During the past year, the Consumer Financial Protection Bureau (CFPB) has started taking a closer look at companies in the ARM industry in order to find non-compliance. These actions are based on recent consent orders (penalties) against businesses that were found in violation of CFPB regulations.
The CFPB has issued multiple consent orders against members of the ARM industry in the past year.
A specific point that is sure to make members of the ARM industry nervous is this: In March 2016, CFPB Director Richard Cordray referred to the recent consent orders as a “guide” for all participants in the ARM industry to adhere to in order to avoid violations. He specifically told the Consumer Bankers Association that any company not following the precedents set by the CFPB’s consent orders is committing “compliance malpractice.” (You can read his entire remarks here.)
With that thought in mind, (however NOT legal advice) it would be helpful to go over the CFPB’s definition of violations. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), all covered persons or service providers are legally required to refrain from committing unfair, deceptive, or abusive acts or practices (collectively called UDAAPs) in violation of the Act. Here is how the Dodd-Frank act defines those practices:
An act or practice is unfair when:
(1) It causes or is likely to cause substantial injury to consumers;
(2) The injury is not reasonably avoidable by consumers; and
(3) The injury is not outweighed by countervailing benefits to consumers or to competition.
A “substantial injury” typically takes the form of monetary harm, such as fees or costs paid by consumers because of the unfair act or practice. However, the injury does not have to be monetary.
Deceptive Acts or Practices:
An act or practice is deceptive when:
(1) The act or practice misleads or is likely to mislead the consumer.
(2) The consumer’s interpretation is reasonable under the circumstances.
(3) The misleading act or practice is material.
Deceptive acts or practices can take the form of a representation or omission. The Bureau also looks at implied representations.
Abusive Acts or Practices:
An act or practice is abusive when it:
(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 consumer’s lack of understanding of the material risks, costs, or conditions of the product or service;
(B) A consumer’s inability to protect his or her interests in selecting or using a consumer financial product or service; or
(C) A consumer’s reasonable reliance on a covered person to act in his or her interests.
The above definitions are summaries. For more complete descriptions and explanations directly from the CFPB, download CFPB Bulletin 2013-07 (pdf document).
There are two important points to remember:
- These prohibitions are separate, distinct and governed by separate legal standards. In other words, an “abusive” act or practice may also be deemed “unfair” and/or “deceptive”. Since the prohibitions are separate and distinct and governed by separate legal standards, the standards of each can be applied to a single act and the service provider can be found in violation of all three prohibitions.
- A service provider is responsible for the compliance of any vendors that the provider hires. If a vendor is found to be non-compliant, the service provider who hired the vendor is subject to fines, fees, and penalties. We discuss this more in depth in a previous blog post entitled Compliance is King.
So invest the time to review your policies and practices with your team. Staying within compliance is of utmost importance in your business. Taking the time to review your procedures now will prevent a lot of possible headaches in the future.
Helping service providers maintain compliance is a key focus for BillingTree. To learn more about how we can help you, visit Compliance Central