During the summer, the CFPB suffered two separate losses in prominent cases before federal judges. So far this fall, the Bureau has had mixed results in the three cases being heard in federal court, essentially losing two of them. While the judgments in those cases did not result in outright dismissals, the agency did see claim amounts adjusted, specific charges dropped or reduced, and reduction of certain penalties.
In the two losing decisions, the CFPB was denied the ability to pursue deceptive and abusive practices charges against a company for actions it committed prior to the July 21, 2011 passage of Dodd-Frank. In another case, the court rejected claims by the Bureau for restitution for all consumers who signed up for a specified service, since the agency had not proved that every consumer who signed up was hurt financially.
CFPB v. TCF National Bank
The U.S. District Court for the District of Minnesota dismissed the CFPB claims against TCF National Bank related to violation of Regulation E’s opt-in disclosure requirements. The September 8, 2017, decision came after the CFPB filed a complaint alleging that TCF misled consumers into opting into overdraft services it offered. The bank did allow the case to proceed based on additional claims that the bank violated the Dodd-Frank prohibition on abusive or deceptive practices.
CFPB v. Nationwide Biweekly Administration Inc.
In another case brought by the CFPB and resulting in the bench trial, the U.S. District Court for the Northern District of California rejected the Bureau’s contention that Nationwide’s disclosure of the setup fee related to its enrollment contracts lacked complete truthfulness. The CFPB had also claimed that the bank made various marketing statements that were misleading about the bank’s “Interest Minimizer” program, and that it violated abusive and deceptive practices regulations. The judges upheld this claim and found that portions of Nationwide’s marketing efforts were false or misleading. The court allowed the CFPB to collect civil penalties but declined an award of consumer reparations based on the lack of proof that every consumer enrolling in the program was harmed.
CFPB v. Charles Smith
In this third case, the U.S. District Court for the District of Maryland rejected the Bureau’s claims that lawyer Charles Smith violated Dodd-Frank’s “practice of law” exclusion by engaging in unfair, deceptive and abusive acts and practices (UDAAP). The charges were related to a scheme in which Smith allegedly misled structured settlement holders. In the complaint, the CFPB said that Smith deceived settlement holders into signing away their future settlement payments to Access Funding LLC in exchange for a one-time payout. However, the court found that he did not mislead clients, and also dismissed a claim against Access Funding that the company provided “substantial assistance” to Smith in misleading clients to engage. The court did allow the CFPB to continue their case against Access Funding for abusive acts in regards to advances given to structured settlement holders while their paperwork was being processed.
Reigning in the Bureau’s Authority
Under the Dodd-Frank Act, abusiveness is defined as an act or practice that: “(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.”
The CFPB sometimes vaguely interprets the definition of deception or unfairness under the act to file various claims against companies it feels are harming consumers. In the TCF case, the CFPB had claimed that the bank offered consumer opt-in notices for overdraft services with the initial account opening package. The court determined that the actions alleged by the CFPB demonstrate that TCF actions were likely to “deceive or confuse customers about its overdraft services.” The court did not explain, however, how they applied a legal standard to how the confusion may be construed as “abusive practices.”
In other cases, the CFPB has used the “abusive and deceptive” practices clause to ensnare financial companies for failure to concisely indicate an exact amount of fees or requirements of a certain program. The Bureau uses claims that consumers are “confused” or do not understand the terms of agreements as a way to file deceptive and abusive practices claims. The courts’ decisions in these three cases declined to take on the underlying reasons behind each deceptive and abusive claim as separate and distinct charges, often conflating implied deceptive practices with actual physical instances of wrongdoing.
Protecting Yourself against a UDAAP Claim
In the TCF case, the court dismissed the CFPB’s claims that the bank violated Regulation E based on the Bureau’s testimony that the bank had complied with the intent of the law. However, the court further rejected TCF’s contention that because they complied with Reg E, they could not have committed a UDAAP violation under Dodd-Frank. The court determined that simply because a notice was provided, a defendant cannot assert that any charges of a violation of the UDAAP are unwarranted.
This decision may have broad implications for the financial industry, given that compliance with the UDAAP regulatory regime does not fully insulate a company against being charged with a violation. There will be further litigation to be sure, and any decision by the courts will determine whether or not the CFPB continues to pursue aggressive enforcement actions against companies based on alleged UDAAP violations.
In the court decision for Access Funding, all UDAAP violation claims were dismissed against the attorney Charles Smith based on the determination by the court that Smith’s conduct constituted a “financial advisory” role, and thus not subject to the CFPB’s UDAAP enforcement authority. Specifically, the Dodd-Frank Act states, “the Bureau may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law under the laws of the state in which the attorney is licensed to practice law.”
Limits on Consumer Remuneration
Part of the CFPB’s enforcement authority provided by Dodd-Frank allows it to issue fines, such as consumer restitution, as part of a punitive action. However, the courts have found in several cases that the Bureau overstepped its authority in demanding excessive consumer restitution from alleged violators. In some claims, the CFPB issues a penalty that assumes no benefit was ever provided to the consumer by the institution.
Courts have rejected this argument because the CFPB cannot prove that no benefit ever existed. Thus, the court has reduced or outright dismissed many of the consumer monetary awards sought by the agency. Some of the civil judgments remain, however, as a punishment and deterrent for when deception charges are upheld.
For the past several years during the previous administration, it appeared that the CFPB seemed unopposed in its ability to unilaterally punish companies it determined had violated some aspect of Dodd-Frank. Recently, with a string of stinging court losses and a new administration questioning the very Constitutionality of the agency’s leadership and authority, the future may hold more questions than answers for the Bureau and the entire financial industry.