The Consumer Financial Protection Bureau (CFPB) has proposed a new rule to regulate payday lending and auto-title loan companies. Right now, it is merely a proposal, meant to undergo the notice and comment period until September 14, 2016. But if the rule goes into effect, it would be a significant imposition on the lending business.
The CFPB has been studying the effects of payday lending on consumers for years and found that many consumers struggle. They cannot repay their loans, so they take out new ones and incur significant penalties and fees. Or, they default on repayment altogether. The new rule tries to reduce this by regulating the people who issue those loans.
In theory, the rule would affect two types of loans: those with a term of 45 days or less, and those with a term of more than 45 days but with certain specifications, like an all-in annual percentage rate above 36% and a consumer’s bank account or vehicle for collateral. Before issuing either loan, a lender would have to determine if the borrower can repay it without re-borrowing in the following 30 days. To determine this, a lender would assess the borrower’s income, debt obligations, and housing costs; project them over the life of the loan; and forecast non-housing living costs.
The rule would also restrict how lenders can collect repayment. Today, lenders are allowed unlimited tries to withdraw from an indebted borrower’s bank account, but the new rule would stop them after the second attempt that fails due to insufficient funds.
Because the rule has not been approved yet, affected borrowers and lenders can speak out against or in favor of it. Richard Cordray, the director of the CFPB, has promised that the Bureau “will continue to listen and learn” as comments come in. Sourcing from the industry is the best way to create a rule that protects consumers and helps lenders continue to provide so vital a lifeline.
Recently, I wrote about the CFPB’s plans to issue new regulations restricting arbitration clauses in certain consumer contracts. Today, the agency announced those new rules and CFPB Director Richard Cordray is expected to discuss them at the agency’s field hearing in Albuquerque, New Mexico. As expected, the new rules eliminate the use of class action waivers and otherwise restrict the availability of arbitration in consumer contracts, including those involving credit transactions, automobile leases, debt relief services, consumer depository accounts, check cashing, credit monitoring/reporting, and debt collection. The CFPB admits that it intends to “incentivize” greater legal compliance through the “in terrorem” deterrent impact of the new rules. In other words, the CFPB wants the prospect of increased class action litigation to scare companies into treating consumers better.
The new proposed rules are available at the CFPB’s website along with over 350 pages of supplementary information explaining the proposed rulemaking. The CFPB proposal prohibits “companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits.” See Proposed § 1040.4(a). Companies would still be able to include arbitration clauses in their contracts, but could not restrict access to class litigation and the arbitration provisions must include specific language provided by the CFPB.
In addition, in practical terms, the CFPB has just designated itself as the overseer of U.S. arbitral bodies in direct contrast to existing laws and rules that provide very limited court oversight and review of arbitration decisions. The proposed rules would require covered companies to submit detailed information about any of their consumer arbitrations to the CFPB. See Proposed § 1040.4(b). The CFPB states that it will gather, and may publish, this data so that it may gain “insight into whether companies are abusing arbitration or whether the process itself is fair.” Although the rule provides for redaction of personal information, this new practice threatens to undermine the confidential nature of arbitrations and thereby limit one of arbitration’s principle benefits. It is not yet clear how the CFPB might conclude that consumer arbitrations are “unfair” or what they might do in response to such a determination.
Regardless of whether the proposed regulations will succeed in scaring companies into greater legal compliance, if the rules become effective, companies should expect a marked increase in consumer class action litigation. The newly announced regulations are not final, however, and interested parties will have an opportunity to comment before the rules become effective. Interested parties have 90 days from the publication of the proposed rule in the Federal Register to comment and we expect multiple objections from the financial industry this summer. The comments likely will include practical examples of the benefits of consumer arbitration provisions, critiques of the agency’s study of consumer arbitration that formed the basis of the proposed regulations, and proof of the detrimental impact that an increase in class actions will have on the business community, especially on smaller businesses. Any potentially covered company should consider commenting on the CFPB proposed regulations, either directly or through trade associations.
Once the rules are final, companies will only need to comply with the new regulations prospectively; the provisions of the Dodd-Frank Act authorizing the CFPB to regulate arbitration provide that any new rules will be binding 180 days after their effective date. So any arbitration agreement entered into prior to, or within six months of, the new rule’s effective date is not subject to the new restrictions. This gives potentially covered companies some breathing space to review and, if necessary, modify their existing contracts.
