Financial Trades Rip CFPB Effort to Define ‘Abusive Acts or Practices’

Credit union groups CUNA and NAFCU both outline concerns over UDAAP proposal.

The CFPB’s proposal to define “abusive acts or practices” is vague, exceeds the agency’s authority and may even violate the U.S. Constitution, a coalition of financial services trade groups charged this week, in a scathing letter to the agency.

“The Statement is too broad and general to provide guidance as to whether any specific market practice is ‘abusive,’” CUNA, The Bank Policy Institute, the American Financial Services Association, the Consumer Bankers Association, the Mortgage Bankers Association and the U.S. Chamber of Commerce wrote in a joint letter commenting on the proposal. “In accordance with the Fifth Amendment’s guarantee of due process, the Bureau should provide fair notice of conduct that it regards as abusive before bringing an enforcement action.”

NAFCU submitted its own letter blasting the proposal.

“The broad definition of abusive acts or practices outlined in the policy statement has the potential to be applied to a virtually limitless array of acts or practices in the consumer financial services market,” the credit union group stated.

Backstory and Context

The CFPB has been soliciting comments on what constitutes an “abusive act or practice.” Financial services trade groups have complained that there is no legal definition for that term and have asked for clarity since it was included in the Dodd-Frank Act.

When she was CFPB director under former President Trump, Kathleen Kraninger issued a policy statement on the issue. However, this was quickly rescinded when President Biden took office.

Now, the CFPB has issued a new policy statement, taking a more expansive view of the term.

Comments on the policy proposal were due Monday.

Coalition Reaction

The coalition of financial services providers said that the policy goes beyond what is allowed under Dodd-Frank and questions standard and routine practices of financial institutions.

Specifically, the coalition wrote that the CFPB:

–Issued guidance that would allow the agency to use a subjective and vague evaluation in assessing whether a product or service is too complicated for a consumer to understand.

–Appears to have failed to consult with the prudential banking agencies in developing the policy statement. The banking regulators have exclusive authority to enforce the abusiveness standard, so coordination with the bureau would ensure consistency, they said.

–Could “chill” the offering of consumer financial products since institutions may overcorrect and stop offering innovative products.

–Contends that it has the authority to take action when it “can be shown [that] an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes understanding.” The groups contend that policy would go beyond what the CFPB is permitted.

–Implies that entities would have to determine on a consumer-by-consumer basis whether certain acts or practices might interfere with the consumer’s understanding of a product or service. “Financial institutions should be able to rely on the presumption that consumers generally are reasonable and act reasonably,” they wrote.

NAFCU Letter

In NAFCU’s comment letter, Senior Regulatory Counsel James Akin said that while the policy statement is welcome because it could narrow the scope of an expansive prohibition, it still fails to bring clarity to the issue.

“The Bureau’s reluctance to set clear parameters around the scope of abusive acts or practices is troubling and only serves to foster an environment in which providers of consumer financial services are unable to operate with any sense of certainty about the permissibility of their acts or practices and which suffocates innovation,” he wrote.

Specifically, Akin said that the bureau:

–Failed to provide guidelines for determining that a consumer’s failure to understand a product or service amounts to abusive behavior by a financial institution.

–Must issue formal guidance that incorporates examples, case studies and objective criteria to judge abusiveness.

–Should better define what constitutes a complex service or product that is intended to confuse consumers. “A deposit or share account may be too complex for some consumers to understand, but that does not mean that the Bureau should have the ability to bring an [unfair, deceptive, or abusive acts or practices] enforcement against an institution for offering one,” Akin wrote.

Supporters Beg to Differ

The proposal does have its backers. For instance, 22 state attorneys general endorsed the plan, saying that it “provides helpful guidance and instructive examples to participants in consumer financial markets while avoiding any constrictive or unneeded limitation on a unique and critical regulatory enforcement mechanism.”

The Center for Responsible Lending was also in support, noting that the industry has clamored for guidance since the CFPB was created. However, the center added that the CFPB could make parts of the policy stronger by elaborating on the principles contained in it.