Avoiding and Defending “Abusive” Claims under Dodd-Frank

1. Avoiding and Defending “Abusive” Claims under Dodd-Frank Hilary B. Miller - 11/7/11

2. What We Will Cover • Brief history of federal consumer protection under the FTC Act • State and common-law remedies • How UDAAP came about in Dodd-Frank • Evolution of “abusive” • Comparison with other statutes • Examples of possibly “abusive” conduct • Destroying the elements of “abuse” Hilary B. Miller - 11/7/11

3. History of Unfair/Deceptive • FTCA § 5 enacted in 1914; “Cigarette Rule” in 1964; “Children’s Advertising” proposed rule in 1978; current definition in 1980. • “Unfair” (illegal, immoral, unethical, oppressive or unscrupulous) consumer injury must be: (1) substantial, (2) outweighed by countervailing benefits to consumers or competition, and (3) something that consumers themselves could not reasonably avoid. • “Deception” is (1) a material (2) misrepresentation or omission that is (3) likely to mislead the consumer acting reasonably under the circumstances. Hilary B. Miller - 11/7/11

4. State Remedies - Unconscionability • Unconscionability has been around since 1750 • Doctrine has been unreliable for consumer protection • Useful as a shield, but a poor sword: • Only a defense to a contract claim, not more • Hard to win • Even with “bargaining naughtiness,” courts rarely strike down contracts unless they are substantively unfair Hilary B. Miller - 11/7/11

5. State of Law: Pre-Dodd-Frank • No private remedies under FTCA • 50 “little” FTC acts • Inability to address acts and practices that did not fall squarely into traditional UDAP definition • Widespread carnage as a result of mortgage crisis Hilary B. Miller - 11/7/11

6. Legislative History of “Abusive” Under D-F • Administration’s “White Paper” proposal (later H.R. 3126) proposed changes to the unfairness doctrine. • Those changes were rejected by Congress (in H.R. 4173); Congress insisted on incorporating existing “unfairness” standard; “deceptive” is undefined. • When Congress adopts language with a settled construction, it is presumed to adopt judicial interpretations surrounding that language. Carolene Prods. Co. v. U.S., 323 U.S. 18 (1944). • White Paper created but did not define “abusive.” H.R. 3126, § 131. Hilary B. Miller - 11/7/11

7. Legislative History, Part Deux • Both chambers of Congress were unwilling to let the Bureau define “abusive” • How “abusive” would be defined was never the subject of any Congressional debate; nothing in Cong. Rec. • House and Senate swapped versions. The weaker House version was rejected, and the Senate version was adopted in the conference report. No debate. • But some evidence that Congress feared giving Bureau unbridled authority Hilary B. Miller - 11/7/11

8. How to Interpret “Abusive” • The legislative history consists solely of the Administration’s proposal (rejected) and testimony of witnesses regarding the particular ills that it was necessary for D-F to correct. • “Abusive” is used in other laws (e.g., FDCPA findings, HOEPA and Telemarketing Sales Rule) to mean something else. There is no similar language in these laws or anywhere else. This language is unprecedented. • The full meaning of “abusive” may be inferred solely from the language of the statute. • CFPB interpretation entitled to Chevron deference. Hilary B. Miller - 11/7/11

9. The Language Adopted • (d) ABUSIVE.—The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice— • (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or • (2) takes unreasonable advantage of— • (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; • (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or • (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. Hilary B. Miller - 11/7/11

10. Examples of Acts Claimed to be “Abusive” • Unilateral changes in interest rates • Fine print contracts • High-to-low checking posting • Equity stripping and loan flipping • Possible features of payday loans: • Failure to consider loan applicant’s other liabilities • Failure to consider lender’s own track record of rollovers • Failure to disclose rollover consequences to applicant • Multiple ACH debits Hilary B. Miller - 11/7/11

11. How “Abusive” Practices Can Be Barred • Through regulation • Through one-off enforcement • Here’s the language: • (a) IN GENERAL.—The Bureau may take any action authorized under subtitle E to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. • (b) RULEMAKING.—The Bureau may prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. • Rules under this section may include requirements for the purpose of preventing such acts or practices. • No private right of action. • No express right to punish “abusive” acts that don’t violate an existing rule. Hilary B. Miller - 11/7/11

12. The Good Stuff • “Abusive” is like a criminal statute; you can’t be guilty if you don’t meet each element of the crime. • You walk if you can defeat a single element. • The statute invites prophylactic measures. • Quaere: Is it worth it to adopt such measures now? Answer may depend on whether enough market participants will do so. • Most elements of “abusive” can be defeated through fair dealing and over-disclosure. Hilary B. Miller - 11/7/11

13. “Unreasonable Advantage” • Statute proscribes taking “unreasonable advantage” of the consumer’s unsophistication • What is “reasonable advantage”? • How do we show that the advantage we are taking is reasonable? Hilary B. Miller - 11/7/11

14. Defeating Reasonable Reliance • Statute proscribes taking “unreasonable advantage of … the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.” • Easiest to defeat: • “I understand that I cannot rely, and I have not relied, on Lender to act in my interests with respect to any aspect of this transaction.” Hilary B. Miller - 11/7/11

15. Every Other Branch Is About Disclosure • “…materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service…” • This is about bargaining naughtiness. • It is defeated by making prominent disclosure about each material term of the transaction and not shrouding any attribute. • No “unreasonable” standard applies. • “unfair advantage of … a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service…” • This is about disclosure, too. • Does it require an individualized evaluation each consumer? • “Reasonable” or “least sophisticated” consumer standard? • Invitation to summarize material terms and risks prominently. Hilary B. Miller - 11/7/11

16. Final branch … • “unfair advantage of … the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service…” • This is the toughest problem. • May require subjective, consumer-by-consumer evaluation. • Lends itself to disclosure-based solutions, but there may be some products for which no disclosure is adequate. Hilary B. Miller - 11/7/11

17. Conclusion Hilary B. Miller - 11/7/11