The CFPB's Ambiguous "Abusive" Standard

NORTH CAROLINA BANKING INSTITUTE Volume 22 | Issue 1 Article 12 3-1-2018 The CFPB's Ambiguous "Abusive" Standard Joshua L. Roquemore Follow this and additional works at: http://scholarship.law.unc.edu/ncbi Part of the Banking and Finance Law Commons Recommended Citation Joshua L. Roquemore, The CFPB's Ambiguous "Abusive" Standard, 22 N.C. Banking Inst. 191 (2018). Available at: http://scholarship.law.unc.edu/ncbi/vol22/iss1/12 This Note is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in North Carolina Banking Institute by an authorized editor of Carolina Law Scholarship Repository. For more information, please contact . The CFPB’s Ambiguous “Abusive” Standard I. INTRODUCTION A cloud of uncertainty rests over the Consumer Financial Protection Bureau (“CFPB”), and this uncertainty extends to more than just the future existence of the agency. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was enacted in 2010, bringing with it an abundance of financial regulation and reform. 1 Dodd-Frank also created the CFPB and granted to it the power to “regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws.”2 This mandate includes the authority to protect consumers from “unfair, deceptive, or abusive acts or practices” (collectively “UDAAP”). 3 The Federal Trade Commission (“FTC”) traditionally had the authority to prevent and punish unfair and deceptive behavior, and as a result there is already a fairly well-established body of law on those two legal standards. 4 The abusive standard, on the other hand, has lacked statutory, judicial, and administrative clarity since its inception. 5 Until recently, the CFPB had never brought an action alleging solely abusive behavior, as the agency typically includes a claim of abuse with a claim of deception or unfairness. 6 However, the cloud may finally be lifting, as the CFPB recently brought two administrative proceedings based solely on allegations of abusive behavior.7 These cases present the only standalone abuse claims, and their analysis reveals a great deal of ambiguity surrounding the CFPB’s definition and application of the “abusive” 1. Infra notes 2–4. 2. Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) § 1101, 12 U.S.C. § 5491(a) (2016). 3. Dodd-Frank § 1021, 12 U.S.C. § 5511(b)(2). 4. 15 U.S.C. § 45(a) (2016) (defining “unfair” and “deceptive” acts and practices, and providing examples of behavior that qualifies as such). 5. See infra Part II.C. 6. See infra Part II.B. 7. See infra Part III. 192 NORTH CAROLINA BANKING INSTITUTE [Vol. 22 standard.8 Ultimately, the CFPB should further define the standard in order to provide consumers and financial institutions with clarity and stability. 9 This Note proceeds in five parts. Part II briefly outlines the statutory framework of the CFPB’s authority, focusing on the ambiguity surrounding the abusive standard and discussing support for and criticism of the standard.10 Part III discusses CFPB v. Aequitas Capital Management, Inc., and the Zero Parallel proceeding, which represent the only two occasions the CFPB has brought a stand-alone abuse claim. 11 Part IV discusses CFPB v. Navient Corporation, and the Flurish proceeding, in order to determine whether the abuse claims were truly necessary in Aequitas and Zero Parallel.12 Finally, Part V concludes by analyzing the problems with the abusive standard, providing specific recommendations for the CFPB and financial institutions moving forward.13 II. “ABUSIVE” ACTS OR PRACTICES UNDER DODD-FRANK A. Legislative Framework As previously mentioned, the CFPB inherited the unfair and deceptive legal standards from the FTC,14 and was granted the power to regulate abusive acts or practices under Dodd-Frank. 15 While the unfair and deceptive standards were defined by the FTC in cases spanning several decades, the CFPB was given a clean slate with respect to the abusive standard.16 In fact, the statutory language provides the only 8. 9. 10. 11. 12. 13. 14. See infra Part III. See infra Part V. See infra Part II. See infra Part III. See infra Part IV. See infra Part V. See Consumer Finance Monitor, How the CFPB and the FTC Interact (Part 1), BALLARD SPAHR, LLC (Jul. 7, 2011), https://www.consumerfinancemonitor.com/2011/07/ 07/how-the-cfpb-and-the-ftc-interact-part-i/ (describing how the Dodd-Frank Act allocates responsibilities between the two agencies). 15. Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) §§ 1021, 1031, 12 U.S.C. §§ 5511(b)(2), 5531(a) (2016) (emphasis added). 16. See Patrick M. Corrigan, Abusive Acts and Practices: Dodd-Frank’s Behaviorally Informed Authority Over Consumer Credit Markets and Its Application to Teaser Rates, 18 N.Y.U. J. LEGIS. & PUB. POL’Y 125, 128–29 (2015) (describing the history of the unfair and deceptive prongs as they relate to the FTC and CFPB); see How Will the CFPB Function 2018] CFPB’S ABUSIVE STANDARD 193 official guidance with respect to the abusive standard. Dodd-Frank defines as abusive any act or practice that: (1) [M]aterially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. 17 Similarly, the categorization of “unfair” applies to any conduct where: (1) “the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers;” and (2) “such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”18 Interestingly, Dodd-Frank does not define deceptive practices. 19 However, the CFPB has published examples of deceptive behavior. 20 In addition, the CFPB has litigated cases against financial institutions for solely deceptive behavior.21 In these cases, courts ignore the lack of a statutory definition and rely on a common law definition of deception. 22 Under Richard Cordray: Hearing Before the Subcomm. on TARP, Financial Services, and Bailouts of Public and Private Programs Before the H. Comm. on Oversight and Government Reform, 112th Cong.1, 2 (2012) [hereinafter Cordray Statement] (statement of Richard Cordray, Director of the CFPB) (referencing prior CFPB officials’ inability to answer the “simple question about the definition of abusive”). 17. Dodd-Frank § 1031, 12 U.S.C. § 5531(d). 18. Dodd-Frank § 1031, 12 U.S.C. § 5531(c). 19. Dodd-Frank § 1031, 12 U.S.C. § 5531. 20. Published examples of deceptive beha (...truncated)