The Consumer Financial Protection Bureau's decision last month to rescind Trump-era guidance outlining what constitutes an "abusive" practice was not unexpected given that the bureau's acting director has repeatedly called for holding companies liable for harming consumers.
Acting CFPB Director Dave Uejio’s statement
But given the ambitious agenda of Rohit Chopra, a commissioner at the Federal Trade Commission who is likely to be confirmed soon as the CFPB's permanent director, many experts said rescinding Kraninger’s policy guidance was a foregone conclusion.
“There was no way for Chopra to lead the CFPB and fire on all cylinders with this policy statement still floating around,” said Kelly Lipinski, an attorney at McGlinchey Stafford. “I don’t think the Chopra-led agency could really jump out the gate if this policy statement was still there, so it was a necessary and expected change.”
The Dodd-Frank Act gave the CFPB broad latitude to punish firms for violating longstanding federal prohibitions on "unfair" or "deceptive" acts or practices against consumer by financial companies. But Dodd-Frank also added the "abusive" standard, forming the bureau's core enforcement power against Unfair, Deceptive and Abusive Acts Practices, known as UDAAP.
With the change, financial firms are bracing for increased enforcement and a return to stiffer penalties and fines. Enforcement actions plummeted to a low of just 10 in 2018 under then-acting Director Mick Mulvaney, but began
The big difference can be seen in penalties. Kraninger’s actions brought in $1.5 billion in total consumer relief in 2019 and 2020 combined, while Cordray's took in $9.5 billion in a two-year period from 2014 to 2015.
Since the CFPB opened for business a decade ago, banks and financial firms have sought to narrow the scope of what counts as "abusive" — just as they had decades ago for the definitions of "unfair" and "deceptive." The Kraninger guidance codified that narrow scope, promising restraint in alleging that a company engaged in abusive conduct and declining to impose civil money penalties when companies made a good-faith effort to comply with the law.
But that guidance was not always followed. Some industry lawyers note that the CFPB continued to cite abusive conduct in lawsuits, settlements and during exams even after the previous guidance went public.
The CFPB “left itself plenty of room in that guidance to make case-by-case deviations from the general intent,” said Sarah Auchterlonie, a shareholder at Brownstein Hyatt Farber Schreck. “Not only was the statement itself indefinite, the civil money penalty statute requires consideration of good faith on a case-by-case basis in any event.”
What remains missing is a formal regulation defining precisely what "abusive" means — a time-consuming process that the bureau has not taken on across administrations. For the time being, the CFPB under Uejio has reiterated Dodd-Frank's four legal prongs: companies may not: materially interfere with someone’s ability to understand a product or service; take unreasonable advantage of a consumer's lack of understanding; take unreasonable advantage of a consumer's inability to protect themselves; or exploit a consumer’s reliance on a company to act in their interests.
But industry groups say relying on Dodd-Frank itself to define abusive results in a broad and subjective standard that is hard to navigate, particularly without court precedent to clear things up.
“Companies who are doing their level best to comply with the law [now have] to spend valuable resources and time trying to predict whether their regulator will take issue with a particular action,” said Robert L. Föehl, professor of business law and ethics at Ohio University. “Uncertainty is accompanied by legal and reputational risk.”
Some experts also say the rescission of the Trump-era guidance may not have a material effect on firms' compliance strategies.
"I believe that the focus on defining 'abusive' is a distraction," said Chris Willis, a partner at Ballard Spahr. "It’s certainly true that the concept is vague, and that the CFPB has discretion to identify violations based on its subjective assessment in a particular case, but that is also true of “unfair” and “deceptive.”
Willis added that the CFPB can choose which of those theories to apply in any particular case.
"They are frequently interchangeable, so something that is “unfair” could also be “abusive,” and vice versa," he said. "For that reason, laboring over the definition of “abusive” will never, in my view, have much practical significance. Our focus should be on understanding the conduct that motivates the CFPB to apply its UDAAP authority generally, not on trying to rationalize the component pieces of that authority."
In pushing back against the bureau's reliance on the Dodd-Frank definition of abusive, financial firms have claimed such an overly broad and subjective standard will limit their ability to introduce new financial products. But some legal experts say that idea ignores the more pressing challenge that the Kraninger guidance presents — namely, it stifles the bureau's ability to stop bad conduct when it sees it happening.
“I don't know of any time anyone has ever said that they want to introduce a product that would be good for consumers but they haven't because they fear that the bureau would label the product abusive,” said Jeff Sovern, a law professor at St. John's University School of Law. “If there were such products, we might have expected them to come out in the last year when the policy statement was in effect. But I'm not aware of any that have, though conceivably the industry wanted abusive to be defined even more narrowly before they would introduce the new products.”
Part of the now-rescinded guidance said that the bureau would refrain from so-called notice pleading — going beyond what federal rules require in setting forth specific allegations in giving notice of a violation — when asserting abusiveness violations, and instead would provide all facts needed to prove a cause of action. Whether the bureau will continue to refrain from notice pleading is an open question, and an important one.
“The bureau said it would plead such claims in a manner designed to demonstrate clearly the nexus between the cited facts and the bureau’s legal analysis of the claim,” Auchterlonie said. “If enforcement actions are to act as general deterrents, specificity in pleading is very important — even if it makes more work for enforcement staff or ultimately makes them drop the claim because they can’t articulate it well.”
Many observers expect that taking a way the old guidance will result in a de facto adoption of past enforcement policies under Cordray.
"It most likely foreshadows a return to the CFPB layering 'abusive' on acts and practices that are already characterized as deceptive or unfair," Lipinski said. "Financial penalties will likely increase, which would have the greatest impact to companies."
