CFPB Lowers the Bar Again as it Shares its Playbook on Combatting “Abusiveness”

On April 3, the CFPB” published a broad and wide-ranging Policy Statement on Abusiveness?(“Policy Statement” – See Link Below) meant to assist “government enforcers” in identifying and alleging abusive conduct in the marketplace under the Consumer Financial Protection Act of 2010 (CFPA), specifically 12 U.S.C. 5531(d).

In doing so, the Bureau foreshadows a policy shift on the Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) front, likely migrating away from the hallmark “Unfairness” and “Deception” elements of this principle in favor of a more nuanced prong titled “Abusiveness,” which will be easier to trigger.

Abuse by Material Interference with the Consumers' Understanding

?The Bureau defines material interference as an act or omission that is intended to impede, has a natural consequence of impeding, or actually impedes a "consumers' ability to understand terms or conditions" of a consumer financial product or service. Acts or omissions can include those that "obscure, withhold, de-emphasize, render confusing, or hide information." The Bureau provided the following examples:

• ?Buried Disclosures — limiting comprehension through the use of fine print, complex language, jargon, or the timing of the disclosure;
• Physical Interference — physically impeding a person's ability to see, hear, or understand the terms and conditions (e.g., hiding or withholding notices);
• Digital Interference — technologically impeding a person's ability to see, hear, or understand the terms and conditions in electronic or virtual format (e.g., through use of pop-ups, drop-down boxes, multiple click-throughs, or "dark patterns"); or
• Overshadowing — prominently placing certain content that interferes with comprehending other content, including terms and conditions.

?According to the Bureau, a consumer's lack of understanding is sufficient to demonstrate abusive conduct regardless of how it arose and "entities may not take unreasonable advantage of that lack of understanding." There are multiple methods by which material interference can be evaluated:

• ?"[I]t is reasonable to infer that an act or omission materially interferes with consumers' ability to understand a term or condition when the entity intends it to interfere";
• "[M]aterial interference can be established with evidence that the natural consequence of the act or omission would be to impede consumers' ability to understand"; or
• "[M]aterial interference can also be shown with evidence that the act or omission did in fact impede consumers' actual understanding."
• While evidence of intent could provide a basis for inferring material interference, intent is not required.

?Moreover, some transaction information is considered "so consequential" that failing to properly convey it may be reasonably considered material interference. "That information includes, but is not limited to, pricing or costs, limitations on the person's ability to use or benefit from the product or service, and contractually specified consequences of default." Additionally, providing "a product or service may interfere with a consumers' ability to understand if the product or service is so complicated that material information about it cannot be sufficiently explained or if the entity's business model functions in a manner that is inconsistent with its product's or service's apparent terms."

?Abuse by Taking Unreasonable Advantage

?The other standard for abusiveness is "taking unreasonable advantage," which falls into three sub-categories: 1) gaps in understanding, 2) unequal bargaining power, and 3) consumer reliance. All three of these are based on assumed asymmetry of knowledge, means, and power between consumers and covered entities, even if the conditions under which they occurred were not created by the entity itself.

?First, "gaps in understanding" affecting consumer decision-making means a lack of knowledge of:

?1)??????material risks, such as the consequences or likelihood of default, loss of future benefits;

?2)?????costs — monetary harm, non-monetary harm (lost time, lost value, reputational harm); or

?3)?????conditions of the product or service — length of time to realize benefits of a product or service, relationship between entity and consumer's creditors, the fact a debt is not legally enforceable, or the processes that determine when fees will be assessed.

?When assessing these items, the Bureau looks to determine if entities are receiving a windfall as a consequence of the circumstances (i.e., stemming from the gaps in understanding) or whether this benefit would have existed regardless; the Bureau does not require a quantified finding and will accept a qualitative assessment to determine whether such an advantage exists. This may be demonstrated through consumer complaints and testimony, evidence or analysis showing that reasonable consumers may not understand.

?Second, "taking unreasonable advantage" relates to unequal bargaining power, which is defined as the inability of consumer to switch providers, seek more favorable terms, or other decisions to protect their own interests which can "include monetary and non-monetary interests, including but not limited to property, privacy, or reputational interests."[4] This unreasonable advantage can occur before or at the time a product or service is selected or used. Furthermore, the Bureau looks at how much effort is needed to obtain a product or service, to remedy issues related to them, and how relationships are structured to allow for meaningful choice in the selection or use of a service provider. However, the relationship becomes abusive if entities take advantage of the lack of choice in a relationship or of the fact that the provider is the only source of important information or services. Additionally, other considerations of unequal bargaining power include: non-negotiable contract provisions; if an entity has outsized market power; or if consumers face high transaction costs to exit a relationship.

?The final sub-category of "taking unreasonable advantage" is a consumer's reliance on a covered entity. In this case, there is a reasonable expectation that the entity will act in the consumer's interest because the entity has said it will act in the consumer's best interest or it serves as an agent or trusted intermediary in the market. In short, "consumers generally do not expect companies to benefit from or be indifferent to certain negative consequences...[and consumers] may not understand that a risk is very likely to happen or that—"though relatively rare—the impact of a particular risk would be severe."

