Today's Trends in Credit Regulation

The CFPB's Enforcement "Chokepoint" Strategies - Getting to the Root of a Problem
By Lucy Morris

If you are a lender or other "covered person" under the Consumer Financial Protection Bureau's jurisdiction, do you use third-party service providers to help you offer or provide consumer financial products or services? Or are you a vendor that helps covered persons provide these services? If your answer is "yes" to either of these questions, you should be aware of the CFPB's use of "chokepoint" strategies to get the most out of enforcement actions. Rather than play "whack-a-mole," going after one bad actor after another only to have new ones re-surface, the Bureau seeks to get to the root cause or source of a problem and stop it in its tracks. Sometimes, this means pursuing a service provider that facilitates the wrongdoing of covered persons. And at other times, this means suing covered persons for the conduct of their service providers. In both instances, the Bureau's enforcement cases send a strong message to covered persons and service providers alike: the Bureau will use its enforcement might to stop consumer harm in whatever way is most efficient. In other words, you can't hide behind others to avoid the Bureau's scrutiny.

A good example of the Bureau's effective use of a chokepoint strategy occurred in the debt settlement industry. In its first two years, the Bureau filed enforcement actions against several debt settlement companies that offered to help consumers reduce or eliminate their credit card or other debt by negotiating settlements with creditors. According to the Bureau, these companies charged consumers upfront fees before settling any of their debts, a violation of the Telemarketing Sales Rule. When the Bureau brought its first such case in 2012, against a debt settlement company called Payday Loan Debt Solution, it signaled its intent to root out unlawful practices. The Bureau's press release said the action was part of a "comprehensive effort to prevent consumer harm in the debt-relief industry" and that it was focusing not just on debt settlement companies, "but also on their partners, including those who facilitate their unlawful conduct."

Fast forward, and less than a year later the Bureau took action against Meracord, one of the largest payment processors used by debt settlement companies, for allegedly helping debt settlement companies collect millions of dollars in illegal upfront fees. As a result of this case, Meracord and its principals agreed to stop processing payments for debt settlement companies (and similar mortgage relief companies) and to pay a $1.3 million fine. In the agency's press release, it again talked about its "comprehensive effort" to prevent consumer harm in the debt settlement industry, listing the previous actions taken against debt settlement providers leading up to its case against Meracord. The enforcement strategy was clear. The Bureau started with individual wrongdoers and then moved to the payment processor that was making the illegal conduct possible.

The CFPB's strategy in this industry continued in August of this year, when the Bureau filed an enforcement action against Global Client Solutions, an even larger payment processor used by debt settlement companies. According to the Bureau's complaint, Global processed "tens of millions of dollars" in illegal advance fees from "tens of thousands of consumers," and processed these unlawful fees on behalf of "hundreds of debt relief companies" across the country. As a result of this case, Global and its principals agreed to broad injunctive relief prohibiting them from this kind of unlawful conduct and requiring Global to perform due diligence and screening before it processes payments for debt settlement companies in the future. The company and its principals also were required to pay more than $7 million, including a $1 million civil money penalty.

In suing these payment processors, the Bureau charged that the payment processors had violated the Telemarketing Sales Rule ban on assisting and facilitating others' violations of the rule: they provided substantial assistance to debt relief companies by processing payments. and they did so knowing that the companies were charging and collecting illegal upfront fees. These cases rely on the Telemarketing Sales Rule, but the Dodd-Frank Act also prohibits "any person" from "knowingly or recklessly provid[ing] substantial assistance to a covered person or service provider" that engages in unfair, deceptive, or abusive practices. This is a powerful "chokepoint" tool that the Bureau's Enforcement Office can use to stop covered persons, service providers, or indeed "any person" from knowingly helping others to violate the law.

