But is discrimination “unfair” within the meaning of the federal UDAP laws – i.e., the laws prohibiting “unfair or deceptive” (and sometimes “abusive”) practices? The Consumer Financial Protection Bureau says it is. In March, the CFPB updated its Supervision and Examinations Manual to make clear that discrimination is “unfair” under Dodd Frank, and that the agency plans to scrutinize discrimination “across the board in consumer finance,” “including in situations where fair lending laws may not apply.”

Meanwhile, the FTC is advancing similar views. Over the past year, three of its Commissioners have said in speeches and policy statements that discrimination is “unfair” under the FTC Act. (See here and here.) And in August, the FTC launched an ambitious rulemaking proceeding that would potentially ban “algorithmic discrimination” as an unfair practice.

And not to be forgotten, State Attorneys General are taking a similar position. Recently, for example, California AG Bonta sent letters under its Unfair Competition Law to hospital CEOs requesting information on how healthcare providers are addressing racial and ethnic disparity in commercial decision-making tools.

A new lawsuit from the Chamber of Commerce and other business groups takes aim at the assertion that discrimination is “unfair” (legally, that is). While the lawsuit specifically challenges the process and legal basis for the CFPB’s change to its Manual, it will likely have implications for the FTC and potentially the States too, which follow the same or similar tests for “unfairness.” Here’s more information about the case:

The Parties

Plaintiffs are the Chamber of Commerce, American Bankers Association, Consumer Bankers Association, and four business groups based in Texas (where the complaint was filed). Defendants are the CFPB and Director Rohit Chopra in his official capacity. Plaintiffs say that they “fully support fair enforcement of [the] nondiscrimination laws” passed by Congress, but “cannot stand by while a federal agency exceeds its statutory authority, creates regulatory uncertainty, and imposes costly burdens on the business community.”

The Allegations

The lawsuit presents three legal theories regarding the Manual change, and then adds a challenge to the CFPB’s entire funding structure at the end.

First, the complaint alleges that the CFPB’s change to its Manual exceeds the agency’s statutory authority under Dodd Frank, which authorizes the agency to examine, investigate, and take action against “unfair, deceptive, or abusive” acts or practices. According to the complaint, Congress declined to give the CFPB regulatory authority over discrimination except in specific circumstances (under the fair lending laws), and Dodd Frank consistently treats unfairness and discrimination as distinct concepts. For good measure, the complaint throws in a reference to the Supreme Court’s recent ruling in West Virginia v. EPA, which states that Courts should be skeptical regarding agency efforts to regulate “major questions” (like discrimination) in the absence of clear Congressional intent.

Second, the complaint alleges that the CFPB’s manual change is arbitrary and capricious because it: (1) purports to be based on FTC precedent but doesn’t adhere to FTC statutory constraints (i.e., limits on using unfairness to pursue “public policy goals”); (2) regulates discriminatory “outcomes” (i.e., “disparate impact”) without a clear directive from Congress; and (3) abruptly changes longstanding CFPB policy and processes without considering the impact and burdens on companies – including the burdens created by the examination process itself, by follow-on enforcement actions (with penalties and other remedies), and by the CFPB’s failure to even explain the full scope of the discrimination it will examine. (As to the latter point, the Manual refers repeatedly to “discrimination” and provides examples, but doesn’t flesh out the full scope of the discrimination covered.)

Third, the complaint alleges that the Manual change violates the Administrative Procedures Act because it amounts to a regulatory change without a notice-and-comment process.

Finally (echoing a longstanding talking point in some circles), the complaint states that the CFPB’s entire financial structure violates the Appropriations Clause because the CFPB draws funding from the Federal Reserve without a Congressional appropriation or other checks and balances.

As to relief, the complaint requests (1) a declaration that the Manual change is invalid; (2) injunctive relief stopping all CFPB action related to it; and (3) that the CFPB cease accepting funding in violation of the Appropriations Clause.

Significance

Some of the complaint’s arguments seem more compelling than others. For example, as harmful as discrimination is to individuals and society, it seems reasonable for affected companies to question whether it falls within UDAP, when Congress went to the trouble of passing specific anti-discrimination laws with carefully crafted definitions, exceptions, and grants of enforcement authority. It also seems reasonable to ask the CFPB to define the types of discrimination that it plans to examine.

On the other hand, plaintiffs’ theory that any changes to the Manual must follow APA rulemaking is so broadly framed that, if adopted, it would compel the CFPB (and other agencies) to conduct rulemakings before issuing or revising even the most informal types of guidance materials. Further, plaintiffs’ challenge to the CFPB’s funding structure is untethered to the other allegations in the case and lacks the facts and background needed for a legal challenge of this breadth.

Still, this lawsuit shows that the business community is increasingly willing to push back on its regulators, especially as Republican lawmakers are doing the same and as we approach the midterm elections. It’s likely that we will see more challenges of this type in the near future.

In addition, if the lawsuit succeeds even in part, it could limit not only the CFPB’s efforts to police discrimination but also the FTC’s and potentially the States’, which are based on the same or similar legal underpinnings. We will watch this case closely as it proceeds in court.

So what can we glean from this Georgia settlement? A lot.

AVCs have their pros and cons. Assurances of Voluntary Compliance (or in some jurisdictions, Assurances of Discontinuance) are statutorily authorized in many states as a way to resolve Attorney General consumer protection investigations. Often seen as something lighter than a court ordered judgment and an appealing form of settlement in many cases, AVC statutes like Georgia’s may include express language that they cannot be used as admission. But know their limitations – depending on the state, AVCs may still be filed with the Court with violations punishable by contempt. Moreover, an AVC may not include a complete release – Georgia’s statute and settlement with Rent-A-Center allows the AG to reopen the matter in the event of a future breach of their agreement.

