or wage garnishment for

repayment of a debt without first obtaining a judgment; and

That a servicemember’ s failure to pay a deficiency judgment could result in the

servicemember being held in contempt of court or the imposition of other penalties,

including the taxability of the debt.

Finally, the CFPB alleged that the company engaged in abusive acts or practices by taking

unreasonable advantage of servicemembers’ “inability to protect their interests in connection

with [1] their selection of SNAAC to finance vehicle purchases and [2] SNAAC’s collection of

debt arising from such financing.”23

Specifically, the CFPB alleged that the following acts

together resulted in abusive conduct:

At the time servicemembers obtained the loans, the servicemembers did not know that

upon default the company would threaten to or actually contact the servicemember’s

commander, nor could a servicemember have anticipated the nature and frequency of

threatened and actual contacts;

22

Consumer Financial Protection Bureau v. Security National Automotive Acceptance Company, LLC, Civ. No.

1:15-cv-00401-WOB, Dkt. No. 1 (D. Md. Feb. 11, 2015, 2015). 23

Id.

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Servicemembers were not aware of contractual language in the loan agreement

purporting to authorize that contact and, in any case, would not have been in a position to

negotiate the agreement;

The company continued to contact the commanders of servicemembers even after

servicemembers had requested that such contact stop; and

The company exaggerated claims concerning the potential impact of delinquent debt on a

servicemember’s military career, threats to inform commanders about such debts, and

claims of potential action under the UCMJ that resulted in additional pressures on

servicemembers (that civilian borrowers would not face) in the context of debt collection

activities.

This action was not resolved at the time of publication.

IV. Updates on past cases

a. Union Workers Credit Services, Inc. – Settlement – February 2015

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The CFPB filed a complaint against Union Workers Credit Services, Inc. in December 2014

alleging that the company falsely advertised its cards as general use credit cards, when, in fact,

the cards could only be used to access closed-end, purchase-specific credit from the company. In

February 2015, the company entered into a settlement agreement with the CFPB whereby it

agreed to cease engaging in any activities relating to providing credit or to receive any

consideration in connection with the provision of credit and to pay a civil money penalty of

$70,000.

b. ITT Educational Services – Order on Motion to Dismiss – March 201525

The CFPB filed a civil complaint against ITT Educational Services, Inc.26

in 2014 alleging unfair

and abusive acts and practices in connection with its offering and provision of private student

loans. In April 2014, ITT filed a motion to dismiss based on several theories, which, in March

2015, was denied in part (with respect to the counts involving alleged “unfair” and “abusive”

acts or practices) and granted in part (with respect to the dismissal of the CFPB’s claim of a

violation of the TILA and Regulation Z). The court’s ruling on the motion to dismiss - while not

ultimately dispositive at this stage as to whether the alleged acts and practices are indeed

“abusive” - provides several interesting insights into how courts are dealing with claims of

abusive acts or practices in the context of pleading such claims.

First, ITT challenged the Consumer Financial Protection Act’s (CFPA) prohibition on “abusive”

acts or practices as being “unconstitutionally vague” alleging that the statutory language fails to

give fair notice of the standard required and therefore violates the Due Process clause of the Fifth

Amendment of the U.S. Constitution. The court denied this challenge, holding that:

24

Consumer Financial Protection Bureau v. Union Workers Credit Services Inc, Civ. No. 3:14-cv-04410-L, Dkt.

No. 11 (D. N. Tex. Feb. 10, 2015). 25

Order on Defendant’s Motion to Dismiss, Consumer Financial Protection Bureau v. ITT Educational Services,

Inc., Case No. 1:14-cv-00292-SEB-TAB (S.D. Ind., March 6, 2015) (“Order”). 26

Consumer Financial Protection Bureau v. ITT Educational Services, Inc., Case No. 1:14-cv-00292 Dkt. No. 1

(S.D. Ind., February 26, 2014).

14

The CFPA itself provides significant guidance for defining “abusive” conduct (see 12

U.S.C. § 5531(d)); and

Agencies and courts have successfully interpreted and applied the term in other closely

related matters.

