On January 24, 2020, the CFPB issued a policy statement (“Policy Statement”) providing a framework on how it intends to apply the “abusive” acts or practices standard in supervision and enforcement matters. The Policy Statement was issued in an attempt to address the financial industry concerns over the uncertainty surrounding the scope and meaning of “abusive” acts or practice, which has been a stumbling block for financial institutions on the road to develop new financial products and services for consumers. The Policy Statement is effective January 24, 2020.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) authorizes the CFPB to prevent a covered person and service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law 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. Section 1031(d) of the Dodd-Frank Act sets general standards for when the CFPB may declare that an act or practice is abusive under the Dodd-Frank Act.
Specifically, section 1031(d) authorizes the CFPB to declare an act or practice ‘abusive’ only if the act or practice: (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 (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 his/her interests 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. However, the Dodd-Frank Act does not specifically define the term “abusive” or other terms used as part of the general standards of abusive in section 1031(d) stated above. As a result, there is uncertainty as to what conduct would constitute an abusive act or practice.
The Policy Statement is a product of the CFPB outreach to the financial industry over the past few years and its conclusion, based on such outreach, that the uncertainty surrounding the meaning of abusive standard results in impeding innovation and development of new financial product and services.
In an attempt to create certainty the CFPB opted to issue the Policy Statement to clarify how it plans to implement and apply the abusive standard in its supervisory and enforcement work. The CFPB opted to issue the Policy Statement because it believes that it should allow the concept of “abusiveness” to develop through its supervision power, enforcement action and no action letters rather than through formal rulemaking. According to the Policy Statement the CFPB intends to immediately apply the following principles during its supervision and enforcement work:
- The CFPB will focus on citing conduct as abusive in supervision, or challenging conduct as abusive in enforcement, if it concludes that the harms to consumers from the conduct outweigh its benefits to consumers;
- The CFPB will generally avoid challenging conduct as abusive that relies on all or nearly all of the same facts that the CFPB alleges are unfair or deceptive. If the CFPB decides to include an alleged abusiveness violation, the CFPB intends to plead such claims in a manner designed to clearly demonstrate the nexus between the cited facts and the CFPB’s legal analysis of the claim. In its supervision activity, the CFPB intends to provide more clarity as to the specific factual basis for determining that a covered person has violated the abusiveness standard; and
- The CFPB generally will not seek certain types of monetary relief for abusiveness violations where the covered person was making a good-faith effort to comply with the abusiveness standard.
The issuance of the Policy Statement is an acknowledgment by the CFPB that the standards for determining abusive acts or practices under the Dodd-Frank Act are vague and creates uncertainty. The principles outlined in the Policy Statement do not clarify the meaning of the abusiveness standard. Instead, they only provide an indication, albeit also somewhat vague, on the approach the CFPB will take in its supervision and enforcement.
However, of importance is the CFPB’s indication that it will not seek substantial penalties and monetary relief if the covered person or service provider was making a good-faith effort to comply with the abusiveness standard. Therefore, in the case of innovation and development of new products and services for example, a covered person would be wise to have legal review and analysis conducted prior to rolling out new products and services, so as to provide proper showing of good-faith effort to comply with the law and prevent triggering the abusive standards.
Covered persons and service providers should also consider utilizing the no action letter, and communication with the CFPB prior to rollout of new product and services, so as to minimize the risk of violation and enforcement action.
If you have any questions regarding the CFPB’s Policy Statement or the Dodd-Frank Act abusive standards, please reach out to Solomon Maman.Download Related Document