Last week, the CFPB released a long-anticipated policy statement clarifying the agency’s enforcement standard for “abusive acts or practices.” According to an agency press release, the CFPB’s new standard offers a “common-sense” approach that director Kathleen Kraninger says will “provide a solid framework to prevent consumer harm while promoting the clarity needed to foster consumer beneficial products as well as compliance in the marketplace, now and in the future.”
The policy statement is driven by industry confusion over the exact meaning of the term “abusive acts or practices,” which are banned under the 2010 Dodd-Frank Act. This confusion stems in large measure from a practice known as “dual pleading” where the CFPB charges a regulated entity with engaging in abusive practices while also charging it with deception and unfairness based on the same underlying factual predicate. According to the CFPB, out of 32 enforcement actions that involved abusiveness claims, only two have contained a stand-alone abusiveness claim that was not accompanied by an unfair or deceptive claim for the same conduct. And while the term “unfair or deceptive acts or practices” has well-understood definition based on a long history of legal interpretation, the term “abusive acts or practices,” does not have a similar history. As a result, there is a simple lack of industry guidance as to the precise meaning of “abusive acts or practices,” and, according to the Bureau, “[b]usinesses that want to comply with the law face significant challenges in doing so, and these challenges can impose substantial costs, including impeding innovation.”
In response to this lack of clarity, and the challenges faced by regulated businesses, the CFPB has developed three new principles related to its supervision and enforcement of abuse claims. First, the agency intends to cite or challenge conduct as abusive in supervision and enforcement only if the Bureau determines that the harm to consumers from the conduct outweighs the benefit to consumers. Importantly, the Bureau will consider the effect of enforcement will have on consumer access to credit. In other words, the CFPB may elect to withhold enforcement or supervision where a supervisory or enforcement action may hamper access to credit or otherwise harm the consumer.
Second, the Bureau has pledged to avoid “dual pleading.” Instead, the Bureau will endeavor to allege “stand alone” abusiveness claims “in a manner designed to demonstrate clearly the nexus between the cited facts and the Bureau’s legal analysis of the claims.” In doing so, the CFPB will facilitate the development of a body of law that clearly defines the term “abusive acts or practices.” Likewise, the CFPB has promised to release future editions of its Supervisory Highlights that will describe the basis for abusiveness actions with greater clarity.
Finally, the CFPB’s new policy indicates that it will try to avoid punitive monetary remedies for abusive acts or practices when the regulated business makes “a good-faith effort to comply with the law based on a reasonable–albeit mistaken–interpretation of the abusiveness standard.” Moreover, and “[a]bsent unusual circumstances,” the CFPB will not “intend to seek civil penalties or disgorgement” when a regulated business makes a good-faith effort to comply with the abusiveness standard. However, the CFPB will continue to seek damages and equitable relief designed to provide redress to injured consumers.
To be sure, this policy is not a formal rule. Rather, the statement signals that the CFPB will voluntarily use its discretionary power to limit the way that it enforces its mandate. As such, the CFPB may elect to reverse this policy without a formal notice and rulemaking. Nevertheless, the CFPB’s new framework demonstrates that the agency is open minded and receptive to the legitimate concerns expressed by banks, lenders, and other regulated entities. Moreover, the additional clarity that will follow from a well-developed body of law regarding the term “abusive acts or practices” will unambiguously benefit both businesses and consumers. We will continue to monitor the agency for additional guidance related to the “abusiveness” standard.