For years, the financial services industry has been asking the Consumer Financial Protection Bureau to address what the industry views as ambiguity surrounding the bureau’s regulation of “abusive” practices.
And now, they’re getting their way.
The CFPB announced Friday that, effective immediately, it is changing its approach to “abusive” practices and limiting its own ability to pursue claims for financial abuses.
Many financial regulators have long had the ability to pursue claims against companies under the “Unfair or Deceptive Acts or Practices” or “UDAP” standard.
Things changed for the financial services industry after the creation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added another A to UDAP by adding “Abusive” to the definition of prohibited conduct.
UDAP thereby became UDAAP in the eyes of the CFPB.
But, the financial services industry claimed that the CFPB’s definition of “abusive” was vague and difficult to comply with. And just over a year ago, then CFPB Director Mick Mulvaney told the crowd at the Mortgage Bankers Association Annual Conference in Washington, D.C. that the bureau planned to address the vagueness of the abusive standard.
Mulvaney’s successor, Kathy Kraninger, has done just that.
According to the CFPB, it is enacting a policy that establishes more certainty and clarity around the application of the abusive standard.
“The Dodd-Frank Act is the first Federal law to broadly prohibit ‘abusive’ acts or practices in connection with the provision of consumer financial products or services,” the CFPB said in a statement.
“However, nearly a decade after the Act became law, uncertainty remains as to the scope and meaning of abusiveness. This uncertainty creates challenges for covered persons in complying with the law and may impede or deter the provision of otherwise lawful financial products or services that could be beneficial to consumers,” the bureau continued.
“Through this policy statement, the Bureau is providing clarification on how it intends to apply abusiveness in order to promote compliance and certainty,” the bureau added.
More specifically, it looks as though the CFPB will be limiting its own ability to apply the abusive standard, or at least the frequency at which it does.
According to the bureau, it will now pursue “abusive” actions in the following ways:
Focusing on citing or challenging conduct as abusive in supervision and enforcement matters only when the harm to consumers outweighs the benefit
Generally avoiding “dual pleading” of abusiveness and unfairness or deception violations arising from all or nearly all the same facts, and alleging “stand alone” abusiveness violations that demonstrate clearly the nexus between cited facts and the Bureau’s legal analysis
Seeking monetary relief for abusiveness only when there has been a lack of a good-faith effort to comply with the law, except the Bureau will continue to seek restitution for injured consumers regardless of whether a company acted in good faith or bad faith
According to the bureau, it has used the abusiveness standard in an enforcement action 32 times between 2011 and the fall of 2019 (the last time the bureau used the standard, according to the CFPB itself).
But in nearly all of the cases, the actions by the company in question also led to an unfairness or deception claim for the same actions, and that led to some confusion.
“It is difficult to discern from those actions unique fact patterns to which only the abusiveness standard would apply,” the bureau said in its policy statement. “Given the prevalence of dual pleading, along with the relatively nascent nature of this legal authority (and of the Bureau itself) and the number of matters the Bureau has resolved via settlement agreement, this enforcement activity has resulted in few reported judicial or Bureau administrative decisions that address the contours of the abusiveness standard.”
According to the bureau, the firmer definition of abusive practices will enable the bureau to more effectively manage its “scarce resources.”
From the CFPB policy statement:
Explicitly incorporating this focus into the Bureau’s supervision and enforcement decisions concerning abusiveness not only ensures that the Bureau is committed to using its scarce resources to address conduct that harms consumers, but also ensures that the Bureau’s supervisory and enforcement decisions are consistent across matters.
In a statement, Kraninger said having “clear rules of the road” will help both financial services providers and their customers.
“I am committed to ensuring we have clear rules of the road and fostering a culture of compliance – a key element in preventing consumer harm,” Kraninger said. “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.”
Beyond that, the bureau said that it also may engage in future rulemaking to further define the abusiveness standard.
To read the CFPB’s new policy on abusive practices in full, click here.