Since its inception, the Consumer Financial Protection Bureau (“CFPB”) has issued policy statements around its authority to root out, stop and prevent unfair and deceptive acts pursuant to the Unfair, Deceptive and Abusive (“UDAAP”) provision of the Consumer Financial Protection Act (“CFPA”), specifically 12 U.S.C. 5521(d). These statements have both followed and preceded action by the CFPB which it asserted were consistent with the meaning of those terms and the scope of its related authority. Many have argued that its definitions of those terms and what they cover and the CFPB’s related investigations and enforcement actions based on these interpretations are unsupported by the CFPA, notwithstanding that they may be consistent with the policy statements addressing unfair and deceptive acts and practices. On point, about a year ago, the CFPB proclaimed it would be taking steps to combat “discrimination” in the consumer finance space using its interpretation of the “Unfairness” prong of UDAAP. In sum, the CFPB now takes the position that because it has the authority to take action against unfair actions or inactions relative to consumer financing and discrimination is unfair, wherever and in whatever form it saw discrimination, it had the authority to investigate, stop and penalize for such conduct or inaction. Many industry groups sounded the alarm by noting that this “all in” or blending approach actually blurred and confounded compliance and ran counter to the expressed terms of the fair lending statutes actually passed by Congress. Nevertheless, consistent with its expansive view of its authority to address all things discriminatory, the CFPB seized on Regulation B of the Equal Credit Opportunity Act (“ECOA”), which it had promulgated in the past without any fanfare, to institute an investigation and eventual federal enforcement action against a Chicago-based mortgage lender arguing that the lender violated ECOA by discouraging minorities from applying for mortgage loans from it. However, in February, the U.S. District Court for the Northern District of Illinois dismissed the CFPB lawsuit, ruling in CFPB v. Townstone that the ECOA only prohibits discrimination against actual applicants for credit, and does not even contemplate the discouragement of prospective applicants; in effect ruling the “discouragement” provision of Regulation B to be void. On April 3, the CFPB filed its notice of appeal to the Seventh Circuit. Clearly, the CFPB is not backing down from its position that it has unbridled authority on the topic of discrimination.

On the same day as its appeal in the Townstone action and consistent with its attempt to position itself in a manner that continues to broaden its subjective authority, especially as it relates to discrimination as it defines it, the CFPB issued its expansive and, most importantly, flexible Policy Statement on Abusiveness (“Policy Statement”). This statement not only addressed the CFPB’s authority to identify, stop, prevent and penalize abusive conduct in the consumer finance realm, but also to assist other “government enforcers” in doing the same. The Policy Statement will be published in the Federal Register, and the public will have until July 3, 2023, to submit their comments. While the statement does provide clarity where before there was more haze, the policy puts those in the consumer financial services industry up against a wall with little room for nuance or flexibility.

Background
Prior to the Policy Statement, those in the consumer financial services industry had two things to look to for understanding about the scope of the CFPB’s authority under the Abusive prong of UDAAP: the Act and the CFPB’s prior use of Abusiveness prong in its enforcement actions and consent orders. The Act expressly states that the CFPB does not have authority under the Abusive prong unless the conduct or in action:

1. Materially interferes with the ability of the consumer to understand a term or condition of a consumer financial product or service; or

2. Takes unreasonable advantage of:

• A lack of understanding on the part of the consumer of the material risk, costs or conditions of the product or services;
• The inability of the consumer to protect the interest of the consumer in selecting or using a consumer financial product or services
• The reasonable reliance by the consumer on a covered person to act in the interest of the consumer.

Although the CFPB has made its belief clear that conduct can be both unfair and deceptive, while also being abusive, it has not relied on the Abusive prong in most of its enforcement actions. However, one can look at the CFPB’s several actions against student loan servicers to see how this prong has been utilized to define the servicers’ statements, conduct and in action as “abusive.” In particular, the CFPB has characterized as abusive promises by student loan servicers that they will place borrowers in modified loan programs that best fit their economic situation, but wherein fact that did not occur. However, with the Policy Statement, the CFPB’s direction is much clearer and places industry members in a much more precarious position.