Similar challenges based on claims of vagueness also have been denied.27

Second, ITT challenged the CFPB’s claims that ITT took unreasonable advantage of (i) “the

inability of consumers to protect their own interests” and (ii) “the reasonable reliance by

consumers on ITT to act in the consumers’ interests.” The court ruled against ITT’s motion to

dismiss on both counts, noting the following pertinent points:

Unreasonable advantage – ITT alleged as a threshold matter that the CFPB did not state

a claim that ITT took “unreasonable advantage” of its students. The court disagreed,

construing the meaning of the statute according to its plain language, referencing the

ordinary meaning of “to take advantage of” as “to make use of for one’s own benefit,” to

“use to advantage,” or to profit by.”28

Based on that definition, the court held that the

CFPB’s claims that ITT received a benefit by removing “doubtful assets” from its

balance sheet by having students sign up for private loans in connection with the CFPB’s

allegations about the “unfair nature of the students’ predicament” were sufficient to plead

that ITT derived an “unreasonable advantage” from its conduct.29

Consumers’ inability to protect their interests – ITT argued that the CFPB failed to assert

facts sufficient to support a claim that “students had an inability to protect their interests.”

In denying this argument the court noted that “[r]egardless of who caused the students’

vulnerability, the [CFPB’s] burden here is to show that they were, in fact, unable to

protect their own interests.”30

The court held that ITT’s argument was based on a too

“formalistic reading of the statutory requirement” and that while “students [may have]

never lost the theoretical power to defend their interests” (e.g., a student could

theoretically walk away from ITT and refuse to take out new debt), that a more

reasonable reading of the relevant statutory language “is that it refers to oppressive

circumstances—when a consumer is unable to protect herself not in absolute terms, but

relative to the excessively stronger position of the defendant.”31

Consumers’ reasonable reliance on ITT – Referring to general concepts of tort law, the

court held that “reasonable reliance” is a question of fact that is not generally appropriate

for resolution on a motion to dismiss.32

The court noted that the CFPB “alleged both that

ITT students relied upon staff members’ representations as to the private loans, and that

27

See, e.g., Illinois v. Alta Colleges, Inc., No. 14-C-3786, 2014 WL 4377579 at *3–4 (Sept. 4, 2014) (rejecting

defendant’s claim that UDAAP standard is unconstitutionally vague). 28

Id. at 57 (quoting Webster’s Third New Int’l Dictionary 2331 (3d ed. 1993). 29

Id. at 57. 30

Id. at 59. 31

Id. at 59 (citing Ting v. AT&T, 319 F.3d 1126, 1148–1149 (9th Cir. 2003) (noting that, under the doctrine of

procedural unconscionability, a literal, physical lack of consumer choice is not necessary to show oppressiveness);

Carey Alexander, Abusive: Dodd-Frank Section 1031 and the Continuing Struggle to Protect Consumers, 85 St.

John’s L. Rev. 1105, 1114–1119 (2011) (discussing the legislative history of the “abusive” standard as consistent

with the understanding that it is a statutory codification of the common-law doctrine of unconscionability)). 32

Id. at 60.

15

students acted in reasonable reliance on the school’s misrepresentations as to the nature

and role of the financial aid staff.”33

The court held that these allegations by the CFPB

were sufficient to plead a claim that ITT took unreasonable advantage of “the reasonable

reliance by the consumer on a covered person to act in the interests of the consumer.”34

c. Sprint Corporation – Settlement – May 201535

The CFPB filed a complaint against the Sprint Corporation in December 2014, in conjunction

with the Federal Communications Commission (FCC) and 50 state attorneys general, alleging

that the company outsourced certain compliance and billing practices to a third-party billing

aggregator that allowed fees for premium text messaging services to be unfairly placed on

customers’ wireless telephone service bills. In May 2015, Sprint entered into settlement

agreement with the CFPB under which it was ordered to pay $50 million in consumer redress (in

addition to fines paid to the FCC and states, and to reform its third-party billing practices.

V. Joint Enforcement Actions

The following enforcement actions summarized above were filed by the CFPB in conjunction

with other government actors:

a. S/W Tax Loans – A joint action with the Navajo Nation.

b. Green Tree Servicing – A joint action with the Federal Trade Commission.

c. Verizon Wireless – An action conducted in coordination with 50 state Attorneys

General and the Federal Communications Commission.

VI. CFPB Supervisory Highlights

The CFPB periodically issues Supervisory Highlights reports that summarize its supervisory

activity over a period of time. Its latest reports identified UDAAPs that were resolved through

supervisory actions that did not always result in a public enforcement action.

a. Winter 201536

The CFPB identified the following UDAAPs:

A risk of deception was created by statements that a recurring ACH payment option

could be adjusted or canceled with 24 hour’ notice, when later monthly periodic

statements provided that a minimum 72 hours’ notice was required.

