The Consumer Financial Protection Bureau (CFPB) recently initiated a lawsuit in a South Carolina federal district court against Heights Finance Holding Co. f/k/a Southern Management Corporation and a host of its entirely owned, state-licensed subsidiaries, jointly referred to as Southern. The CFPB has alleged that Southern contravened the Consumer Financial Protection Act’s Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) prohibition by engaging in the practice commonly referred to as “loan churning”. This term specifically refers to the act of recycling payment-stressed debtors in refinances burdened with exorbitant fees. Details can be found here.
The lawsuit filed by the CFPB against the finance companies is a significant event that may have implications for similar proceedings. The action signals that regulators are adopting increasingly stringent approaches to crackdown on practices deemed detrimental to consumers’ financial health—especially concerning practices seen to perpetuate financial distress for vulnerable borrowers.
UDAAP proscriptions form a fundamental part of the Consumer Financial Protection Act, aimed at regulating activities in the consumer finance sector that are perceived as prejudicial to consumers. Practices such as loan churning—in which borrowers are repeatedly refinanced into new loans with steep fees—are at the forefront of these perceived predatory actions.
On a final note, legal professionals at large corporations and law firms need to be acutely alert to such litigation trends. The escalating enforcement of UDAAP regulations spotlight the need for companies to reevaluate and, if necessary, strengthen their compliance practices related to consumer financial products and services.