State Licensing and Federal UDAAP – What’s the Connection?
Consumer financial services providers likely think of state licensing requirements as a state law compliance issue. But the Consumer Financial Protection Bureau (CFPB) views these issues as federal matters as well. In a consent order issued December 8, 2020, the CFPB asserted that an unlicensed debt collector’s threat of suit and actual suit to collect on a debt violated the federal prohibition against deceptive practices. The consent order represents the CFPB’s latest action that essentially federalizes state law violations.
As we’ve previously discussed (here, here and here), the CFPB has taken the position in a number of lawsuits that where a loan is deemed void under state law—either because the lender wasn’t licensed or the loan was usurious—attempting to collect on that loan is unfair, deceptive and abusive. In 2016, a federal court agreed with the CFPB that such conduct was deceptive, though it noted that prior to its decision “there was no case law that clearly established” that principle. We noted at the time that “the CFPB may be emboldened by this decision to identify additional ways to ‘federalize’ state law violations under its expansive UDAAP authority.”
Now the CFPB has applied a similar theory to unlicensed collection activity. The recent consent order found that the respondent, RAB Performance Recoveries, LLC (“RAB”), threatened to sue, and did sue, consumers for unpaid debts in states that required a license to recover payment of consumer debts through the judicial process. RAB did not have such a license. The CFPB found that this conduct violated both the Federal Debt Collection Practices Act (FDCPA) and the prohibition against deceptive practices. The FDCPA violation is relatively straightforward, as that statute expressly prohibits “tak[ing] any action that cannot legally be taken” in collecting a consumer debt. The deception violation is a bit more novel. In the prior CFPB cases alleging that collecting on a loan that was deemed void as a matter of state law constituted a deceptive practice, the CFPB asserted that the act of collection deceptively implied that the underlying debt was valid. Here, similarly, the CFPB found that “threats to sue and actual lawsuits . . . implicitly represented that [RAB] had a legally enforceable right to recover payment from consumers through the judicial process when, in fact, its failure to adhere to applicable state-licensure laws meant it had no such right.”
Financial services companies should be on notice and consider the potential federal ramification of state licensing requirements across the life cycle of consumer financial products. While not every state licensing violation can be recast as a deceptive practice, the CFPB is clearly signaling that especially when it comes to debt collection it will not hesitate to rely on predicate state laws to find federal violations.
