On Friday, January 24, the Consumer Financial Protection Bureau (“Bureau” or “CFPB”) published a Policy Statement clarifying how it intends to exercise its authority to prevent abusive acts or practices under the Dodd-Frank Act. According to CFPB Director Kathy Kraninger, the purpose of the Policy Statement is to promote clarity, which in turn should encourage both compliance with the law and the development of beneficial financial products for consumers. The Policy Statement describes how the Bureau will use and develop the abusiveness standard in its supervision and enforcement work, pursuant to a three-part, forward-looking framework. Under the framework, the Bureau will: (1) generally rely on the abusiveness standard to address conduct only where the harm to consumers outweighs the benefit, (2) avoid making abusiveness claims where the claims rely on the same facts that the Bureau alleges are unfair or deceptive, and (3) not seek certain types of monetary relief against a covered person who made a good-faith effort to comply with a reasonable interpretation of the abusiveness standard. The Policy Statement suggests that the Bureau will use its abusiveness authority even less frequently than it has in the past. While that may be welcome news to regulated parties, it is also likely to mean slower development of meaningful guideposts as to what constitutes abusive conduct.
The Dodd-Frank Act prohibits covered persons and service providers from engaging in any unfair, deceptive, or abusive acts or practices (“UDAAP”) in connection with the offering or provision of consumer financial products or services, and provides the Bureau with supervision and enforcement authority to enforce these prohibitions. While the Federal Trade Commission (“FTC”) has used its own similar enforcement authority under the FTC Act to address unfair and deceptive practices (“UDAP”) for 80-plus years, the abusiveness standard is relatively new. The Dodd-Frank Act outlines four prongs that can constitute an “abusive” act or practice. An act or practice is “abusive” if it:
- materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
- takes unreasonable advantage of:
- a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
- the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
- the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
Unlike “unfair” and “deceptive,” the abusiveness standard is largely underdeveloped. It has never been clear why Congress considered it necessary to bestow the Bureau with the abusiveness authority in addition to the more clearly defined and established unfairness and deception authority.
In practice, the Bureau’s reliance on the abusiveness standard has been relatively minimal. In virtually all cases alleging abusiveness, as the Bureau itself acknowledges, the Bureau also alleged unfairness and/or deception based on the same facts it found abusive, suggesting that little if any conduct is proscribed by abusiveness that wouldn’t already be prohibited by the traditional UDAP prohibitions. In cases where abusiveness has been alleged as a stand-alone claim, the Bureau has taken an inconsistent approach to applying it across cases.
In the Policy Statement, the Bureau acknowledges the dearth of administrative, legislative, and judicial guidance and precedent on the contours of the abusiveness standard. The Policy Statement is intended in part to facilitate the orderly development of such precedent in the future.
CFPB Policy Statement
Under the new three-part framework, the Bureau will (1) apply a cost-benefit analysis before asserting abusiveness claims; (2) where consistent with the abusiveness standard and the Policy Statement, allege “stand-alone” abusiveness claims in a way that makes clear the nexus between the facts alleged and the legal analysis; and (3) not seek certain types of monetary relief against those who made a good-faith effort to comply with a reasonable interpretation of the abusiveness standard.
Cost-Benefit. Under the first part of its framework, the Bureau states that it will focus on citing conduct as abusive in those circumstances where it concludes that the harm to consumers from the conduct at issue outweighs the benefits—in other words, it will rely upon a cost-benefit analysis. Such an analysis is already part of the test for unfairness. And although it is not an express part of the deception standard, the Bureau notes that commentators have suggested that deception presumes that the harms to consumers from deceptive conduct outweigh any benefits. In assessing consumer benefit, the Bureau expressly notes that it will consider how the conduct at issue affects access to credit. This, of course, has been one of the central arguments regarding Bureau efforts to regulate payday lending, with the industry touting increased access to credit and consumer advocates arguing that such lending causes consumer harm. Given the Bureau’s reference to cost-benefit analysis in the context of unfairness and deception, and in light of prior comments from Bureau leaders about the increased reliance on economists, this aspect of the Policy Statement may presage a broader Bureau effort to import cost-benefit analysis into its supervision and enforcement work more generally, along the lines of the role served by the FTC’s Bureau of Economics. In any event, the addition of a cost-benefit analysis to the consideration of abusiveness claims is likely to mean that fewer such claims will be brought.
