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CFPB Issues Policy Statement on Abusive Acts and Practices

michaelchristians • January 27, 2020

On Friday, January 24th, the Consumer Financial Protection Bureau (CFPB) issued a statement of policy regarding its supervision and enforcement authority for abusive acts and practices. First, some background…

Section 1031 of the Dodd-Frank Act makes it unlawful to engage in an abusive act or practice in connection with a consumer financial product or service. Specifically, the statute provides that an act or practice is considered abusive if it:

Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
Takes unreasonable advantage of –
- A lack of understanding on the part of the consumer of the materials risks, costs or conditions of the product or service,
- The inability of the consumer to protect his/her interests in selecting or using a consumer financial product or service, or
- The reasonable reliance by the consumer on a covered person to act in his/her best interests.

The industry has complained for years that the vagueness of the statutory definition along with limited to no additional regulatory guidance as to what constitutes an abusive act or practice makes it nearly impossible to comply with this prohibition. In late 2018, under the reign of then acting director Mick Mulvaney, the CFPB announced that it would engage in rulemaking to further define what types of acts and practices qualify as abusive. While it remains to be seen if/when this rulemaking will occur, the CFPB’s policy statement makes it clear that in the interim the agency plans to significantly curtail its enforcement authority in this area.

First, the policy statement provides that for an act or practice to be considered abusive, any harm to consumers MUST outweigh any benefits. Second, the CFPB will generally avoid citing an act or practice as abusive if it arises out of the same course of conduct that the agency has already declared to be unfair or deceptive. Finally, the CFPB does not intend to seek punitive damages in connection with an abusive act or practice committed by a covered person who was making a good faith effort to comply with the law based on a reasonable – albeit mistaken – interpretation of the abusiveness standard.

The policy statement is consistent with the more hands-off approach we’ve seen taken by the CFPB in recent years. However, this isn’t necessarily all good news. Remember that Section 1042 of the Dodd-Frank Act also provides UDAAP enforcement authority to state attorneys general and state financial regulators. As a result, this may be another area in which we see individual states playing a more active role in consumer financial protection than their federal government counterpart (see California Consumer Privacy Act).

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