On April 3, the CFPB issued a policy statement explaining the legal prohibition on “abusive” conduct in consumer financial markets provided in the Consumer Financial Protection Act (CFPA) and provided a summary past enforcement where these provisions have been applied.
The CFPA defines abusive acts or practices as conduct that , which provide that an abusive practice or act is one that: “(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”
In the policy statement, the CFPB explained how abusive conduct generally includes:
- Obscuring important features of a product or service or
- Leveraging certain circumstances—including gaps in understanding, unequal bargaining power, or consumer reliance—to take unreasonable advantage.
Circumstances in which an entity takes unreasonable advantage of a consumer generally involve situations where there is evidence of (i) a consumer’s gaps in understanding the product or service’s terms, (ii) unequal bargaining power, or (iii) a consumer’s reliance on the company to act in their best interest. 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.”
In particular, the statement describes how the use of dark patterns, set-up-to-fail business models like those observed before the mortgage crisis, profiteering off captive customers, and kickbacks and self-dealing can be abusive.
The policy statement will be published in the Federal Register and comments can be submitted until July 3, 2023.
Putting it into Practice: This most recent policy statement builds on the CFPB’s longstanding focus on penalizing lawbreakers for abusive conduct in financial markets (see previous blog post here). This policy statement accordingly has the potential to have a large impact on financial institutions as it may inform changes to the legal requirements of these businesses. Potentially impacted institutions should continue to monitor agency interpretations of what conduct in financial markets qualifies as abusive and agency actions with respect to alleged violators.