On April 3, 2023, the Consumer Financial Protection Bureau (“CFPB”) issued a policy statement regarding what constitutes an “abusive” act or practice (the “Policy Statement”).[1] The Policy Statement outlines the CFPB’s approach to analyzing whether an act or practice may be abusive and provides examples, which the Policy Statement also notes may be used by state attorneys general or other agencies that are authorized to enforce the prohibition on abusive practices.[2] Accordingly, persons who provide financial products and services to consumers but who are not supervised by or subject to the enforcement authority of the CFPB may nevertheless be affected.
The Policy Statement represents a significant departure from the agency’s February 2020 policy statement on abusiveness (rescinded in March 2021), which did not purport to be a restatement of law, but rather a statement of enforcement priorities (the “2020 Policy”).[3] Significantly, elements of the Policy Statement appear to depart from the plain language of the statute and therefore could be vulnerable to court challenge when applied in enforcement actions or to serve as the basis for a regulation. No effective date is specified, presumably because the Policy Statement does not purport to be a regulation,[4] but institutions should assume it is effective immediately. Nevertheless, the Policy Statement will be published in the Federal Register, and comments may be submitted until July 3, 2023.[5]
BACKGROUND
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)[6] makes it unlawful for any covered person or service provider to engage in any unfair, deceptive, or abusive act or practice.[7] The Dodd-Frank Act also provides the CFPB with rulemaking authority to define and prevent unfair, deceptive, and abusive acts and practices, along with enforcement authority to prevent covered persons and service providers from engaging in such acts and practices.[8] Under the Dodd-Frank Act, however, an act or practice may be declared “abusive” only if it satisfies one of two prongs:
- it materially interferes with the consumer’s ability to understand a term or condition of the consumer financial product or service; or
- it takes unreasonable advantage of:
- the consumer’s lack of understanding of the material risks, costs or conditions of the product or service,
- the consumer’s inability to protect his or her interests in selecting or using the product or service, or
- the consumer’s reasonable reliance on a covered person to act in the interests of the consumer.[9]
SUMMARY OF POLICY STATEMENT
The Policy Statement elaborates upon both prongs of the definition and summarizes prior CFPB enforcement actions, interpreting each prong and its relevant terms very broadly.[10] Importantly, the CFPB observes that abusiveness requires no showing of substantial consumer injury to establish liability[11]—a position that is contrary to the enforcement policy set out in the rescinded 2020 Policy.[12]
A. MATERIAL INTERFERENCE
According to the Policy Statement, material interference may be either an affirmative act or an omission. The Policy Statement provides several examples of material interference, including:
- Buried disclosures, including “the use of fine print, complex language or jargon or the timing of a disclosure”;[13]
- Physical or digital interference, or impediments to a consumer’s ability to see, hear or understand the terms and conditions of a product or service, including utilizing “user interface and user experience manipulations such as pop-up or drop-down boxes, multiple click-throughs, or other actions or ‘dark patterns’ that have the effect of making the terms and conditions materially less accessible or salient”;[14] and
- Overshadowing, including the “prominent placement of certain content that interferes with the comprehension of other content, including terms and conditions.”[15]
Material interference may be proven through several methods, such as: (i) inference from an entity’s intent to interfere, (ii) evidence that the “natural consequence” of the act or omission is interference, or (iii) evidence that the act or omission in fact interfered with a consumer’s understanding.[16] Furthermore, “it may be reasonable to presume” material interference if certain “consequential” transaction terms, such as pricing, are not conveyed prominently or clearly,[17] and the provision of a product or service may be considered material interference if the product or service is so complicated that material information cannot be sufficiently explained.[18]
B. UNREASONABLE ADVANTAGE
According to the Policy Statement, what an “unreasonable” advantage is depends on an evaluation of the particular facts and circumstances, but may involve using one or more of the second prong’s three independent grounds to “benefit from, or be indifferent to, negative consumer outcomes[,]” to “acquire particular leverage over people or deprive consumers of legal rights[,]” or to “reap[ ] more benefits[,]” or when an act or practice causes one or more of those grounds to exist.[19] The evaluation need not consider “whether the advantage-taking is typical or not” and does not require quantification.[20] Even a relatively small advantage may be abusive if it is unreasonable.[21] Moreover, an entity need not create the conditions of which it is taking unreasonable advantage to run afoul of the prohibition on abusiveness.[22]
Lack of Understanding
