The Consumer Financial Protection Bureau's proposed rules on small-dollar loans are significant not only because they are sprawling, complex and tough, but also because they are the first rules the CFPB has issued pursuant to its powers to prohibit unfair, deceptive or abusive acts or practices.
Before the small-dollar proposal, the consumer bureau had used this authority only as the basis of enforcement actions against specific companies, not industrywide rules. Proponents of the CFPB extol its so-called UDAAP powers as being among the bureau's most versatile and potent weapons. Indeed, they assert that these authorities are crucial to ensure that the CFPB can be nimble in addressing developments and innovations in consumer finance markets without having to wait for Congress to decide what conduct or products the agency may target.
Critics of the CFPB, meanwhile, view its UDAAP powers with dread. They fear that the expansive, malleable and often subjective nature of these powers, when combined with the CFPB's unique autonomy and broad discretion in wielding them, allows for the prospect of unchecked regulatory overreach.
Such overreach is not without precedent. Congress famously chastised the Federal Trade Commission in the late 1970s for misusing its own "unfairness" authority when the FTC sought to ban all advertisements aimed at children on the nebulous grounds that such advertising was immoral, unscrupulous and unethical. In response to the FTC's actions, Congress shut down the FTC for several days and restricted its authority to issue new unfairness regulations. Congress ultimately amended the FTC Act to require the FTC to engage in economic analyses of unfairness and to limit the role of subjective public policies when making unfairness determinations.
Fears that the CFPB may overstep the boundaries of its UDAAP powers arguably have already been realized in the proposed small-dollar rulemaking. For instance, to support its assessment that small-dollar lenders act unfairly, the CFPB alleges that these lenders ensnare consumers in "debt traps." But the bureau plays down the comparative harms that consumers suffer when they lack access to these loans, such as when they confront emergency medical expenses or unexpected shortfalls in their income. This type of dismissive attitude suggests that what is really driving the CFPB's unfairness determination is not statutory factors, but rather moral distaste for the "high costs" of small-dollar loans and for small-dollar lenders preying on financially distressed consumers. But the Dodd-Frank Act, like the FTC Act, prohibits moral sentiments from serving as a primary basis for the CFPB's unfairness rulemakings.
The CFPB also overreaches in its proposed prescriptions for "preventing" the UDAAPs it identifies. Even if the CFPB properly assesses that it is unfair and abusive for small-dollar lenders to make loans without first assessing borrowers' ability-to-repay, the CFPB's proposed remedies go far beyond what is reasonably necessary to "prevent" this unfairness and abuse. Such remedies include imposing stringent underwriting requirements, restricting repeat borrowing and prescribing alternative loan products.
The CFPB has casually ignored proposals for different solutions — such as enhanced disclosures that would warn consumers about potential debt traps — which might achieve the CFPB's ends at lower costs to consumers and industry. In fact, the CFPB has even favored prescriptions that have at best a tenuous relationship with the underlying UDAAPs the agency identifies. This includes the bureau's proposal to create "registered information systems."
In sum, the CFPB's proposals seem to be directed at smashing and then remaking the small-dollar lender industry to its liking, rather than preventing particular harmful acts and practices.
One cannot fault the CFPB for wielding its UDAAP powers forcefully on an industry that the bureau believes it is charged with bringing to heel. Nevertheless, the CFPB's lack of restraint could very well lead to legislative blowback similar to what the FTC faced more than 30 years ago. Such a reckoning could ultimately impose enduring limits on the CFPB's UDAAP powers that could impact not only its rules governing small-dollar lenders but also other rules it contemplates for the future.
Perhaps in recognition of this, the CFPB does not rely solely upon UDAAP for its authority to issue its small-dollar rules. As a backstop, the CFPB shrewdly cites its general rulemaking power, set forth in the Dodd-Frank Act to prescribe rules as "may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof."
Such grants of general rulemaking power are not unique to the CFPB; rather, they are common features of many if not most enabling statutes for federal agencies. These powers also are not inherently dangerous. Instead, they typically serve the sensible purpose of allowing agencies to fill inadvertent gaps that Congress often leaves in such statutes.
However, when agencies resort to general rulemaking powers for more ambitious purposes, including filling gaps that Congress intended to leave in their enabling statutes or circumventing directives or limitations that Congress expressly imposed upon them, courts have repeatedly invalidated their actions. In doing so, these courts have reasoned that the use of general rulemaking powers in this manner would frustrate congressional intent and render superfluous detailed legislative schemes that reflect delicate negotiation and compromise.
One may reasonably ask why Congress would have drafted complex criteria for determining a UDAAP if it intended to permit the CFPB to regulate or ban conduct for any reason, or none at all, provided only that the CFPB determines such rules are necessary to accomplish its general consumer protection mission.
As the CFPB arms itself for regulatory duels with the small-dollar industry and others, it has a formidable arsenal from which to choose. However, the mere fact that the CFPB possesses UDAAP authority does not guarantee its victory in these fights. Firing weapons with abandon not only risks missing targets. The CFPB may well end up shooting itself in the foot.
Brett Kitt is of counsel in Greenberg Traurig's Financial Regulatory and Compliance Group in Washington. Gil Rudolph is a shareholder in the firm's Washington and Phoenix offices and co-chairman of the firm's Financial Regulatory and Compliance practice.