A federal court has denied a motion from ITT Educational Services to dismiss a lawsuit filed last year by the Consumer Financial Protection Bureau. ITT argued in its motion (found here) that the CFPB lawsuit violates the due process clause of the Constitution because regulated parties do not have fair notice of what constitutes “unfair” or “abusive” acts or practices. The court’s decision can be found here.
In February of 2014, the CFPB filed the lawsuit, which seeks restitution for victims, a civil fine and an injunction against the company, alleged unfair, deceptive or abusive practices (UDAAP). The nature of the CFPB’s use of UDAAP violations have been previously covered here. ITT argued that the terms “unfair” and “abusive” are unconstitutionally vague.
The CFPB has no authority to declare an act or practice “unfair” unless there is a “reasonable basis to conclude” that “the act or practice causes or is likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers and that such substantial injury is not outweighed by countervailing benefits to consumers or to competition.” ITT asserted that what constitutes “substantial injury” or is “reasonably avoidable” is purely subjective, and that the CFPB has not attempted to provide meaningful guidance.
ITT’s motion noted that “abusive” is even less defined. An “abusive” act or practice is one that “takes unreasonable advantage of…the inability of the consumer to protect their interests,” or of “the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.” ITT cited CFPB Director Richard Cordray’s own statement that the term “abusive” is “a little bit of a puzzle because it is a new term,” and that the CFPB “ha[s] been looking at it, trying to understand it, and we have determined that that is going to have to be a fact and circumstances issue” It is “probably not useful to try to define a term like that in the abstract; we are going to have to see what kind of situations may arise where that would seem to fit the bill.”
According to ITT, “The Bureau’s ‘know it when I see it’ approach leaves regulated entities to ‘guess at its meaning and…application,” which violates “the first essential of due process of law.’” The court’s dismissal of ITT’s motion removes due process as a cause of action against the CFPB, and leaves the Bureau free to continue regulating with a remarkably free hand.