A “lack of understanding” occurs when there is a gap in the consumer’s understanding of material risks, costs, or conditions of the product or service involved.[23] The provider need not have caused the lack of understanding through untruthful statements or other actions; the lack of understanding can be caused by third parties and occur even in the absence of a contractual relationship between the consumer and the entity (such as for credit reporting agencies). Nor does the consumer’s lack of understanding have to be reasonable, and there is no required threshold number of people who lacked understanding.[24] Further, a consumer may have a lack of understanding even if he or she is generally aware that a particular consequence may follow—e.g., he or she may be aware of the consequence, but may not understand either the magnitude or likelihood of a particular risk.[25] Evidence of lack of understanding can include direct evidence, evidence that reasonable consumers were not likely to understand, or evidence based on a consumer’s course of conduct.[26]
Inability to Protect Interests
This ground focuses on whether there is unequal bargaining power.[27] “Interests” within the meaning of the statute can be monetary or non-monetary, including “property, privacy, or reputational interests” and interests in time or effort, such as when time is spent trying to obtain customer support assistance.[28] Consumers may be unable to protect their interests when: it is impractical to do so, they lack the financial means to do so, they do not have a meaningful choice in entering into a relationship with an entity, they face high transaction costs to exit a relationship, an entity uses form contracts that consumers have no ability to negotiate, or an entity has “outsized market power.”[29] In addition, low-income consumers may be unable to protect their interests when the only practical way to do so is by paying money. According to the Policy Statement, “merely serving people without monetary means is not abusive,” but taking unreasonable advantage of a consumer’s inability to protect his or her interests due to a lack of monetary means may be.[30]
Reasonable Reliance
This ground focuses on whether the consumer has a reasonable expectation that an entity will make decisions or provide advice in the person’s interest.[31] Reasonable reliance may occur when an entity communicates either to a particular consumer or to the public that it will act in the consumer’s best interest.[32] Reasonable reliance may also occur when the entity assumes a role that could give rise to such reliance, such as acting on consumers’ behalf, helping consumers to select providers or acting as an intermediary in the consumer financial services market.[33] The Policy Statement explains that it may be taking unreasonable advantage of such reliance for an entity to engage in “certain forms of steering or self-dealing” when it is reasonable for a consumer to rely on the entity as acting in his or her interests.[34]
OBSERVATIONS
The Policy Statement presents summaries of prior enforcement actions and the CFPB’s analysis of whether certain acts or practices are abusive “with the goal of providing an analytical framework to fellow government enforcers and to the market.”[35] Public comment may focus on the following issues, among others:
- Two of the Policy Statement’s methods for proving material interference—(1) an intent to interfere and (2) if the “natural consequence” is to impede understanding—are not supported by precedent.[36] Moreover, the absence of any need to prove actual material interference arguably goes beyond the plain language of the statute.[37] In recent years, federal courts have become more skeptical of deferring to agency interpretations of their governing statutes.[38] The Policy Statement may represent an effort by the CFPB to bolster the agency’s ability to stretch the scope of the abusiveness provision, while improving the persuasiveness of its arguments when challenged in litigation.
- The Policy Statement represents a significant change in direction as compared to the 2020 Policy, which did not purport to be a legal interpretation but instead stated that the CFPB would (i) focus on cases where “harms to consumers from the conduct outweigh its benefits to consumers”; (ii) avoid challenging conduct as abusive that is also alleged to be unfair or deceptive; and (iii) generally not seek civil money penalties for cases where the entity made a good-faith effort to comply with the abusiveness prohibition, based on a reasonable interpretation of what the prohibition requires.[39] As to (i), as noted above, the Policy Statement rejects the need to prove that any consumers have been harmed in bringing an abusiveness claim, much less to balance any harm against any benefit.[40] Regarding (ii), it is likely that a substantial number of the examples of conduct the Policy Statement describes as abusive could also be charged as unfair or deceptive—a circumstance that was effectively acknowledged in the 2020 Policy—but with potentially higher evidentiary burdens; namely, proving substantial injury to consumers.[41] Indeed, the 2020 Policy recognized that the abusiveness standard was not well defined, at least in part because abusiveness claims overlapped with unfairness and/or deceptiveness claims in the vast majority of abusiveness cases.[42] The CFPB may be laying the groundwork for charging acts that could be charged as unfair or deceptive as abusive instead so as to avoid a higher evidentiary burden.[43] As to (iii), the Policy Statement includes no discussion of good faith or reasonable interpretation, raising the possibility that the CFPB may pursue remedies even where there is good faith and a reasonable interpretation.
