CFPB Lays Out What It Will Look For as an Abusive or Deceptive Practice

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.

Document Review

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.

Marketing Disclosures

  • 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.


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See also  Consumer Financial Protection Bureau In The Works But Don't Expect Much Before July, 2011

34 thoughts on “CFPB Lays Out What It Will Look For as an Abusive or Deceptive Practice”

  1. In orange county today people lost their jobs.  I did.  So did my colleagues at a few other places.

    Regulation is required, however painting small business into a corner that effects the hometown families and cities alike does more harm than good.  I’m 50 years old with a kid in college and all I have done for the last 3 years is settle debt.  What did I do to make them take my lively hood?

    My hope is that God provides.


    •  Wow guys. Whats the deal?? It takes courage to stay in the game and do it right. Are you saying that because these rules are now defined through a different agency, you are all throwing in the towel? I actually see the CFPB as being a very good thing. The FTC simply threw down CIDs and C&Dd until you substantiated your claims. That would shut down most. The CFPB, as I understand it, is far more willing to work through it. Anyone thinking of shutting your doors, I have this message for you:

      This is the time in our industry where the strong stand. It is the time when ethics, integrity and character determine your path. It’s the time to separate those in this business for the people or simply for the easy money. There is more on the line than just your bottom line. I have petitioned this great industry time and time again. Give me a call and let me set you straight, bolster your courage and show you “The Way”!

      Matt Hearn-MSTARS
      Contact info posted above.

      • Matt,

        I’m sure you are going to help people get compliant and review all of their materials and business practices. That’s a good thing.

        For so long people have not paid attention to these issues even though so much help was out there for them. I know compliance consultants that want to help but can’t get their phones to ring.

        •  It will take time before the consumers and regulators regain confidence in this industry. You are right on those points, though. My opinion on how to regain trust is this:

          A consistent, sustained change in behavior.

          •  You are absolutely right on that… I hope the remaining firms reach out, take heed and get their businesses in order. On a separate note, the “Examination” process looks fairly straightforward. Granted it will put you out of business if you cannot demonstrate viable efforts and compliance in those areas, but I actually like their process. Any proficient, serious business would already have 80% of those requirements met. The other 20% can be shored up fairly quickly and with little financial outlay to be in compliance. It’s just not the wild west anymore, and if you cross the line, it’s lights out! Get the facts, clean your house, put the protocols in place and service the clients with excellence. If everything you do focuses on the client’s experience, the rest falls into order…

        • ISO 9001  – The Certification process was presented at the Evolution Conference – Audits – Data – Bonds – Insurance –

          License – State Laws – Privacy Laws – DAA – DSA -UDMSA – Check Sellers – Credit Services – Debt Management – Red Flag I will stop there sounds like some companies have alot of work to do

          • … and after all this is done and paid for. The lucky company gets to go out and compete with all the others that don’t care about any of it and play by their own rules.

        • Steve,

          Our company would like to consult with someone on compliance issues. You mention here that you know some compliance consultants, can you share some names or contact info. We would like to compare consultants and know the cost for consultation before committing to a contract. We could join AFCC and receive this but there is a considerable expense for membership and are wondering about other ways to be sure we are operating compliantly.


        • The only nationally recognized certification for Debt Settlement
          Companies  is ISO 9001  other certs to look at are 2700 and PCI – The person
          that audited USDR audited NASA so you can imagine the scrutiny – ISO
          incorporates daily weekly monthly quarterly and annual reviews to ensure
          compliance and service delivery

          • Scott my understanding is that ISO certifications are for companies in “any” industry…how do they unsure legal compliance (State & Federal) specifically for debt settlement companies?

          • good question, I too wondered about this. I understand that certifying for QA is a good thing but wonder if ISO auditors have a solid understanding of the debt relief industry and what it takes to be compliant with FTC Section 5, TSR, state UDMSA etc.

          • Certain States Require Certification for Licensure and For
            Debt Settlement Firms ISO 9001 is the gold standard – You are correct that many
            industries and companies use ISO 9000 Cert for reference http://en.wikipedia.org/wiki/ISO_9000

            Feel free to email and I would be happy to share more

          • I would be happy to do a webinar to to cover ISO 9001 and show how it matches up to existing and the new directives of the federal and state agencies

          •  There are many many ways to ensure compliance with the rules. It is extremely simple to do. Don’t get too panicked about it and drop me a call. Did you attend the CFPB UDAAP Compliance webcast yesterday? If not, I will make it available for you.

