UDAAP: CFPB’s Tool to Trample Tribal Sovereignty

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the Consumer Financial Protection Bureau (CFPB) and granted the agency broad supervisory, enforcement, and rulemaking authority over financial service providers. Along with almost 20 different federal consumer protection laws, Congress also issued the CFPB the power to prosecute unfair, deceptive, and abusive acts and practices (UDAAP) under Section 1031 of Dodd-Frank. As an enforcement tool, UDAAP (or UDAP as earlier versions were classified because “abusive” acts and practices were not added until Dodd-Frank) has existed at the federal and state levels for decades. However, it was only recently that the CFPB turned an effective federal regulation intended to curb anti-competitive business behavior into a means to pervert the sanctity of tribal sovereignty.

In April, the CFPB brought a complaint against the lending operations of a California tribe for violations of the Truth in Lending Act and UDAAP. The agency is arguing that the tribal lending entities (TLEs) failed to secure state lending licenses and adhere to state usury caps on loans delivered across the United States; the CFPB claims that this is an unfair and abusive practice under Dodd-Frank. As history has proven, this is an irresponsible use of the agency’s UDAAP authority and a clear attempt to trample on the rights of a sovereign tribal nation.

Since its creation in 2010, the CFPB has done little to issue any sort of agency guidance to supplement the brief descriptions of “unfair” and “abusive” in Section 1031. At a hearing of the House Financial Services Committee only a few weeks before the CFPB filed its UDAAP lawsuit against the TLEs, CFPB Director Richard Cordray fielded a number of questions from Rep. David Kustoff (R- TN) concerning the lack of guidance provided by the agency on UDAAP and the CFPB’s failure to plead sufficient facts in a separate UDAAP case against a third party payment processor. Instead of publishing guidance on its own enforcement provision governing a rapidly-evolving industry, the CFPB is choosing to rely on outdated guidance developed and released by the Federal Trade Commission (FTC) from the early 1980s.

The Wheeler-Lea Act of 1938 amended Section 5 of the Federal Trade Commission Act and set out the original parameters for UDAP. Dating back to debates in 1914, Congress refused to specifically define unfair and deceptive acts or practices, concerned such a list would be easily circumvented through loopholes and quickly become outdated. Instead the FTC chose to periodically issue agency guidance on how it pursued UDAP claims, and federal courts joined in the exercise through a gradual process of inclusion and exclusion. To further limit potential abuse of the FTC’s UDAP authority, Congress created a non-partisan commission to oversee the agency and inform its activities. The FTC’s last major guidance for deception and unfairness came more than 30 years ago. Despite considerable technological and regulatory advances in recent years, the CFPB chooses to retain the FTC’s archaic interpretations.

Unlike the FTC, the CFPB is managed by a single, independent director, former Ohio Attorney General Richard Cordray. Under his leadership, the CFPB has quickly mobilized enforcement personnel to stretch the applicability of UDAAP in the consumer finance sector. However, with no checks to the agency’s authority, the CFPB is now ignoring years of Supreme Court precedent regarding UDAP authority and tribal sovereignty to impose state laws on a tribal enterprise in an area expressly forbidden by the Dodd-Frank Act.

In April, the CFPB filed a lawsuit against the lending operations of a tribe located in Northern California. In its complaint, the agency is arguing the TLEs violated UDAAP by failing to secure state lending licenses and a refusal to comply with state usury caps (http://files.consumerfinance.gov/f/documents/201704_cfpb_Golden-Valley_Silver-Cloud_Majestic-Lake_complaint.pdf). A quick review of Supreme Court precedent regarding state jurisdiction over tribes and UDAP, coupled with express language found in the Dodd-Frank Act, clearly demonstrates why this lawsuit is an example of CFPB overreach and a danger to tribal economic development.

First, the Dodd-Frank Act prohibits the CFPB from setting usury or interest rate caps at the federal level. This express limitation of the CFPB’s authority by Congress makes the agency’s use of UDAAP in this instance all the more egregious. Interest rate caps on consumer loan products are left to the providence of the states; some states have imposed usury caps, but other have chosen to let market forces dictate those loan terms. At his April hearing before the House Financial Services Committee, Director Cordray contended that 14 states ban small dollar lending, but their residents still do fine. He failed to note that consumers in those 14 states submitted approximately 2.7 million loan applications to out of state lenders in the fourth quarter of 2016 alone. The concepts of interstate commerce and rate exporting help explain how lenders can legally provide products to consumers across the United States.

Rate exporting permits a business to rely on the usury laws of its home jurisdiction when contracting with consumers across state lines. Rate exporting is common with credit cards, and led many credit card companies to relocate operations to South Dakota, a state with limited usury requirements. The Supreme Court determined in Smiley v. Citibank that the National Bank Act permitted banks to export rates without violating UDAP. In the CFPB’s case against the TLEs, the tribal lending code in question lacks strict usury controls. Similar to Citibank, the TLEs should be free to export rates to other jurisdictions free of UDAP challenges. Congress is the sole American authority related to Indian commerce via the U.S. Constitution; the CFPB cannot shift this authority to state regulators simply because the agency is expressly prohibited by Congress and Supreme Court precedent from bringing an action against the tribe.

Finally, considerable Supreme Court precedent demands the preemption of state law regarding sovereign tribal activity. Dating back to the 1830s, the Supreme Court has consistently held that states lack jurisdiction over tribal affairs. More recently, America’s highest court has extended tribal sovereignty to commercial activities of economic subdivisions of the tribe for business dealings on and off reservations. Any changes to this doctrine must come directly and unequivocally from Congress.

The CFPB is attempting to impose state jurisdiction over a sovereign economic subdivision of a federally-recognized tribe in an area that Congress has expressly prohibited the agency from participating. The Bureau’s use of UDAAP creates a de facto state jurisdiction over sovereign tribal affairs and contradicts decades of Supreme Court precedent and explicit Congressional action. NAFSA’s mission begins with our defense and advocacy of tribal sovereignty. NAFSA is committed to the promotion of responsible and sustainable financial solutions, while also defending the sovereign rights of tribal nations to self-determine economic policies that bring prosperity and hope to Indian Country. The CFPB’s actions against the TLEs of the Upper Lake tribe are in direct conflict with our mission, the Supreme Court, and the intent of Congress.