- The Policy Statement is another example of the CFPB’s ongoing focus on competition and what it considers “market failures.” In a speech given the same day the Policy Statement was released, Director Chopra noted some examples in which an absence of consumer choice and the potential for taking unreasonable advantage are inherent in the relevant market’s structure, including the markets for consumer credit reporting companies, loan servicers, and debt collectors.[44] Director Chopra warned that these companies should not “use the fact that their customers are captive to force people into less advantageous deals, extract excess profits, or reduce costs by providing worse service than they would provide if they were competing in an open market.”[45]
ENDNOTES
[1] CFPB, Policy Statement on Abusiveness, April 3, 2023, available at https://files.consumerfinance.gov/f/documents/cfpb_policy-statement-of-abusiveness_2023-03.pdf.
[2] See, e.g., 12 U.S.C. § 5552(a)(1) (empowering state attorneys general to enforce the provisions of the Consumer Financial Protection Act of 2010).
[3] See 85 Federal Register 6733 (Feb. 6, 2020).
[4] The Policy Statement probably qualifies as a general statement of policy or, more likely, as an interpretive rule exempt from notice and comment requirements under the Administrative Procedure Act. 5 U.S.C. § 553(b)(A). It is not uncommon for agencies to solicit public comment on policy statements and other guidance. See, e.g., Appendix A to 12 CFR Part 1074 (“The Bureau may decide to seek public comment on supervisory guidance. Seeking public comment on supervisory guidance does not mean that the guidance is intended to be a regulation or have the force and effect of law. The comment process helps the Bureau to improve its understanding of an issue, to gather information on institutions’ risk management practices, or to seek ways to achieve a supervisory objective most effectively and with the least burden on institutions.”).
[5] CFPB, CFPB Issues Guidance to Address Abusive Conduct in Consumer Financial Markets, April 3, 2023, available athttps://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-guidance-to-address-abusive-conduct-in-consumer-financial-markets/.
[6] Public Law 111-203, 124 Stat. 1376 et seq. (2010).
[7] Id. at Title X, § 1036 (codified at 12 U.S.C. § 5536). “Covered person” means any person that engages in offering or providing a consumer financial product or service, and any affiliate of such a person acting as a service provider to such person. 12 U.S.C. § 5481(6). “Service Provider” means any person that provides a material service to a covered person in connection with the offering or provision by such person of a consumer financial product or service. 12 U.S.C. § 5481(26).
[8] Id. at Title X, § 1031 (codified at 12 U.S.C. § 5531) and Title X, § 1025 (codified at 12 U.S.C. § 5515). The CFPB has examination and primary enforcement authority with respect to insured depository institutions with total assets of more than $10 billion and their affiliates. The Federal banking agencies have primary enforcement authority for insured depository institutions with total assets of $10 billion or less and their affiliates. The CFPB also has enforcement authority over all non-bank covered persons and examination authority over certain non-bank covered persons.