Although many in Congress do not support the newly proposed rules, given current political realities, there are unlikely to be any legislative changes to the proposed rules or the CFPB’s authority. As a result, we expect that something close to the proposed rule will become effective later this year. Following that, there likely will be multiple court challenges to the new rules and the CFPB’s authority to issue them. In the meantime, all potentially affected companies should:
- Review their existing contracts and arbitration programs to determine whether their existing contract forms would violate the proposed regulations;
- Prepare alternative contract language if existing forms will no longer be permitted; and
- Consider whether their existing pricing structure and litigation positions make sense in the coming world.
Whatever the goal, companies are unlikely to be scared into greater legal compliance; most companies already strive to comply with the law. We anticipate that the CFPB’s proposed rules will have many unintended consequences. In the short term, the increase in class action litigation will be a boon for many lawyers. Consumers with legitimate claims, however, may find that the class action process results in smaller payouts over which they have less control. And as companies adjust to this new environment, they will pass on the increased costs of increased class litigation to customers and likely will further tighten credit standards and product availability to reduce potential claims.
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 Under Section 9 of the Federal Arbitration Act, a court must confirm an arbitration award unless it is vacated, modified, or corrected in accordance with Sections 10 and 11.5 of the FAA, i.e. where the award was procured by corruption, fraud, or undue means or there was an evident material miscalculation or mistake in the award.
 For example, companies may wish to withdraw from the American Arbitration Association’s Consumer Clause Registry. For that matter, the AAA and similar arbitral organizations are sure to lose significant business as the consumer arbitration market is sure to shrink significantly if the new rules become effective.
Since the Federal Arbitration Act (FAA) of 1925, the United States has had a policy preference for arbitration, even when an arbitration provision includes language barring class action litigation. We saw this most recently in December 2015 when the Supreme Court reversed a decision by a California Court of Appeal to invalidate a class-arbitration waiver within a service agreement between DirecTV and its customers. But not everyone thinks arbitration is so great a thing. Encouraged by consumer groups and trial lawyers, federal regulators are pushing for limits on arbitration provisions in consumer contracts.
At its core, the debate is about whether companies may compel consumers to arbitrate rather than litigate disputes and – perhaps more significantly – bar consumers from class action remedies as part of the arbitration requirement. Critics of mandatory arbitration say that it restricts consumer redress and is tantamount to a deceptive trade practice because the arbitration provisions are usually contained in the “fine print” of a contract. The new rules being proposed reportedly are designed to eliminate mandatory arbitration provisions and facilitate class action litigation.
Despite the criticisms of consumer groups, arbitration often is cheaper and more effective for both individual consumers and companies. By interfering with Americans’ freedom of contract to prevent the use of mandatory arbitration, the government could severely damage U.S. business interests by exposing them to a marked increase in expensive class action litigation. In turn, that would result in more limited choices and increased costs for consumers.
The government’s efforts to eliminate mandatory arbitration provisions in consumer-related contracts have been highlighted in several recent agency actions. In its list of near-term goals, the Bureau of Consumer Financial Protections (CFPB) said that new rules to govern arbitration in consumer contracts would be a priority in 2016. The Department of Education announced that it, too, was reviewing mandatory arbitration provisions in college enrollment contracts. And despite multiple appellate decisions to the contrary, the National Labor Relations Board (NLRB) again concluded that class action waivers in arbitration agreements infringe on an individual’s rights under Section 7 of the National Labor Relations Act.
All of this has happened in the space of three months, indicating a clear effort by the government to diminish businesses’ ability to require arbitration that shields them from often frivolous and costly class action litigation. The acts of some Congressmen have made this agenda even more transparent. In February 2016, Senator Patrick Leahy introduced a bill that would modify the scope of the FAA and curtail the use of mandatory arbitration. The bill is unlikely to pass in the current Republican Congress, but Congress previously empowered federal agencies to curtail the use of mandatory arbitration provisions on a significant, but more limited, basis.
The CFPB’s current actions were authorized by the 2010 Dodd-Frank Act, which barred the use of arbitration clauses in certain mortgage contacts and gave the SEC power to ban or restrict the use of arbitration in other disputes. Deepak Gupta, then the CFPB’s senior counsel for enforcement strategy, stated that prohibiting or restricting mandatory arbitration would be “the single most transformative thing the bureau can do” for consumers. In March 2015, the CFPB released a 728-page study of arbitration in consumer contracts, which was criticized by some academics and trade groups for misstating the impact of mandatory arbitration provisions on consumers. Since then, members of Congress have engaged in deeply partisan squabbling over the need for additional rulemaking on consumer arbitration or to limit class action litigation in other ways.
