By Frank A. Hirsch, Jr., Consumer Finance, Credit Union

In a published “Policy Statement on Abusiveness” on April 3, 2023, the Consumer Financial Protection Bureau (CFPB) announced its analytical framework for the ban of abusive acts or practices granted by Dodd-Frank back in 2010. The policy statement is designated as its “first formal issuance” to summarize the past twelve years of enforcement by the Bureau, though there was a policy announcement by the CFPB in January 2020 on the same topic. The stated goal is to provide examiners and other regulators like the Office of the Comptroller of the Currency (OCC), the National Credit Union Association (NCUA), and the state Attorney Generals to “assist consumer financial protection enforcers in identifying wrongdoing.” The Bureau says none of the analytical guidance is new law, it is simply “a clearer synthesis.” Comments are accepted until July 3^rd.
 
What it Says
 
There are two abusiveness prohibitions: (1) an act or practice that materially interferes with the ability of the consumer to understand a term or condition of a product or service; or (2) an act or practice that takes unreasonable advantage of any one of these three scenarios:

• A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.
• The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service. This is described as having “three independent disjunctive grounds.”
• The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

This is the verbatim test specified in the Dodd Frank statute, but the authority granted to the CFPB is in the negative: the Bureau “shall have no authority under this section to declare an act or practice abusive…unless the act or practice….” The grant of authority makes no reference to other legislation using “abuse” as a legal standard even though such statutes clearly existed, and it provides no insights into how to demonstrate the “unreasonable advantage,” how to show the “ability of the consumer to understand,” or to prove the “inability of the consumer to protect [their] interests.”
 
The Congressional text of the abusiveness standard does not provide details supporting all aspects of the recently announced analytical framework. Instead, the Bureau cites the Congressional concerns for gaps in understanding, unequal bargaining power, and consumer reliance as the essential textual factors.
 
Notably, the inability of consumers to protect themselves includes circumstances where customer support assistance is inadequate or unavailable, where the protection paths are “onerous,” where there are high transaction costs to exit the relationship, or where a consumer must come out of pocket to help themselves. 
 
The Bureau emphasizes that abusiveness “requires no showing of substantial injury to establish liability.” By contrast, unfairness does require this, and deception might. And an act or a practice can fall into more than one category “depending on the circumstances.” Such overlaps or conflations are not detailed.
 
Explaining further the first abusiveness concept of “material interference,” the CFPB says this can be shown in any one of three ways: when an act or omission (1) is intended to impede a consumer’s ability to understand; (2) has the natural consequence of impeding understanding; or (3) actually impedes understanding. Acts or omissions can take numerous forms such as buried disclosures (fine print, complex language, jargon, or untimely disclosures), physical or digital interference (user interface, experience manipulations, using pop-ups, drop-down boxes, multiple click throughs, or other “dark patterns”), overshadowing, and various other means of manipulating consumers’ understanding.
 
Material interference does not require intent. It does not require establishment with evidence that the natural consequence of the act of omission would be to impede understanding. It does not even require that it did in fact impede the consumer’s actual understanding. The Bureau also says that certain products or services may also be so complicated that they “cannot be sufficiently explained or if the entity’s business model functions in a manner that is inconsistent with its product’s or service’s apparent terms.”
 
Explaining further the second abusiveness touchstone of “unreasonable advantage,” again the CFPB details three particular circumstances: (1) gaps in understanding affecting consumer decision-making; (2) unequal bargaining power preventing the switch of service providers, preventing the pursuit of more favorable terms, or of consumers protecting their own interests; and (3) reasonable reliance by the consumer on an entity to look out for them. The CFPB highlights that it is “illegal” for an entity “to take unreasonable advantage of any one of the above three circumstances, even if the condition was not created by the entity.”
 
Taking unreasonable advantage is not looked at holistically in terms of the marketplace and does not need quantification. “Even a relatively small advantage may be abusive if it is unreasonable.”
 
Three analytical methods have been used by the Bureau to evaluate unreasonable advantage-taking. One is products with abusive terms set up to fail, where the provider may be indifferent to consumer outcomes. The second is trapping consumers by fine print and impeding comparison shopping. The third is receipt of a windfall due to a gap in understanding.
 
