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CFPB at long last defines enigmatic ‘abusive’ standard

The Consumer Financial Protection Bureau stated guidance on its policy for combating "abusive" industry practices — defining a standard that has befuddled financial firms since it was introduced in the Dodd-Frank Act.

In a policy statement Friday, the CFPB said an “abusive” act or practice is one in which the harm to consumers outweighs the benefit. The agency said it will only seek monetary relief for abusive acts or practices from companies that “lack a good-faith effort to comply with the law.”

Dodd-Frank gave the CFPB authority to punish firms for violating the longstanding federal prohibition on "unfair" or "deceptive" acts or practices, while also introducing a new "abusive" standard.

In the past, the CFPB has fined companies under the abusive standard without defining it, essentially building precedent through enforcement actions. But the agency under Director Kathy Kraninger has sought to give the industry clearer guidance.

“I am committed to ensuring we have clear rules of the road and fostering a culture of compliance — a key element in preventing consumer harm,” Kraninger said in a press release. “We’ve developed a policy that provides a solid framework to prevent consumer harm while promoting the clarity needed to foster consumer beneficial products as well as compliance in the marketplace, now and in the future.”

The agency's statement also said it would generally avoid combining abusiveness findings with unfairness or deception violations arising from the same facts, focusing instead on "stand alone" violations of the abusive standard.

Banks and financial institutions have sought for years to narrowly define the abusive standard.

But the CFPB's new definition immediately drew criticism from consumer advocates who see it as an attempt to limit the agency's authority.

“The CFPB is limiting the authority that Congress gave it, taking an arrow out of its quiver and limiting accountability,” said Lauren Saunders, an associate director at the National Consumer Law Center. “This is something that those who defend companies accused of harming consumer have been pushing for for a long time."

On the agency's move to deal with abusiveness on a standalone basis, Will Corbett, director of litigation at the Center for Responsible Lending, said Congress never intended for bad actors to be cited only for violations of one law at a time.

"Kathy Kraninger and CFPB leadership should stick to enforcing the law and not trying to rewrite it," Corbett said.

Still, the bureau has filed only 32 enforcement actions in nine years that included an abusiveness claim. Of those, only two contained just an abusiveness claim. The bureau also said it is not required to issue a notice of proposed rulemaking to define the abusive standard.

The CFPB cited numerous industry sources who alleged the lack of a definition created "uncertainty" for the industry.

“This uncertainty creates challenges for covered persons in complying with the law and may impede or deter the provision of otherwise lawful financial products or services that could be beneficial to consumers,” the bureau said in the press release.

Last year, the CFPB held a symposium on abusive acts or practices and asked for feedback on how the term should be defined.

Dodd-Frank defined abusive behavior as an act or practice that materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.

An abusive act also was defined as taking unreasonable advantage of a consumer’s understanding of the material risks, costs or conditions of a product or service; the inability of the consumer to protect their own interests in selecting a product or service; or the unreasonable reliance by the consumer on a covered person to act in the interests of the consumer.

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