Last week, the Consumer Financial Protection Bureau (CFPB or Bureau) just reversed course on the standard for abusive practices established under prior CFPB leadership. In this short report, we refresh you on the prior formal policy, discuss the newly stated position and offer up some initial thoughts on why this move could adversely impact the very consumers the CFPB is legislatively intended to protect.
Back in January 2020, we reported that the CFPB issued what we characterized as an “important” policy statement on how the Bureau intended to apply the abusiveness standard under the Dodd-Frank Act. Adding a new prong to traditional unfair and deceptive acts or practices (UDAP) laws, the Dodd-Frank Act prohibits “abusive” acts or practices in connection with the provision of consumer financial products or services (thus, the new acronym UDAAP).
Distilling Section 1031(d) of Dodd-Frank, the abusiveness standard prohibits a covered person or service provider from:
- Materially interfering with a consumer’s ability to understand a covered financial product or service; or
- Taking unreasonable advantage of (i) a consumer’s lack of understanding of such product or service, (ii) consumers who cannot protect themselves, or (iii) consumers who reasonably rely on the covered person to act in their interests.
Notwithstanding this statutory language, industry and consumer groups alike have argued about the meaning of the new “abusive” prong of the law, and the term has been applied inconsistently in CFPB enforcement efforts.
In its January 2020 policy statement, the CFPB indicated that it sought to clear any confusion about the abusiveness standard, and would henceforth apply the following principles in its supervision and enforcement matters:
- Focus on citing or challenging conduct as abusive only when the conduct’s harm to consumers outweighs the benefit.
- Generally avoid “dual pleading” of abusiveness and unfairness or deception violations (the “U” and “D” in “UDAAP”) arising from the same facts, and alleging “stand alone” abusive acts or practices violations that demonstrate clearly the nexus between cited facts and the Bureau’s legal analysis.
- Seek monetary relief for abusiveness only when there has been a lack of a good faith effort to comply with the law, except the Bureau will continue to seek restitution for injured consumers regardless of whether a covered person acted in good faith or not.
In addition, the CFPB in the policy statement expressed the reasonable concern that the new abusiveness standard might inadvertently deter parties from conduct that benefits consumers. As a result, the CFPB noted it would craft a safe harbor for a covered person that has in good faith attempted to comply with the law based on a reasonable but ultimately mistaken interpretation of the standard. When that occurs, the CFPB said it would not seek civil penalties or disgorgement in enforcement actions. Likewise, the CFPB would apply the same standard when requesting action as a result of violations in Matters Requiring Attention (MRAs) and other supervisory requests.
At the time of issuance, we hailed the policy statement as “a significant and positive development for industry,” but also warned that (1) the guidance lacks the force and effect of regulations, (2) future Bureau policy may change with a Biden-appointed director, and (3) the guidance is not binding on state attorneys general, who may take a broader view.
As published, it was unclear how significant an impact the Policy Statement would itself have on day-to-day supervision and enforcement. The reason? So few CFPB actions (whether supervisory or in enforcement) have, historically at least, depended solely on a finding of abusive conduct. To the contrary, nearly all have relied, at least in material part, on traditional concepts of unfair or deceptive behavior.
But the Policy Statement, whatever its intended value, has now suffered a quick demise. Trump-appointed Director Kathy Kraninger resigned with the inauguration of President Biden, and Acting Director Dave Uejio has proceeded with lightning speed to reverse the course of the prior administration on various CFPB-related actions.
In this most recent move, the CFPB announced on March 11, 2021, that it is rescinding, with immediate effect, the prior abusiveness Policy Statement, arguing that the statement was inconsistent with the Bureau’s duty to enforce Congress’s standard and rescinding it will better serve the CFPB’s objective to protect consumers from abusive practices. The revised posture is contained in a short, eight-page statement nominally dated March 8, 2021.
The Bureau’s rationale is straightforward enough. It argues that the earlier Policy Statement, by notifying covered entities that the CFPB would decline to seek civil money penalties and disgorgement, in certain instances at least, undermines deterrence and is thus “contrary to the CFPB’s mission of protecting consumers.” Further, the Bureau argues that it may also “skew the consumer financial marketplace, to the detriment of market participants who do not act abusively.”
And thus all bets are off. Going forward, says the CFPB, it will apply abusiveness precisely as provided by Congress, exercising “the full scope of its supervisory and enforcement authority to identify and remediate abusive acts or practices.” And, in deciding on how best to do so, it “intends to consider good faith, company size, and all other factors it typically considers as it uses its prosecutorial discretion.”
Why It Matters
When the CFPB issued its abusiveness Policy Statement in January 2020, we were cautiously optimistic that the Bureau might continue its move away from regulation by enforcement, a hallmark of the early (Richard Cordray-led) era, when the Bureau was in its infancy. This most recent reversal is a step in the opposite direction.
One of the most fundamental arguments against regulation by enforcement is that covered persons and service providers were left to wonder whether seemingly legal conduct might be second-guessed by an overly aggressive CFPB sheriff. As then-director Kraninger noted in 2019, regulated entities crave “clear rules of the road . . . that promote competition, increase transparency, and preserve fair markets for financial products and services.” And this process, she argued, benefits not just industry:
This transparent process informs the public of the underlying reasons for both proposed and final regulations. And it can both help identify practices that warrant regulatory action and lessen the chances that the Bureau prohibits or restricts business practices that benefit consumers or competition. . . . [M]arkets allocate resources more efficiently than government agencies. That is why the presumption should be in favor of the market and the onus should be on government to demonstrate it can improve the status quo. . . . And in developing such policies[,] we start from the presumption that with timely and understandable information, consumers will be empowered to make decisions in their best interests.
Of course, the CFPB’s movement toward a more balanced and market-driven perspective on supervision and enforcement is apparently coming to a screeching halt. Given the limited role of abusiveness in past and current enforcement efforts, this move alone may be viewed by some as largely symbolic. But the more troubling aspect is where future supervision and enforcement actions may lead with respect to the imaginative consumer financial products that have helped many consumers, including during the pandemic. If the CFPB had existed back in the 1970s, would mortgage lenders have had the courage to develop and introduce mainstream products that were once deemed “exotic,” such as adjustable-rate mortgages?
Time will tell whether the CFPB will apply the abusiveness standard to rid the nation of tomorrow’s imaginative financial products that would otherwise have facilitated and enhanced the process of obtaining consumer loans, and the overall consumer experience. Stay tuned.