Is Your Bank Abusive?


Few companies have changed the payments landscape quite like PayPal, which has made it easier and safer for more than 150 million consumers to shop online. But these achievements and their value to the average person haven’t shielded the 17-year-old company from the ire of the Consumer Financial Protection Bureau.

The CFPB announced May 19 that PayPal has agreed to pay $25 million to settle allegations that it illegally signed up and billed tens of thousands of consumers for its add-on credit product, PayPal Credit. At issue in particular was the way the product used limited-time, interest-free financing promotions to encourage purchases, much like furniture stores do on the 4th of July.

The problem arose when customers accumulated multiple deferred-interest balances that expired at different times. As opposed to allowing customers to pay off the balances that came due early, and thereby helping them to avoid facing interest payments when the promotional period expired, PayPal automatically allocated customers’ payments equally among the outstanding balances. It was this feature of PayPal Credit, said the CFPB, that transformed an otherwise consumer-friendly financial product into an “abusive” one that violated the Dodd-Frank Act of 2010. PayPal declined to provide a comment for this article.

The designation initially seemed to signify little more than another notch in the CFPB’s enforcement belt. However, a closer examination reveals a potentially deeper significance-one that may mark a broader and more aggressive use of the CFPB’s mandate to identify and eliminate what it perceives to be abusive financial products and services.

The duty to root out unfair, deceptive and abusive practices lies at the heart of the CFPB’s mission. But while the terms “unfair” and “deceptive” get their meaning from a long line of precedent under the Federal Trade Commission Act of 1914, the definition of “abusive” isn’t settled.

To be fair, the Dodd-Frank Act does offer guidance. It holds that the CFPB may characterize a consumer financial product or service as abusive only if it “materially interferes” with consumers’ ability to understand its terms or conditions, or if the product or service provider takes “unreasonable advantage” of consumers’: lack of understanding of the material risks, costs or conditions of a financial product or service; inability to protect their interest in selecting or using a financial product or service; or reasonable reliance on the product or service provider to act in consumers’ best interests.

Beyond this, CFPB Director Richard Cordray says the Bureau won’t use its rule-making authority to further define the term. It’s opting instead to use the facts and circumstances of individual enforcement actions to give it meaning-what’s generally referred to as a “know it when you see it” approach.

As Cordray told Congress in 2012:

In terms of abusive specifically, we have been looking at it, trying to understand it, and we have determined that that is going to have to be a fact and circumstances issue; it is not something we are likely to be able to define in the abstract.

Financial service providers have thus been left to piece together a coherent meaning from the roughly dozen enforcement actions and consent orders in which the CFPB has already characterized financial products and practices as abusive.

“Although it’s difficult to tease out much that’s concrete from these actions,” says Nicholas Vlietstra, a partner at Dorsey & Whitney and former deputy general counsel at U.S. Bank, “they generally exhibit one or more commonalities.”

The first is some type of vague and still-evolving suitability standard, which requires financial service providers to, in certain instances, look out for the best interest of consumers. “This is an important development,” Vlietstra explains, and appears to require that banks (and others) take care that the consumer did not get a bad deal. In 2013, for instance, the Bureau filed an enforcement action against Florida-based American Debt Settlement Solutions, alleging that it promised to renegotiate, settle, reduce or otherwise alter the terms of its customers’ debts. But after gaining access to their bank accounts, ostensibly to disburse debt payments, ADSS diverted most of the money to pay itself enrollment and service fees. Out of the more than $9.9 million held in customer accounts, less than $2 million found its way to creditors and debt collectors. ADSS admitted these allegations in a settlement with the CFPB and could not be reached for comment.

The second common element consists of vulnerability on the part of consumers. To date, almost every enforcement action alleging abusiveness involved either low-income households, nau00efve and impressionable students, or members of the armed forces.

Finally, a financial product or practice may be deemed abusive if it exploits the unequal bargaining power between vulnerable consumers and financial service providers when entering into a contract. This was the CFPB’s conclusion in its 2014 action against Freedom Stores, a Virginia-based furniture and electronics retailer that caters to U.S. service members through locations near military bases nationwide.

The case involved a standard contractual provision known as a venue selection clause, which required consumers to resolve disputes with the company in Virginia courts even though many of them had neither signed the contract in Virginia nor lived in the state when the suits were filed. Of the more than 3,500 lawsuits won by Freedom Stores in Virginia courts, the CFPB noted that “almost all” resulted in default judgments, after which the company garnished the absent service members’ wages or put liens on their bank accounts-Freedom Stores neither admitted nor denied the allegations in a settlement with the Bureau.

But the move from furniture stores to a well established financial technology company such as PayPal has some worried. “Now that the CFPB has cleaned up payday lenders and debt collectors, where do you think they’re going to go next?” says Rusty Cloutier, CEO of MidSouth Bancorp, a $2 billion asset lender based in Lafayette, Louisiana. “When you have 5,000 well-paid and highly educated employees, they’re going to find something to do.”

The CFPB’s enforcement power extends to virtually any type or size of company that sells financial products or services, notes Mayer Brown attorneys Reginald Goeke, Catherine Bernard and Jeffrey Redfern. To head potential issues off at the pass, they encourage banks to beef up disclosure, particularly for products and services aimed at vulnerable consumers; set a clear tone at the top of a responsible lending culture; and mine their catalog of customer complaints for potential issues. “Even one well founded complaint could trigger an enforcement action,” says Bernard.

Ultimately, it remains to be seen whether the CFPB’s authority to prohibit abusive consumer financial products and practices, in addition to those deemed unfair and deceptive, will usher in higher fines and worse sanctions for the firms involved. That hasn’t been the case to date, but it’s probably prudent to assume that it eventually will.


John Maxfield


John Maxfield is a freelance writer for Bank Director magazine. He was previously the senior banking specialist at The Motley Fool. He regularly writes for Bank Director magazine and BankDirector.com. His work has been syndicated widely to national publications including USA Today, Time and Business Insider, and he’s been a regular guest on CNBC. John has a bachelor’s degree in economics from Lewis & Clark College and a juris doctorate from Southern Methodist University. He’s a licensed attorney in the State of Oregon.

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