Take 2: CFPB Provides New Guidance About What Constitutes

On April 3, 2023, the Consumer Financial Protection Bureau (CFPB or "Bureau") issued new guidance about what constitutes an abusive act or practice under the Consumer Financial Protection Act (the "Policy Statement"). This statement comes nearly two years after the CFPB rescinded its initial abusiveness policy statement and takes an examples-based approach that differs from the approach the CFPB took in the original statement. Not surprisingly, the CFPB continues to take an expansive view of the scope of abusiveness and its authority to bring enforcement actions challenging allegedly abusive conduct. In this client alert, we outline the new approach and key takeaways below.

Background

The Consumer Financial Protection Act of 2010 (CFPA) makes it unlawful for any covered person or service provider to engage in any unfair, deceptive, or abusive act or practice (UDAAP).¹ The CFPA expanded longstanding prohibitions against unfair and deceptive acts and practices by adding a new prong that deems an act or practice "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.²

For many years, the CFPB declined to further define what constitutes an abusive act or practice. Instead, covered entities attempted to understand the CFPB's position based on allegations in consent orders that included abusive claims.

The Bureau finally issued a policy statement on abusiveness in 2020 (the "2020 Policy Statement"). In the 2020 Policy Statement, as we explained at the time, the Bureau took a principles-based approach, advising covered entities that it would: (a) apply a cost/benefit analysis in deciding whether to bring an abusive claim; (b) avoid pleading both an abusive claim and an unfair/deceptive claim based on the same factual allegations; and (c) seek monetary relief other than restitution only if the covered entity had not made a good faith effort to comply with the law. The 2020 Policy Statement was rescinded a year later.

The Policy Statement

Unlike the 2020 Policy Statement, which provided a high-level overview of the Bureau's general approach to defining abusive acts and practices, the new Policy Statement takes a more detailed, examples-based approach, identifying specific acts and practices that the Bureau may consider to be abusive. CFPB Director Rohit Chopra explained that the Policy Statement is intended to provide a "practical analytical framework" and "some simple rules of thumb."

Those "simple rules" include the CFPB's assertion that it need not prove any substantial injury to establish liability. Instead, it takes the view that "abusive" conduct is presumed to be harmful.

Highlights of the Bureau's discussion of the analytical framework are detailed below. The framework is tied to elements of the definition of abusive in the CFPA.

Material interference.In the Policy Statement, the Bureau takes the position that it need not prove actual material interference, and instead can establish abusive conduct based on an intent to interfere or if the "natural consequence" is to impede understanding.

The Bureau identified the following examples:

Buried disclosures: Use of fine print, jargon, or complex language as well as ineffective timing of the disclosure;
Physical or digital interference: Conduct that physically impedes a consumer's ability to understand the terms, including withholding notices and use of pop-ups or check boxes for default options that could hide information a consumer needs to fully understand a product or service; and
Overshadowing: This category involves the placement of terms that the CFPB deems to be important, as compared to other information displayed to the consumer, in a way that could interfere with a consumer's understanding.

Taking unreasonable advantage. The Bureau focuses on a wrongful or improper benefit to a covered entity that offers financial products or services to consumers when the covered entity knows the consumer has limited choices or is possibly making poor financial choices.

Consumer's lack of understanding: The Bureau takes the position that lack of understanding is a subjective standard, so an unreasonable lack of understanding can be sufficient for an abusive violation. The Bureau also takes the view that it need not prove that any significant number of people lacked understanding for a practice to be abusive.
Consumers' inability to protect their interests: The focus here is on unequal bargaining power, including use of form contracts. This would seem to include most if not every consumer who contracts with a covered entity. The CFPB also points to relationships in which a consumer has limited options for obtaining a particular product or service or when a consumer cannot exercise meaningful choice when interacting with or choosing a particular entity, such as a loan servicer. In these instances, the Bureau implicitly suggests there is a higher risk for abusive conduct. The CFPB did recognize that a relationship of this nature is not per se abusive, but that it could present an opportunity for a company to take unreasonable advantage of the consumer's absence of choice.
Consumer's reasonable reliance on a covered person to act in the consumer's interests: The CFPB's examples here indicate that it will look to statements made by the covered entity as well as the nature of its role to determine whether a consumer could believe the covered entity is acting in its customers' best interests. In particular, the CFPB points to entities acting as intermediaries, like brokers, that may either expressly or impliedly indicate they are acting on the consumer's behalf.

Key Takeaways

The Policy Statement takes an expansive view of the scope of abusive conduct as well as the CFPB's authority to enforce the prohibition of abusive conduct. It also creates a broad penumbra of potentially problematic conduct, such as its position that the inability of a consumer to negotiate the terms of financial products and services creates a per se unfair advantage. It is unclear whether a court would agree with the CFPB's approach.

Covered entities should consider the specific examples set forth by the CFPB in the Policy Statement and identify any products or services they offer that may raise concerns under the CFPB's guidance. This includes products with relatively high profit margins given the Bureau's focus on "taking unreasonable advantage" of consumers. These products and services may require additional risk assessment and compliance focus. The same is the case for relationships with third parties that offer financial products and services, especially when consumer choice is limited.

The CFPB is soliciting comments on the Policy Statement, an unusual step given that these kinds of statements are exempt from notice and comment requirements. It is unclear why the Bureau is seeking comments and whether it views that doing so somehow makes the Policy Statement more authoritative. Even when issued as final, the Policy Statement will be non-binding and subject to change. Comments must be submitted by July 3, 2023.

Finally, the Bureau issued the Policy Statement at a time when the constitutionality of the Bureau's funding is being considered by the U.S. Supreme Court. It is not yet clear what, if any, impact this open constitutional question will have on the Policy Statement or the CFPB's UDAAP enforcement more generally.

Conclusion

The Bureau has long taken a "we know it when we see it" approach to defining abusive acts and practices. We do not expect the Bureau will feel constrained by the examples in the Policy Statement, so that general approach is likely to continue going forward.

Footnotes

1. 12 U.S.C. § 5536.

2. 12 U.S.C. § 5531(d).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.