Lowering the Bar: CFPB Unveils Its Playbook on Combatting “Abusiveness”

On April 3, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) published a broad and wide-ranging Policy Statement on Abusiveness  (“Policy Statement”) meant to assist “government enforcers” in identifying and alleging abusive conduct in the marketplace under the Consumer Financial Protection Act of 2010 (CFPA), specifically 12 U.S.C. 5531(d). In doing so, the Bureau foreshadows a policy shift on the Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) front, likely migrating away from the hallmark “Unfairness” and “Deception” elements of this principle in favor of a more nuanced prong titled “Abusiveness,” which will be easier to trigger.

The CFPB’s Examination Manual regarding UDAAP (“Manual”) explains that the principles of “Unfairness” and “Deception” both pre-date the CFPA, instead finding their roots in the longstanding Federal Trade Commission (FTC) Act. As noted in the Manual, the FTC has already applied these standards for many years “through case law, official policy statements, guidance, examination procedures, and enforcement actions that may inform CFPB.”  By way of this Policy Statement, however, it is evident the Bureau will now seemingly pivot to Abusiveness as a violation du jour, in an effort to more autonomously design and enforce their own UDAAP framework, which will be stricter and more draconian.

The Policy Statement will be published in the Federal Register, and the public will have until July 3, 2023, to submit their comments. For now, this apparent change in policy leaves the consumer financial services industry in a very complicated situation.

Background

The Dodd-Frank Act expressly states that the CFPB has no authority to declare that an act or practice is abusive unless 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-
   1. A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
   2. The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
   3. The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

Since the inception of Dodd-Frank, industry members have tried to grapple with defining and interpreting the “A” in UDAAP, which was always viewed as a mostly redundant “catch all” provision. The Policy Statement changes everything.

What the Policy Statement Says

In the Policy Statement, the CFPB sets forth its analysis and the elements necessary to support and identify abusive conduct and practices. Although the CFPB claims its goal is to provide an “analytical framework,” they concede that evidence of proof weighs little on their conclusions, which are instead drawn from their interpretation of Congressional intent.

The CFPB dissects the abusiveness prong by providing specific examples of conduct and outlining the standard of proof.

Material interference can be shown when an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes [their] understanding. Examples of such interference are buried disclosures or digital manipulations on a website (i.e. “multiple click-throughs”). However, the CFPB points out that while there are numerous ways to prove material interference, intent is not a required element.

With respect to proving an “unreasonable advantage,” the CFPB concludes that there is no need to show the act or practice caused substantial injury in order to establish liability. The CPFB identifies three circumstances where an entity can take unreasonable advantage of a consumer:

1. Gaps in Understanding. These reflect gaps regarding material risks, costs, or conditions of a product or service. The Bureau points out that causation is irrelevant and a consumer’s lack of understanding, regardless of how it arose, can be sufficient. The statement surprisingly notes that the prohibition does not require that the consumer’s lack of understanding be reasonable or that a specific number of people also lacked that understanding. One consumer can carry the day.
2. Unequal Bargaining Power. The CFPB states that Congress has outlawed taking unreasonable advantage of circumstances where people lack sufficient bargaining power to protect their interests. The Bureau points to situations where it is impractical for a consumer to protect their interests when selecting or using a product or service, they are unaware of the necessary steps needed to protect themselves, or they have limited financial means to do so. The Bureau notes that the mere existence of certain consumer relationships fosters abusiveness. They cite to examples of debt collectors, credit reporting agencies, and loan servicing companies coming under heightened scrutiny for abuse merely because the consumer did not participate in the section of the downstream vendor relationship.
3. Reasonable Reliance. The CFPB expresses concern with entities taking advantage of consumers that “rely” on the entity to act in their best interest. The CFPB provides two examples of sensitive relationships but cautions that there are other scenarios that might lend themselves to reasonable reliance violations. The first instance is when an entity expressly states it is working on behalf of the consumer. The second instance is when the entity assumes the role of an intermediary to help the consumer select certain products or services. The CFPB remains hyper-focused on removing all manipulation from these relationships, however, stops short of providing any concrete insight on how consumer subjectivity or even advertising accuracy will (or will not) play into any findings of abusiveness.

Big Themes & Takeaways

1. A New Approach to Proving Discrimination. This Policy Statement, in its current format, seems to provide the CPFB with some newfound ammunition and support in its efforts to more closely scrutinize discriminating conduct that violates the principles of UDAAP. Almost a year ago, the CFPB created a stir by announcing an initiative to combat discrimination through the “Unfairness” prong of UDAAP. In response, a number of trade groups pointed out in a letter to Director Chopra that the Bureau conflated distinct statutory concepts and went beyond the fair lending laws “carefully set by Congress”, which has resulted in numerous contentious lawsuits being filed. Meanwhile, the CFPB had been concurrently attempting to expand the bounds of the Equal Credit Opportunity Act (“ECOA”) through Regulation B by looking to discriminatory conduct in not only applications for credit as the law envisioned, but also through nuanced elements of “discouragement” in the prospective application process. In February, the U.S. District Court for the Northern District of Illinois rebuffed these attempts, ruling in CFPB v. Townstone that the ECOA only prohibits discrimination against applicants for credit, and does not even contemplate the discouragement of prospective applicants. The case was dismissed due to the Bureau’s overreach. The Policy Statement now reveals the CFPB’s next procedural attempt to expand some of the same concepts through a similar, but slightly different, UDAAP approach.
2. Curtailing Defenses to Abusiveness. The CFPB’s repeated and express disregard for an entity’s true intent or existing market customs suggests that pursuing abusive claims will be an easier lift for the Bureau if they proceed under this policy outline, which will likely result in higher demands to resolve investigations. It is also apparent that the agency will review abusiveness violations through the eye of consumers on a case-by-case basis, regardless of how reasonable the underlying action was.
3. A Gift to the States. The Policy Statement offers a playbook for state regulators to pursue federal UDAAP claims, which was encouraged by the CPFB in its May 2022 Interpretive Rule. It is not a coincidence that the Statement labels itself as a resource for “government enforcers” rather than merely for Federal Bureau staff.
4. Non-Bank Industry Will See Biggest Impact. The sweeping declarations and demands made in the Policy Statement, if and when implemented, create a nearly limitless web for potential violations. It isn’t difficult to dream up plausible hypotheticals. Consider the impact to debt collection and collection litigation for example. Can a debt collector still innocently state “We are here to help?” Can a collection representative even assist with a settlement? Can collection attorneys speak to pro-se litigants about their case? This is just the tip of the iceberg. Regulated markets each have standard practices that could come under fire in the wake of this Policy Statement.

Through this Policy Statement, the CFPB has again championed an important mission: removing abusiveness, discrimination, and other unsavory behavior from the consumer financial services marketplace. This mission at its core should be commended, but by acting independently outside the bounds set by Congress, the risk for a contentious showdown with industry markets will loom large.

Clark Hill’s Consumer Financial Services Regulatory and Compliance Practice Group provides effective representation during enforcement and supervision, technical guidance, policy advice, and strategic planning and outreach to relevant stakeholders in the financial services industry. Our exceptional team of lawyers and government and regulatory advisors has extensive experience in – and an in-depth understanding of – the laws and regulations governing financial products and services. For more information, please contact Joann Needleman (jneedleman@clarkhill.com), and Aryeh “Ari” Derman (aderman@clarkhill.com).

The views and opinions expressed in the article represent the view of the author(s) and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.