The Consumer Financial Protection Bureau (CFPB) has released material which lays out how it will investigate and/or identify unfair, deceptive or abusive acts and practices. This has a serious impact on the entire debt relief industry, non-profits included.
The rules and regulations, to me, appear to be clear that the underlying issue is if the material and activities by the debt relief company were unclear, omitted important decision making information, or trapped the consumer in an unfair position.
Classic examples of such behavior would include not giving consumers refunds when services were not delivered, selling debt relief services without clearly laying out the true pros and cons, and not providing consumers with performance transparency.
Another key trouble spot is going to be the representations of product performance and consumer expectations by third-partys and sales personnel. It will not be a pass at all if your sales staff is 1099 employees. You will be help accountable for their representations of your products and services.
In my past secret shopper calls to debt relief companies, employees seem to have been motivated for me, the consumer caller, to enroll, rather than evaluating my situation in a larger context to see if it was appropriate or the best solution for me. That behavior is going to be a big red flag for any examiner or investigator shopping call.
The CFPB makes clear that consumer complaints play a key role in identifying companies they should examine or investigate. I have previously stressed the importance that debt relief companies should manage all complaints and make sure the unhappy consumer receives a full refund and leave happy. The importance of that cannot be overstated.
This site receives consumer complaints. Those complaints create a pattern and we do forwarded troubling complaints on to the FTC, CFPN, and state officials.
One industry practice that must be evaluated for immediate change is that of sales commissions. I’m giving you an early warning on this. You should avoid paying sales commissions based on volume and instead, if commissions are to be paid, they should be based on the appropriateness or quality of the consumer being matched with the correct solution.
It will take the CFPB examiner less than ten seconds to flag commissions that create the situation where it leads to “unintended incentives to engage in unfair, deceptive, or abusive acts or practices” and motivates a sales person to make the sale rather than make an appropriate sale.
This post is not meant to alarm. It is meant to provide all debt relief companies and consumers with the facts of what the CFPB will use when evaluating debt relief companies for unfair, deceptive or abusive acts and practices that will create a liability for the debt relief company.
Direct from CFPB Manual
Risk of Harm and Injury
As examiners review products or services, such as deposit products or lending activities, they generally should identify the risks of harm to consumers that are particular to those activities. Examiners also should review products that combine features and terms in a manner that can increase the difficulty of consumer understanding of the overall costs or risks of the product and the potential harm to the consumer associated with the product.
- The act or practice must cause or be likely to cause substantial injury to consumers.
Substantial injury usually involves monetary harm. Monetary harm includes, for example, costs or fees paid by consumers as a result of an unfair practice. An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury.
Actual injury is not required in every case. A significant risk of concrete harm is also sufficient. However, trivial or merely speculative harms are typically insufficient for a finding of substantial injury. Emotional impact and other more subjective types of harm also will not ordinarily amount to substantial injury. Nevertheless, in certain circumstances, such as unreasonable debt collection harassment, emotional impacts may amount to or contribute to substantial injury.
About Transparency and True Information
An act or practice is not considered unfair if consumers may reasonably avoid injury. Consumers cannot reasonably avoid injury if the act or practice interferes with their ability to effectively make decisions or to take action to avoid injury. Normally the marketplace is self-correcting; it is governed by consumer choice and the ability of individual consumers to make their own private decisions without regulatory intervention. If material information about a product, such as pricing, is modified after, or withheld until after, the consumer has committed to purchasing the product; however, the consumer cannot reasonably avoid the injury. Moreover, consumers cannot avoid injury if they are coerced into purchasing unwanted products or services or if a transaction occurs without their knowledge or consent.
A key question is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer’s decision-making. For example, not having access to important information could prevent consumers from comparing available alternatives, choosing those that are most desirable to them, and avoiding those that are inadequate or unsatisfactory. In addition, if almost all market participants engage in a practice, a consumer’s incentive to search elsewhere for better terms is reduced, and the practice may not be reasonably avoidable.
Misleading the Consumer
Deception is not limited to situations in which a consumer has already been misled. Instead, an act or practice may be deceptive if it is likely to mislead consumers.
It is necessary to evaluate an individual statement, representation, or omission not in isolation, but rather in the context of the entire advertisement, transaction, or course of dealing, to determine whether the overall net impression is misleading or deceptive. A representation may be an express or implied claim or promise, and it may be written or oral. If material information is necessary to prevent a consumer from being misled, it may be deceptive to omit that information.
Written disclosures may be insufficient to correct a misleading statement or representation, particularly where the consumer is directed away from qualifying limitations in the text or is counseled that reading the disclosures is unnecessary. Likewise, oral or fine print disclosures or contract disclosures may be insufficient to cure a misleading headline or a prominent written representation. Similarly, a deceptive act or practice may not be cured by subsequent accurate disclosures.
Acts or practices that may be deceptive include: making misleading cost or price claims; offering to provide a product or service that is not in fact available; using bait-and-switch techniques; omitting material limitations or conditions from an offer; or failing to provide the promised services.
In determining whether an act or practice is misleading, one also must consider whether the consumer’s interpretation of or reaction to the representation, omission, act, or practice is reasonable under the circumstances. In other words, whether an act or practice is deceptive depends on how a reasonable member of the target audience would interpret the representation. When representations or marketing practices target a specific audience, such as older Americans, young people, or financially distressed consumers, the communication must be reviewed from the point of view of a reasonable member of that group.
