In 2013, the Consumer Financial Protection Bureau filed a complaint against CashCall Inc. and other financial services companies, alleging that their conduct in collecting on payday loans that allegedly violated certain states’ usury and/or licensing laws constituted unfair, deceptive and abusive acts and practices under federal law. The CFPB recently struck again, filing suit against NDG Financial Corp. and others, making similar claims. The complaint against NDG, however, both expands the list of states where the CFPB alleges that collecting on a usurious and/or unlicensed payday loan is a case of UDAAP and changes the theory of abusiveness upon which the CFPB relies.
In CashCall, the CFPB first articulated its theory that certain violations of state law also constitute violations of the federal UDAAP prohibition. CashCall involves payday loans made by an entity that claimed that the loans were only subject to the laws of the Cheyenne River Sioux Indian Reservation. The CFPB, by contrast, alleged that these loans were subject to, and violated, certain state usury and/or licensing statutes.
The CashCall complaint identifies five states — Arkansas, Colorado, New Hampshire, New York and North Carolina — whose laws allegedly provide that certain loans made in violation of the state usury limit are void in whole or in part. The CashCall complaint also identifies seven states — Arizona, Colorado, Indiana, Massachusetts, New Hampshire, New York and North Carolina — whose laws allegedly provide that certain loans made by unlicensed lenders are void in whole or in part.
The CFPB can’t enforce those state laws. Instead, it asserted a novel theory and alleged that because the underlying loans were unenforceable as a matter of state law, the defendants’ attempts to collect those loans constituted unfair, deceptive, and abusive conduct prohibited by Dodd-Frank, which the CFPB can enforce. I focus here only on the abusive conduct claim.
Relying on one prong of the statutory definition of abusiveness, in CashCall the CFPB alleged that collecting on such loans is abusive because it “takes unreasonable advantage of ... a lack of understanding on the part of the consumer of the material risks, costs, or conditions of” a consumer financial product or service. Thus, the CFPB alleged that defendants’ collection efforts “took unreasonable advantage of consumers’ lack of understanding about the impact of applicable state laws on the parties’ rights and obligations.” Implicit in the CFPB’s claim is that: (1) collecting on loans can constitute “taking unreasonable advantage” of someone and (2) that the “impact of applicable state laws” is a “material risk, cost, or condition” of the underlying loan.
Presumably, the CFPB will need to establish both elements to succeed on its abusive conduct claim. The complaint does not make clear whether the CFPB believes that the “impact of applicable state laws” is a risk, cost or condition of those loans, or some combination of those attributes. The alleged unenforceability of a loan, however, does not appear to be a “risk” of the loan to a borrower, or a hidden “cost” of the loan. The CFPB’s claim, therefore, likely turns on its being able to establish that the “impact of state laws” is a “condition” of the loans.
Last month’s complaint against NDG — which involves payday loans made by foreign and off-shore entities that, like the CashCall lender, claim they are not subject to state law — asserts similar claims, but with a few notable differences. First, the NDG complaint substantially expands the list of states whose laws allegedly render some usurious or unlicensed loans void as a matter of state law (a prerequisite for the CFPB’s UDAAP theories). In addition to the CashCall states, the NDG complaint lists Minnesota as a state where certain usurious loans are void, and Alabama, Illinois, Kentucky, Minnesota, Montana, New Jersey, New Mexico, Ohio and Utah as states where certain loans made by unlicensed lenders are void in whole or in part.
Second, and more interestingly, the CFPB appears to have changed its theory as to why collecting on such loans is abusive. Dodd-Frank sets forth four separate types of conduct that can constitute abusiveness — conduct that:
(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
takes unreasonable advantage of —
(2) a lack of understanding on the part of the consumer of the material risks, costs or conditions of the product or service;
(3) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
(4) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
As discussed above, in CashCall the CFPB relied on the second of these prongs, alleging that attempting to collect on loans rendered void by state law takes “unreasonable advantage” of a lack of understanding on the part of the consumer of the “material risks, costs, or conditions” of the loan.
Perhaps proving that — as CFPB Director Richard Cordray famously said — the term abusive is “a little bit of a puzzle,” the CFPB has now shifted gears. In the NDG complaint, the CFPB appears to allege that collecting on loans that are rendered void in whole or in part pursuant to state law is abusive because it violates the first prong above: it “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.”
Implicit in this new theory are the notions that: (1) collecting on a loan can constitute “material interference” and (2) the enforceability of the loan is a “term or condition” of the loan. This difference in approach affects both elements of the abusiveness equation: it substitutes “materially interferes with” for “takes unreasonable advantage of” the consumer’s lack of understanding, and requires the alleged unenforceability of the loans to be a “term or condition” as opposed to a “material risk, cost, or condition” of the loans.
As to the first element, it is not clear why the NDG defendants’ collection conduct is deemed to “materially interfere” with consumers’ understanding of the law, whereas the CashCall defendants’ collection activity is alleged to “take unreasonable advantage of” consumers’ lack of understanding. In both cases, the conduct at issue involved collecting on allegedly void loans without informing consumers about the impact of the underlying state law. There is nothing in the NDG complaint that suggests a reason for this change. (Although the NDG complaint alleges that the defendants used irrevocable wage assignment clauses in their notes to collect on the loans, in alleged violation of the credit practices rule, the CFPB did not assert that the use of those clauses was abusive.)
The change in theory is even more puzzling when considering the second element, where the defendants’ conduct is immaterial to the determination of whether the “impact of state laws” allegedly rendering the loans unenforceable is a “term or condition of the loan” (required for the new theory of abusiveness alleged in NDG) or a “material risk, cost, or condition” of the loan (required for the old theory of abusiveness alleged in CashCall). The alleged unenforceability of the loans is no more readily characterized a “term” of the loans under the new theory than it is a material “risk” or “cost” of the loans under the old theory. That appears to leave the CFPB relying on an argument that the impact of state laws on the loans in NDG is a “condition” of those loans (as opposed to a “material condition” in CashCall).
It bears noting that the NDG complaint is not a model of clarity. The complaint only cites to the statutory provision setting forth the “materially interferes with” prong of abusiveness (and also brings a separate, but similar, abusiveness claim under that same prong based on defendants’ alleged statements that their loans are not subject to U.S. state or federal law). At the same time, the complaint contains a separate paragraph asserting that defendants took “unreasonable advantage of consumers’ lack of understanding regarding the enforceability of the loans.” Elsewhere, it asserts that the “consumer's legal obligation to repay is a material term, cost, and condition of the loan,” conflating the “term or condition” requirement of the new theory with the “material risk, cost or condition” requirement of the old theory. Regardless of whether the CFPB shifted gears because of different facts, additional legal analysis, or simple inadvertence, the agency’s changing approach does little to help clarify the scope of what constitutes “abusive” conduct under Dodd-Frank. That is still an evolving concept — and likely will be for some time until the courts have a chance to provide further definition to each of the statutory prongs.