In the payment processor cases, the CFPB took action against service providers for facilitating the primary wrongdoing of covered persons, i.e., the debt settlement companies. Conversely, in other cases, the Bureau has taken action against covered persons for conduct of their service providers. In doing so, the Bureau has sent a strong message that covered persons should monitor and police their service providers to prevent consumer harm. The Bureau first sent this message in 2012 when it issued its Service Provider bulletin and took the first of several enforcement actions against large banks for deceptive marketing and unfair billing related to credit card add-on products. Some of these banks outsourced their telemarketing of add-on products to vendors, but this didn't stop the Bureau from taking action against the banks. As the Bureau has made clear, a covered person can delegate tasks, but it can't delegate its responsibility to comply with federal consumer financial laws.

In addition to the credit card add-on cases, the Bureau has held companies responsible for their service providers in other markets like auto finance and payday lending. In August of this year, the Bureau filed an enforcement action against an auto finance company that used a vendor to furnish information on its accounts to credit bureaus. According to the Bureau, the vendor's system resulted in the inaccurate reporting of account information that potentially affected thousands of consumers. Although the cause of the problem was the vendor, the Bureau held the auto finance company responsible for failing to have or implement reasonable policies and procedures to comply with the FCRA Furnisher Rule. Similarly, in an Equal Credit Opportunity Act case announced last year, the Bureau held an indirect auto finance company responsible for alleged pricing discrimination by auto dealers, even though the auto finance company had no way of knowing of specific acts of discrimination. And in a case announced in July of this year, the Bureau sued a large payday lender for, among other things, illegal collection tactics by third-party debt collectors used by the company.

Now that the Bureau has pursued covered persons for conduct of their service providers, it has the authority to come full circle and pursue service providers for their own role in offering or providing the products or services. To the extent that a service provider offers its products or services to many different companies, an action against the service provider for law violations would further the "chokepoint" strategy of stopping a practice at its source. Under Section 1031(a) of the Dodd-Frank Act, the Bureau has broad enforcement authority to prevent a covered person or service provider from engaging in an unfair, deceptive, or abusive act or practice in connection with any transaction for a consumer financial product or service. Similarly, under Section 1036(a)(1), it is unlawful for any covered person or service provider to (A) offer or provide to a consumer any financial product or service not in conformity with Federal consumer financial law, or otherwise commit any act or omission in violation of a Federal consumer financial law; or (B) to engage in any unfair, deceptive, or abusive act or practice. In 2013, the Bureau used this authority to sue both an auto lender and its service provider for deceptive marketing and lending practices targeting servicemembers.

Where will the Bureau go next with its "chokepoint" enforcement strategy? We have seen payment processors held responsible for debt settlement companies that charged illegal fees. We have seen banks and other lenders held responsible for misdeeds by their service providers. One can imagine that the Bureau will continue to leverage its enforcement resources to get the biggest bang for its buck.

The question, then, is how to avoid or minimize the possibility of being the target of a CFPB enforcement action. As the saying goes, the best defense is often a good offense. What that means is taking an active and affirmative role to prevent violations from occurring in the first place by having a strong compliance management system and third-party oversight program. And if despite those efforts a covered person or service provider learns that it has violated the law, what then? There's no guarantee, of course, but the Bureau has indicated it will look kindly on a company's "responsible business conduct" in deciding whether to pursue a public enforcement action and the size of any fine. According to the Bureau, to get credit for responsible business conduct, "a party may proactively self-police for potential violations, promptly self-report to the Bureau when it identifies potential violations, quickly and completely remediate the harm resulting from the violations, and affirmatively cooperate with any Bureau investigation above and beyond what is required." Taking these steps - in particular, identifying and fully remediating violations - is not only the right thing to do for your customers, but it just might help you avoid a public enforcement action.

Lucy Morris is a partner in the Washington, D.C. office of Hudson Cook, LLP. Lucy can be reached at 202-327-9710 or by email at Before joining the firm, she was a Deputy Enforcement Director at the CFPB where she oversaw Bureau investigations and litigation.

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