Overview: The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has issued a policy statement clarifying its approach to enforcing the Dodd-Frank Act prohibition against abusive acts or practices in consumer financial services. The public is invited to submit comments on the policy statement before July 3, 2023.
Background
For years prior to the enactment of the Dodd-Frank Act, unfair and deceptive acts or practices (“UDAP”) were prohibited by the Federal Trade Commission Act and other laws. A combination of case law, enforcement actions, and published regulatory guidance circumscribed the standards by which agencies would determine whether conduct was unfair or deceptive. In 1980, the Federal Trade Commission (“FTC”) issued its policy statement on unfair acts or practices. It followed that policy statement with one in 1983 on deceptive acts or practices. This area of consumer protection law remained relatively static until the enactment of the Dodd-Frank Act in 2010. Among other things, the Dodd-Frank Act expanded UDAP to include a prohibition against abusive acts or practices (together, “UDAAP”) and, in the course of establishing the CFPB as a new agency, granted the Bureau enforcement power over UDAAP violations in the consumer financial services market.
. The Dodd-Frank Act described abusive conduct in broad terms. Specifically, conduct cannot be considered abusive unless it: (i) materially interferes with a consumer’s ability to understand a term or condition of the product or service; (ii) takes unreasonable advantage of a consumer’s lack of understanding of material risks, costs, and conditions, or a consumer’s inability to protect their own interests, or a consumer’s reasonable reliance on the company to act in the consumer’s best interests. For a decade, the Bureau did not immediately adopt a formal policy or set of standards, but rather, was content to rely on the statutory definition without any overarching framework.
Then, at the beginning of 2020, the CFPB (under the Trump administration) issued a policy on abusive conduct, which provided three principles to govern the Bureau’s enforcement actions in this area:
- The Bureau would focus on whether harm to consumers from the alleged conduct outweighs the conduct’s benefits to consumers.
- The Bureau would avoid, where possible, combining allegations of abusive conduct with allegations of unfair or deceptive conduct arising from the same set of facts. Instead, it would focus on “stand-alone” abusive conduct separate and apart from unfair or deceptive conduct violations.
- The Bureau would not generally seek monetary relief for abusive conduct when the business had made a good-faith effort to comply with the abusiveness definition in the Dodd-Frank Act, except to the extent that monetary penalties would be necessary to remedy consumer harm caused by the conduct.
Although the 2020 policy helped consumer financial service providers understand the Bureau’s enforcement philosophy, it lacked specific details about how the CFPB interprets the Dodd-Frank Act’s description of abusive conduct. Critics complained that the policy created more rather than less regulatory uncertainty for market participants. Little more than a year later (under the Biden administration), the Bureau rescinded the 2020 policy statement. When announcing the rescission, the Bureau essentially decided to rely once again on the judicial and administrative process to explore the contours of the abusive conduct prohibition. Businesses were therefore left to figure out the full scope of what conduct could be deemed abusive based mainly on enforcement actions.
2023 Policy Statement on Abusive Acts or Practices
The new policy statement summarizes and consolidates precedent established by 43 CFPB enforcement actions, together with numerous supervisory examinations, conducted over the past thirteen years. The core of the policy statement is there are two types of abusive conduct prohibited by the statute:
- obscuring important features of a product or service; and
- leveraging certain circumstances (such as gaps in understanding, unequal bargaining power, or consumer reliance) to take unreasonable advantage.
An act or practice need only fall into one of the two categories to be abusive under the law, but the Bureau was quick to point out that conduct may fall into both. Importantly, the Bureau also noted that, unlike with unfair conduct, abusiveness does not require a showing of substantial injury. For an act to be considered unfair, the Bureau must show that it caused either a significant amount of harm to a small number of consumers or a smaller amount of harm to a large number of consumers. To find that conduct is abusive under this policy statement, the Bureau need only demonstrate that the business engaged in conduct that Congress presumed to be harmful to the proper functioning of the consumer financial services market.
The first type of abusive conduct concerns situations where a business “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.” The policy states that there does not need to be an intent to materially interfere, though it is reasonable to infer that conduct materially interferes when it is intended to interfere. Additionally, the Bureau views certain aspects of a transaction to be so important that if they are not prominently or clearly communicated to consumers, it can be presumed that the business materially interfered with the consumers’ ability to understand the product or service. Such crucial information includes, but is not limited to, pricing or costs, limitations on the consumer’s ability to use or benefit from the product, and contractual consequences of default.
The second form of abusive conduct concerns situations where a business takes unreasonable advantage of certain circumstances. In the policy statement the Bureau laid out the three situations where a business may be deemed to have taken unreasonable advantage: (1) a consumer’s lack of understanding of material risks, costs, and conditions; (2) a consumer’s inability to protect their own interests; or (3) a consumer’s reasonable reliance on the business to act in the consumer’s best interests. The policy describes the analysis that the Bureau will perform when examining conduct to determine whether it fits any of these three circumstances.
The policy statement also signaled the Bureau’s current enforcement priorities by highlighting how the use of dark patterns, set-up-to-fail business models (like those employed before the mortgage crisis in 2008), profiteering off captive customers, and kickbacks or self-dealing can all be abusive practices.
The policy was published in the Federal Register on April 12, 2023, offering a public comment period that ends on July 3, 2023. However, it is important to note that unlike in a rulemaking, the Bureau is not required to solicit or address public comments on a policy statement. As such, the policy statement was deemed applicable as of its publication date.
Outlook: While there certainly may be disagreement over the substance of the policy, the abusive conduct policy is generally useful to financial service providers because it summarizes established precedent and provides specific details about the Bureau’s approach to enforcement in this area. Additionally, the policy reinforces the Bureau’s focus on dark patterns and similar practices. The policy should provide greater regulatory certainty as companies assess whether or not certain conduct could be considered “abusive.” The request for public comments is also an important opportunity for financial service providers to voice concerns about the Bureau’s approach.
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AUTHOR INFORMATION:
Craig Saperstein, a member of Nacha’s Government Relations Advisory Group, is a partner in the Public Policy practice of Pillsbury Winthrop Shaw Pittman LLP in Washington, D.C. In this capacity, he provides legal analysis for clients on legislative and regulatory developments and lobbies congressional and Executive Branch officials on behalf of companies in the payments industry. Deborah Thoren-Peden is a partner and member of the Financial Institutions Team at Pillsbury Winthrop Shaw Pittman LLP. She provides advice to financial institutions, bank and non-bank, and financial services companies. Daniel Wood is a Counsel and member of the Financial Services Regulatory Team. He provides analysis for financial institutions, technology companies, and clients that offer consumer financial products. Brian Montgomery is a Senior Counsel and member of the Financial Services Regulatory Team. He provides analysis for financial institutions, technology companies, and clients that offer consumer financial products. The information contained in this update does not constitute legal advice and no attorney-client relationship is formed based upon the provision thereof.