          • ISO 9001 requires an organization to identify and control the statutory and regulatory requirements applicable to its products (including services). It is up to the organization how to do this within its quality management system

          • ISO 9001 is very expensive for a small or start up debt relief company with costs for pre-audit, implementation and audit/certification. ISO 9001 is a management standard, not a product or service standard. ISO 9001 only certifies the quality of documentation and standards within the company, it does not say anything about the quality of the product or service sold. Many believe that ISO 9001 is too expensive, general and bureaucratic, and this is why affordable debt relief industry-specific standards need to be developed.  

          •  This is easier than you think. There are standards being developed as we speak to govern the industry on a more specific level. Getting compliant with the UDAAP guidelines isn’t needing that level of protocol. Call me and I’ll explain further.

          • If the question of capitol shortfalls of a company in the debt relief space is the objection to certifications bonds insurance I think that is a discussion on another thread if we are trying to change the image of debt settlement why not the gold standard and one required by several states.
            From Wiki
            ISO 9000 is a family of standards related to quality management systems and designed to help organizations ensure that they meet the needs of customers and other stakeholders
            Hope the statement about customers stood out
            ISO 9001 is the ultimate global benchmark for quality management. It is a critical tool for boosting your company’s success, profitability and market potential.

            ISO 9001 will better equip your business to meet every client requirement, improve client focus throughout and a host of other benefits, such as:
            Improve competitiveness leading to a higher profit potential

            Optimize your market potential, as well as opening your business up to larger clients, both at home and abroad

            Streamline efficiency, cost containment and savings

            Improve your consistency and information flow

            Improve your employee motivation

            Improve time management, service and performance to the highest level

            Improve your businesses customer service

            Improve accountability and traceability

            Abstract:Several studies have examined how the ISO 9001 Quality Management System standard predicts changes in organizational outcomes such as profits. This is the first large-scale study to explore how employee outcomes such as employment, earnings, and health and safety change when employers adopt ISO 9001. We analyzed a matched sample of nearly 1,000 companies in California

          • Scott I am sure that you run a very fine company and that your ISO certification is a valuable asset of your company. I am only saying what many have said about ISO certifications, it is expensive, time consuming and does not guarantee any quality of the products or services sold by the company certified. I believe the debt relief industry like many other industries needs to develop an industry specific company certification program. ISO 9001 may be the gold standard for quality management processes of debt settlement companies and many have this but it would be good to have a more industry specific guage.

          • I am in agreement that specific industry standards need to be developed – any standard that sets thresholds for service  would start to “seperate the wheat from the chaff”  COMMISSIONER ROSCH FTC 2008

  2. We have been posting on this and just posted on this again yesterday. This is CRITICAL. It may seem similar to the rules of Section 5, which they certainly are, but the triggers are set much more sensitively. The CFPB has a complaint based identification system, powered by very robust consumer outreach initiatives. The system is set up very much like a ticketing system within a technology company. You submit an inquiry and can track it throughout the process of the “investigations”. That means that everything you do and say must be in complete harmony with the rules in place. A single consumer can get the eyes of the CFPB on your firm. However scary that seems, if you are doing everything by the book, and are putting the consumer experience at the forefront of every system in your operation, you’ll have no reason to fear the scrutiny or “Examination”. The pieces of examination are exactly what we reported they would be a year ago. Having internal training protocols is good but are generally viewed as biased. Having solid third party compliance training certifications will be far more helpful in “bullet-proofing” your operation. Understanding the rules and doing your best to comply is great, but building your systems on absolute excellence and full compliance is better. As always, call me if you want assistance, insight or direction on this. Nice job on reporting this, Steve!

    Matt Hearn-MSTARS
    (952) 388-0668
    (952) 451-6288

    •  LOL! Don’t knee jerk, my friend. Call me and let’s talk it through. This is FAR better for you than the previous regulating entity protocols…


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