On April 3, the Consumer Financial Protection Bureau published a policy statement on abusive practices. As readers know, the bureau has authority to supervise and enforce acts and practices that are unfair, deceptive or abusive in the consumer financial service industry.
Since the Consumer Financial Protection Bureau (CFPB) acquired this authority in 2010, a common question that regulated entities have asked is how to interpret the “abusive” standard, and how to anticipate ways the CFPB would apply it in the auto finance industry. This newest policy statement is noteworthy because it further articulates the CFPB’s position on how it will interpret and apply the “abusive” test.
The statement differs from others that have been published by the CFPB because it includes a lengthy history of the prohibition on abusive conduct. The CFPB explains that the three pillars of “unfair, deceptive or abusive acts or practices (UDAAP) were incremental advances that originated after Congress first prohibited unfair sales practices, followed decades later by a prohibition on deceptive advertisements and business practices.
CFPB Director Rohit Chopra’s prepared remarks, which were issued in conjunction with the policy statement, cite this history to bolster his belief that the newest focus on abusive acts or practices is consistent with Congress’s long-standing efforts to regulate fair dealing.
Since being vested with this new authority to enforce against abusive acts or practices, the CFPB regularly finds an act or practice to be abusive in conjunction with finding the same conduct to also be either unfair or deceptive. It has been uncommon for the CFPB to classify an act or practice solely as abusive.
This enforcement strategy has prompted many companies to question what specific conduct, if any, would independently be challenged as abusive. The CFPB offers this policy statement as a resource for both the market and “fellow government enforcers” to understand the key principles of abusiveness based on the bureau’s tenure of enforcement activity.
An act or practice is abusive when it:
- Materially interferes with the ability of the 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 its own interests in selecting or using a consumer financial product or service; or
- the reasonable reliance by the consumer on a company to act in the interests of the consumer.
The policy statement summarizes the second test as when companies impermissibly leverage gaps in understanding, unequal bargaining power and consumer reliance.
Although the bulk of the statement focuses on the second type of abusive acts or practices, there is commentary on the first part that the auto finance industry should consider. The CFPB states that some terms of a transaction are so important that it may be reasonable to presume that an entity materially interfered with the customer’s ability to understand if the information is not clearly or prominently conveyed to consumers. The policy statement goes further to state this includes pricing, costs, limitations on a person’s ability to use or benefit from a product or service, and contractually specified consequences of default.
The second form of abusiveness, with its focus on when a company takes unreasonable advantage of certain situations, is the focus of the statement. The CFPB reminds industry and enforcement agencies alike that an act or practice that doesn’t cause the consumer substantial injury may still be abusive based on an indirect allegation that the conduct distorts the market. In the absence of any need to find specific economic harm, an enforcement agency may simply rely on a qualitative assessment to determine whether a company takes unreasonable advantage.
Unreasonable advance of what? Reciting the three potential prongs from the legal definition provided above, the policy statement offers the following additional detail:
- Lack of understanding. The CFPB emphasizes that it is focused on situations where a consumer has a gap in understanding the risks, including the risk of default, the consequences of default, or the effort or cost to exercise a certain benefit. The statement goes further to state that the gap in understanding need not come from any action or omission from a supervised entity. A consumer’s lack of understanding, however it arose, is sufficient if the company then takes unreasonable advantage of the lack of understanding. The CFPB relies on the statutory language to state that the consumer’s lack of understanding need not be reasonable to support an enforcement agency’s allegation that the act or practice was abusive.
- Inability of a consumer to protect their interests. The statement explains that the interests at hand include non-monetary interests, including privacy, reputational interests and when a consumer has to exert unnecessary time to obtain or remedy a consumer finance product. The statement also emphasizes that consumers have a heightened risk when they cannot select the entity on the other side of the consumer finance transaction, such as a third-party servicer or credit reporting agency. Finally, the policy statement offers examples of scenarios when a consumer may lack the power to protect their interests, including when the contract is a standard pre-negotiated form or the company has a large market share.
- Reasonable reliance. The statement says that consumers assume entities tell the truth. In perhaps an unexpected extension of this principle, the CFPB goes on to say that, in some cases, the entity creates an expectation of trust and the conditions “for people to rely on the entity to act in their best interest.” Further, consumers should be able to rely on companies that operate in a marketplace or broker type role to act without manipulation, such as self-dealing or certain forms of steering.
The CFPB was deliberate and intentional in establishing the historical precedent for its policy statement, thereby suggesting its analysis and principles are rooted in sound legal grounds. However, much of the statement takes an expansive position that is likely to provide enforcement agencies with significant latitude and leave regulated entities questioning if there are limitations to what can be challenged as abusive.
Kelly Lipinski is a member (partner) in McGlinchey’s Consumer Financial Services regulatory and compliance group. She also serves as managing member of the firm’s Cleveland office.
The Big Wheels Auto Finance Data 2023 report, the only tabulation of the top 200 auto lenders by outstandings, is available now.