?The following are examples of how to establish a consumer's reasonable reliance:

• ?"[A]n entity communicates to a person or the public that it will act in its customers' best interest, or otherwise holds itself out" as doing so; or
• "[A]n entity assumes the role of acting on behalf of consumers or helping them to select providers in the market."

?The CFPB also may take into account an evaluation of the facts or circumstances, but "does not require an inquiry into whether advantage-taking is typical or not."

?Additionally, the Bureau notes that in order to establish liability, the agency would not be required to show that “substantial injury” occurred—it only needs to show that a practice is considered “harmful or distortionary to the proper functioning of the market.” This is extremely disconcerting. To better understand this, it is necessary to assess what CFPB identifies as three circumstances where an entity can take unreasonable advantage of a consumer:

• ?Gaps in Understanding. These reflect gaps regarding material risks, costs, or conditions of a product or service. The Bureau points out that causation is irrelevant and a consumer’s lack of understanding, regardless of how it arose, can be sufficient. The statement surprisingly notes that the prohibition does not require that the consumer’s lack of understanding be reasonable or that a specific number of people also lacked that understanding. One consumer can carry the day.
• ?Unequal Bargaining Power. The CFPB states that Congress has outlawed taking unreasonable advantage of circumstances where people lack sufficient bargaining power to protect their interests. The Bureau points to situations where it is impractical for a consumer to protect their interests when selecting or using a product or service, they are unaware of the necessary steps needed to protect themselves, or they have limited financial means to do so. The Bureau notes that the mere existence of certain consumer relationships fosters abusiveness. They cite to examples of debt collectors, credit reporting agencies, and loan servicing companies coming under heightened scrutiny for abuse merely because the consumer did not participate in the section of the downstream vendor relationship.
• ?Reasonable Reliance. The CFPB expresses concern with entities taking advantage of consumers that “rely” on the entity to act in their best interest. The CFPB provides two examples of sensitive relationships but cautions that there are other scenarios that might lend themselves to reasonable reliance violations. The first instance is when an entity expressly states it is working on behalf of the consumer. The second instance is when the entity assumes the role of an intermediary to help the consumer select certain products or services. The CFPB remains hyper-focused on removing all manipulation from these relationships, however, stops short of providing any concrete insight on how consumer subjectivity or even advertising accuracy will (or will not) play into any findings of abusiveness.

?Three Major Considerations to Take into Account as we Assess Future Compliance (UDAAP and Otherwise:

• ?A New Approach to Proving Discrimination. This Policy Statement, in its current format, seems to provide the CPFB with some newfound ammunition and support in its efforts to more closely scrutinize discriminating conduct that violates the principles of UDAAP. As you will recall from a Notice in 2022, the CFPB created a stir by announcing an initiative to combat discrimination through the “Unfairness” prong of UDAAP. In response, a number of trade groups pointed out in a letter to Director Chopra that the Bureau conflated distinct statutory concepts and went beyond the fair lending laws “carefully set by Congress”, which has resulted in numerous contentious lawsuits being filed. Meanwhile, the CFPB had been concurrently attempting to expand the bounds of the Equal Credit Opportunity Act (“ECOA”) through Regulation B by looking to discriminatory conduct in not only applications for credit as the law envisioned, but also through nuanced elements of “discouragement” in the prospective application process. In February, the U.S. District Court for the Northern District of Illinois rebuffed these attempts, ruling in CFPB v. Townstone that the ECOA only prohibits discrimination against applicants for credit, and does not even contemplate the discouragement of prospective applicants. The case was dismissed due to the Bureau’s overreach. The Policy Statement now reveals the CFPB’s next procedural attempt to expand some of the same concepts through a similar, but slightly different, UDAAP approach.
• Curtailing Defenses to Abusiveness. The CFPB’s repeated and express disregard for an entity’s true intent or existing industry standards suggests that pursuing abusive claims will be an easier lift for the Bureau if they proceed under this policy outline, which will likely result in higher demands to resolve investigations. It is also apparent that the agency will review abusiveness violations through the eye of consumers on a case-by-case basis, regardless of how reasonable the underlying action was.
• A Gift to the States. The Policy Statement offers a playbook for state regulators to pursue federal UDAAP claims, which was encouraged by the CPFB in its May 2022 Interpretive Rule. It is not a coincidence that the Statement labels itself as a resource for “government enforcers” rather than merely for Federal Bureau staff. The ambulance chasers will also be all over this one.

?The policy statement shows a continued trend towards a robust and active enforcement posture by the Bureau, particularly in the areas of unfair and deceptive acts or practices. We will continue to monitor and communicate on these updates. The Bureau will receive comments on the policy statement through July 3.

?This Policy Statement is yet another reason to consider our newer MAAD and BMAAD, which were written from scratch post-UDAAP.

?Link to CFPB Policy Statement:

?CFPB_POLICY_STATEMENT (18-pages)

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