Despite the criticism and opposition, CFPB director Richard Cordray reiterated the agency’s plans to release new rules aimed at banks and other financial firms. Earlier comments by the agency confirm that the new rules will be designed to prevent arbitration clauses from restricting class action remedies. We think such changes would quickly spread to encompass telephone, Internet, and other commonplace consumer agreements.
American companies should be concerned with how executive agencies, e.g., the CFPB, the Department of Education, and the NLRB, will carry out their plans to introduce regulations that restrict the use of arbitration clauses in a broad range of consumer contracts. We will not be surprised to see some companies restrict their consumer offerings or increase prices to account for these new rules. If you work in American business, we urge you to take notice of these changes and review how to protect your company from undue litigation in future contracts. Among other options, you should analyze the inclusion of non-mandatory arbitration provisions, the separation of class-action waivers from arbitration provisions, and the option of raising prices to contend with increased litigation.
 Id. § 1414.
 Carter Dougherty, CFPB Finds Arbitration Harms Consumers, Presaging New Rules, BLOOMBERG BUS., March 10, 2015, available at http://www.bloomberg.com/news/articles/2015-03-10/cfpb-finds-arbitration-harms-consumers-in-study-presaging-rules.
In the age of handheld banking apps, private funds transfer systems, and digital currencies, ensuring that new products are fair to consumers and compliant with existing – and sometime archaic – regulations are difficult tasks. The Bureau of Consumer Financial Protection (“CFPB”) recently finalized a new policy for providing “no-action letters” (“NALs”) to companies seeking to introduce new consumer finance products and technologies. Although the CFPB’s stated goal was to ensure transparent and efficient markets that “facilitate access and innovation,” it has failed to hit that target. The CFPB’s new policy is a step in the right direction, but the benefits of the new policy are limited and applicants will run commercial and legal risks in seeking the limited shelter offered by the agency.
Not only will NALs offer limited protection, they will be available only in exceptional circumstances where there is both regulatory confusion and a new product. The CFPB said that it is devoting only limited resources to this program and expects to issue only two or three NALs per year. The restrictive nature of this policy will minimize the value of the agency’s much-needed guidance. The limited scope of the new policy stands in contrast to the SEC’s no-action policy, where NALs are important tools for market participants and their counsel in conducting business. Although NALs are rare in the bank regulatory context, the SEC has recognized that many issuers and securities law practitioners closely monitor such letters, and often view them as “the most comprehensive secondary source on the application of [the federal securities] laws.” (1)
There is considerably less guidance as to CFPB regulations and a more robust no-action policy would provide much needed clarity for market participants and innovators. Under the new policy, market participants considering bringing a new product to market may request a “no action letter” (“NAL”) from the agency. The request for a NAL must contain 15 categories of information, including: a description of the new product (including how it functions); the product’s timetable, an explanation of its substantial benefit to consumers; a “candid explanation” of the potential consumer risks posed by the product; an explanation of the source(s) of the regulatory uncertainty to be addressed by the NAL; and a promise to share data about the product’s impact on consumers. Examples of products that might qualify for a NAL include the early intervention credit counseling program proposed by Barclays PLC and Clarifi (a consumer credit counseling service), which was an early CFPB Project Catalyst research pilot.
The benefit from any NAL issued by the CFPB will be limited. The proposed relief offered is a statement that the CFPB “staff has no present intention to recommend initiation of an enforcement or supervisory action against the requester in respect to the particular aspects of its product…” This amounts to “we won’t take action – unless we do.” While the CFPB is unlikely to take enforcement action with respect to a new product shortly after issuing a no-action letter, the proposed letters are in no way binding and offer little more protection than the existing process of informal consultation. This weakness may be ameliorated over time as courts have an opportunity to weigh in on the impact of CFPB no-action letters and the agency develops a track record for its handling of these issues.
Submitting a request for a NAL could create commercial or regulatory risk for an applicant. From a cost standpoint, preparation of such an application will be a significant undertaking, especially for smaller companies. Because the process is only available for products that are close to market ready, potential applicants will have invested significant sums to prepare their new product. A company in this position may not want to run the risk that the CFPB denies the NAL request, which might delay or prevent it from bringing the new product to market altogether. The publication of the NAL might also give competitors a chance to duplicate or improve on the innovation before or shortly after it reaches the market.
