Stop; Reverse That: CFPB Rescinds Abusiveness Policy Statement

On March 11, 2021, the Consumer Financial Protection Bureau (CFPB or “Bureau”) issued a Rescission of Statement of Policy rescinding its January 24, 2020 Policy Statement regarding the prohibition on abusive acts or practices (“2020 Policy Statement”). The CFPB indicates that it is rescinding the 2020 Policy Statement “to better protect consumers and the marketplace … and to enforce the law as Congress wrote it.” The Bureau’s action signals a return to the “Know It When You See It” standard for UDAAP abusiveness, which will require regulated entities to “read the tea leaves” based on allegations in enforcement actions and statements in CFPB supervisory guidance and the CFPB examination manual.

The CFPB’s UDAAP Authority

The Dodd-Frank Act makes it unlawful for any covered person or service provider to “engage in any unfair, deceptive, or abusive act or practice” (UDAAP).[1] Although the meanings of the unfair and deceptive prongs were well-established when the Dodd-Frank Act took effect, the “abusive” prong was new. According to the Dodd-Frank Act, an act or practice is “abusive” if it materially interferes with the consumer’s ability to understand a term or condition of a consumer financial product or service, or takes unreasonable advantage of a consumer’s (1) lack of understanding of the material risks, costs, or conditions of the product or service; (2) inability to protect his or her interests in selecting or using a consumer financial product or service; or (3) reasonable reliance on a covered person to act in his or her interest.[2]

The 2020 Policy Statement established a three-part set of principles for enforcement based on the abusiveness standard:

1. The CFPB would focus on citing or challenging conduct as abusive only when the harm to consumers outweighs the benefit, and the agency would apply a cost-benefit analysis.

2. The CFPB would seek to avoid “dual pleading” of abusiveness and unfairness or deception violations arising from all or almost all of the same facts. Instead, the Bureau would allege “stand-alone” abusiveness violations.

3. The CFPB would seek monetary relief for abusive acts or practices only when there has been a lack of a good-faith effort to comply with the law.

The CFPB’s Rescission of Statement of Policy

Under new leadership, the CFPB now takes the view that “[t]he 2020 Policy Statement was inconsistent with the Bureau’s duty to enforce Congress’s standard.” Specifically, after an internal review of the agency’s application of the 2020 Policy Statement, the CFPB found that the Policy Statement did not deliver clarity to regulated entities and, in fact, had “the effect of hampering certainty over time.” In particular, the Bureau’s internal review found:

• No basis for the principle of citing or challenging conduct as abusive only when the harm to consumers outweighs the benefit and no basis for treating the abusiveness standard differently from the other elements of its enforcement and supervision program.
• The principle of avoiding “dual pleading” of abusiveness and unfairness or deception violations slowed the Bureau’s ability to clarify and articulate the statutory standard of abusiveness through the issuance of judicial and administrative decisions, which the Bureau found “counterproductive” to the stated purpose of the 2020 Policy Statement.
• The principle of seeking monetary relief for abusive acts or practices only when there has been a lack of a good-faith effort to comply with the law “undermined deterrence and was contrary to the CFPB’s mission of protecting consumers.” The Bureau also expressed concern that not penalizing abusive conduct might “skew the consumer financial marketplace” in favor of bad actors, resulting in undue harm to market participants acting in accordance with the law.

In its Rescission of Statement of Policy, the Bureau advises that it intends to look to the statutory definition of “abusiveness” in the Dodd-Frank Act in pursuing claims based on this prong of its UDAAP authority. Further, the CFPB specifies in the press release accompanying the Rescission of Statement of Policy that it “intends to consider good faith, company size, and all other factors it typically considers as it uses its prosecutorial discretion” when applying the abusiveness standard in the future.

Key Take-Aways

At the time of the publication of the 2020 Policy Statement, we wrote that by choosing to issue a policy statement instead of a regulation, the Bureau left open the possibilities of future rulemaking or the repeal of this policy. After a change in Administration, we are seeing just that with this policy U-turn that would seem to signal a return to the regulation by enforcement model favored by the Bureau under Director Cordray. In rescinding the 2020 Policy Statement, the Bureau did not refute the findings in the statement that there was meager guidance for regulated entities regarding when the abusiveness standard would apply. Nor did the Bureau provide any such guidance, choosing instead to simply repeat the statutory language.

As explained in the 2020 Policy Statement, only two of the 32 enforcement actions alleging an abusiveness claim did not also allege an unfair and/or a deceptive claim. It remains to be seen, then, whether the Bureau will continue to take this dual pleading approach or will pursue additional actions alleging only an abusiveness claim.

[1] 12 U.S.C. § 5536.

[2] 12 U.S.C. § 5531(d).