The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) empowers the Consumer Financial Protection Bureau (CFPB) to prohibit unfair, deceptive or abusive acts or practices (UDAAP). Abusive acts or practices under Dodd-Frank are those that:
1. materially interfere with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
2. take 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 the interests of the consumer in selecting or using a consumer financial product or service; or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
The previous two installments of this series examined the terms “unfair” and “deceptive.” In this installment, we review “abusive,” the term that some have called the most-feared word in all of Dodd-Frank. Why does “abusive” create fear?
The primary reason may be because it is a relatively new term in the regulatory landscape of consumer finance. Compounding the fear may be the fact that the CFPB has given the industry very little formal regulatory guidance on what abusive means. “Very little” may, in fact, be an overstatement. Substantively, all that the CFPB has officially said about “abusive” is that “although abusive acts also may be unfair or deceptive, examiners should be aware that the legal standards for abusive, unfair, and deceptive each are separate.”
But this guidance does not tell us who or what “abusive” is supposed to protect. We are left to make guesses.
One notion that may fit squarely within the CFPB’s vision of what constitutes as abusive is the protection of vulnerable consumers. The standards themselves lend support to this interpretation. There is also some modest precedent in the consumer financial services industry for such an interpretation.
The Office of the Comptroller of Currency, for example, has used the abusive label on predatory lending practices. Under the Fair Debt Collection Practices Act, harassing collections practices are considered abusive. Under the Home Owners Equity Protection Act, repeated and unwarranted refinancing practices can be abusive. With each, consumer vulnerability is arguably a key issue.
What about unconscionabilty? Many have postulated that unconscionability falls within the definition of abusive. In the law, unconscionability is a term used to capture the concept of contract terms that are excessively unfair to one party. That sounds like a variation of someone taking an unreasonable advantage of a vulnerable consumer.
Another concept that might fall within abusive is the burgeoning concept of suitability: Are your consumer financial products suitable to specific consumers? What happens if you put your product or service into the hands of someone who is financially illiterate? How would a consumer financial services company even measure financial literacy? Is it abusive for you not to take into account a consumer’s age? It could be.
Several years ago, a Federal Reserve Bank economist conducted a survey and concluded that as we age, our ability to process information related to financial transactions diminishes. Consider an example. Five people purchase a lottery ticket and agree that they will split the winnings equally among themselves. As it turns out, they have a winning ticket worth $2 million. How much money would each individual receive?
The correct answer is $400,000. Less than half of the 50-year-olds in the Federal Reserve Bank survey got the answer right. Only 25 percent of 85-year-old respondents got it right, and almost no 90-year-olds got it right. Should you be factoring these kinds of suitability considerations into your thinking about what could potentially be abusive under UDAAP? Has UDAAP given rise to new duties to ensure that a consumer is suited to financial product or service?
Because the CFPB has not given us very much in the way of formal guidance on abusive practices, it is really important to listen to what the bureau has said informally about the standard. CFPB Director Richard Cordray has commented that abusive is a situational term, something the CFPB is “going to have to measure on a facts and circumstances basis as we go.” Cordray has stated that “there is a gray area and a core.” Frightening? Fear inducing? Most of us do not want to see gray areas when it comes to abusive or any of the other UDAAP standards. We want clarity and transparency. We want—we need—the CFPB’s guidance.
Cordray has told Congress that good businesses know abusive practices when they see it: “They know when they are walking a line, and they know when they are far beyond the line.” This sounds a quite a bit like the pornography standard over at the Supreme Court. But a “knowing abusive when you see it” standard is not going to give the industry much, if any, comfort.
On Feb. 21, Cordray delivered a speech to the Consumer Advisory Board in Washington, D.C., that included a discussion of “problems” in the debt collection, loan servicing and credit reporting sectors involving what could be characterized as vulnerable consumers. Will these industry segments see the CFPB’s first public charge at the abusive standard? What can you do to avoid it?
The next installment in this series will include recommendations about how to adjust to the vagueness and lack of guidance surrounding abusive and the other UDAAP standards in an effort to help you mitigate not only the regulatory risks, but the looming civil litigation risks as well.