Three Things to Know About the CFPB’s Proposed Guidance on Abusive Acts or Practices

On April 3, 2023, the Consumer Financial Protection Bureau (CFPB) issued the CFPB Policy Statement on Abusive Acts or Practices (the Proposed Guidance), which is intended to provide long-awaited clarity on the “abusiveness” standard of the Consumer Financial Protection Act (CFPA).

The lack of clarity surrounding the abusiveness standard has been a point of contention for industry participants since the enactment of the CFPA in 2010. The CFPB, until now, had declined to provide an analytical framework defining what behavior would constitute abusive acts or practices under the CFPA. Rather, the CFPB had chosen to define the abusiveness standard through legal actions taken against industry participants, a practice derided by some as “regulation by enforcement.” The publication of the nonbinding Proposed Guidance, which sets forth a framework to be used by the CFPB to evaluate potentially abusive conduct and provides illustrative examples of such conduct, represents a notable departure from the CFPB’s former approach.

This Advisory highlights three important aspects of the Proposed Guidance and identifies key takeaways that industry participants should know.

Even Omissions Can Be Abusive

The Proposed Guidance states that an act of omission can be abusive under the CFPA when a regulated entity fails to provide a consumer with material information relevant to a transaction. The Proposed Guidance explains that some terms of a transaction are so consequential that when a financial institution does not convey them prominently or clearly to consumers, it may be reasonable, in the CFPB’s view, to presume that the institution has materially interfered with consumers’ ability to understand the transaction, which constitutes an abusive practice.

The Proposed Guidance specifically identifies product prices or costs, limitations on the consumer’s use of or ability to derive benefits from a product or service, and specified consequences of default as examples of information that is of such significance to the consumer that its omission from the terms and disclosures provided to the consumer could establish a basis to presume that the institution materially interfered with a consumer’s ability to understand the terms of the product or service, and therefore engaged in “abusive” conduct.

Watch Out for “Windfalls” From an Uneven Playing Field

Profiting from an uneven playing field may constitute an abusive act or practice. The Proposed Guidance states that benefitting from a gap in understanding, unequal bargaining power, or reasonable consumer reliance may be viewed as obtaining an “unreasonable advantage” in violation of the CFPA’s prohibition on abusive conduct. The Proposed Guidance explains that entities should not obtain “windfalls” because of these asymmetries between a regulated entity and a consumer.

The Proposed Guidance notes that inappropriate benefits derived from relational asymmetries could take the form of a variety of monetary and non-monetary advantages, whether they were received by the regulated entity, its affiliates, or its partners. The CFPB makes clear that it believes inappropriate benefits could include increased market share, revenue, cost savings, profits, reputational benefits, or other operational advantages. The Proposed Guidance clarifies that quantification of any such benefit is not required in order to find that an entity has taken unreasonable advantage of a consumer; rather, a qualitative assessment may provide the basis for such a finding.

Taking Advantage of Unreasonable Consumer Beliefs and Expectations Can Still Be Abusive

Even if a consumer’s lack of understanding about the risks, costs, or conditions of a product or service is not reasonable, an institution that is deemed to have taken unreasonable advantage of the consumer’s lack of understanding may have engaged in an abusive act or practice under the Proposed Guidance. The Proposed Guidance notes that the text of the CFPA does not require that a consumer’s lack of understanding be reasonable to demonstrate abusive conduct. Similarly, the Proposed Guidance points out that the CFPA does not require a threshold number of consumers that lack understanding to establish that a particular act or practice was abusive. Instead, the Proposed Guidance indicates that the proper inquiry is whether some consumers in question have a lack of understanding which was taken advantage of by a regulated entity — not all, or even most, consumers.

What Does This Mean for Financial Institutions?

The Proposed Guidance provides a certain degree of clarity to a murky legal standard that has frustrated industry participants for over a decade. In addition to the key insights noted in this Advisory, the Proposed Guidance provides general instruction regarding abusive acts or practices that industry participants can use to minimize regulatory risk.

The Proposed Guidance is not final and is subject to public comment, as well as revision and adoption by the CFPB. The public will have until July 3, 2023, to submit their comments on the Proposed Guidance. Even if the CFPB adopts the Proposed Guidance, it will remain a nonbinding policy statement and will not be legally enforceable. Notwithstanding that this Proposed Guidance is nonbinding and subject to change, it conveys the current views on abusiveness by the CFPB and should be evaluated carefully by all industry participants. As stated by CFPB Director Rohit Chopra, the CFPB hopes the proposed guidance will function as both an educational tool and as an analytical framework by which industry participants can understand the CFPA’s prohibition against abusive conduct. Financial institutions may want to evaluate the terms of their own products and services in light of the CFPB’s views expressed in the Proposed Guidance to assess whether the terms could result in an allegation by the CFPB that they involve abusive acts or practices.

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Financial institutions interested in how the CFPB’s Proposed Guidance on abusive acts or practices may impact their businesses may contact any of the authors of this Advisory or their usual Arnold & Porter contact. The firm’s Financial Services team would be pleased to assist with any questions about the Proposed Guidance, CFPB supervision, or consumer finance more broadly.

George Eichelberger contributed to this Advisory.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.