Moreover, a representation may be deceptive if the majority of consumers in the target class do not share the consumer’s interpretation, so long as a significant minority of such consumers is misled. When a seller’s representation conveys more than one meaning to reasonable consumers, one of which is false, the seller is liable for the misleading interpretation.
A representation, omission, act, or practice is material if it is likely to affect a consumer’s choice of, or conduct regarding, the product or service. Information that is important to consumers is material.
Certain categories of information are presumed to be material. In general, information about the central characteristics of a product or service – such as costs, benefits, or restrictions on the use or availability – is presumed to be material. Express claims made with respect to a financial product or service are presumed material. Implied claims are presumed to be material when evidence shows that the institution intended to make the claim (even though intent to deceive is not necessary for deception to exist).
Claims made with knowledge that they are false are presumed to be material. Omissions will be presumed to be material when the financial institution knew or should have known that the consumer needed the omitted information to evaluate the product or service.
If a representation or claim is not presumed to be material, it still would be considered material if there is evidence that it is likely to be considered important by consumers.
The Role of Consumer Complaints
Consumer complaints play a key role in the detection of unfair, deceptive, or abusive practices. Consumer complaints have been an essential source of information for examinations, enforcement, and rule-making for regulators. As a general matter, consumer complaints can indicate weaknesses in elements of the institution’s compliance management system, such as training, internal controls, or monitoring.
While the absence of complaints does not ensure that unfair, deceptive, or abusive practices are not occurring, complaints may be one indication of unfair, deceptive or abusive acts and practices. For example, the presence of complaints alleging that consumers did not understand the terms of a product or service may be a red flag indicating that examiners should conduct a detailed review of the relevant practice. This is especially true when numerous consumers make similar complaints about the same product or service. Because the perspective of a reasonable consumer is one of the tests for evaluating whether a representation, omission, act, or practice is potentially deceptive, consumer complaints alleging misrepresentations or misunderstanding may provide a window into the perspective of the reasonable consumer.
When reviewing complaints against an institution, examiners should consider complaints lodged against subsidiaries, affiliates, and third parties regarding the products and services offered through the institution or using the institution’s name. In particular, examiners should determine whether an institution itself receives, monitors, and responds to complaints filed against subsidiaries, affiliates, and third parties.
CFPB examiners are instructed to look for unfair, deceptive or abusive acts and practices by reviewing the following material:
- Training materials.
- Lists of products and services, including descriptions, fee structure, disclosures, notices, agreements, and periodic and account statements.
- Procedure manuals and written policies, including those for servicing and collections.
- Minutes of the meetings of the Board of Directors and of management committees, including those related to compliance.
- Internal control monitoring and auditing materials.
- Compensation arrangements, including incentive programs for employees and third parties.
- Documentation related to new product development, including relevant meeting minutes of Board of Directors, and of compliance and new product committees.
- Marketing programs, advertisements, and other promotional material in all forms of media (including print, radio, television, telephone, Internet, or social media advertising).
- Scripts and recorded calls for telemarketing and collections.
- Organizational charts, including those related to affiliate relationships and work processes.
- Agreements with affiliates and third parties that interact with consumers on behalf of the entity.
- Consumer complaint files.
- Documentation related to software development and testing, as applicable.
- All representations are factually based.
- All materials describe clearly, prominently, and accurately:
- costs, benefits, and other material terms of the products or services being offered;
- related products or services being offered either as an option or required to obtained certain terms; and
- material limitations or conditions on the terms or availability of products and services, such as time limitations for favorable rates, promotional features, expiration dates, prerequisites for obtaining particular products or services, or conditions for canceling services.
- The customer’s attention is drawn to key terms, including limitations and conditions, that are important to enable the consumer to make an informed decision.
- All materials clearly and prominently disclose the fees, penalties, and other charges that may be imposed and the reason for the imposition.
- Contracts clearly inform customers of contract provisions that permit changes in terms and conditions of the product or service.
- All materials clearly communicate the costs, benefits, availability, and other terms in language that can be understood when products are targeted to particular populations, such as reverse mortgage loans for the elderly.
- Materials do not misrepresent costs, conditions, limitations, or other terms either affirmatively or by omission.
- The entity avoids advertising terms that are generally not available to the typical targeted consumer.
When it comes to making marketing claims about the service the company should make sure performance statements include both completed and uncompleted accounts, it is a statement supported by the facts, the average client is likely to receive that result.
The Debt Relief Company Liability for Third-Party Marketing Representations
Examiners are directed to evaluate how the entity monitors the activities of employees and third-party contractors, marketing sales personnel, vendors, and service providers to ensure they do not engage in unfair, deceptive, or abusive acts or practices with respect to consumer interactions. Examiners are told to interview employees and third parties, as appropriate. Specifically, consider whether:
- The entity ensures that employees and third parties who market or promote products or services are adequately trained so that they do not engage in unfair, deceptive, or abusive acts or practices.
- The entity conducts periodic evaluations or audits to check whether employees or third parties follow the entity’s training and procedures and has a disciplinary policy in place to deal with any deficiencies.
- The entity reviews compensation arrangements for employees, third-party contractors, and service providers to ensure that they do not create unintended incentives to engage in unfair, deceptive, or abusive acts or practices, particularly with respect to product sales, loan originations, and collections.
- Performance evaluation criteria do not create unintended incentives to engage in unfair, deceptive, or abusive acts or practices, including criteria for sales personnel based on sales volume, size, terms of sale, or account performance.
- The entity implements and maintains effective risk and supervisory controls to select and manage third-party contractors and service providers.
I’d like to give a hit tip to Matt Hearn from MSTARS who sent out an earlier email on this subject.