[9] 12 U.S.C. § 5531(d). The addition of the prohibition of abusive practices in the Dodd-Frank Act expanded on the prohibition on “unfair or deceptive acts or practices” in the Federal Trade Commission Act (the “FTC Act”), which the Federal Trade Commission (the “FTC”) and certain other agencies have authority to enforce. 15 U.S.C. § 45(a). The FTC has issued two policy statements defining unfairness and deception (the “FTC Policy Statements”), which are considered the definitive guidance on these issues and are cited in the CFPB’s own exam procedures on Unfair, Deceptive, or Abusive Acts or Practices. See CFPB, Unfair, Deceptive, or Abusive Acts or Practices Exam Procedures, March 16, 2022, available athttps://files.consumerfinance.gov/f/documents/cfpb_unfair-deceptive-abusive-acts-practices-udaaps_procedures.pdf(“Examiners should be informed by the FTC’s standard for deception.” Id. at 5 n.10.). Indeed, the Dodd-Frank Act codified the consumer injury analysis in the FTC’s Policy Statement on Unfairness. See 12 U.S.C. § 5531(c); Policy Statement on Unfairness.
[10] Policy Statement at 3.
[11] Policy Statement at 4, 8.
[12] 85 Federal Register at 6736 (“Consistent with the priority it accords to the prevention of harm, the Bureau intends to focus on citing conduct as abusive in supervision and challenging conduct as abusive in enforcement if the Bureau concludes that the harms to consumers from the conduct outweigh its benefits to consumers[.]”)
[13] Policy Statement at 5.
[14] Id. at 6.
[15] Id.
[16] Id.
[17] Id. at 7.
[18] Id.
[19] Id. at 9-10.
[20] Id. at 9, 10. The Policy Statement does not elaborate on the meaning of “typical” advantage-taking, although it adds that “[w]hile evidence of large or atypical advantage-taking is not required under the reasonableness inquiry, it may nonetheless be relevant.” Id. at 9.
[21] Id. at 9, 10.
[22] Id. at 8.
[23] Policy Statement at 10.
[24] Id. at 12.
[25] See id. at 13.
[26] See id.
[27] Policy Statement at 14.
[28] Id.
[29] See Id. at 15-17.
[30] Id. at 15.
[31] Policy Statement at 17.
[32] Policy Statement at 17.
[33] See id. at 18.
[34] Id.
[35] Id. at 3.
[36] Id. at 6. With the exception of these two examples, the guidelines and examples described in the Policy Statement generally are supported by reference to cases the CFPB has brought, most of which were settled without litigation that would have tested the CFPB’s abusiveness theories.
[37] 12 U.S.C. § 5531(d)(1). In a footnote, the Policy Statement notes that the FTC Act did not define “unfair” because Congress intended the term to be flexible and develop over time. Id. at 1-2 n.3. The Policy Statement positions itself as an extension of this flexible approach and as comparable to the FTC Policy Statements.
[38] See American Hospital Association v. Becerra, 142 S. Ct. 1896 (2022) (Court interprets Medicare statute without indicating any deference to agency interpretation.).
[39] See 85 FR 6733 (Feb. 6, 2020).
[40] See Policy Statement at 4; 8. The cost-benefit analysis test is included in the Dodd-Frank Act’s definition of unfairness, and the Policy Statement evidently takes the position that the fact that it wasn’t included in the abusiveness definition means the CFPB is not required to show that harm outweighed benefit in proving an act or practice is abusive.
[41] See 12 U.S.C. § 5531(c)(1).
[42] 85 FR at 6734.
[43] The Policy Statement does not discuss what differentiates abusive practices from unfair or deceptive ones, but in his recent remarks Director Chopra attempted to explain how material interference with consumers’ understanding differs from deception: “Deception claims are more concerned with whether company communications create a misleading net impression. The abusive prohibition is more of a bright line and is focused on company conduct that obstructs people’s ability to digest information. Deception is more concerned with words, and abusive with actions, although both are relevant to both prohibitions.” CFPB, Director Rohit Chopra’s Prepared Remarks at the University of California Irvine Law School, April 3, 2023, available at https://www.consumerfinance.gov/about-us/newsroom/director-chopra-remarks-at-the-university-of-california-irvine-law-school/.
[44] CFPB, Director Rohit Chopra’s Prepared Remarks at the University of California Irvine Law School, April 3, 2023, available at https://www.consumerfinance.gov/about-us/newsroom/director-chopra-remarks-at-the-university-of-california-irvine-law-school/.
[45] Id.
This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “CFPB Policy Statement on Abusive Conduct,” dated April 14, 2023, and available here.