The process also entails legal risks. The NAL application process requires the company’s lawyers to explain why they think the legality of the proposal is “substantially uncertain” but nonetheless should be resolved in the company’s favor. If the CFPB determined that the product is not in compliance with any pertinent law or regulation, the application effectively will be converted to an admission of wrongdoing that would bar the product from the market. (2)
Because the CFPB will publish each NAL that it issues, the non-binding letters also may highlight potential compliance issues to other regulators (and potential consumer litigants), none of which will be bound by the NAL.
By creating such a restrictive process, the CFPB has offered innovators little opportunity to save costs if their product is deemed non-compliant, and no real protection if it is. In many instances, it is questionable that the new no-action policy offers substantially more comfort to a market participant than they could already obtain through informal discussions with the agency. But because there is little existing guidance on CFPB regulations, the new process is welcome, even if limited. The new policy will be particularly useful for companies introducing products at the edge of current law. Deciding whether to seek a NAL will require careful consultation with a company’s lawyers to navigate the potential legal and business risks.
(1) Expedited Publication of Interpretative, No-Action and Certain Exemption Letters, Securities Act Release No. 6764, [1987-1988 Transfer Binder] Fed. Sec. L. Rep. (CCH) 84,228, at 89,053, 89,054 (Apr. 7, 1988). 10 Thomas P. Lemke, The SEC No-Action
(2) The CFPB limited its new policy to new services and technologies. It would make little sense to seek guidance for existing products where the application itself could be seen to be an admission of wrongdoing.
If you didn’t know any better, you might have gotten pretty fiery over for-profit education after reading one of the front page stories of Tuesday’s New York Times. The lengthy article titled “For-Profit Colleges Fail Standards, but Get Billions” is all about accusations of greedy institutions bilking taxpayers and taking advantage of students through fraud and other deceptive practices. Why the story ran on page one of the paper is anybody’s guess: the only timely element in the piece appeared toward the end of the article, where the author mentioned the Defense Department’s recent decision to bar the University of Phoenix from its tuition assistance program. By the time you got to that part of the article, you might have cheered the DOD’s decision to cut the educator off, despite the fact that the decision appears premature, based on allegations as opposed to findings (meaning they are meting out punishment before a full investigation or review).
The New York Times piece seems narrowly focused on denigrating an industry that has become the bastard-stepchild of higher education. Ever since U.S. Sen. Tom Harkin decided to take on for-profit education, the industry has been under intense scrutiny from state and federal regulators as well as partisan research and advocacy groups. The article would have readers believe that all the negative attention is the equivalent of substantiated claims that for-profit education is a fraud on federal student loan programs. Thirty-seven state attorneys general, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the Department of Justice, and the Federal Trade Commission are all investigating for-profit schools. These schools must be horrible, right? But what the article lacks are legal holdings or findings of fact.
That several agencies are investigating industry participants is not tantamount to guilt: it is more reflective of the fact that regulators take their cues from other regulators. Once an industry becomes unpopular, everyone wants to jump in and get their piece of the pie … or the felled lion. For-profit education is now an obvious target. But, again, that does not make the industry per se bad.
Nor does the fact that many for-profit educators have settled with regulators mean they are guilty: people and companies alike perform a cost-benefit analysis when it comes to whether to fight or stand down. It often makes economic sense to settle out with regulators rather than stay the course through potentially lengthy costly litigation.
What is troubling is the undercurrent – and application – of guilt before innocence, both by the New York Times article and by regulators. What is missing is a comparison of how much for-profit education costs per student versus how much other schools cost, or what dropout rates and post-graduation employment rates look like across schools for single parents and the poor (the types of individuals typically enrolled in for-profit colleges). For instance, studies have shown that community colleges are costing taxpayers billions of dollars for uncomfortably high drop out rates. Other studies identify taxpayer subsidies covering significant amounts of college operating costs.
One of the major reasons why for-profit education has high drop-out rates and poor post-grad employment rates is that they are reaching individuals who otherwise may not have access to degree programs, such as single parents or people in economically depressed areas. These individuals have other complications in their lives that can make completing a degree or finding gainful employment more challenging (e.g., scheduling, transportation). These challenges are not the schools’ fault, but a reflection of external factors. Punishing the schools and taking away educational opportunities does not seem like the most thoughtful decision, but it’s the one that partisan groups, partisan journalists, and regulators seem to be angling for.
