Bank Notes

By: Mark A. Mangano

On January 24, 2020, the Consumer Financial Protection Bureau (CFPB) published “Statement of policy regarding prohibition on abusive acts or practices” (Statement).¹  The CFPB’s intention in publishing the Statement was “To convey and foster greater certainty about the meaning of abusiveness”. The Statement provides little to immediately clarify the definition of abusiveness. It does create a framework for promoting greater clarity through supervisory opinions and enforcement actions over time. It also provides some reduction in the financial risk of violating the evolving standard.

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Act) provided the CFPB with supervisory and enforcement authority to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.² 

The term “abusive” was a new term in consumer financial services regulation. The Act provides that an act or practice is not abusive unless it:

1. Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
2. takes unreasonable advantage of
   1. a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
   2. the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
   3. the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.³ 

This is an undeniably broad definition.

The CFPB acknowledged that nearly ten years after prohibition of abusive acts or practices, there remains significant uncertainty regarding the scope and meaning of abusiveness. The CFPB also acknowledged that its practice in enforcement actions of alleging abusiveness claims that arise from the same facts as allegations of either unfair or deceptive practices has limited the usefulness of those actions in building a clear definition of abusive as a separate and distinct prohibited behavior. A significant concern is that such uncertainty may impede or deter the provision of otherwise lawful financial products or services that could be beneficial to consumers.

Action

By reducing uncertainty regarding the definition of abusive, the CFPB seeks to improve compliance with the abusive standard while encouraging innovation in consumer products and services. The Statement does nothing to immediately clarify the definition of abusive. But, it does take three important steps to reduce uncertainty over time.

First, the CFPB states its intention to focus its supervision and enforcement resources on acts or practices where the behavior meets the definition of abusive and the harm to consumers from the behavior outweighs its benefits to consumers including its effects on access to credit. This introduces a balancing test not previously articulated.

Second, in circumstances where a single course of conduct may provide the factual basis for allegations of unfair, deceptive, or abusive acts or practices, the CFPB will avoid alleging an abusiveness violation that relies on all or nearly all the same facts as an unfairness or deception violation. This will help to create a clearer history of actions that the CFPB and courts find violate the abusive standard.

Third, the CFPB expressed its intention not to seek certain monetary remedies for abusive acts or practices if the covered person made a good-faith effort to comply with the law based on a reasonable-albeit mistaken-interpretation of the abusiveness standard. This potentially reduces the financial risk of consumer finance innovation.

Only a first step

Over time the CFPB’s adherence to the Statement may lead to greater clarity, reduced uncertainty and greater innovation. But the Statement’s benefits are substantially qualified and limited.

First, it is only a policy statement. It only suggests a course of action.  It does not change the underlying law or bind the CFPB.

Second, the CFPB will continue to seek equitable remedies for even good-faith violations of the abusive standard. CFPB retains the ability to determine what constitutes good-faith.

Third, the CFPB may amend or reverse its policy position in the future.

The Statement is a positive development for financial service providers with a desire to develop innovative consumer products and services. But until a body of supervisory or enforcement actions is developed, the risks of innovation remain for the most part unchanged.

Mark Mangano is Counsel with Jackson Kelly PLLC. Mark is an attorney focusing on strategic planning, corporate governance, and banking matters. He has 26 years of experience as the CEO and owner of a community bank.  mark.mangano@jacksonkelly.com.  304-284-4104

¹  Bureau of Consumer Financial Protection, Statement of Policy Regarding Prohibition on Abusive Acts or Practices, https://www.consumerfinance.gov/policy-compliance/guidance/supervisory-guidance/statement-policy-regarding-prohibition-abusive-acts-or-practices/ (January 24, 2020)
²  12 USC §5531(a)
³  12 USC §5531(d)