CFPB Clarifies “Abusive Acts or Practices”

In 2010, Congress passed the Consumer Financial Protection Act of 2010 (CFPA) in hopes of rooting out what they saw as “abusive conduct.” The CFPB recently issued a Policy Statement to help explain how the CFPB determines what is abusive conduct by providing examples which they hope provide a framework for financial institutions to identify behavior which might violate the CFPA. Under the CFPA, there are abusiveness prohibitions: 1) being unclear about a product or service, and 2) using circumstances to take an unreasonable advantage of a consumer.

The first prohibition is further described as material interference with the ability of a consumer to understand a term or condition of a consumer financial product or service. Material interference could include actions that withhold, de-emphasize, confuse, or hide information which hinders a consumer’s ability to understand terms and conditions. Buried disclosures (see below), physical or digital interference (see below), overshadowing (see below), and various other means of manipulating consumers’ understanding could all be considered material interference. Intent is not required for material interference to occur, and an institution could unintentionally materially interfere with their customer’s ability to understand their financial product or service.

Buried disclosures could include disclosures that limit comprehension of information, including things like fine print, complex language, jargon, the omission of terms or conditions, and the timing of a disclosure. Digital interference would include user experience manipulations such as the use of pop-up or drop-down boxes, multiple click-throughs, or similar methods. Overshadowing would include the prominent placement of certain content that interferes with the comprehension of other content.

The second prohibition is further described as a taking unreasonable advantage of: a) gaps in understanding: a lack of understanding of the material risks by the consumer related to costs or conditions of the product or service, b) unequal bargaining power: the inability of the consumer to protect their own interests in selecting or using a financial product or service, or c) consumer reliance: the consumer’s reasonable reliance on a financial institution to act in the consumer’s interests.

An advantage can include a variety of monetary and non-monetary benefits to institution, such as increased market share, revenue, cost savings, profits, reputational benefits, as well as other operational benefits. An “unreasonable” advantage is a little bit harder to quantify as the guidance leans on Webster’s dictionary to define the term as “exceeding the bounds of reason or moderation.” The guidance does not go into further detail as to exactly how “reason” or “moderation” might be defined.

Taking unreasonable advantage of gaps in understanding might be further understood to include things like not understanding the consequences or likelihood of default and the loss of future benefits but could also include things like the length of time it will take to benefit from the product or service, or the process that determines when fees are assessed. A lack of understanding by the consumer doesn’t require untruthful statements, under the CFPB’s guidance, and the consumer’s allegation of a lack of understanding is sufficient to prohibit a financial institution from taking unreasonable advantage.

Taking unreasonable advantage of unequal bargaining power can exist if consumers do not have the ability to protect their own interests. This unequal power may exist at the time the product or service is obtained, during the life of the product or service, or both. This imbalance in power is often seen in the amount of time needed to obtain products and services as well as the time needed to remedy problems. Other examples of unequal bargaining power involve third parties with whom the consumer does not establish a relationship, but are nonetheless obligated to deal with, such as credit reporting companies, debt collectors and third-party loan servicers. In these third-party situations the consumer has no ability to choose the provider and may have limited recourse should they encounter a problem with the provider.

Taking unreasonable advantage of a consumer’s reasonable reliance happens when a consumer has a reasonable expectation that a company will act in the consumer’s best interest when helping them make a decision. Reasonable reliance may occur when a company holds itself out as acting in consumer’s best interests, or when a company helps consumers select market providers.

This guidance from the CFPB may stir you to want to take another look at your policies or procedures to avoid abusive acts or practices. If you have any questions about the process, or about whether certain activity could be considered an abusive act or practice, please reach out to us on the hotline.