On May 30, 2013, the Consumer Financial Protection Bureau (CFPB) filed a six count Complaint and proposed Stipulated Final Judgment and Order (the Judgment) against American Debt Settlement Solutions, Inc. (ADSS), a debt relief provider and Michael DiPanni (DiPanni), its owner and manager of daily operations, for injunctive relief, damages and non-monetary relief due to alleged violations of the FTC’s Telemarketing Sales Rule (TSR) and Title X of Dodd Frank.¹  The case is particularly significant because it marks the first time the CFPB has prosecuted a covered person or service provider for engaging in “abusive acts or practices” under Sections 1031 and 1036 of Dodd Frank.²

ADSS is a debt relief provider that restructures, modifies or settles debts for consumers in exchange for payment of various fees. The CFPB alleged that, among other things, ADSS collected fees – including, enrollment fees (calculated as a percentage of the debt serviced by ADSS), service fees and processing fees -- before renegotiating, settling or reducing at least one debt for the consumer. The CFPB charged that ADSS failed to restructure, modify or settle any debts for approximately 89% of its enrolled consumers.

In Count V of its Complaint, the CFPB asserted that ADSS engaged in “abusive acts or practices” by knowingly enrolling and collecting draconian enrollment fees from consumers “whose financial conditions make it highly unlikely that they can complete the program.” See Complaint at ¶57. The CFPB claimed that ADSS was cognizant of consumers’ tenuous finances by virtue of requiring, as a precondition to enrollment, that consumers complete detailed worksheets disclosing their monthly income, expenses and debts. The CFPB also claimed that ADSS “engaged in deceptive acts or practices” by (1) failing to disclose to consumers that the terms of debt under $700 were “nearly impossible” to restructure or settle; (2) misrepresenting that it “will likely” restructure or settle debts within the first three to six months upon enrollment and (3) misrepresenting that it “likely will” restructure or settle the debts of enrolled consumers. See Counts II-IV of Complaint.

The Judgment permanently enjoined ADSS and DiPanni from advertising or providing any debt relief product, assessed money damages of $499,247.96 and imposed a $15,000 civil penalty.³  The Judgment also required ADSS and DiPanni to implement certain credit monitoring, compliance monitoring and recordkeeping requirements.

While the penalties are undoubtedly stiff, the case’s significance clearly arises out of the CFPB’s decision to finally utilize its enforcement authority for an alleged “abusive” act or practice. Since its inception, the CFPB had elected to only bring UDAAP claims for deceptive or unfair acts or practices. This was hardly a new legal concept inasmuch as the deceptive and unfair component of UDAAP were lifted from Section 5 of the FTC Act. CFPB v. ADSS provides the first glimpse of the type of conduct that may give rise to an enforcement action for an “abusive act or practice”. In the months ahead it will be interesting to see if this case is a harbinger for aggressive enforcement of “abusive” acts or practices, or if ADSS remains an outlier.

_{1 The Complaint and Judgment are available here.}

_{²12 USC 5531(c) defines an act or practice as “abusive” where it “(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.”}

_{³ Payment of the money damage aspect of the Judgment would be suspended if ADSS and DiPanni promptly comply with other sections of Judgment.}