33

Id. at 60-61. 34

Id. at 60 (citing 12 U.S.C. § 5531(d)(2)(C). 35

Consumer Financial Protection Bureau v. Sprint Corporation, Civ. No. 1:14-cv-09931-WHP, Dkt. No. 25 (D. S.

N.Y. June 30, 2015). 36

See Supervisory Highlights, Consumer Financial Protection Bureau (Winter 2015), available at

http://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf (last visited August 28,

2015).

16

Deception may occur if, without notifying customers, deposit account management is

switched from a ledger-balance method to an available-balance method for purposes of

deciding: (1) whether to authorize signature-based debit transactions and other electronic

transactions; and (2) whether to post or return checks and ACH transactions, when such

change could result in an overdraft (and the imposition of related fees).

Unfairness may occur when a series of transactions pushes an account into overdraft

status and fees are charged for each subsequent overdraft.

Deception occurred in connection with the disclosure of overdraft processing logic for

electronic transactions. Specifically, the disclosures created a misrepresentation that the

institution would not charge an overdraft fee with respect to an electronic transaction if

authorization of the transaction did not push the customer’s available balance into

overdraft status. However, the institutions assessed overdraft fees for electronic

transactions in a manner inconsistent with the overall net impression created by the

disclosures. The disclosures were also deemed unfair because customers were injured or

likely to be injured by the overdraft fees.

b. Summer 201537

The CFPB identified the following UDAAPs:

Student loan servicers engaged in deception by inaccurately suggesting on statements that

borrowers could not deduct student loan interest unless they paid more than $600 in

interest when no such limitation exists.

Home equity loan agreements with “general waiver provisions” were considered

deceptive because they implied that the borrower agreed to a waiver that was actually

unenforceable with respect to claims based on federal law.

Mortgage servicers were found to have:

o Engaged in unfair practices by failing to acknowledge loss mitigation applications

where the failure “caused delays in converting trial modifications to permanent

modifications, resulting in harm to borrowers…;”

o Deceptively described how deferred interest under a mortgage repayment plan

would be repaid, “suggesting that deferred interest would be repayable at the end

of the loan term when, in fact, it would be collected from the consumer

immediately after the deferment ended;”

o Engaged in unfair practices by not honoring the terms of trial modifications and

causing injury in the form of accrued interest;

o Unfairly and deceptively sent foreclosure notices to consumers that were

approved for trial modifications but before the first payment was due, which

discouraged consumers from carrying out the modification; and

o Deceptively sent foreclosure notices to borrowers that were current on their loans.

37

See Supervisory Highlights, Consumer Financial Protection Bureau (Summer 2015), available at

http://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf (last visited September 15, 2015).

17

About the Authors

Adam Maarec

Davis Wright Tremaine LLP

Washington, District of Columbia

adammaarec@dwt.com | 202-973-4217

Adam Maarec concentrates his practice on

consumer financial services, primarily advising

financial institutions on regulatory compliance

matters regarding credit product structures,

marketing, and servicing. Adam has experience

with a broad range of financial services laws,

including the Dodd-Frank Act, the Truth in

Lending Act, the CARD Act, the Gramm-

Leach-Bliley Act, the Fair Credit Reporting

Act, and the Real Estate Settlement Procedures

Act, as well as state-based lending and

insurance regulations.

Adam’s regulatory practice involves helping

companies comply with various laws and

regulations, drafting rulemaking comment

letters, meeting with government agencies, and

responding to regulatory investigations. Adam

is active in the American Bar Association’s

Consumer Financial Services Committee.

John Morton

Gordon Feinblatt LLC

Baltimore, Maryland

jmorton@gfrlaw.com | 410-576-4176

John Morton is a Member of Gordon

Feinblatt’s Financial Services Practice Group.

He provides legal advice to an extensive range

of financial institutions, including: nationwide,

regional and community banks; credit unions;

consumer lending companies; sales finance

companies; mortgage lenders and brokers;

investment advisers; and other regulated

businesses.

John provides counsel regarding multi-

jurisdictional compliance issues, including

advising clients on federal and state credit

statutes and regulations; UDAAP and the

CFPB; interaction with state and federal

regulators; licensing and registration matters;

due diligence and transactional matters; and

general corporate governance issues.