On April 3, 2023, the Consumer Financial Protection Bureau (CFPB) issued a policy statement with guidance on what constitutes “abusive conduct” under the Consumer Financial Protection Act (CFPA).
The CFPA, enacted in 2010 in response to the financial crisis, prohibits “abusive conduct” in consumer financial markets and identifies two categories of abusive conduct: (1) materially interfering with consumers’ understanding of important features of a product or service, and (2) leveraging certain circumstances – i.e. “gaps in understanding, unequal bargaining power, and consumer reliance” – to take unreasonable advantage of a consumer.
The CFPB issued the statement to provide federal and state regulators, and industry participants with much needed insight into the types of conduct that the CFPB regards as abusive under the two categories referenced in the statute.
Material Interference.
First, the CFPB explains that material interference, “can be shown when an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes understanding.” In addition to evidence that the act or omission did, in fact, impede consumers’ actual understanding, the CFPB also highlights two additional circumstances which may give rise to an inference of material interference: (1) where the natural consequence of the act or omission impedes consumers’ ability to understand, and (2) where there is evidence of intent to interfere with a consumer’s understanding.
Taking Unreasonable Advantage.
Second, the CFPB explains that covered entities are prohibited from taking unreasonable advantage of consumers in circumstances where there is: (1) gaps in consumer understanding; (2) unequal bargaining power or consumers’ inability to protect their interests; and (3) consumer reliance. The CFPB provides guidance on each of these three circumstances:
Gaps in Understanding.
The CFPB identifies three types of consumer gaps in understanding that it considers abusive. The first category is gaps in consumer understanding as to “risks,” including the likelihood of default or loss of future benefits. The second category is gaps in consumer understanding related to “costs,” which include both monetary costs and non-monetary costs such as lost time, loss of use, or reputational harm. The third category is gaps in consumer understanding with respect to “conditions,” which include “any circumstance, context, or attribute of a product or service, whether express or implicit,” such as the length of time it would take a person to realize the benefits of a financial product or service, the relationship between the entity and the consumer’s creditors, the fact a debt is not legally enforceable, or the processes that determine when fees will be assessed.
Inability of Consumers to Protect their Interests.
The CFPB explains that covered entities cannot take “unreasonable advantage” of consumers in situations where it is impractical for those consumers to protect their interests in selecting or using a consumer financial product or service. This includes situations in which consumers are unable to protect both their monetary and non-monetary interests. Examples of consumer non-monetary interests include property, privacy, and reputational interests.
Reasonable Reliance.
Finally, the CFPB explains that covered entities engage in abusive conduct where they take “unreasonable advantage” of consumers that have a reasonable expectation that the entity will act in their best interest. For example, reasonable reliance may exist where an entity communicates that it will act in its customers’ best interest, or otherwise holds itself out as acting in the customer’s best interest. Reasonable reliance may also exist where an entity assumes the role of acting on behalf of consumers or helping them to select providers in the market.
According to CFPB Director Rohit Chopra, this statement “provide[s] an analytical framework to help federal and state agencies hold companies accountable when they violate the law and take advantage of families.” For covered entities, the statement provides much needed insight into the CFPB interpretations of a standard that has historically been ambiguous and the cause of much uncertainty in the industry.