The CFPB has released a policy statement intended to explain the legal prohibition on abusive conduct in consumer financial markets. In 2010, in response to the financial crisis, Congress passed the Consumer Financial Protection Act, and created the prohibition on abusive conduct. This added a new term to a field of consumer protection that for many decades was already covered by the Federal Trade Commission.
The policy statement is flawed. If allowed to stand, it would detrimentally affect the consumer financial marketplace as we know it. The fact that one unelected official – the CFPB Director – can make such a sweeping change demonstrates the need for the CFPB to be more accountable to Congress, and thus to the electorate.
From the outset, the CFPB displays a lack of understanding of the consumer credit market:
The Bureau claims that lenders no longer have an incentive to ensure that a borrower had the ability to repay a debt. The CFPB provides no evidence to support such a statement. In fact, it cannot because it’s simply not true. Lenders have every incentive to ensure that their customers can repay the amounts they borrow, regardless of whether lenders securitize or not. Lenders do not make money when their borrowers do not repay their loans. Suggesting that securitization isolates lenders from default risk is false. The well-known history of increased repurchase demands from secondary market players during the 2010 financial crisis demonstrates that lenders are held accountable.
The CFPB claims that the financial crisis was caused by mortgage lenders profiting on loans that set people up to fail. This is revisionist history. In reality, the crisis was caused by the failure of ratings agencies to account for drops in housing prices. An unprecedented spike in unemployment also played a role, as people who lose their incomes are usually at elevated risk to default on financial obligations – a fact so obvious that it seems disingenuous at best that the CFPB suggests an alternate history.
While the CFPB does develop themes in an attempt to define acts or practices that they consider “abusive” such as: 1) materially interfering with consumers’ understanding of the terms and conditions of the transaction; 2) taking unreasonable advantage of the consumer; 3) a lack of understanding on consumers’ part; 4) inability of consumers to protect their interests; and 5) reasonable reliance by the consumer; due to their incorrect and inaccurate understandings, the CFPB says that the following could be considered abusive:
- Fine print and complex language;
- Form contracts;
- Pop-ups or drop-down boxes;
- Multiple click-throughs;
- If a consumer doesn’t benefit from a product or service;
- Complicated products;
- If an entity benefits from “increased market share, revenue, cost savings, profits, reputational benefits, and other operational benefits;”
- “Negative consumer outcomes;”
- A consumer having “unequal bargaining power;”
- Gaps in understanding, which are risks, which include default;
- A product or service the consumer complains about;
- Anything a consumer says is abusive;
- Risky transactions;
- 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; and
- Brokers who don’t have a fiduciary duty to the borrower.
The Bureau claims that abusiveness requires no showing of substantial injury to establish liability, so a business practice that causes no harm to consumers could still be determined by the Bureau to be abusive. How is this consumer protection?
The Bureau also says that the Dodd-Frank Act does not require an investigative accounting of costs and benefits to make a finding, and claims it can just conduct a qualitative assessment to determine if it thinks a company took advantage of a consumer.
In addition, the Bureau, in its way of thinking, says it does not matter whether the business in question causes a consumer’s lack of understanding through untruthful statements or other actions or omissions. The fact that the consumer simply claims to not understand something is sufficient to be abusive. By this logic, a consumer who simply does not understand how food is packaged, is being abused when they purchase a can of peas. Moreover, it indicates that a lack of understanding can be caused by unrelated third parties and can exist even when there is no contractual relationship between the person and the entity accused of taking unreasonable advantage of the person’s lack of understanding. Furthermore, the statutory text of the prohibition does not require that the consumer’s lack of understanding be reasonable to demonstrate abusive conduct. Similarly, the prohibition does not require proof that some threshold number of people lacked understanding to establish that an act or practice was abusive. There may be a violation with respect to some consumers even if other consumers do not lack understanding. This absolute reliance on subjectivity essentially puts an impossible burden on industry to conduct business.
This policy statement, with its false foundations and wild potential consequences, will cause great concern for the consumer finance industry and should cause great concern for Congress, which has oversight of the CFPB. Creditors will certainly have a difficult time understanding how to maintain a business that avoids the pitfalls of the broad “abusive” standard. But as an example of the urgent need to reform the CFPB, this document is more than understandable.
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