Abusive Acts and Practices: Putting the CFPB’s Policy Statement into Practice

The Consumer Financial Protection Bureau (CFPB) released a second iteration of its Policy Statement on Abusive Acts and Practices (Policy Statement) on April 3, 2023, giving insight into its current thinking on the abusiveness doctrine, laying the groundwork for supervision and enforcement, and giving clear guidance to state enforcement authorities pursuing abusive practices cases.

The guidance document, which will be published in the Federal Register for comment, is expressly intended to parallel the Federal Trade Commission’s (FTC’s) successful and frequently cited Policy Statements on Unfairness and Deception, instructing companies under the CFPB’s jurisdiction about the agency’s current interpretation of the third prong of the prohibition on unfair, deceptive, and abusive acts and practices (UDAAP) in the Dodd-Frank Act.

What the Policy Statement Is—and Is Not

The Policy Statement [1] is helpful as an articulation of the CFPB’s current enforcement approach to the abusiveness doctrine. But it is unlikely to provide the same kind of stable longevity as the FTC’s now nearly 40-year-old Policy Statements on Unfairness [2] and Deception. [3] The CFPB’s last Policy Statement on Abusiveness lasted only 14 months—from January 2020 to March 2021—before the agency’s new leadership rescinded it.

Unlike the unfairness and deception doctrines, further, “abusiveness” has been defined in the statute [4] from the beginning, and the Policy Statement expressly declines at every turn to narrow its approach from the widest possible interpretation of the statutory language. By contrast, the FTC’s policy statements reflected self-imposed limitations on and standards for previously undefined terms: the agency added a requirement of materiality and layers of nuance to the deception standard and set forth the cost-benefit balancing test under the unfairness standard that Congress later added to the statute (and included in the Dodd-Frank Act [5]).

The success of the FTC policy statements has depended heavily on their measured approach to voluntarily restrain the agency’s discretion and their focus on a standard of illegal conduct for which there was and is a broad consensus. In contrast, the Policy Statement does not attempt to narrow the CFPB’s focus or set limits on the exercise of the statutory authority toward the end of consensus. It largely extrapolates from the statutory language to provide examples of conduct from prior enforcement and supervisory actions that the current agency leadership views as satisfying each of the four subparts of the statutory definition of abusiveness.

While it may be tempting to disregard the Policy Statement as just today’s gloss on a statutory text, there are important lessons that all entities subject to the CFPB’s jurisdiction can glean from the Bureau’s positions—which highlight that the abusiveness standard is a meaningful independent prohibition, covering conduct that may be neither unfair nor deceptive.

The Policy Statement, and CFPB Director Rohit Chopra’s accompanying speech, [6] also make the beginnings of a case that at least some of the conduct addressed by these supplemental prohibitions should be illegal, laying the groundwork for a consensus position that may emerge in the coming years.

And finally, the Policy Statement and the Chopra Speech continue a running theme at the CFPB of emphasizing that many other agencies, including the attorney general of every state, have the authority to enforce the prohibition on abusive conduct. [7] The plain purpose of this refrain is to empower state attorneys general and financial enforcement agencies to follow the approach laid out in the Policy Statement even if subsequent CFPB leadership changes course—and even if the pending constitutional challenge to the Bureau’s funding mechanism succeeds. [8]

What the Policy Statement Says

The statutory abusiveness doctrine makes four categories of conduct illegal:

• Materially interfering with the ability of a consumer to understand a term or condition of a consumer financial product or service.
• Taking unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of a consumer financial product or service.
• Taking unreasonable advantage of the inability of a consumer to protect their own interests in selecting or using a consumer financial product or service.
• Taking unreasonable advantage of the reasonable reliance by the consumer on a covered person to act in the consumer’s interests. [9]

The Policy Statement summarizes these four prohibitions as “obscuring important features of a product or service” and “leveraging certain circumstances to take an unreasonable advantage,” specifically “gaps in understanding, unequal bargaining power, and consumer reliance.”

The bulk of the Policy Statement is given over to providing case examples—from enforcement actions and publicly reported supervisory resolutions—where the CFPB has alleged abusive practices. Many of the examples that the agency gives in explaining what satisfies each of these four alternative prongs of the test could easily be deceptive or unfair practices as well. The examples that would not so easily meet those tests are more informative and illustrate how the agency may use the abusiveness doctrine to attack future conduct. We highlight these issues below.

Material Interference

The Policy Statement gives no clear examples of “material interference with the ability of a consumer to understand a term or condition of a consumer financial product or service” that would not be actionable under the unfairness or deception prong of the statute. Each of the examples focuses on actually withholding material information from consumers or presenting that information in such a way that a consumer cannot understand it.

The one observation that the Policy Statement makes in passing—and without citation—that could expand the doctrine beyond existing anti-deception law is that “an entity’s provision of a product or service may interfere with consumers’ ability to understand if the product or service is so complicated that material information about it cannot be sufficiently explained.” [10] That is, offering a financial product to consumers—or a subgroup of consumers—that has fully disclosed terms and conditions that those consumers cannot understand, no matter the level of disclosure, could in the CFPB’s view violate the material interference provision on its own.

Taking Advantage of Existing Conditions

In one of its most pointed observations, the Policy Statement explains that abusiveness can entail taking advantage of a factual circumstance that it did not create. [11] The CFPB is correct that the statute on its face imposes no causation requirement: the prohibited conduct is simply taking unreasonable advantage of the circumstances.

