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CFPB Brings Clarity to the "Abusiveness Standard Under UDAAP
The CFPB Brings Some Clarity to the ‘Abusiveness’ Standard Under UDAAP
By Peter Idziak, Polunsky Beitel Green
On January 24, 2020, the Consumer Financial Protection Bureau (CFPB) published a Policy Statement clarifying how it intends to apply the “abusiveness” standard in future enforcement and supervisory matters concerning unfair, deceptive, or abusive acts or practices (UDAAP).
The Policy Statement provides that, going forward, the CFPB will generally direct its supervisory and enforcement actions in the following ways: • Focusing on citing or challenging conduct as abusive only if the CFPB concludes the harms to consumers from the conduct outweigh its benefits to consumers. The consideration of harms and benefits will be qualitative as well as quantitative. • Avoiding alleging an abusiveness violation that relies on all or nearly all the same facts as an unfairness or deceptive violation. • Not seeking certain types of monetary relief where the covered person was making a good-faith effort to comply with the abusiveness standard.
The Policy Statement was issued in response to long-running concerns from industry stakeholders that the statutory standard was unclear, that past CFPB guidance had been insufficient, and that past enforcement practices had inconsistently applied the abusiveness standard.
For those of us within the mortgage industry, any clarity is welcome. Although to date the vast majority of CFPB actions alleging claims of abusive behavior have involved companies and individuals engaged in nonmortgage consumer lending, the abusiveness standard was included in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), specifically in response to concerns that mortgage lenders, bankers, and brokers had taken unreasonable advantage of consumers by recommending mortgage products that were illsuited to the consumer. There is always risk that the regulator will decide a particular act or practice that was long thought acceptable by the industry is in fact unfair, deceptive, or abusive.
THE CFPB’S AUTHORITY TO REGULATE UNFAIR, DECEPTIVE, OR ABUSIVE ACTS OF PRACTICES
As part of Dodd-Frank, the CFPB was granted the power to prevent a covered person or service provider from “engag[ing] in any unfair deceptive, or abusive act or practice.” This was an expansive grant of authority to the new regulator, with one scholar calling it “the most threatening” of all the CFPB’s powers.
The standards for ‘unfair’ and ‘deceptive’ behavior are fairly well-developed in consumer protection law. For over 80 years, the Federal Trade Commission has used its authority under the FTC Act to address unfair and deceptive acts and practices that harm consumers, establishing a robust framework of regulation, caselaw, and agency policy statements that provide a reasonably clear definition of these concepts.
However, the term ‘abusive’ was entirely new in consumer protection law, and the limited legislative history did not make clear Congress’ intent in adding the standard. As CFPB Director Kathleen L. Kraninger herself noted, the abusiveness standard “does not have the long and rich history of unfairness or deception,” which has led to “uncertainty creat[ing] impediments to innovation and other salutary developments in the marketplace.”
Compounding the problem is that many find the statutory text unclear. Under Dodd-Frank, an “abusive act or practice” requires that the act or practice (1)
WASHINGTON, DC - MARCH 14, 2019: Consumer Financial Protection Bureau entrance, aka the CFPB at sunset. Note logo through lobby window. 17th Street downtown DC.
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 (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. None of the underlined terms is defined in the statute, and none has been clearly defined either by the CFPB or through litigated court opinions. In fact, to date, there has been no circuit court opinion that has defined the abusiveness standard.
PRIOR CFPB ACTIONS INCREASED UNCERTAINTY
Prior to the issuance of the Policy Statement, the CFPB’s supervisory and enforcement actions often either failed to clarify, or in some cases added to, industry uncertainty as to what the CFPB considered abusive conduct. For example, the CFPB’s Supervisory Manual section on UDAAP merely recites the statutory definition of “abusive” without providing any descriptions or examples of abusive conduct, in contrast to unfair and deceptive behavior, for which the Manual provides several examples of each.
The CFPB’s enforcement actions have further confused the matter. Enforcement actions have inconsistently applied the abusiveness standard, alleging abusive behavior in some actions but not others, despite the underlying behavior at issue being highly similar. Perhaps even more frustrating, in 30 of 32 enforcement actions, the CFPB alleged that particular act or practice was both abusive and unfair or deceptive. This so-called “dual pleading” often meant that it was difficult to discern what conduct would only violate the abusiveness standard.
The Policy Statement recognizes that past CFPB actions have caused uncertainty and states that the CFPB hopes its new focus will provide “more certainty” and “more clarity” to those subject to its supervision or enforcement.
As one appellate court judge stated, in issuing the Policy Statement, the CFPB has “provided for those seeking clarity a half victory.” Although the Policy Statement is a helpful step in clarifying the abusiveness standard, it is important for those subject to CFPB supervision and enforcement to remember that it was not issued subject to a formal rulemaking process; and, therefore, the CFPB is free to rescind the Policy Statement without formal notice or rulemaking. Perhaps more importantly, the CFPB makes clear in the Policy Statement that although it will “focus” its enforcement and supervisory actions on the areas indicated in the Policy Statement, it is still free to pursue actions against behavior it alleges to be abusive outside those areas.
Therefore, lenders, bankers, and brokers must be mindful that although the Policy Statement does provide some clarity and outline of current CFPB priorities, in the future those priorities may change. MBM
