For Consumer Finance Companies, the most unique aspect of the Dodd-Frank Act of 2010 involved the creation of the Consumer Financial Protection Bureau (CFPB). The Bureau acted quickly to address Unfair, Deceptive, or Abusive Acts or Practices. “Unfair” and “Deceptive” Acts or Practices had long been regulated by the Federal Trade Commission. The introduction of “Abusive” was the new and interesting factor for creditors in Dodd-Frank. That is, “Unfair” and “Deceptive” have been legal adjectives long used and long interpreted. Not so “Abusive.”
The Dodd-Frank Act defined an act or practice as abusive when such materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or when an act or practice takes unreasonable advantage of the consumer’s lack of understanding of the material risks, costs or conditions of the product or service, the inability of the consumer to protect his or her interests, or the reasonable reliance by the consumer on the creditor to act in the interests of the consumer. This is a mouthful.
My partner Sam Friedman did an early analysis in March of 2015, in which he diagrammed this structural definition of “Abusive.” Turns out that Sam’s analysis was prescient. This week, the Bureau proposed a Policy Statement Regarding Abusive Acts or Practices. The
proposal seeks to add clarity to the meaning of “Abusive” as stated in the Dodd-Frank Act. It mentions “obscuring important features of a product or service,” and “leveraging certain circumstances—including gaps in understanding, unequal bargaining power, or consumer reliance—to take unreasonable advantage.”
The CFPB’s Analysis uses five major themes to define acts or practices that are “Abusive”:
• Materially interfering with consumers’ understanding of the terms and conditions of the transaction
• Taking unreasonable advantage of the consumer
• A lack of understanding on consumers’ part
• Inability of consumers to protect their interests
• Reasonable reliance by the consumer.
The Bureau’s proposed policy statement reiterates Sam’s analysis and diagram. It does add some exemplary language to give us a better understanding of “Abusive.” The policy statement is open for comment until July 3, 2023.
-Maurice L. Shevin