CFPB Takes a Step to End Regulation by Enforcement

After almost a decade of ambiguity, the Consumer Financial Protection Bureau (CFPB) has finally offered some clarity to its definition of what constitutes an “abusive” practice by lending institutions like banks and credit unions.

In a policy statement issued last week, the Bureau outlines what an abusive practice is and how regulators will handle supervision and enforcement actions. The statement defines an abusive act or practice as one where “the harm to consumers outweighs the benefit.” Moreover, the Bureau notes that it will only seek monetary relief in those situations “when there has been a lack of a good-faith effort to comply with the law.”

This latest action seeks to fix a problem that started in 2010. When the CFPB was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law granted the newly formed agency vast and unparalleled authority over consumer financial products and services. Specifically, Title X gave the CFPB the power to take the actions necessary “to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice.” While the standard for what constitutes “unfair” and “deceptive” practices was already well-established under the Equal Credit Opportunity Act (ECOA), Dodd-Frank gave very little guidance as to how Congress wanted the CFPB to delineate this new “abusive” standard. In fact, the law only states that the abusive standard had to address any business practice 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.

With such vague language in the statue, subsequent Bureau efforts to define the abusive standard using so-called guidance documents have been just as bad. Even former CFPB Director Richard Cordray said that he and the Bureau weren’t sure what abusive meant and that “the prong of the abusive definition is, in fact, situational and somewhat subjective.” Some in the financial services industry aptly labeled the standard “the most feared word in Dodd-Frank.” Some might try to dismiss such fears as hysterics, but they are by no means irrational—financial firms could unknowingly violate the standard and be subjected to civil fines of up to $1 million per day.

The lack of clarity over this matter became such a pressing problem that in 2018, then-CFPB Acting Director Mick Mulvaney issued a request for information regarding the standard—something CEI weighed in on here. Last year, CFPB Director Kathy Kraninger held a symposium with consumer finance experts to further these efforts and help “inform the Bureau’s thinking as to whether the Bureau should use its rulemaking or other tools to provide clarity about the general meaning of abusiveness—and, if so, which principles should be applied to determine the scope of abusiveness.”

While this latest guidance does much to help businesses navigate the current regulatory lay of the land, the Bureau could provide even more certainty for firms if it went through the formal rulemaking process. Such a rule would help codify this policy and make it less susceptible to future political pressures. Nevertheless, the policy statement shows that Director Kraninger is committed to ending the kind of “regulation by enforcement” that plagued the Bureau in years prior. Between actions like this, the new CFPB Taskforce on Federal Consumer Financial Law, and others, Director Kraninger is making progress on addressing the concerns of both industry and consumers alike.