Gaps in understating are labelled by the CFPB as “exploitative” – if they concern risks of default or consequences; if they concern costs, including reputational harms; if they involve nondisclosure of the time it takes to benefit from a product or service; or if they concern the effects of relationships with creditors. As the Bureau sees it, the standard “does not require that the entity caused the person’s lack of understanding.” It matters not how the lack of understanding arose. It can be caused by the actions of third parties and still be actionable. 
 
Finally, the consumer’s lack of understanding does not have to be shown as “reasonable.” Not all consumers, or even a majority of consumers, need to have a demonstrated lack of understanding. If some do, then the CFPB can deem it abusive.
 
Context
 
The abusive standard has been around for more than a decade and the CFPB has on many prior occasions refused to specify what proof is actually required and what relevant facts and defenses are material. Back in 2013, the CFPB published some proposed rulemaking which indicated an intent to perhaps define “abuse,” as covered by the Fair Debt Collections Practices Act (FDCPA) and/or Dodd-Frank. The agency posed some specific questions highlighting the scope and covered persons under the FDCPA, but the definition of “abusive” was never announced. Logically, because Dodd-Frank added the term “abusive” to the prior existing prohibitions on deceptive acts or practices, there must be some difference in the terms, or the addition would be meaningless/redundant.
 
The CFPB’s recent policy statement also fails to mention any prior inconsistent positions taken by the Bureau as to the meaning of “abusiveness.” For example, in the CFPB’s Exam Manual for unfair, deceptive, or abusive acts or practices (UDAAP), in October 2012, explaining the role of consumer complaints under the abusiveness test, the CFPB stated that “the perspective of the reasonable consumer is one of the tests for evaluating.” This “reasonable consumer” standard is now disregarded.
 
In a July 10, 2013, publication on UDAAP, the CFPB has stated that “It is important to note that, although abusive acts or practices may also be unfair or deceptive, each of these prohibitions are separate and distinct, and are governed by separate legal standards.” The policy statement does not recite this separate and distinct language. It also in footnote 11 sidesteps and distinguishes the 2020 Kathy Kraninger-led CFPB announcement that the Bureau did not intend to pursue legal actions with overlapping allegations of abusive, deceptive or unfair practices (limiting abuse actions to ‘”stand alone’ abusiveness violations that demonstrate clearly the nexus between cited facts and the Bureau’s legal analysis”).
 
Curiously, when announcing the abusiveness analytical framework during a speech on April 3, Rohit Chopra claimed the Bureau’s entitlement to develop the regulatory test historically comports with the role that the FTC has played since 1914 with respect to defining “unfair and deceptive” business practices. Chopra served as an FTC Commissioner from May 2018 until October 2021 when he moved into the role of Director at the CFPB. And yet his comments do not seem at all complimentary of the performance of the FTC in shepherding the old-UDAP standards: “While unfairness and deception reach a broad set of problematic practices, misguided enforcement policies and interpretations by FTC Commissioners had, over time, undermined their effectiveness.” He claims the need for the CFPB to lead/teach what “abusiveness” should mean in the legal sense.
 
An obvious question is how another governmental agency, this time the CFPB, interpreting the “abusiveness” prohibitions now part of the UDAAP authority which is shared among multiple regulators (the FTC, FDIC, OCC, FRB, NCUA), is going to do an exemplary job in setting parameters which will withstand judicial scrutiny in the context of litigated enforcement actions?
 
Chopra’s speech also notes that “the term itself, ‘abusive,’ was not a new concept. In fact, it existed in federal law and regulation, including in the Home Ownership and Equity Protection Act, the Fair Debt Collection Practices Act, and the Telemarketing Sales Rule.” HOEPA was passed in 1994 as a means to control high-cost mortgage loans. The FDCPA was passed in 1978 to regulate the debt collection industry and stop harassment. Primary enforcement authority for both the HOEPA and the FDCPA passed to the CFPB in 2010, but examination and enforcement also remain with other regulators. The TSR was passed in 1994 as an attempt to control telemarketing harassment. The FTC retains the lead enforcement role for the TSR and not the CFPB.
 
