On January 24, 2020, the Consumer Financial Protection Bureau (CFPB) announced a new policy regarding the prohibition on abusive acts or practices. The CFPB has clarified how it will define, supervise and enforce “abusive” standards under Dodd Frank § 1031(a) and (d).  The Bureau’s announcement acknowledges that there has been uncertainty in this area. The Director intends the Policy Statement to help avoid adverse consequences which may “chill or overly deter covered persons from engaging in conduct that may be beneficial to consumers.” The Policy Statement is effective January 24, 2020 and will govern supervisory and enforcement conduct going forward. The full Policy Statement is available here.

Dodd Frank Abusiveness Standard

Section 1031(d) of Dodd Frank defines broad parameters for abusiveness. The practice may be determined to be abusive if 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.

See 12 U.S.C. 5531(d).

Bureau’s Historical Prosecution of Abusiveness

The Policy Statement provides background on the Bureau’s enforcement activities specific to abusiveness. Since 2011, the Bureau “has brought 32 enforcement actions that included an abusiveness claim, including as recently as fall 2019.” However, more than 90% of the actions included both abusiveness and unfairness or deception claims. According to the Bureau, “only two enforcement actions contained just an abusiveness claim.” Demonstrating the challenge of amorphousness, the Bureau acknowledges “in many of those 30 actions, the abusiveness claim arose from the same course of conduct as the unfairness or deception claim.”

2019 Symposium – Differing Perspectives

Director Kraninger has been active in seeking input from various constituents since taking the helm. In  June 2019, the Bureau held its Symposium on Abusive Acts or Practices. “Eight academics and practitioners with expertise in UDAAP issues engaged in dialogue…” According to the Statement topics included the following:

• “the necessity of clarifying the abusiveness standard (and if so, whether rulemaking or another tool should be used),
• the degree of uncertainty posed by the statutory language, the particular aspects of the standard most in need of clarification,
• the practical consequences of this uncertainty on consumer financial markets, and how the Bureau should enforce the abusiveness standard.”

Should you have interest, the Statement provides summaries of certain commentary along with links the experts submissions. What is clear, the Statement concludes is that there are a variety of perspectives regarding what should constitute “abusiveness” and how it should be supervised and enforced. 

Policy Statement – 3 Main Points of Guidance

The Statement then outlines it three points of clarification and guidance to institutions and covered persons. While incrementally beneficial, what is lacking is any concrete examples or short list of conduct. The Statement makes clear that the Bureau will continue to analyze this issues will provide additional focus and information through Supervisory Highlights and other means going forward. The Bureau offers that in addition to the Policy Statement, effective January 24, 2020, covered persons and institutions should be analyzing past enforcement announcements and cases to continue to discern the scope of and thresholds for abusive conduct.  

1. Harms to Consumers from the Conduct Outweigh Its Benefits to Consumers

The Statement clarifies an approach which has been used both by the Bureau as well as by the FTC  focusing on weighing consumer benefits and burdens. The Bureau specifically notes that this approach is consistent with “the FTC’s approach to unfairness and deception. Section 5(n) of the FTC Act expressly codifies, in its unfairness standard, a weighing of the costs and benefits of the conduct at issue. 15 U.S.C. 45(n).”  Among the specific impacts the Bureau indicates it will consider is “its effects on access to credit.”

The Policy Statement notes:  “consideration of the harms and benefits of the conduct (i.e., its effects) on consumers can be qualitative as well as quantitative. That is, a quantitative analysis is not necessary for every citation or challenge to conduct as being a violation of the abusiveness standard.” Accordingly, covered persons and institutions should be evaluating both aspects going forward in assessing compliance and developing programs.  On a positive note, the Statement acknowledges market forces and credit access considerations:  “Competition among firms can lead to lower prices for and innovation in consumer financial products and services. Consequently, conduct that fosters competition can benefit consumers, while conduct that impedes competition can harm consumers.”

2. Bureau Generally Will Not Challenge Conduct as Abusive if it “Relies on All or Nearly All of the Same Facts” for an Unfair or Deceptive Claim.

Clearly reacting to its own enforcement data, the Policy Statement attempts to tackle the problem of historical “piling on.”  The Bureau indicates that it will strive going forward to provide more transparency and specificity as to the “nexus” and “specific factual basis” for abusiveness claims. This will be true, according to the Statement, for both supervision and enforcement activity. “To the extent practicable, the Bureau in the future intends to develop model pleadings and updates to its UDAAP examination procedures in order to provide greater specificity and clarity as to the abusiveness standard.” Future Supervisory Highlights editions also will describe alleged abusive facts and circumstances going forward. 

The Bureau emphasized, however, that despite these heightened requirements, it will still pursue “stand-alone abusiveness violations (i.e., violations that are not accompanied by related unfairness or deception violations) where doing so would be consistent with the abusiveness standard and this Policy Statement.”

The Statement also foreshadows that the Bureau may “seek an institution’s written response where the facts indicate that the institution’s conduct may qualify as abusive or unfair or deceptive.”

3. Good Faith Should Limit Civil Penalties/ Disgorgement Claims But Is Not An Affirmative Defense

The Statement acknowledges that here are instances where covered persons and institutions may be working in good faith to comply with the standards but may nevertheless make a mistake and land afoul of the standards. Under such circumstances that Bureau is willing to concede that it generally will pursue civil penalties or disgorgement. However, the Statement emphasizes that the good faith is not an affirmative defense and will not preclude pursuit of other “legal or equitable remedies, such as damages and restitution, to redress identifiable consumer injury caused by the abusive acts or practices that would not otherwise be redressed.”

The Statement refers to and essentially incorporates its Bulletin 2013-06 regarding responsible business conduct. Accordingly, it is worth reviewing that Bulletin with fresh eyes to understand how the Bureau will assess good faith.  “In determining whether a covered person made a good-faith effort to comply with the abusiveness standard, the Bureau intends to consider all relevant factors, including but not limited to the considerations outlined in CFPB Bulletin 2013-06 regarding Responsible Business Conduct.”  That Bulletin outlines in detail four critical factors including “self-policing, self-reporting, remediation, and cooperation with the Bureau’s investigation.”

In concluding this section, the CFPB reiterates it continues to be focused on deterrence and will actively pursue all remedies against bad actors (those not acting in good faith but mistakenly). In addition, the Bureau notes that the Office of Innovation should be utilized and leveraged to avoid challenges with new products and services.

Conclusion.

Presumably, we will learn more from the supervisory highlights and potential model pleadings forthcoming this year. In the interim, this guidance should help covered persons and institutions understand what may constitute stand-alone abusive conduct and to avoid claims of it going forward.

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