Instead of celebrating the Defense Department’s decision to cut off the University of Phoenix from its tuition assistance program, we should be troubled that it is doing so before completing an investigation. In a statement, the University noted that: “It is troubling that DoD has used requests for information from other governmental agencies as grounds for placing the university’s DoD MOU in a probationary status.”
For-profit education does have, and has had, its bad actors… as does every industry. But the all-out slam against the sector, the fight for its demise, is unfair and shortsighted. In the end, the greatest losers will be historically underserved populations who will be denied education opportunities.
Things look a bit bleak for the for-profit education industry: it seems like every other day a new federal or state agency is launching an investigation or proposing new regulations. The latest news is that a coalition of 32 state attorneys general, along with the Consumer Financial Protection Bureau, is expanding a probe into lending practices at for-profit colleges. This news follows pronouncements by the Securities and Exchange Commission, the Justice Department, the Federal Trade Commission and the Federal Communications Commission of stepped-up initiatives to combat alleged predatory practices by for-profit colleges. In the midst of this full frontal assault, the industry is facing a major new regulatory scheme under the Department of Education’s impending Gainful Employment rule. What the new regulatory scheme will cover and require remains to be determined, but the released drafts of the rule portend extensive record keeping and reporting requirements. With mounting investigations and regulatory scrutiny, no wonder shares in for-profit education have been on the decline: how can these companies turn a profit in the midst of all this costly government intervention?
But the CFPB and the 32-state coalition could (unwittingly) be the industry’s knights in shining armor. The enforcement agencies’ expanded probe – along with action by the SEC, DOJ, FTC and the FCC – could provide a good argument for why the Education Department’s impending Gainful Employment rule may be redundant. Since there is so much disagreement over the Gainful Employment rule, not only over the prospective text,but also over the rule’s utility in the first place,it may be time to follow the cues of some in Congress who advocate abandoning the rule when the Higher Education Act is next up for re-authorization (this year).And if Congress could be persuaded to nix the rule, educators could allocate more resources to growth that would otherwise need to be focused on compliance with complex new regulations.
This argument initially may sound like a stretch, but consider some of the following points: (1) congressional infighting about the possible effects of the rule, (2) rule making failures as interested parties cannot come together on regulatory language, and (3) current law and enforcement actions that already address the goals of the prospective rule. There are only so many ways to skin a cat, and you can only have so many cat-skinners (poor analogical cat!).
(1) Congressional Democrats are split on whether the Gainful Employment rule would protect students or negatively impact students. Thirty Democratic members of Congress recently wrote a letter to Education Secretary Arne Duncan voicing concerns over the adverse effects a Gainful Employment rule could have on students. At the same time, 31 Democratic members wrote a letter in support of the prospective rule. During the back and forth on the Democratic side, many Republicans are advocating abandoning the rule, concerned that it would ultimately hurt students.With so much uncertainty, why press forward with a rule that has been lingering in limbo for years?
(2) While Congress members deliberate the rule’s ultimate utility, the Education Department and its panel of negotiators have slogged through several sessions of a statutorily mandated negotiated rule making. They have been unable to reach any consensus on what types of metrics to incorporate into the rule, let alone what metric ranges to use. After several months, three rounds of negotiations, and three very different drafts of the prospective rule, the Education Department is no closer to final language. The third and final round of negotiations, which occurred mid-December, highlighted the extent to which opposing sides remained polarized.
(3) The Education Department has stated that its goals for the Gainful Employment rule are to:
- Define what it means for a program to prepare a student for gainful employment in a recognized occupation and construct an accountability system that distinguishes between programs that prepare students and those that do not;
- Develop measures to evaluate whether programs meet the requirement and provide the opportunity to improve program performance;
- Protect students and taxpayers by identifying GE programs with poor student outcomes and end taxpayer support of programs that do not prepare students as required; and
- Support students in deciding where to pursue education and training by increasing transparency about the costs and outcomes of GE programs.