Policy Statement
The Policy Statement, true to the CFPB’s form, claims to provide an analytic or objective “framework,” while at the same time containing admissions that the CFPB will approach its application of the Abusive prong on a case-by-case basis which will find its footing in its interpretation of Congresses intent; What? This notwithstanding, the Policy Statement provides specific examples of actionable conduct and the standard of proof as to same. 

First, material interference of a consumer’s ability to understand the terms or conditions of an offered or provided service or product as a result of an intentional or unintentional act or omission which, natural or intentional, impedes a consumer’s ability to understand.

Second, an unreasonable advantage can exist when: 1) there are gaps in the consumer’s understanding; 2) there is unequal bargaining power between the consumer and the provider; and 3) there has been reasonable reliance by the consumer on the provider. The prohibited abuse occurs when the provider acts on this unreasonable advantage to the detriment of the consumer, whether there was intent to do so and whether any actual damage is suffered by the consumer. Gaps in knowledge can exist when the consumer does not understand the risk, costs or conditions of the product or services. Problematic here is the fact that the lack of understanding does not have to be reasonable, just exist. The CFPB notes that unequal bargaining power exists where the consumer’s financial circumstances compels the consumer to seek out and obtain the product or services or interact with the provider. The mere existence of such circumstance, the CFPB remarks, fosters abusiveness (almost a per se existence of abusiveness?). Reasonable reliance, noted in the Policy Statement, exists in all situations where the consumer would expect the provider to look out for and act in the best interest of the consumer. The CFPB noted two such situations, though expressly noting they are not the limit: when an entity expressly states it’s working on behalf of the consumer; and when an entity assumes the role of an intermediary to assist the consumer select products or services. The abusiveness appears most often here when there is the ability to manipulate the consumer’s decisions and choices.

Take Away
As with its recent attempts to envelope “discrimination” within its unfair enforcement purview, the Policy Statement is a siren for the CFPB’s intent to use the abusive prong of UDAAP to attack conduct that may either not squarely fall under proscriptions of other statutes or regulations or are indeed permissible, but which the CFPB wants stifled. The statutes that immediately come to mind are Fair Credit Reporting Act (“FCRA”), Real Estate Procedures Act (“RESPA”), Truth in Lending Act (“TILA”) and the Fair Debt Collections Practice Act, all of which provide certain safe harbors or that do not restrict certain conduct but which the CFPB could find – based on the inherent relationship between the provider and the consumer – give rise to the ability for the provider to be abusive because it is “reasonable” for the consumer to have relied on the provider or the provider had the ability to manipulate the consumer’s choices. Given the CFPB’s repeated disregard in the Policy Statement of a provider’s intent or market customs, the application of the abusive prong will not be shield against because subject conduct has a statutory safe harbor or if prohibited would need to be so delineated by the governing statute or regulation. This and the fact that the CFPB is going to review abusiveness from the eye of the consumer opens wide the door for investigations and subjective applications of this prong. If that was not bad enough, the Policy Statement is clearly also being offered as a lighted path for state regulators and attorneys general to follow in pursuing conduct they just do not favor under the guise of a UDAAP violation. One thing is for sure, those who provide financial products or services must be careful of defining the relationship they proport to have with the consumer; to close to an “advocate,” “agent,” or “ambassador” will establish a per se abusive-prone relationship, with the consumer’s view of how it turned out as the deciding factor.

Information like that provided by the CFPB in the Policy Statement is better to have than rather than not. And, the purpose – to identify and route out manipulative, discriminatory and deceptive conduct against less sophisticated consumers – is a good thing. However, the CFPB, like other agencies, is not absolutely free to set its own boundaries based upon the subjective whim of a politically appointed director or committee. Rather, what is proscribed must be consistent with the agency’s promulgating statute. Otherwise, the industry and the CFPB will face an increasing number of litigations like the Townstone matter leaving the industry unsettled from one administration to another.