The Year in CFPB: What 2015 Looked Like from the Regulators' Perspective

As 2015 winds to a close, it might be illustrative to take a look at some of the bigger actions the CFPB has taken in its oversight of the ARM industry.

1) Special Attention to Service Providers/Vendors

In early April of 2015, we learned that the CFPB had filed suit against a network of companies engaging in sham collection operations targeting “phantom” debts. However, this action went a step further, and named a number of legitimate payment processors and a voice broadcasting service as defendants, too — specifically, for “enabling” the debt collectors in their scheme.

The CFPB said that The Debt Collectors used collectors and automated telephone broadcasting services to contact consumers and threaten them with false allegations of check fraud and false claims of debt owed, which would result, according to the Debt Collectors, in service of a “financial restraining order,” notification to the consumer’s employer of the alleged fraud or debt, garnishment of wages, and arrest, unless the consumers paid the alleged debt.

The CFPB brought the claim under a provision of the 2010 Dodd–Frank Wall Street Reform and Consumer Financial Protection Act., citing that “[I]t is unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of section 5531 of this title [prohibiting unfair, deceptive, or abusive acts or practices.]”

There are potentially far-reaching ramifications for “service providers” as a result of this case. The ultimate issue may be the amount of due diligence” that will be required by a service provider before doing any work with a company subject to the CFPA.

2) Actions Against Larger Market Participants

In September of this year, the CPFB announced actions against two of the biggest debt buyers in the U.S., Encore Capital Group and Portfolio Recovery Associates (PRA). The Bureau cited both buyers for what it termed illegal debt collection activities, including purchasing debts they should have known were inaccurate and/or not legally enforceable and attempting to collect on that debt through unlawful means.

The Bureau ordered Encore to refund customers up to $42M, to stop efforts to collect on $125M in debts and to pay a $10M penalty. PRA is on the hook for $19M in refunds, must stop collections on $3M in debts and pay an $8M penalty.

Both buyers were expected to refund “tens of thousands” of consumers, per the CFPB estimates. The CFPB wouldn’t say what specifically triggered its investigation into the debt buyer giants, saying only that the actions and settlements followed from an agency investigation into the buyers’ practices.

The fact that this action was a possibility did not come as a surprise. This information had been listed in both PRA’s and Encore’s second quarter results. What was a surprise were the dollar amounts of the fines and refunds to consumers. Encore had mentioned exposure “in excess of $35 million”, but PRA Group had not provided any such guidance. The most significant takeaway for the ARM industry from this story is Director Cordray’s comment in the announcement: “Industry members who sell, buy, and collect debt would be well served by carefully reviewing the terms of these orders, as well as our recent resolution with JP Morgan Chase.”

3) Limiting Arbitration

In discussing the CFPB’s thoughts on arbitration, he describes the story of two hypothetical women, customers of two different banks, who both have experienced unexpected overdraft fees due to unexplained bank processing policies. Both end up paying hundreds in fees. After consulting with attorneys, who explain that there are likely many other consumers who have been affected by the same practices, both pursue action. One of the banks had an arbitration clause in their agreement with the consumer (that case was dismissed) and the other didn’t (that case successfully won a large settlement).

The CFPB’s proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well.

However, consumers traditionally get next to nothing in almost every class action case while the lawyers that file these cases become multi-millionaires. It’s clear that the CFPB views these economics as fair pay for attorneys who providing the service of holding companies accountable.

Arbitration has proven to a be quicker, cheaper, simpler, and less expensive method to resolve disputes. That would seem beneficial not harmful to consumers.

What is being ignored in this debate is the ultimate cost to the consumer if arbitration is eliminated and more class action litigation follows. Businesses will ultimately pass down to all consumers the costs involved defending and settling class action cases. The question is whether an average recovery of $32.35 per impacted consumer in these types of class action proceeding outweighs the class action costs that will ultimately be passed down by businesses to all consumers.

Is the CFPB protecting all consumers by suggesting the virtual elimination of these clauses?