Notably, neither the CFPB’s 18-page policy statement or Chopra’s nine-page speech concerning the policy goals makes any mention of the previous interpretation of what “abusive” means under those other statutes. The policy statement ignores the history of the legal concept of “abusiveness” either as used in these other federal statutes, or as historically applied by the agencies charged with enforcement. There is not a single notation of a relevant judicial decision interpreting what “abusive” or “abuse” means in the context of HOEPA, of the FDCPA, or the TSR. To the same point, there is not a single citation to an actual interpretation of what “abuse” or “abusive” means by any other federal regulator. There is merely a quote of the FDIC’s 2007 Congressional testimony by Sheila Blair, then-co-chair that “abusive” should address new risks in the marketplace without the encumbrance of cost-benefit analysis restrictions on “unfairness” enforcement.
 
Indeed, in the entirety of the CFPB’s Policy Statement, there are a total of only four citations to judicial determinations relevant to the agency’s interpretations of “abuse” as alleged in the complaints by the CFPB. All four of these were at the motion to dismiss stage of litigation—where all allegations and inferences are to be construed in favor of the complaint. The context of these abuse challenges by the CFPB were against TCF Bank (for inadequate opt-in processes for selecting overdraft protections (2017)), against Think Finance (on-line lender making void loans in contravention of state usury or licensing laws (2018)), against Certified Forensic Loan Auditors (for mortgage relief services (2020)), and against ITT Educ. Services (for-profit college’s financial aid staff advising students on loan options (2015)). These rulings merely said that the CFPB’s complaint allegations, presumed to be true, might support a claim of “abuse.”
 
There are no cited summary judgment decisions about what “abusiveness” means. There are no cited final adjudications interpreting what evidence is sufficient to establish “abusiveness.”
 
How The CFPB’s Definition of Abusiveness Comports With The Historical Definition
 
Black’s Law Dictionary defines “abuse” as “departure from reasonable use”; “immoderate or improper use.” It also defines “abusive” as “tending to deceive;” “ill-treat[ment]…by hurtful acts;” and “injurious.” Thus, the standard legal definition presumes three important concepts: (1) the lack of reasonableness by the actor; (2) the alignment with some type of deceit—which itself is defined as “a fraudulent…misrepresentation…used …to… trick another, who is ignorant of the true facts” … and “acts in reliance;” and (3) harm/injury actually resulting from the abuse.
 
All three of these concepts are being qualified by the recently announced analytical framework. Unreasonableness for regulated entities is broad and growing, while the reasonableness of consumers is considered irrelevant. Intent and deceptive conduct are disregarded. Actual injury and harm to the one claiming to be “abused” does not really matter.  Abuse can be the return of a windfall.
 
Conclusions

1. We live in a politically charged world where uncertainty regarding the provision of financial services to consumers is unavoidable. The pendulum changes with new administrations and with new Bureau directors.
2. The three guiding principles for the abusiveness standard announced by the CFPB then-Director on January 24, 2020, are dead and gone (actually they were repealed without explanation of the replacement framework by interim Director Dave Uejio as one of the early acts of the new Biden administration). In 2020 the Bureau said when looking at “abusiveness” it would focus only on overall consumer harm and not just a subset if the benefits exist for the product/conduct; it would avoid duplicative or overlapping UDAAP claims; and that monetary relief would only be pursued for bad actors, which means a good faith effort at compliance is a defense (or at least a mitigating factor).
3. The Black’s Law Dictionary definition of “abuse” and “abusiveness” is being altered by administrative declarations, rather than by the courts.
4. Judicial interpretations of the extent of UDAAP authority is acknowledged as supreme, but the previous cases decided do not utilize the currently announced analytical framework. What is meant here is that while footnote 3 to the CFPB policy announcement recites that “the meaning and application [of the statutory reach] must be arrived at by … the gradual process of judicial inclusion and exclusion,” the “precedent” and justifications cited by the CFPB as sussing out the meaning of “abusiveness” is mostly a recitation of the Bureaus’ selected policy pronouncements and legal enforcement actions quoting from the Bureaus’ own pleading contentions and not from fulsome court holdings.

Take-Aways
 
Re-examine your products, conduct, marketing, and terms in light of the changed abusiveness analytical framework. Document your findings and make changes/tweaks where it is advisable. Stay on top of consumer complaints and look for any vulnerable subsets of consumers with limited understanding of risks and consequences. Examine your offerings in light of the Bureau’s recent and parallel announcements of tracking contract terms and conditions, as well as enforcement actions against newer industries like Buy Now Pay Later.
 
The credit union group at Kaufman & Canoles is poised to assist with these nuanced concepts and regulatory risks.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.