In an effort to promote compliance and certainty, the Consumer Financial Protection Bureau (CFPB or Bureau) on January 24 issued an often promised and much anticipated policy statement regarding how it intends to apply the “abusiveness” standard in supervision and enforcement matters. The Dodd-Frank Act (Act) is the first federal law to broadly prohibit “abusive” acts or practices in connection with the provision of consumer financial products or services. The Act deems an act or practice to be abusive when 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.”
However, the CFPB believes that, nearly a decade after the Act became law, uncertainty still remains as to the scope and meaning of abusiveness and how to distinguish “abusive” from “deceptive” and “unfair” actions. The CFPB acknowledges that this uncertainty “creates challenges for covered persons in complying with the law and may impede or deter the provision of otherwise lawful financial products or services that could be beneficial to consumers.”
According to the policy statement, which is effective immediately, the CFPB intends to apply the following principles during supervision and enforcement work:
- Focusing on citing or challenging conduct as “abusive” in supervision and enforcement matters only when the harm to consumers outweighs the benefit to them (which itself is a prong of the “unfairness” standard).
- Generally avoiding “dual pleading” of abusiveness and unfairness or deception violations arising from all or nearly all the same facts, and alleging “stand alone” abusiveness violations that demonstrate clearly the nexus between cited facts and the Bureau’s legal analysis as well as providing more clarity on the abusiveness standard in its supervision activity.
- Generally seeking monetary relief for abusiveness only when there has been a lack of a good-faith effort to comply with the law (even if based on a reasonable—albeit mistaken—interpretation of the abusiveness standard). The Bureau, however, will continue to seek damages and restitution for injured consumers regardless of whether a company acted in good faith. Similarly, in supervisory actions, the Bureau will apply the same standard when requesting action as a result of violations cited in reports of examination as “Matters Requiring Attention” or other supervisory requests.
The Bureau has applied the abusiveness standard since it began operating in 2011. Thirty-two of its enforcement actions have included an abusiveness claim, including as recently as fall 2019, and 30 of those 32 enforcement actions had both an abusiveness claim and an unfairness or deception claim (i.e., only two enforcement actions contained just an abusiveness claim). Because the abusiveness claim arose from the same course of conduct as the unfairness or deception claim in many of those 30 actions, it has been difficult to determine particular or unique fact patterns to which only the abusiveness standard would apply. Together with the number of matters the Bureau has resolved via settlement agreement, there are few reported judicial or Bureau administrative decisions that provide substantive guidance on the abusiveness standard. Furthermore, as the CFPB acknowledges, the Bureau’s unfair, deceptive, or abusive acts or practices (UDAAP) examination procedures largely restate the language of the Act, and the Bureau’s 18 editions of Supervisory Highlights “only rarely have described citations of abusive acts or practices in a manner that would provide guidance.”
The “unfair” and “deceptive” prongs of UDAAP are expressly derived from the longstanding text of the Federal Trade Commission Act (FTC Act)—which was in turn incorporated into state UDAP laws. Those standards have accordingly been the subject of detailed, actionable agency guidance from the FTC, informed by decades of state and federal case law further defining the contours of those two standards. The same cannot be said for the abusiveness standard.
Prior to the new policy statement, the sole definition of “abusive” was from agency guidance in July 2013 issued under former CFPB Director Richard Cordray’s tenure in the context of consumer debt collection. That guidance, however, has been widely considered insufficient to provide meaningful assistance to industry participants in evaluating what practices the CFPB may deem “abusive.” And because the abusiveness standard (unlike the unfairness and deception standards) does not appear in the FTC Act or any other state UDAP statute, it has received little agency interpretation beyond Mr. Cordray’s pronouncement (although the CFPB has asserted that certain practices with respect to payday, vehicle title, and certain high-cost installment loans would be “abusive,” in the context of a particular rulemaking). As a practical matter, CFPB staff, when charging UDAAP, has simply alleged all three prongs of the UDAAP standard, i.e., unfair, deceptive, and abusive. Importantly, this policy statement ends that practice (or at least does so for the remainder of Director Kraninger’s tenure).
The policy statement expressly notes that the CFPB is leaving open the possibility of engaging in a future rulemaking to further define the abusiveness standard. To the extent practicable, the CFPB in the future also 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. Last year, the CFPB held a Symposium on Abusive Acts or Practices with academics and practitioners. These experts provided a variety of perspectives on the need to develop a clearer understanding of the abusiveness standard; most agreed that the CFPB should seek to resolve the present uncertainty as to its meaning. In turn, the CFPB stated in its policy statement that the symposium, along with other feedback from stakeholders, “was an important part of the process leading to the Bureau’s decision to issue the policy statement.”
It is worth noting that the Act granted all 50 state attorneys general and state financial regulators individual UDAAP authority. Further, these state attorneys general and regulators are not strictly bound to adhere to the policy statement since it is expressly not in the form of an Administrative Procedures Act rule (although the policy statement would likely be entitled to limited Skidmore deference in litigation against a state agency). In practice, however, it would likely take a fairly egregious matter before all but the most aggressive of state attorneys general or regulators would bring an action in federal court alleging “abusive” behavior outside the boundaries of the CFPB’s policy statement.