On June 25, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) kicked off its symposia series with a panel discussion of whether the Bureau should use its rulemaking authority to further define “abusive acts or practices.” The Dodd-Frank Act added a prohibition on abusive acts and practices to the established prohibition on unfair acts and practices, changing the acronym UDAP to UDAAP. Over the years Federal Trade Commission (“FTC”) policy statements, enforcement actions, and judicial precedents have defined the prohibitions on “unfair” and “deceptive” conduct. The abusiveness standard is less developed.
What is “abusive”?
The Dodd-Frank Act makes it unlawful for any covered person or service provider to engage in an “abusive act or practice,” which is one that:
- 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) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
The Bureau convened a panel of academics and regulatory and industry experts who debated:
Should the CFPB define abusiveness?
Only one panelist argued that the Bureau doesn’t have rulemaking authority, despite the express authority granted by the Dodd-Frank Act. Most agreed that further guidance would be helpful.
Is now the time to further define abusiveness?
While most agreed that further guidance would be helpful, there was much disagreement on whether the CFPB should be the one to issue such guidance. Some participants argued that because the Bureau cannot anticipate the types of problems to address, it should follow the FTC’s example and develop the definition over time through the common law process. To that end, one panelist cautioned that the Bureau should be careful to not tie its hands too prematurely. By contrast, others argued strongly for the need for guidance that provides boundaries and limiting principles. Legal and compliance professionals require such guidance to facilitate compliance and to provide direction to their companies. One panelist argued that the Bureau’s current “know it when you see it approach” would be better served with concrete examples.
What form should guidance take?
Recognizing that promulgating a rule would be a long process, some argued an industry specific no-action letter, or even a discussion in the Bureau’s supervisory highlights, would be appropriate. Other panelists want more permanence and advocated for a policy statement as a measured next step.
What does abusiveness mean?
Here, there was a healthy debate. The panelists considered questions including:
- Does the abusiveness standard preclude a cost benefit analysis?
- Should abusiveness be tied to suitability of product rather than reasonableness of the consumer? Should the definition be tied to specific industries?
- Is it an individualized inquiry focusing on “a consumer”?
- Should we look for guidance at the SEC 10(b)(5) rule, or to the laws of other countries (such as Australia), or strictly follow the statutory language?
- What does behavioral economics tell us?
- Should abusiveness be defined by example?
- Is abusive completely separate from unfair or deceptive or is there overlap?
To the last point, the CFPB exam manual provides that “[a]lthough abusive acts also may be unfair or deceptive, examiners should be aware that the legal standards for abusive, unfair and deceptive are each separate.”
What comes next?
What the Bureau will do with the information gathered during the symposium is not clear. We do know that the CFPB is planning on holding more symposia. Specifically, the Bureau has announced that future topics will include small business loan data collection, disparate impact and ECOA, cost benefit analysis, and consumer authority for financial data sharing.