These goals are already being addressed in current regulations and current enforcement actions. For instance, in November the FTC released marketing guidelines directed toward for-profit colleges, advising colleges against misrepresenting, for instance, their job placement and graduation rates, graduate salaries, credit transferring, etc. The announcement was accompanied by guidelines for prospective students on choosing a school. The FTC’s guidelines send a message to the for-profit education industry: ensure integrity in your marketing and advertising or face the consequences of regulatory action. A new FCC rule, which took effect last October, restricts how for-profit educators can make recruiting calls to past, current, and prospective students.The SEC and CFPB are investigating student recruitment and private lending at various for-profit colleges for possible violations of, for instance, the Dodd-Frank Act (which prohibits violations of federal consumer financial laws and unfair, deceptive or abusive acts or practices), TILA and Regulation Z. And numerous states attorneys general have been actively investigating the industry under state laws.
The expanded probe that the CFPB and state attorneys general coalition is but a continuation of the panoply of government actions and initiatives directed at the for-profit education sector. But the probe provides an excellent basis for reconsidering the necessity of the Gainful Employment rule. The for-profit industry is not shy of regulatory oversight. All the new regulation would achieve is more cost to industry and taxpayers in compliance and compliance reviews.
On October 3, 2013, the Consumer Financial Protection Bureau announced it had filed a complaint in federal district court in Washington state against a leading debt-settlement payment processor, Meracord LLC, and its CEO. The CFPB contends that Meracord helped third parties collect millions of dollars in illegal upfront fees from consumers.
The complaint alleged violations of the Federal Trade Commission’s Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act of 2010. The CFPB contended that Meracord maintained accounts and processed payments for consumers who had contracted with providers of debt-relief servicers and mortgage assistance relief services. As is often the case, when consumers enroll in a debt-relief program, they also enter into a separate agreement with a payment processor, which establishes and maintains a “dedicated account” for the consumer. At the time of enrollment, the debt-relief service provider instructs the consumer to stop paying his or her unsecured debts and, instead, to make monthly payments to the payment processor. The processor can later pay renegotiated debts to the creditor and also pay the debt-relief servicers’ fees.
The CFPB alleged that, since October 27, 2010, Meracord processed payments for more than 250,000 consumers receiving debt-relief services from more than 250 debt-relief service servicers. According to the agency, consumers paid debt-relief service providers before any debts were settled. The Telemarketing Sales Rule has special requirements for debt reduction services. In particular, providers are not allowed to request or take fees for services before providing debt-relief services resulting in actual renegotiation or other settlement of a consumer’s debt and a payment by the consumer to a creditor. The FTC asserted that Meracord processed payments for debt reduction services which routinely charged advanced fees to consumers in violation of the TSR.
The TSR also makes it unlawful for third parties to assist others in violating the TSR. The CFPB used this section of the TSR against Meracord. Since Meracord collected the payments from consumers and would know whether or not they had been disbursed to creditors, and when they had been disbursed to the debt-relief servicers, Meracord would have knowledge that the debt-relief servicers were violating the TSR by collecting fees prior to delivering debt-relief services that resulted in payments to creditors.
Meracord and its CEO have agreed to settle the case. In the Stipulated Final Judgment and Order, Meracord and its CEO, Linda Remsberg, agree that they will permanently enjoined from providing account-maintenance or payment-processing services to any provider of a debt-relief service or a mortgage assistance relief service. The proposed settlement (which must be approved in court) also provides for a civil money penalty of $1.37 million and compliance reporting and monitoring, as well as ongoing recordkeeping requirements.
The CFPB’s action signals that it will use its authority to reach organizations that it believes provide substantial assistance to others allegedly violating consumer protection laws within its jurisdiction. CFPB Director Richard Cordray said, “By taking a stand against those who facilitate illegal activity, we can root out harmful behavior across the debt-settlement industry and better protect consumers.” Thus, it is not only those companies dealing directly with consumers who need to be cognizant of the CFPB’s reach. In particular, organizations within the “chain” of industries such as debt-settlement and credit repair, should review their compliance with laws and rules the CFPB may enforce (usually shared with other agencies such as the FTC), and which include the Fair Debt Collections Practices Act, the Fair Credit Reporting Act, the Telemarketing Sales Rule, the Business Opportunities Rule, and other consumer financial-related statutes.
Since 2003, online marketers and merchants have been gathering twice a year to take part in the Affiliate Summit Conferences. In recent years, Ifrah Law has become a fixture at these shows, and our associate Rachel Hirsch is not only widely recognized as the face of the Ifrah Law Power Booth station, but also as a well-respected and preferred attorney counseling online advertisers on compliance-related matters and representing them in nationwide litigation.
After Rachel recently returned from this year’s Affiliate Summit East conference in Philadelphia, we interviewed her about new and emerging trends at this conference and in the industry.
