Regulating With A Sledge Hammer

*Mayer Brown published a client alert last week about the CFPB's recent squeezing of $10 million in blood out of the turnip known as ACE Cash Express, a (surprise! surprise!) payday lender. The Adjustment Bureau determined that ACE is not the place with the helpful payday hands, but the place where UDAAP runs rampant. Specifically, the CFPB determined that ACE engaged in unfair, deceptive, and abusive acts or practices in connection with the collection of its own debts.

Mayer Brown lists some substantial problems raised by the CFPB's enforcement action (which ACE settled without an admission of wrongdoing, proving, once again, that the threat of paying your defense counsel more than the government entity that's pursuing you is a powerful inducement to "folding."). Among those are the following:

• The CFPB apparently plans to use its UDAAP authority to subject first-party debt collectors to many, if not all, of the requirements of the federal Fair Debt Collection Practices Act (FDCPA);
• Notwithstanding repeated requests by businesses for clarification of the circumstances in which a company will be held vicariously liable for violations by its service provider, this enforcement action continues the CFPB’s refusal to provide any guidance regarding that question; and
• The CFPB’s action in this case is one more example of its practice of imposing requirements through enforcement actions rather than notice-and-comment rulemaking—here, essentially circumventing the CFPB’s own ongoing debt collection rulemaking, which posed questions regarding the appropriate standards for first-party debt collectors, through the principles announced unilaterally in this enforcement action.

Financial institutions that collect on their own debts or that rely on service providers to serve their customers should take note.

I advise reading the entire alert, which is not long and, therefore, should not deter even members of Gen Y. The CFPB is reading provisions of the FDCPA that apply to third-party (not first-party) debt collectors into the UDAAP provisions of Franken-Dodd, and then applying them to lenders trying to collect their own debts, and doing so not through the rule-making process, which requires public notice and opportunity for comment from all interested parties, but through enforcement action is "disconcerting." It's also dinging lenders for not only their own actions, but actions of third-party service providers without (notwithstanding industry requests) providing lenders with guidance as to when they will be held liable for third-party actions. That is also "disconcerting."

Mayer Brown concludes that the implications of this action extend beyond the payday lending business.

The CFPB’s ACE Cash Express enforcement action casts a significant shadow, not just over payday lenders, but also—and likely most significantly—over financial institutions that collect their own debts or rely on service providers to serve their customers, and that continue to struggle with the regulatory uncertainty created by the CFPB’s regulation by enforcement approach. As with other recent enforcement actions and regulatory pronouncements, the CFPB has taken an expansive and aggressive view of its authorities and a narrow view of the specific limitations Congress imposed, clouding legal requirements rather than generating clear rules that facilitate compliance. Financial institutions should carefully manage their potential exposure to CFPB enforcement activity

That is wise counsel.

For a federal government entity with tremendous power, the Adjustment Bureau takes a fast and loose approach to exercising that power. Instead of acting with prudence and restraint, and through the inconvenient requirements of due process and fundamental fairness provided by the Administrative Procedures Act, these "new sheriffs in town" prefer to shoot first and ask questions later. Rule-making by enforcement action. The CFPB backed off including enforcement attorneys on its examination teams after regulated institutions squawked, but its zeal to crack down on "evil" with a heavy hand because, after all, they know it when they see it is giving its congressional critics additional ammunition to support their efforts to knee-cap it with "oversight" of varies sorts. In the battle for its future, its overreaching may end up being its opponents' best weapon against it.

*Photo's Source: kathrinlonghurst.com