It seems unremarkable enough. A recent enforcement action filed by the Consumer Financial Protection Bureau targets a debt relief provider that was allegedly engaged in a plethora of unsavory and illegal practices – accepting advance fees in violation of the Telemarketing Sales Rule, impersonating a government agency, and not delivering on the promised savings. It’s hard to argue that these aren’t practices worthy of CFPB action.
So, you may be wondering what any of this has to do with lenders and finance companies. Well, as always, it pays to read the “fine print.” Tucked away in the CFPB’s 13-page complaint against Mission Settlement Agency is an allegation that certainly drew my attention and should draw yours. In Paragraph 26 of the complaint, the CFPB seemed to assert that it is an “unfair” practice, and therefore illegal, to charge “exorbitant” fees that leave consumers “in worse financial positions than before.” Not to be melodramatic, but ponder what the ramifications of this assertion could be if applied in other contexts. Consider the prospect of the CFPB looking over your shoulder to make sure the prices you charge, and the deals that you offer consumers, are acceptable to the government.
A brief refresher might be helpful here. Section 1031(c) of the Dodd-Frank Act gives the CFPB the authority to act against providers of consumer financial products or services if they engage in “unfair, deceptive, or abusive acts or practices.” The unfairness part of this equation is modeled after the Federal Trade Commission Act’s prohibition of “unfair or deceptive acts or practices,” including importing into the Dodd-Frank Act the definition of “unfair” found in Section 5(n) of the FTC Act: “[an] act or practice that causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”
It’s useful to know a little bit of the history of the FTC’s use of unfairness to understand my concern. Unfairness was added to the FTC Act in 1938 as a way of addressing problematic trade practices that did not fit within the category of “deceptive.” It was used quite liberally by the FTC over the ensuing decades, culminating in the agency’s conclusion in 1964 that selling cigarettes without including a health warning in advertising and on packaging was an unfair practice. Starting around 1976, the FTC decided to apply unfairness authority even more aggressively to challenge practices that it thought were ‘bad’ for the public but had little to do with the FTC’s role. Most memorably, in 1978, the FTC published a proposed rule “to eliminate harms arising out of television advertising to children,” including, as one option, banning advertisements for sugared cereals during children’s programming. Not surprisingly, this proposal raised quite a hue and cry in the business community, with The Washington Post labeling the FTC “the national nanny” for interfering with decisions that parents are supposed to make about what’s best for their children.
In response, Congress started systematically dismantling the FTC’s authority. Faced with possible oblivion, the FTC decided to create a much narrower definition of “unfair” to rein itself in and reassure Congress and the public that it could be trusted. That definition, later enshrined by Congress in the FTC Act, is the one quoted above that also now appears in the Dodd-Frank Act. It establishes, in essence, a cost-benefit test for finding a practice unfair – the practice must cause (or be likely to cause) substantial consumer injury that consumers could not have avoided and that outweighs any benefits the practice might produce (or the costs of fixing the problem). No longer could the FTC, or the CFPB for that matter, ban a practice simply because it believed the practice to be unscrupulous or oppressive to consumers. Since the definition was added to the statute, the FTC has been careful to apply its unfairness authority in cases where the practices were clearly harmful, like cramming unauthorized charges onto consumers’ phone bills, failing to disclose significant safety hazards created by a product, or failing to honor a refund policy.
One of the ways in which the FTC has exercised self-restraint is by staying out of the business of deciding when prices are too high. Most recently, in amending the Telemarketing Sales Rule to ban debt relief providers from charging advance fees (the same rule that the CFPB is enforcing in the Mission Settlement case), the Commission rejected a proposal to establish fee caps for debt relief services. It explained that, in its view, the law did not permit the FTC to regulate the amount of fees providers could charge and that, in general, fee-setting is best done by a competitive market. The Commission noted that “[t]he purpose of the FTC’s unfairness doctrine is not to permit the Commission to obtain better bargains for consumers than they can obtain in the marketplace.… Instead, it is to prohibit acts and practices that may unreasonably create or take advantage of an obstacle to the ability of consumers to make informed choices.”
That brings us to the CFPB’s complaint against Mission Settlement. Paragraph 26 of the complaint accuses Mission Settlement of committing unfair acts and practices as follows:
Despite promising consumers that it would settle their unsecured debts for typically 55% of consumers’ total outstanding credit-card balances, Mission often: (i) concealed the fact that creditors will not be paid by the time that consumers expect, or might not be paid at all; (ii) charged exorbitant debt-relief services fees often without settling any debts; and (iii) left consumers in worse financial positions than before they enrolled in Mission’s program.
What are we to make of this statement? There are several possible interpretations, including the following:
We can hope that the first two interpretations are not what the CFPB intended – they would certainly mark a 180-degree turn from the FTC’s application of unfairness over the past few decades and would raise the specter of the government monitoring the rates and fees that sellers charge to determine if they are “exorbitant” in some sense and perhaps even imposing a duty on sellers to ensure that consumers are “better off” after buying their products.
It is more likely, however, that the CFPB is trying to convey one or both of the third and fourth interpretations. With regard to the third, the failure to deliver promised products or services has frequently been challenged as an unfair practice by the FTC. What creates confusion and concern, however, is the CFPB’s reference to “exorbitant fees.” What the FTC cases stand for is the proposition that charging any fees without delivering the product or service is unfair; the amount of the fees may go to the extent of the injury, but it is not necessary for fees to be exorbitant for the practice to be unfair. The complaint suggests that there may be something inherently unfair about exorbitant fees.
With regard to the fourth interpretation, again it is unclear why the presence of “exorbitant” fees is relevant. Making debt settlement promises while “concealing” the fact that creditors will not be paid when consumers expect, if at all, is a classic deceptive practice, falling within the statute’s deception prong. Again, this is true regardless of the amount of the fees. What purpose is served by calling the fees “exorbitant,” and the practice unfair, if not to signal that there’s something illegal per se about charging exorbitant fees?
I’m not suggesting that the CFPB will now be monitoring everyone’s prices. Obviously, the practices that Mission Settlement engaged in have nothing to do with how you conduct your business. Nevertheless, the principle that the CFPB may be advancing here – that at least in some circumstances it is an unfair practice to charge “exorbitant” prices that leave consumers worse off – is troubling indeed. For example, given the skepticism that the CFPB has expressed about the value of debt protection products that auto dealers and others sell, might the agency challenge the pricing of these products as “exorbitant” and thus unfair?
How, or if, the CFPB chooses to apply this seemingly new and wide-sweeping principle in other settings remains unknown. But it is fear of this kind of unknown that keeps finance company personnel awake at night.
Joel C. Winston is a partner in the Washington, D.C., office of Hudson Cook, LLP. Joel can be reached at 202-327-9716 or by email at jwinston@hudco.com.
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