Stand-alone claims. Under the second part of the framework, the Bureau sets out its intention generally to avoid making an abusiveness claim that relies on all or virtually all of the same facts as an unfairness or deception claim. According to the Policy Statement, to date, the Bureau has brought 32 enforcement actions alleging abusiveness. Only two of those did not also have an unfairness or deception claim. And in most cases, as we have previously noted, the abusiveness claim was based on the same course of conduct that the Bureau found unfair or deceptive. Going forward, the Bureau says it intends generally to allege “stand-alone” abusiveness violations as opposed to pleading abusiveness in conjunction with unfairness and/or deception. In doing so, the Bureau anticipates drawing a closer nexus between the cited facts and the legal analysis underlying the abusiveness claim. The Bureau predicts that such “stand-alone” pleading will promote a body of jurisprudence more clearly defining the contours of what constitutes abusive conduct. The Policy Statement notes that the Bureau may, in limited circumstances, still allege an abusiveness claim and a “related” unfairness or deception claim “where it would help clarify the scope of the abusiveness standard,” but it would seek to do so in a manner that distinguished one standard from the other when it does so.
While the Bureau’s efforts described above may serve to help further clarify the meaning of abusiveness, it is not clear if they will help tease out what conduct is abusive that could not also be considered unfair or deceptive. That is, although the Bureau indicates that it will generally not plead abusiveness in addition to unfairness or deception, that does not mean that conduct pled as a stand-alone abusiveness claim could not also be considered unfair or deceptive. Nor do these changes address the Bureau’s past inconsistency in using the abusiveness standard. While the Bureau states that use of the cost-benefit analysis described above will “ensure that the Bureau’s supervisory and enforcement decisions are consistent across matters,” it is not clear why that would be the case. As with cost-benefit analysis, the limitation of the use of abusiveness to “stand-alone” claims is likely to mean that fewer such claims will be brought.
Monetary remedies. The third part of the framework is not about when the Bureau intends to allege abusiveness, but about the consequences when it does so. To “ensure that uncertainty regarding the abusiveness standard does not impede beneficial conduct,” the Policy Statement provides that absent unusual circumstances, the Bureau will not seek civil penalties or disgorgement for abusive acts or practices where the covered person made a good-faith effort to comply with a reasonable interpretation of the abusiveness standard. The Bureau will still hold a covered person accountable for legal or equitable remedies, such as damages and restitution, to redress “identifiable consumer injury caused by the abusive acts or practices that would not otherwise be redressed.” The Policy Statement makes clear that the Bureau will aggressively pursue civil money penalties against those not acting in good faith.
Oddly, the Bureau states that in determining whether a covered person made a good-faith effort to comply with the abusiveness standard, it will consider all relevant factors, expressly including those outlined in the CFPB’s Responsible Conduct Bulletin. The Responsible Conduct Bulletin, however, describes the kind of conduct that the Bureau will take into account when considering how to exercise its enforcement discretion, and the considerations identified in the Bulletin – self-policing, self-reporting, remediation, and cooperation – have little to no relevance to the question of whether a party’s interpretation of the abusiveness standard is reasonable or whether its efforts to comply with that interpretation were in good faith. Rather, the considerations relate to a party’s capacity to identify and respond to violations of the law. It is also odd that the Bureau would adopt this approach to abusiveness but not to other legal violations. Shouldn’t a party’s good-faith effort to comply with a reasonable interpretation of the law always mitigate against civil penalties? This aspect of the Policy Statement appears to provide greater leeway to those accused of abusive conduct than to those facing novel interpretations of the unfairness and deception standards.
As with all such pronouncements, it is hard to know precisely how it will impact agency conduct until the policy has been in effect for a while. (And, because this is just a policy statement and not a regulation, a new CFPB Director could easily repeal the policy.) While it appears clear that the Policy Statement is likely to result in fewer claims of abusiveness, it is less clear if it will, as intended, either help clarify what constitutes abusive conduct (and what constitutes such conduct that isn’t also unfair or deceptive) or encourage the innovation of beneficial consumer products. In the interim, companies subject to the Bureau’s authority are advised to maintain robust compliance programs intended to identify and prevent potential unfair or deceptive acts or practices. Given the Bureau’s history, that is likely to cover virtually all conduct that might also be considered abusive.