CFPB to define ‘abusive’ for future UDAAP enforcement

Acting Director Mick Mulvaney indicated that the bureau’s prior enforcement on allegedly abusive practices had been controversial and that he hoped to provide more clarity for the financial services industry.

In recent remarks, the acting director of the Consumer Financial Protection Bureau, Mick Mulvaney, announced that the bureau would soon issue a rule defining the term “abusive” as it relates to “unfair, deceptive or abusive acts or practices” of regulated entities under the 2010 Dodd-Frank Act. He indicated that the bureau’s prior enforcement on allegedly abusive practices had been controversial and that he hoped to provide more clarity for the financial services industry.

“I think ‘unfair’ is fairly well-established in the law, ‘deceptive’ is very well-established in the law and to my knowledge, I don’t think ‘abusive’ is nearly as established in the law,” Mulvaney said.

Consumer laws in the United States have long prohibited “unfair or deceptive acts or practices.” Section 5 of the Federal Trade Commission Act of 1914 prohibits “unfair or deceptive acts or practices in or affecting commerce.” The Federal Reserve is currently considering a similar rule. Dodd-Frank expanded the prohibition to include “abusive” acts and gave the CFPB primary rulemaking authority for such acts.

However, despite the fact that the vast majority of CFPB enforcement actions use the “unfair, deceptive, or abusive acts or practices” language, the bureau has never issued a rule concerning “abusive” acts. From its inception, the bureau leveled enforcement actions against industry entities without explaining how UDAAP was being interpreted. Previous CFPB director Richard Cordray made UDAAP a central part of regulation in the agency’s 2013 five-year strategic plan, claiming that the bureau had to ensure that no regulated entity could “build a business model around unfair, deceptive, or abusive practices.”

Mulvaney is moving away from that model. The most recent strategic plan makes no mention of UDAAP. He noted in his remarks that currently some practices could be unfair and deceptive without being abusive, and vice versa, which could cause confusion.

“On regulation, it seems that the people we regulate should have the right to know what the rules are before being charged with breaking them,” he wrote in the recent strategic planning memo. “This means more formal rulemaking on which financial institutions can rely, and less regulation by enforcement.”

Mulvaney was careful to note that UDAAP is part of Dodd-Frank and that the bureau will continue to look into UDAAP claims. “You have a right to know what the law is,” he said. “That being said, UDAAP is the law.” However, he wants that law to be understood up front. “Regulation by enforcement is done,” he said.