CFPB Takes a Step Away from “You Know It When You See It” Standard for UDAAP Abusiveness
On February 6, 2020, the Consumer Financial Protection Bureau published a Statement of Policy Regarding Prohibition on Abusive Acts or Practices to “convey and foster greater certainty” regarding how it will apply the “abusiveness” standard in exercising its sweeping UDAAP authority under the Dodd-Frank Act. This is a welcome move by the Bureau, which previously had declined to provide rules or guidance to describe, let alone define, acts or practices deemed to be “abusive.” Instead, the Bureau required regulated entities to “read the tea leaves” based on allegations in enforcement actions and statements in its Examination Manual.
The CFPB’s UDAAP Authority
The Dodd-Frank Act makes it unlawful for any covered person or service provider to “engage in any unfair, deceptive, or abusive act or practice” (UDAAP). Although the meaning of the unfair and deceptive prongs was well-established, the “abusive” prong was new. According to the Act, an act or practice is “abusive” if it materially interferes with the consumer’s ability to understand a term or condition of a consumer financial product or service, or takes unreasonable advantage of a consumer’s (1) lack of understanding of the material risks, costs, or conditions of the product or service; (2) inability to protect his or her interests in selecting or using a consumer financial product or service; or (3) reasonable reliance on a covered person to act in his or her interest.
Former CFPB Director Richard Cordray made a point of using enforcement actions to imply the meaning of the term “abusive.” In contrast, former Acting Director Mick Mulvaney declared that “regulation by enforcement is done,” indicating the agency would take a different course.
Under current Director Kathy Kraninger, the Bureau held an Abusive Acts or Practices Symposium on June 25, 2019. The Symposium provided an opportunity to discuss how to interpret the standard with experts from academia and practitioners. In her opening remarks, Director Kraninger acknowledged that abusiveness “does not have the long and rich history of unfairness” and explained that the Bureau had heard from regulated entities that “there is uncertainty about abusiveness’s parameters, which makes it harder for business that want to comply with the law to do so.”
The Symposium discussion, together with feedback from stakeholders, was an “important part of the process” that led to the Policy Statement.
The CFPB’s Policy Statement
In the Policy Statement, the Bureau explains that although it has brought 32 enforcement actions alleging an abusiveness claim, only two of those enforcement actions exclusively alleged an abusiveness claim without also making an unfair and/or a deceptive claim. This dual pleading made it “difficult to discern . . . unique fact patterns to which only the abusiveness standard would apply.” The Bureau also noted that most of the enforcement matters were resolved by settlement agreements, so there are few judicial or Bureau administrative decisions that “address the contours of the abusiveness standard.” Moreover, the Bureau’s UDAAP examination procedures “largely restate the language of the Dodd-Frank Act.”
In light of this admittedly meager guidance, the Bureau explained in the Policy Statement that “[c]larifying the abusiveness standard is in the public interest and the issuance of a supervision and enforcement policy statement regarding the abusiveness standard is beneficial to all stakeholders.”
The Policy Statement establishes a three-part set of principles.
First, the Bureau will focus on citing or challenging conduct as abusive only when the harm to consumers outweighs the benefit, including its effects on access to credit. The Bureau then will apply a cost-benefit analysis. The FTC standard for unfair acts or practices contains a similar requirement, injecting a fact-based analysis that provides regulated entities with the ability to argue particular facts and circumstances regarding the challenged practice.
Second, the Bureau will seek to avoid “dual pleading” of abusiveness and unfairness or deception violations arising from all or almost all of the same facts. Instead, the Bureau will allege “stand alone” abusiveness violations and plead these claims in a way that “clearly demonstrate[s] the nexus between the cited facts and the Bureau’s legal analysis of the claim.” The Bureau’s goal is to provide “more clarity as to the specific factual basis for determining that a covered person has violated the abusiveness standard.” Historically, enforcement actions have been limited to their facts, so it remains to be seen whether the Bureau will be able to provide useful guidance through its proposed pleading changes.
In the Policy Statement, the Bureau indicates that it also intends to provide similar clarity in its discussions of abusiveness in the Supervisory Highlights publication and supervisory materials.
Third, the Bureau will seek monetary relief for abusive acts or practices only when there has been a lack of a good-faith effort to comply with the law (although the Bureau clarified that it will continue to seek restitution for consumers whether or not a company acted in good faith). The Bureau will make a determination as to the good-faith effort by relying on factors detailed in its 2013 Bulletin on Responsible Business Conduct. Those factors, though, include self-policing, remediation, self-reporting, and other factors that assume the regulated entity’s view of abusive conduct mirrors the Bureau’s as-of-yet undefined view.
By choosing to issue a policy statement instead of a regulation, the Bureau leaves open the possibilities of a future rulemaking or the repeal of this policy should Director Kraninger or a future Director determine changes are warranted. The Bureau’s action suggests that the agency may pursue fewer abusiveness claims going forward given the self-imposed limits on dual pleading and the likelihood that few enforcement actions will merit a stand-alone abusiveness claim. This may allow the Bureau to develop its interpretation of its abusiveness authority more slowly and carefully. We will have to wait to see how the new principles play out in practice.