Even a regulated industry may be subject to UDAP laws. Navigating the varied exemptions in state unfair and deceptive act and practice laws may be challenging. It’s important not to assume that just because your industry is heavily regulated under another state law (like Georgia’s Lease-purchase Agreement Act) that it is exempt from general UDAP compliance. Moreover, conduct that is exempt in one state’s UDAP law may not be in another. Given that UDAP enforcement is the bread and butter of State AG consumer protection, make sure you know your exposure in any given state.

State AGs remain concerned about first-party debt collection practices. While the federal Fair Debt Collection Practices Act may largely exempt businesses collecting on their own debts, state laws may cover first-party debt collection practices. Even the absence of a specific state law may not absolve your practices – Georgia’s AVC alleged that Rent-A-Center’s practices, which included repeated phone calls and threatening consumers with criminal prosecution, constituted unfair and deceptive practices under their UDAP law.

State AGs will heavily scrutinize disclosures and consumer consent, especially for recurring charges. As we’ve previously reported, State AGs have been focusing on automatic renewals especially in response to new state laws requiring clear disclosure and express consent. The Georgia AVC focused on two recurring charges imposed by Rent-A-Center. First, the AG alleged that loss damage waivers were falsely offered as “insurance” or “warranty programs.” Second, the AG alleged that charges for club memberships continued after a rental purchase agreement concluded without adequate disclosure. The lack of clear and conspicuous disclosure of material terms calls into question the adequacy of the consumer’s consent, and is going to be an easy target for State AGs.

Enforcement actions may be costly, but there could be opportunity to save if you put your money where your mouth is. While the Georgia AVC calls for a payment of over $300,000 in penalties, fees, and costs, the agreement also provides that a final payment of over half of that amount can be waived if there is not a default in the next two years. Including a provision like this in a settlement allows a company to not only save money in the long run, but also to demonstrate its commitment to follow the detailed injunctive relief and hold itself out as a good corporate citizen to regulators.

Georgia’s AVC is a great reminder of how broad State AG authority is and the type of penalties you might face if you end up on their radar. Whether you’re currently subject of an investigation or not, it’s a good idea to take a close look at your business practices to ensure compliance.

The letter notes that, “Attorneys general are uniquely qualified and well-positioned to provide insights regarding impersonation scams.” Not only do State AGs provide insights regarding these scams, but also they often enforce their laws prohibiting unfair and deceptive practices (UDAP) to stop them. The letter details several recent State AG actions in this area, including settlements with companies allegedly sending deceptive mail solicitations that appeared to come from government agencies, and companies making calls impersonating government agencies and other businesses. Having obtained these resolutions, it is interesting that the State AGs then write that “there is a pressing need for FTC rulemaking to address the scourge of impersonation scams” and that “a national rule that encompasses and outlaws such commonly experienced scams discussed herein would assist attorneys general and their partners in reducing consumer harm….”

The AGs also take aim at what they call facilitators of these scams, considering they should sometimes be held accountable and citing recent rulings in states such as California and Massachusetts holding lenders responsible for actions that contributed to fraud. They also note that third parties may sometimes be victim themselves. Indeed, most players in the marketplace are harmed from imposter scams, including consumers, legitimate businesses or government agencies being impersonated, and some third parties whose platforms are being used for illegitimate purposes without their knowledge or in abuse of their policies.

The AGs also note that the standard provided in such a rule should act as a floor and clearly state that it is not intended to preempt state laws. This seems like a risky proposition, since having such a rule would likely result in arguments of field preemption.

State deceptive trade practices acts are designed to protect against just that – deception. Imposter scams take advantage of the ultimate deception, leading consumers to believe they are speaking with trusted relatives, companies, or agencies. Government imposter scams are one of the most notorious forms, which could include a company making a false claim that they can provide government benefits or insinuating it is a government actor by failing to clearly and conspicuously disclose it is not. Some state UDAP laws even contain specific violations against government imposter scams, such as misrepresenting a government entity in solicitations.

So, given that, what can the AGs accomplish with an FTC rulemaking? Perhaps they are looking to further their partnership with the FTC, as we have previously discussed. In the letter’s conclusion, the authors state “Attorneys general hope to continue working with the FTC and other partners to sound the alarm on impersonation scams.” They also add that education and outreach efforts must act as a “complement to strong regulation.” This may present great opportunity not only for the States and FTC to work together, but the legitimate business community which is also often the victim of imposter scams.

As our 30 years of combined experience as former government regulators has taught us, the difficulty in combatting imposter fraud isn’t a lack of legal authority to bring actions against wrongdoers, or even a lack of consumer education, but often is the challenge of unraveling who the imposters really are and catching them before they disappear. Once they are found, taking action under the current enforcement regime is certainly possible as the lengthy history of enforcement actions described by the States demonstrate. As the States note, impersonators are increasingly able to use newer technology and platforms to their advantage such as new payment processors, social media, and cryptocurrency. They also note that there are minimal startup costs to become an imposter. Covid-19 has also made people especially vulnerable to falling victim, as people spent more time apart and expected more contact from government agencies. If nothing else, the rulemaking is highlighting this pervasive problem. Working together with the business community that is often victimized as well, States and the FTC have an opportunity to collaborate on the tools they need to combat this pervasive type of fraud.