The Consumer Financial Protection Bureau is putting limits on the ways that it will use its power to pursue banks and other financial companies for abusive practices against consumers.
The 2010 Dodd-Frank Act gave the CFPB the unique authority to go after companies for abusive practices alongside long-established standards for pursuing unfair or deceptive acts and practices (UDAP). The financial services Industry has long complained that there has been little guidance as to what constitutes an abusive practice.
Under a new policy statement obtained today by Bloomberg Law, the CFPB said it will no longer bring abusiveness claims against companies alongside claims that they have engaged in unfair and/or deceptive practices, unless the CFPB can provide a legal rationale for bringing a separate abusiveness claim.
The policy statement also says that the CFPB will only bring an abusiveness claim if the agency “concludes that the harms to consumers from the conduct outweigh its benefits to consumers (including its effects on access to credit).”
“We’ve developed a policy that provides a solid framework to prevent consumer harm while promoting the clarity needed to foster consumer beneficial products as well as compliance in the marketplace, now and in the future,” CFPB Director Kathleen Kraninger said in a statement.
A company’s actions would be deemed abusive if they “materially interfere” with a customer’s ability to understand a term or condition attached to a financial product under a two-pronged test. The second prong states that a practice can be abusive if a company takes “unreasonable advantage” of a customer’s inability to understand any risks or costs of a product or a consumer’s inability to make a choice in their service provider.
Those directives are likely to make it harder for the CFPB to deploy the abusiveness standard, said Will Corbett, director of litigation at the Center for Responsible Lending.
“The CFPB is deliberately tying the hands of its enforcement and supervision of abusive acts practices,” he said.
In addition, companies would be able to escape civil money penalties for abusive practices if the CFPB determines that the entity made “a good-faith but unsuccessful effort to comply with the abusiveness standard,” the policy statement said. The CFPB will still pursue restitution payments for consumers in such instances, the bureau’s statement said.
Putting restrictions on when the CFPB will pursue civil money penalties could limit the bureau’s effectiveness as an enforcement agency, said Graham Steele, director of the Corporations and Society Initiative at Stanford University Business School.
“That is not the way to deter anybody,” said Steele, a former chief counsel to the Senate Banking Committee’s Democrats.
Industry Wanted More
So far, the CFPB has brought 32 enforcement actions using their abusiveness authority. Of those, 30 included both a claim of abusiveness and either unfair or deceptive acts or practices.
Industry attorneys question how much impact the new policy will ultimately have.
The CFPB held a symposium on the abusiveness standard in June, where some industry representatives pushed the bureau to do a formal rulemaking rather than guidance or a policy statement.
“Is this really what we’ve waited for since 2018?” said Allison Schoenthal, the head of Hogan Lovells LLP’s consumer finance litigation practice.
The new policy does not provide much clarity, and the industry may need to wait for a case to be litigated to get a better picture of what constitutes an abusive practice, she said.
The CFPB has not ruled out doing a rulemaking in the future. And that may be important if Kraninger wants the new abusiveness standard to survive past her tenure at the CFPB, particularly if a Democrat wins the 2020 presidential election.
“A new CFPB director appointed by a Democrat can change a policy statement much more readily than he or she can change a regulation,” said Alan Kaplinsky, the co-practice leader of Ballard Spahr LLP’s consumer financial services group.
While the CFPB’s power to bring abusiveness claims is unique among federal regulators, the Democratic governors of New York and California, Andrew Cuomo and Gavin Newsom, want to give their states financial regulators the power to do so as well. Both proposed doing so in their upcoming state budgets.