Which of the following constitutes an abusive practice by a company trying to collect a debt:
- Answering the phone with, “How may I help you?”
- Closing on nights and weekends.
- Going to court to recover an account in default.
Under a new policy proposed by the Consumer Financial Protection Bureau (CPFB), the answer could be all of the above.
The policy seeks to interpret a ban on “abusive acts or practices” in connection with a consumer financial product or service in the Consumer Financial Protection Act of 2010 (CFPA), part of the post-financial crisis Dodd-Frank reforms.
Congress added the concept of abuse to the longstanding prohibitions on unfair and deceptive conduct to combat some of the most egregious practices in the mortgage industry leading up to the financial crisis. The issue often wasn’t that customers were deceived about the terms of their loans; it was that mortgage brokers arranged and sold loans they knew the borrower couldn’t repay. Millions of families faced foreclosure as a result of these products that were “designed to fail.”
The CFPB’s new policy interprets the concept of abuse to go far beyond these predatory lending practices. Indeed, the bureau says conduct can be abusive even if the consumer was not harmed. Nor, it declared, could a company defend itself by claiming it hadn’t intended to mislead customers.
During the Trump administration, the CFPB declared it would not pursue abuse cases unless “the harms to consumers from the conduct outweighed its benefits.” The bureau has now rescinded that policy, suggesting it’s open to mandates that impose substantial burdens on financial companies while providing little benefit to consumers.
Rohit Chopra, the bureau’s director, said the policy is meant to offer the industry a “bright line” to clarify how the law will be enforced. Its effect is likely to be the opposite, eliminating standards that have provided some guidance to financial services companies.
In nearly every section of the 9,000-word policy statement (interpreting 126 words in the act), there is room for an expansive interpretation of what constitutes abusive acts or practices. The bureau is essentially giving itself license to return to “Regulation by Enforcement,” the practice of its early years when it communicated new rules by bringing an enforcement action rather than publishing them in advance.
The impact on collections
Here I’m going to walk through three examples of how this open-ended framework could interfere with normal operations of debt collection and collection litigation. The policy also leaves many other aspects of consumer finance, especially the marketing of new products, vulnerable to a charge of abuse.
The collections process will be most affected by the bureau’s interpretation of the CFPA provision that bans financial companies from taking “unreasonable advantage” of certain situations that could give them the upper hand in dealing with consumers.
Although the policy statement offers some guidance on what is considered unreasonable, it does not make any attempt to identify instances of “reasonable advantage.” Rather, it offers a list of things that are not required for the advantage to be unreasonable, including whether the practice is typical in the industry or that a significant number of consumers misunderstood the situation.
Taken to its logical extreme, we could say that a practice is abusive if one person has an unreasonable understanding of the product and suffers no harm as a result, even though no benefit may have accrued to the entity.
The law identifies three specific ways that a financial company can have an unreasonable advantage, and the bureau’s policy statement interprets each of them in a way that could be problematic for the collections industry.
1. Taking unreasonable advantage of “a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.”
The CFPB specifically calls out that lack of understanding can include failure to understand the likelihood and consequences of defaulting on a loan. And it defines abuse to include taking advantage of gaps in understanding by consumers of the non-monetary costs of a product, like the time and inconvenience required to obtain benefit from the product.
This definition could well include a consumer who did not realize that their debt would be accelerated upon default, that they might have to go to court, or that the lawsuit would add charges like court costs to the debt amount.
Will lenders have to include a prominent and explicit description of the U.S. legal system before originating a loan?
The policy statement is not explicit.
2. Taking unreasonable advantage of “the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.”
Here the policy includes a focus on situations where consumers can’t select the company they are dealing with, including when a creditor sends an account to a collections agency.
“Even though there may be many participants in these markets, you have no choice but to deal with a specific, single servicer or debt collector that you did not choose,” said Chopra in remarks introducing the new policy.
What the director didn’t say is what would be considered taking unreasonable advantage of the fact that the consumer cannot switch debt collectors. There certainly are many differences between collection firms—their hours, the payment types they accept, and even the average time on hold before reaching a collector. Some are more willing than others to erase a negative credit bureau report in exchange for a payment.
Is the CFPB suggesting that it could be considered abuse to assign a debt to a collection firm that didn’t have the policies preferred by the consumer?
The bureau expresses no preference.
3. The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
This aspect of the policy focuses on situations “where an entity communicates to a person or the public that it will act in its customers’ best interest.” It’s meant to deal with cases like mortgage brokers who steer clients to products that produce the most profit rather than those that have the best terms for the borrower.
Here too, the agency has eliminated any guidelines that might focus enforcement on cases where there is significant harm to consumers. So it leaves open whether standard customer service language can be considered a representation of acting in the customer’s best interest.
Will collectors be banned from answering the phone saying, “How can I help you?” or from responding to a concern with, “We’d be happy to help you get this matter resolved?”
The CFPB offers no help.
There’s still time to comment
These examples are just a small fraction of the questions that the CFPB’s overbroad and ambitious policy statement leaves open. Thankfully, it’s not final yet, and the bureau is accepting comments on it until July 3.
If your company is involved in any aspect of consumer finance, now is your opportunity to ask the bureau to provide the bright line that Director Chopra promised.
Comments can highlight where the draft policy statement lacks the guidance that the industry needs to comply with this interpretation of the law. And they can predict how participants will react if the rules are left unclear.
I suspect the bureau’s current plan will wind up hurting consumers more than helping them. The credit application process will be bogged down by needless disclosures. There may be fewer innovations because new products could be more likely to be misunderstood. And fewer people could get loans because restrictions on the ability of creditors to collect a debt may encourage them to concentrate only on customers with high credit quality.
While the CFPB policy statement is meant to encourage the marketing of financial products while eliminating abusive practices, it may end up delivering none of the above.
Jessica D. Lamoreux is the Director of Risk and Compliance at Oliver Technology Corporation. She regularly presents to industry groups on a wide range of compliance-focused topics, including Regulation F. She has experience supporting compliance for both debt collection firms and original creditors.
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