The US Consumer Financial Protection Bureau’s 'Abusive' Standard — Early Lessons

Keywords: CFPB, Dodd-Frank, enforcement authority

The Dodd-Frank Act granted the Consumer Financial Protection Bureau (CFPB or Bureau) the authority to combat "unfair, deceptive, or abusive" practices in the consumer finance industry.1 "Unfair and deceptive" acts and practices have long been prohibited by the Federal Trade Commission Act, so the legal meaning of those terms is now reasonably clear.2 But the proscription against "abusive" practices is Dodd-Frank's novel invention. As Director Richard Cordray told Congress, the term is "a little bit of a puzzle." Solving that puzzle is crucial for industry participants, as the CFPB's enforcement authority allows it to seek a broad range of remedies, including civil penalties of up to $1 million per day.

Dodd-Frank does not define "abusive" practices, but it does state that the Bureau cannot declare an act to be abusive unless the act:

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 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; or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.3 An earlier version of Dodd-Frank would have added a major limitation: that an act could not be abusive unless it contributed to systemic risk in the financial system.4 Such a limitation might have provided a safe harbor that would have been readily discernible through the use of generally accepted methods of economic analysis. But that provision was, unfortunately, removed.

Although the CFPB has the power to issue regulations defining abusive practices, it has so far declined to do so. The guidance that the CFPB has published contributes only the quixotic advisory that the definitions of unfair, deceptive and abusive acts are separate yet overlapping.5 Cordray explained that the determination of what practices are abusive "is going to have to be a fact and circumstances issue," and that it would "not be useful to try to define a term like that in the abstract."6

This "I know it when I see it" approach naturally grants the CFPB the maximum flexibility to bring enforcement actions, while granting industry participants the minimum level of notice about what is required of them. The industry is left to wonder: What is "material interference?" What is "unreasonable advantage?" When is it reasonable for a consumer to rely on the covered person to act in their interest? How does one determine whether a consumer is able to protect its own interests? And how does one determine "the interests of the consumer?"

The CFPB has brought only a handful of enforcement actions alleging abusive practices, but these cases offer the best clues to understanding the CFPB's interpretation of the "abusiveness" standard:

In CFPB v. American Debt Settlement Solutions, the Bureau sued a debt-relief company in federal district court in Florida, alleging that the company had falsely promised consumers that it would renegotiate their debts with third parties in exchange for certain up-front fees and commissions. Unsurprisingly, the Bureau concluded that the alleged false promises were "deceptive." But the Bureau also maintained that it was "abusive" to enroll consumers in debt-relief programs that the consumers would be unlikely to finish due to their limited incomes. The complaint alleged that because the...