Although “unfair or deceptive acts or practices” by entities in the financial marketplace have been illegal since the Federal Trade Commission Act of 1938, the Dodd-Frank Act authorized the Consumer Financial Protection Bureau to implement and enforce a prohibition on “unfair, deceptive, or abusive acts or practices” (UDAAP). The addition of “abusive” to the equation has created confusion in the financial services industry. A recent report by K&L Gates, highlights the conclusions that can be drawn from the CFPB’s understanding of an abusive act.
The terms “unfair” and “deceptive” have well-established definitions. The definition of an “abusive” act or practice, however, is not so simple. It consists of four prongs, any one of which is sufficient to constitute abusiveness. An abusive act or practice can be one that does any one of the following:
• “materially interferes with the ability of a consumer to understand a term or condition”
• “takes unreasonable advantage of … a lack of understanding on the part of the consumer”
• “takes unreasonable advantage of … the inability of the consumer to protect” their interests
• “takes unreasonable advantage of … the reasonable reliance by the consumer” on an entity’s claims
The CFPB has brought nearly 125 enforcement actions. In more than 80 of those, it has alleged or found UDAAP violations. In only 16 cases has the CFPB alleged abusive conduct, but fully half of those cases were filed in 2015 and 2016, suggesting an increased willingness to rely on this authority.
By far, the CFPB prefers the middle two prongs, which focus on a lack of knowledge or power on the part of the consumer. In analyzing those recent cases, the report concludes that bringing an abusiveness claim is a way for the CFPB to make a statement of “moral disapproval.” Indeed, all of the recent UDAAP actions alleging abusive acts turn on misrepresentations, and could more logically have brought under the older deceptive acts heading.
The report concludes that after five years, there is still no clarity as to what constitutes an abusive practice in the eyes of the CFPB. However, a trend emerges. The report found that steering customers into products and services that are either overpriced or that the consumer cannot afford will be considered abusive. The CFPB appears to be using its abusiveness authority to impose a “suitability” requirement on providers of consumer financial products or services.