In 2013, the CFPB filed a complaint against CashCall, Inc. and others, alleging that their conduct in collecting on payday loans that allegedly violated certain states’ usury and/or licensing laws constituted unfair, deceptive and abusive acts and practices (UDAAPs) under federal law. Late last week, the CFPB struck again, filing suit against NDG Financial Corp. and others, making similar claims. The complaint against NDG, however, both expands the list of states where the CFPB alleges that collecting on a usurious and/or unlicensed payday loan is a UDAAP and changes the theory of abusiveness upon which the CFPB relies.

In CashCall, the CFPB first articulated its theory that certain violations of state law also constitute violations of the federal UDAAP prohibition. CashCall involves allegations that the defendants made loans in violation of certain states’ usury and/or licensing statutes. The CashCall complaint identifies five states—Arkansas, Colorado, New Hampshire, New York, and North Carolina—whose laws allegedly provide that certain loans made in violation of the state usury limit are void in whole or in part. The CashCall complaint also identifies seven states—Arizona, Colorado, Indiana, Massachusetts, New Hampshire, New York, and North Carolina—whose laws allegedly provide that certain loans made by unlicensed lenders are void in whole or in part. The CFPB can’t enforce those state laws. Instead, it asserted a novel theory—that the violation of the underlying state laws violated federal law. Specifically, the CFPB alleged that because the underlying loans were unenforceable as a matter of state law, the defendants’ attempts to collect those loans constituted unfair, deceptive, and abusive conduct prohibited by the Dodd-Frank Act—which the CFPB can enforce. I focus here only on the abusive conduct claim.

Relying on one prong of the statutory definition of abusiveness, in CashCall the CFPB alleged that collecting on such loans is abusive because it “takes unreasonable advantage of... a lack of understanding on the part of the consumer of the material risks, costs, or conditions of” a consumer financial product or service. Thus, the CFPB alleged that defendants’ collection efforts “took unreasonable advantage of consumers’ lack of understanding about the impact of applicable state laws on the parties’ rights and obligations.” Implicit in the CFPB’s claim is that (a) collecting on loans can constitute “taking unreasonable advantage” of someone and (b) that the “impact of applicable state laws” is a “material risk, cost, or condition” of the underlying loan. The latter proposition in particular is questionable—the alleged unenforceability of a loan is not a “risk” of the loan to a borrower; is not a hidden “cost” of the loan; and is not a “condition” of the loan as that term is commonly understood.

This week’s complaint against NDG asserts very similar claims, with a few notable differences. First, the NDG complaint substantially expands the list of states whose laws allegedly render some usurious or unlicensed loans void as a matter of state law (a prerequisite for the CFPB’s UDAAP theories). In addition to the CashCall states, the NDG complaint lists Minnesota as a state where certain usurious loans are void, and Alabama, Illinois, Kentucky, Minnesota, Montana, New Jersey, New Mexico, Ohio, and Utah as states where certain loans made by unlicensed lenders are void in whole or in part. Second, and more interestingly, the CFPB appears to have changed its theory as to why collecting on such loans is abusive.

The Dodd-Frank Act sets forth four separate types of conduct that can constitute abusiveness—conduct that:

• [1] materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
• takes unreasonable advantage of—
  • [2] a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
  • [3] the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
  • [4] the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

As discussed above, in CashCall the CFPB relied on the second of these prongs, alleging that attempting to collect on loans rendered void by state law takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the loan.

Perhaps proving that—as CFPB Director Richard Cordray famously said—the term abusive is “a little bit of a puzzle,” the CFPB has now shifted gears. In the NDG complaint, the CFPB appears to allege that collecting on loans that are rendered void in whole or in part pursuant to state law is abusive because it violates the first prong: it “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.” Implicit in this new theory are the notions that (a) collecting on a loan can constitute “material interference” and (b) the enforceability of the loan is a “term or condition” of the loan. As with the CFPB’s original abusiveness theory, the facts asserted don’t neatly fit the chosen abusiveness prong.  Setting aside the question of whether the facts alleged plausibly demonstrate “material interference,” it is no more clear that the alleged unenforceability of a loan is a “term or condition of the loan” (required for this new theory of abusiveness) than it is a “material risk, cost, or condition” of the loan (required for the old theory of abusiveness).  In both cases, the CFPB seems to be forcing a puzzle piece where it doesn’t quite fit - the proverbial square peg in a round hole.

It bears noting that the NDG complaint is not a model of clarity. The complaint only cites to the statutory provision setting forth the “materially interferes with” prong of abusiveness (and also brings a separate, but similar, abusiveness claim under that same prong based on defendants’ alleged statements that their loans are not subject to U.S. state or federal law). At the same time, the complaint contains a separate paragraph asserting that Defendants took “unreasonable advantage of consumers’ lack of understanding regarding the enforceability of the loans,” and elsewhere asserts that the “consumer's legal obligation to repay is a material term, cost, and condition of the loan,” conflating the “term or condition” requirement of the new theory with the “material risk, cost or condition” requirement of the old theory. Whether this reflects sloppy drafting or intentional hedging by the CFPB it is too early to tell.  But what is clear is that what constitutes abusiveness is still an evolving concept—and likely will be for some time until the courts have a chance to provide further definition to each of the statutory prongs.