Q. What struck you about the crowd at the conference this year?
A. In addition to the new venue, there were plenty of new faces at the conference this year. Surprisingly, however, despite the conference’s name, there weren’t as many affiliates there as there have been in the past. Traditionally, affiliates, sometimes known as “publishers,” are independent third-parties who generate or “publish” leads either directly for an advertiser or through an affiliate network. This year, with a reported crowd of about 4,000 people, the conference included more individuals representing networks, brokers, and online merchants than affiliates. (Official conference statistics bear this out. Only 29 percent of attendees were affiliates.)
Q. What about vendors?
A. According to the organizers, one out of every 10 people there was a vendor. The term “vendor,” however, is something of a misnomer. A vendor can be another term for an online merchant – someone who is actually selling a product on the market – or it can be a generic category for marketers who do not fit into the traditional categories of affiliates, merchants, or networks.
Q. What new industry trends did you notice?
At every conference, one or two markets always seem to have a dominant presence. At the Las Vegas conference in January, there was a large turnout of marketers in the online dating space. This year, two different markets emerged– diet/health and downloads.
Some of the exhibitors this year were manufacturers of neutraceuticals, which can include weight-loss products or testosterone-boosting products. The trend seems to be for online marketers to “white label” or “private label” neutraceuticals from bigger manufacturers. What this means is that online marketers or advertisers actually attach their brand names to a product and product label that they purchase from a manufacturer, either based on their own formulations or based on the manufacturer’s product specifications. Well-known products that would fall into this category include Raspberry Ketone, Green Coffee Bean, and Garcinia Cambogia.
There were also a lot of individuals and companies there in the so-called “download” space. This often means the use of browser plug-ins that the consumer can download himself or herself. These can install targeted advertising (often pop-ups or pop-under ads) on an existing web page.
Q. Are there any risks involved in private labeling?
A. Definitely. If your name is on the label, it doesn’t matter that you didn’t manufacture the product. Your company and your label are subject to FTC scrutiny to the extent that you make claims about the product that you cannot substantiate. And beyond that, the Food and Drug Administration will also flex its enforcement power to the extent you or your manufacturer fail to institute good manufacturing practices, or “GMPs.” While many companies claim that they are GMP-certified, many do not have practices and processes in place to account for defective product batches, serious adverse events resulting from product use, or product recalls.
Q. What are some other hot areas of enforcement by the federal government?
A. Well, how you market your product may be as closely scrutinized as the underlying message. Online marketers who make outbound calls to consumers, or who engage third-party vendors (such as call centers) to make these calls can run afoul of the Telephone Consumer Protection Act. Under the TCPA, anyone who calls customers without their express advance consent, or who hires anyone else to do so, can be hit with a $500 fine for each violation. That adds up, and the TCPA can be enforced by the Federal Communications Commission or by private plaintiffs. Upcoming changes in the TCPA, which will be effective in October 2013, make it even harder to stay on the right side of the law.
Q. How would you put it all together as far as the legal issues?
A. It’s not just the FTC any more. These days, online marketers need to be aware of other agencies with broad enforcement powers, such as the CFPB, the FDA, and the FCC. And don’t forget about the threat of private consumer litigation.
The credit reporting industry – dominated by Experian, Equifax and Transunion – maintains a precarious balance of obligations: On the one hand, these companies bear a responsibility to banks and other businesses at large to retain reliable information to ensure that the credit scores they report are a fair representation of the individual’s credit-worthiness. On the other hand, federal law, including the Fair Credit Reporting Act, imposes an obligation upon the credit reporting agencies and other related companies to conduct reasonable investigations to address disputes about errors in individuals’ credit files. In both instances, the companies bear a weighty responsibility.
For this reason, companies in the credit reporting industry are subject to intensive regulatory scrutiny – historically by the Federal Trade Commission and, more recently, by the Consumer Financial Protection Bureau. Both agencies have issued reports on their studies of the way in which credit reporting companies handle the information entrusted to them, and how they respond to consumer disputes.
This past Sunday, CBS’s 60 Minutes – a show that most people associate with responsible news reporting – ran a segment that unfairly distorted these reports about credit reporting agencies’ compliance with their obligations. The show, which was largely based on an advance copy of an FTC study, relied upon selective interpretation of the data in that study, throwing out snippets of information without being specific on what the data meant.
