US Financial Consumer Agency Outlines ‘Abusive’ Acts

April 12, 2023
Based on statutory definition and a decade of precedent, the Consumer Financial Protection Bureau lays out what it considers abusive conduct in consumer financial markets.

Based on statutory definition and a decade of precedent, the Consumer Financial Protection Bureau (CFPB) lays out what it considers abusive conduct in consumer financial markets.

According to the policy statement, an act is abusive if it “materially interferes” with the ability of a consumer to understand a term of a consumer financial product, or if a service “takes unreasonable advantage” of:

  • The consumer’s lack of understanding of risks, costs or conditions of the product.
  • The consumer's inability to protect their interests in selecting or using a consumer financial product.
  • The consumer's reasonable reliance on a business to act in their best interests.

US federal legislation prohibits firms from engaging in unfair, deceptive and abusive acts and practices (UDAAPs).

The agency, which has the authority to supervise and regulate all entities engaged in providing consumer financial products, including payment firms, has relied on the abusive prong of the prohibition in several high-profile cases.

Last July, U.S. Bank agreed to pay the agency $37.5m to settle a claim that it violated the abusive act prohibition. The bank was caught pressuring employees to open checking and savings accounts, credit cards and lines of credit on behalf of consumers without their permission.

In another case, the CFPB alleged that PayPal took unreasonable advantage of the consumer's inability to protect their own interests when the company made PayPal Credit consumers use the credit line for all purchases instead of their preferred payment method.

"Dark patterns", often used to make people subscribe to services or make it difficult for them to cancel, could also amount to abusive practices.

Commenting on the release, CFPB director Rohit Chopra said the policy statement acts not only as “a practical educational tool” but also as an analytical framework that promotes “a visceral understanding of the prohibition” and prevents “strategic or intentional ‘misunderstanding’ that some companies use to ignore the law.”

The statement comes as the CFPB works full steam to strengthen consumer protections in financial products and potentially signals the agency’s intent to increase its supervision and enforcement against abusive acts.

Additionally, the statement also mentions that it could serve as guidance for federal and state enforcers, alluding to the fact that in addition to the federal agency, attorney generals and state agencies could also crack down on companies engaging in abusive acts.

Last year, the CFPB made it clear that UDAAP is one of its priorities and firms could expect heightened scrutiny against these practices.

At that time, the agency looked at the “unfair” prong of the definition and stated that discrimination amounts to an unfair practice.

“When a person is denied access to a bank account because of their religion or race, this is unambiguously unfair,” Chopra said at the time.

The announcement put the CFPB into the crosshairs of banks and Republicans that claimed the agency severely overstepped its authority by making financial institutions liable for discriminatory outcomes, even in cases when there is no such intent.

Banks and Republicans also criticised the way the CFPB adopted the controversial change, highlighting that such an issue should have undergone an open and transparent rulemaking where companies have a chance to comment on the changes.

The CFPB now says the policy statement will be published in the Federal Register. The public will have until July 3 to submit their comments.

Chopra defended the action, stating “[w]hat we’re doing here isn’t new.”

“There is a rich tradition of federal consumer protection agencies issuing authoritative policy statements to help advance understanding of complex legal prohibitions.”

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