Disabusing the CFPB
Earlier this year the Consumer Financial Protection Bureau (CFPB) released a policy statement intended to explain the legal prohibition on abusive conduct in consumer financial markets. At the time, we called it a perhaps-well-intended-but-flawed effort that could substantially hamper the consumer financial marketplace. Just as concerning as the seeming lack of understanding or appreciation for how the consumer credit market operates, was the Bureau’s eagerness to vastly expand the definition of “abusive” to include practices allowed by state law.
With the CFPB starting from baseline assertions that lenders no longer have an incentive to ensure that a borrower has the ability to repay a debt and that lenders set borrowers up to fail, it perhaps is not surprising that the end result of the Bureau’s policy statement is that abusive conduct amounts to just about every activity undertaken by consumer-facing businesses every day, including:
- Fine print and complex language;
- Form contracts;
- Website pop-ups or drop-down menus;
- Complicated products;
- If an entity benefits from “increased market share, revenue, cost savings, or profits;
- Anything a consumer perceives to be abusive;
- If it takes too long to obtain the consumer financial product or service;
- Customer support taking too long;
- A consumer having to spend money;
- Servicing (when a customer cannot select the servicer), including credit reporting companies, debt collectors, and third-party loan servicers;
- Large companies.
In addition, the Bureau says it does not matter whether the business in question causes a consumer’s lack of understanding through untruthful statements or that the consumer simply claims to not understand something. Either is abusive.
Since the release of the policy statement recent enforcement actions by the Bureau against traditional installment lenders have emphasized its expansive “abusive conduct” standard, with the Bureau at the same time continuing to mischaracterize day-to-day activities and practices specifically allowed by state law as abusive.
For example, the Bureau claims that assisting borrowers in refinancing loans is abusive. Refinancing a loan, however, when done in the context of a traditional installment loan (no balloon payments, no hidden fees, a review for ability to repay), can be a good way for borrowers to manage their debt.
And when it comes to refinancing, installment loans customers who identify a need for additional credit are totally in control of the process and must make a clear choice before they trigger a new loan process. Refinancing always requires a new underwriting process and new mandatory disclosures for consumer protection purposes, and lenders require borrowers to have made payments on a previous loan before refinancing.
Installment lenders create highly successful lending relationships with tangible benefits for the borrower, particularly those who do not have access to other forms of credit. This ongoing relationship is the reason borrowers often feel able to turn to installment lenders whenever a need for credit is identified. Credit card companies allow their customers to increase their debt through use of their cards, why shouldn’t other consumers be allowed to do the same with the credit option they use?
The CFPB continually brands installment loans as “high-rate,” but as we have noted many times a traditional installment loan with a higher annual percentage interest rate is not a high-cost loan for a borrower. Because traditional installment lenders work with borrowers through the underwriting process on an ability to pay, borrowers get the funds they need at a payment level they can afford.
The Bureau’s abusive standards are seemingly predicated on two beliefs: consumers who require installment credit are incapable of understanding, let alone managing, their finances in manners that give them the same flexibility other forms of credit provide. And that providing such credit products as installment loans and doing so profitably is abusive behavior. Both beliefs are false and misguided and reflect a zealotry that harms both the consumers the Bureau claims to be protecting and the financial services industry it is at the least expected to work to ensure is well functioning and meeting the needs of the marketplace.
To those ends, the CFPB should not claim that practices allowed by state law are abusive or unfair.
August 24th, 2023