This shift in focus is a fundamental characteristic of the abusiveness doctrine, as conceptualized in the Policy Statement. Unlike the unfairness and deception doctrines, which look to consumer injury (or risk of injury) first, the abusiveness doctrine focuses first on whether the covered person is wrongfully benefiting. As several cases the Policy Statement cites in support of this proposition indicate, that focus opens the door to charging third parties that simply benefit from others’ wrongdoing [12] —or, more controversially, that profit from existing societal conditions, such as differences in bargaining power or education.

Taking Advantage of Consumers’ Choices and Market Power

In a similar vein, the Policy Statement repeatedly emphasizes that, unlike a deception claim, disclosure is no protection against a charge of abusiveness. If a covered person knows that consumers are making poor financial choices, are under duress, or are unable to shop and the covered person generates profit from those situations, the CFPB may allege an abusive practices violation—even if the consumer was presented with accurate information (precluding a deception allegation) and could have made a different choice (precluding an unfairness allegation).

This position derives from the prohibition against taking unreasonable advantage of consumers’ “lack of understanding” of a product or from their “inability . . . to protect [their own] interests.” [13] The CFPB acknowledges that this reading expands “inability” beyond its literal meaning: “A consumer’s ‘inability’ to protect their interests includes situations when it is impractical for them to protect their interests in selecting or using a consumer financial product or service.” [14]

The CFPB also asserts that a provider’s “outsized market power” may be enough to render a consumer “unable” to protect their own interests. [15] The Policy Statement points to non-negotiable contract provisions, supra-competitive pricing, and high switching costs as examples of potentially abusive practices flowing from this “outsized market power” approach.

This last point reflects the CFPB’s continued focus on competition and quasi-antitrust issues, which are of particular importance to Director Chopra. It also shows that one of the most powerful weapons in the agency’s arsenal for pursuing competition-driven cases could well be the abusiveness doctrine—if the CFPB can convince courts to acquiesce with its reading of the word “inability” in the statute.

Moreover, as noted, because state attorneys general are authorized to enforce this statute and are not bound by a subsequent CFPB director’s interpretations, a Dodd-Frank Act abusiveness claim is an appealing action for a state because it may not require the damages and consumer welfare analysis inherent in traditional competition cases that state attorneys general also have authority to file under relevant federal law.

Taking Advantage of Reasonable Reliance

Finally, the CFPB emphasized that the statutory standard prohibits taking advantage of consumers’ reliance on a covered person to act in their best interests because (1) the covered person expressly made that representation or (2) the covered person’s role in the transaction as an intermediary implied that relationship.

Much of this risk, as the examples cited in the Policy Statement note, derives from advertising language that either inadvertently or intentionally created consumers’ expectations of such a relationship. But the Policy Statement explains that consumers’ reasonable expectations that create this risk can arise just as much by implication of the nature of the party’s role in the transaction as from any explicit representation, in particular where a party assumes the role of acting on behalf of consumers or helping them to select providers in the market.

What Parties Under CFPB Jurisdiction Can Do

The novel elements of the Policy Statement communicate standards and expectations to the industry as much as to examiners and enforcement attorneys at the CFPB. The agency is likely to follow on the pronouncement of the Policy Statement with a greater focus on allegedly abusive practices, both in the course of ongoing supervision and in enforcement investigations.

To be ready for closer abusiveness scrutiny, financial institutions and other companies under CFPB jurisdiction should consider the following steps:

• Update compliance governance. Compare existing governance structures, including policies, procedures, and products reviews, for abusiveness risk to the Policy Statement, and evaluate whether updates are needed. A well-grounded governance framework will facilitate both issue identification and help provide examiners with documentation of decisions around abusiveness risk. It is far preferable in a supervision context to have a debate about whether a reasoned decision made pursuant to policy was right than to have to explain the absence of decisionmaking framework.
• Evaluate sources of consumer revenue. The heavy focus on “taking unreasonable advantage” in the abusiveness doctrine is tantamount to a focus on the ways that financial institutions generate money from consumers. Banks, lenders, and other covered persons under the Dodd-Frank Act should be comfortable that they have a ready response to questions from the CFPB about why major sources of consumer revenue—whether direct or indirect—are in line with market pricing and reflect genuine consumer choice. While pricing in response to market pressures and risk is no less defensible under the doctrine, consumer revenue sources with unusually high profit margins could attract greater regulatory scrutiny, particularly when similar products offered to customers that have greater market power have lower margins.
• Consider third-party risk. The Policy Statement emphasizes that profiting from others’ wrongdoing could create abusiveness risk. For sources of revenue and profit that depend on third parties’ interactions or transactions with consumers, financial institutions should understand and be comfortable with the level of consumer protection risk that those third parties’ business practices present.
• Assess advertising claims. To mitigate the risk of “reasonable reliance” claims, financial institutions and others should evaluate advertising and marketing claims for language that suggests that the company puts consumers’ interests ahead of their own unless it is strictly true. Intermediaries should exercise particular care about their marketing, including the efficacy of any disclaimers of acting in the consumers’ interests.
• Decide how far to go. The CFPB continues to push the boundaries of its authority in numerous areas, and the Policy Statement represents in several respects an aggressive reading of the statute—for example, in its definition of a consumer’s “inability” to protect their own interests. Companies under the CFPB’s jurisdiction should carefully consider the balance between acceding to the CFPB’s interpretation of the law and choosing where to take a narrower, reasonable reading of the law. Those decisions, especially for banks and other companies under the CFPB’s supervisory jurisdiction, could have significant ramifications and should be made with care.

The April 3, 2023 Policy Statement is unlikely to be the last guidance document on the scope of the abusiveness doctrine. But it provides important insight into the Bureau’s thinking today, lays the groundwork for supervision and enforcement, and sends a clear signal to state enforcement authorities allied with the CFPB about how to pursue an abusive practices case.