Future of Federal and State Enforcement Against ‘Abusive’ Acts
Last week, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued its long-awaited pronouncement regarding how it will protect consumers against “abusive” acts and practices. Unlike specific regulatory provisions — or even the prohibition against “unfair” and “deceptive” practices, which have been elucidated through eight decades of use by the Federal Trade Commission (“FTC”) — the “abusive” standard introduced by the Consumer Financial Protection Act (“CFPA”) has brought a new level of risk and ambiguity for the financial services industry since its first use by the CFPB. Although the CFPB’s new policy statement on its “abusiveness” standard (the “Policy Statement”) provides some welcome relief for the industry, much uncertainty remains for the long term. This bulletin discusses the Policy Statement and its practical impact on future supervision and enforcement by the CFPB and by the States.
The Policy Statement
The industry can expect the Policy Statement to withstand attack, as opponents (such as consumer groups which already have voiced their objections) do not have the same opportunity to bring legal challenge under the Administrative Procedure Act against the Policy Statement as they would against a set of new rules. Attempts to argue that the CFPB’s new “abusiveness” standard is invalid because the Bureau failed to conduct a rulemaking would face major obstacles because the Bureau contends that it is not attempting to change the law, but rather is only announcing the circumstances under which it will challenge particular conduct as “abusive” in its supervisory or enforcement activities. The Policy Statement specifically states that it is solely to clarify “how the Bureau plans to implement and apply the abusiveness standard in its supervisory and enforcement work.”
The Policy Statement sets out three guideposts on the CFPB’s criteria for singling out particular conduct as “abusive”:
- The CFPB intends to cite conduct as “abusive” only if the Bureau concludes that the harms from it outweigh the benefits to consumers.
- The CFPB generally will avoid citing as “abusive” conduct that relies on all or nearly all of the same facts that the Bureau alleges are “unfair” or “deceptive;” if it nevertheless decides to include an “abusive” allegation, then it intends to provide more clarity as to the specific factual basis for that “abusive” allegation.
- The CFPB generally does not intend to seek certain types of monetary relief, such as disgorgement or penalties, for “abusiveness” violations where the actor was making a good faith effort to comply with the standard.
The Policy Statement essentially is a pledge by Director Kathy Kraninger that the CFPB will be sparing in its use of the “abusive” standard. Institutions will have more opportunity to persuade CFPB staff that a claim of “abusiveness” should not be pursued, for example, by presenting information showing that the consumer benefits outweigh the harms (although how that calculation will be made remains in question). Moreover, those acting in good faith would avoid heavy monetary exposure, even where the challenged practice is determined to be abusive or potentially so. This assurance is especially valuable because the CFPB has continued to assert “abusiveness” claims under Director Kraninger.
It is important to note that the Policy Statement does nothing to clarify the definition of “abusive” under the CFPA. While the Bureau states that it is not foreclosing possible future rulemaking to provide more definition, it takes pains to note that “courts have consistently found that the statutory language in section 1031(d) [of the Dodd-Frank Act] provides sufficient notice for due process purposes.” The legal standard under the CFPA thus remains unchanged.
The Policy Statement is helpful primarily to help set expectations and provide assurance to the industry regarding how the CFPB under Director Kraninger will approach its enforcement and supervision activities. Institutions should look to the Policy Statement both in assessing their liability exposure and in developing and implementing their strategy for response to supervisory and enforcement activities under the CFPB’s current leadership. This statement of the Bureau’s new policy may not hold through a change in leadership, however. Loosening business practices in reliance on the Policy Statement thus would be a mistake, as such practices may trigger enforcement actions years later under more aggressive CFPB leadership. (Moreover, reversing course in the future to place constraints on business practices in response to the Bureau’s swing to more aggressive leadership could prove highly challenging.)
Besides the CFPB’s assertion of its “abusiveness” authority, the industry also must be wary of State supervisory and enforcement activities, which are wholly unaffected by the Policy Statement. The CFPA gives States independent authority to enforce the Act’s general prohibition against “unfair, deceptive and abusive acts and practices” (“UDAAPs”) by State-chartered and State-licensed entities. During the Obama administration, some States were inclined to enforce the “abusiveness” prohibition even more broadly than the CFPB. The CFPB was able to temper their inclination, not only based on its authority to participate in any CFPA action brought by the States, but also by virtue of its leadership role and close relationship with the States during this period. Many States have become highly vocal in their objection to the CFPB’s shifted enforcement stance in recent times, however.
Governor Gavin Newsom of California and Governor Andrew Cuomo of New York earlier this month declared their intent to establish mini-CFPBs and to broaden their State consumer financial protection laws, including to prohibit UDAAPs, in response to a perceived rollback in CFPB enforcement activities. (Their proponents, including CFPB founding Director Richard Cordray, argue that the Dodd-Frank Act generally does not preempt more restrictive State laws, particularly in regard to the UDAAP prohibition.) The CFPB’s Policy Statement heightens the probability that California, New York and potentially other States will forge a different enforcement path against “abusive” acts and practices under their own State laws as well as under the CFPA. Enforcement activities under their State laws threaten to reach all entities in the financial services market, including national banks and Federal thrifts. Accordingly, while the CFPB’s Policy Statement provides welcome relief in regard to the Bureau’s supervisory and enforcement stance under Director Kraninger, the specter of “abusiveness” claims by the States and the CFPB remains looming in the industry’s future.
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This article is for general information purposes only. It is not intended as legal advice, and you should not consider it as such.