The vast majority of the story can hardly be viewed as unbiased: interviews with a politically motivated state attorney general, two plaintiffs’ attorneys who spend their careers suing the credit reporting agencies, a handful of dissatisfied consumers, and several disgruntled former call center employees whose role in addressing consumer complaints was never really explained in a meaningful way. The result was a show clearly intended to convey a message that the credit data retained by these companies is riddled with errors, and that the credit reporting agencies fail to comply with their legal obligations to take steps when there is a claim of an inaccuracy.
In fact, as the Consumer Data Industry Association has pointed out, the FTC study shows that 98 percent of credit reports are materially accurate. In this regard, 60 Minutes missed the most critical point in the research – that the measure of accuracy is tied to the question of whether an error has consequences for consumers and not just whether there is an error that has little or no impact on credit scores. The FTC study actually concluded that only 2.2 percent of credit reports have an error that would lead to higher-priced credit for the consumer.
60 Minutes compounded its error by repeatedly asserting that it was “nearly impossible to expunge” an error in a credit report, and providing a forum for a state attorney general and two plaintiffs’ attorneys to assert that the credit reporting companies do not comply with their obligations under federal law. This one-sided treatment does not square with a 2011 study from the Political and Economic Research Council that showed that consumers were satisfied with the resolution of their disputes in 95 percent of the cases. It also does not square with the results of a year-long study of the dispute process by the FTC in which the agency found no violations of law.
It is not hard to understand what motivated 60 Minutes to run this story: Because everyone has a credit score, an inflammatory story about credit scores is likely to get everyone’s attention. But the one-sided and distorted way in which 60 Minutes presented this information was a disservice to the public. And even if credit reporting agencies are not perfect, they deserve better treatment at the hands of those who have the public’s ear.
Recently, the Consumer Financial Protection Bureau, the watchdog agency of the financial industry, has proved that it has considerable bite. Created under the Dodd-Frank act to fill gaps in regulatory coverage, the CFPB’s mandate is to enforce federal regulations that, among other things, restrict “unfair deceptive or abusive acts or practices” in consumer finance. The CFPB in recent months announced two major debt relief crackdowns, the most recent of which permanently shut the doors of a Florida company.
Last month, the CFPB announced that it filed a complaint against a Florida debt-relief company that misled consumers across the country by charging upfront fees for debt-relief services without actually settling most of the consumers’ debts. According to the complaint, the defendants engaged in abusive practices by knowingly enrolling vulnerable consumers who had inadequate incomes to complete debt-relief programs. The complaint charged American Debt Settlement Solutions, Inc. (ADSS) and its owner, Michael DiPanni, with actions that were not just unfair and deceptive, but also abusive. Indeed, this case if the first time that the CFPB in its short history has enforced this prohibition on “abusive” acts or practices.
While “unfair” and “deceptive” are familiar terms to anyone who follows the Federal Trade Commission, the term “abusive” is new to Dodd-Frank and has been the subject of much consternation among Republicans in Congress, who consider it too vague. With this complaint, the CFPB provided what may be its first example of the type of conduct it will consider “abusive.” ADSS allegedly collected about $500,000 in fees from hundreds of consumers in multiple states, charging illegal upfront fees for debt-relief services and “falsely promising them it would begin to settle their debts within three to six months when, in reality, services rarely materialized.
The CFPB said the actions were “abusive” because consumers reasonably relied on the company to “act in their interest by enrolling them in a debt-relief program that they can be reasonably expected to complete, and which will therefore result in the negotiation, settlement, reduction, or alteration of the terms of their debts.” The CFPB simultaneously filed a proposed consent order that would settle the matter by halting the company’s operations and imposing a $15,000 fine.
ADSS and its owner may have walked away relatively unscathed, with only a civil penalty, but others caught in the CFPB’s cross hairs have not been as fortunate. Earlier this year, the CFPB filed suit against two lawyers and two debt relief companies in New York, alleging that they charged thousands of consumers illegal advance fees and left some worse off financially, while illegally profiting themselves. One of the lawyers, Michael Levitis, also faces mail and wire fraud charges brought by the Manhattan U.S. Attorney’s Office – the first-ever criminal charges stemming from a CFPB referral. What’s notable in this complaint is that the acts are described as both deceptive and unfair, but not as abusive.
Although a relatively new agency, the CFPB is proving that it has the chops to take down offenders in the financial industry. Both the Florida and New York cases are signs of future enforcement, and they send a stern warning to offenders – if you prey on vulnerable consumers, be prepared for a fight.