Abusiveness The CFPB s New Enforcement Tool Ori Lev Partner Mayer Brown olev@mayerbrown.com Christopher Shelton Associate Mayer Brown cshelton@mayerbrown.com
Speakers Ori Lev Partner Mayer Brown olev@mayerbrown.com Christopher Shelton Associate Mayer Brown cshelton@mayerbrown.com 2
From UDAP to UDAAP Federal Trade Commission Act, 1938 Unfair (causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and which is not outweighed by countervailing benefits to consumers or to competition). Deceptive (likely to materially mislead a consumer whose interpretation is reasonable under the circumstances). Dodd-Frank Act, 2010 Unfair Deceptive Abusive (??) 3
Use of Abusiveness in CFPB Enforcement Cases 140 120 Number of CFPB Enforcement Cases 100 80 60 40 20 Abusiveness Not Alleged Abusiveness Alleged 0 2012 2013 2014 2015 Total 2012- May 2016 4
Abusiveness: Four Separate Theories ( Prongs ) of Liability 5
Use of Specific Abusiveness Prongs by the CFPB 30 Number of Claims (Some Cases Include Multiple Claims) 25 20 15 10 5 0 2013 2014 2015 Total 2013- May 2016 Prong (1) Prong (2)(A) Prong (2)(B) Prong (2)(C) 6
Prong (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service. Only three CFPB cases invoke Prong (1). Generally involves misrepresentations that prevented consumers from understanding a term or condition of a financial product. In one recent case, minimizing the amount of time that the consumer had to view a key document was used to support a Prong (1) claim. Prong (1) has generally been used in combination with other abusiveness prongs, as part of a kitchen sink or belt and suspenders approach. 7
Prong (2)(A) takes 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. Ten cases invoke Prong (2)(A). (2)(A) can be thought of as Deception Plus. A deceptive statement or omission is often the basis for the consumers lack of understanding, and then accepting money from the consumers often constitutes taking unreasonable advantage of the consumers lack of understanding. 8
Prong (2)(A) takes 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. Example of (2)(A): company that offered pension advances obscured the true nature of the credit transaction by denying that their product was a loan and failed to disclose or denied the existence of an interest rate and fees associated with the loans. 9
Prong (2)(B) takes 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. 11 cases invoke Prong (2)(B). (2)(B) can be thought of as Unfairness Plus. The consumer s inability to protect her interests under (2)(B) is very similar to a substantial injury that is not reasonably avoidable by consumers under the unfairness doctrine. 10
Prong (2)(B) takes 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. Example of (2)(B): A payday lender allegedly created an artificial sense of urgency to induce delinquent borrowers with a demonstrated inability to repay their existing loan to take out new loans. 11
Relationship of Prongs (2)(A) and (2)(B) Arguably, all (2)(A) cases could also be (2)(B) cases. A consumer who does not understand the material terms of a financial product presumably cannot protect her interests in selecting or using it. (2)(A) (2)(B) 12
Prong (2)(C) takes unreasonable advantage of the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. Only three cases invoke Prong (2)(C). Cases so far have tended to focus on schools and student loan counselors who induce students trust and then allegedly take advantage of that trust by advising the students to purchase financial products that are not beneficial. (2)(C) might also apply in other contexts where the defendant has a relationship of trust with vulnerable consumers. 13
How Is Abusiveness Distinctive from Unfairness and Deception? Possible Areas Where Abusiveness is Distinctive: Suitability: A number of cases under (2)(A), (2)(B), and (2)(C) focus on the defendant s knowledge that the financial product is not in the consumer s best interest. Steering: Some cases under (2)(A) and (2)(B) concern directing consumers to financial products containing lessfavorable terms than might be available to them elsewhere. 14
QUESTIONS
Mayer Brownis a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLPand Mayer Brown Europe Brussels LLP, both limited liability partnershipsestablished in Illinois USA; Mayer BrownInternational LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359);Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated legal practices in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary, which are affiliated with Mayer Brown, provide customsand trade advisory and consultancy services, not legal services. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.