CFPB Releases Analysis of 'Abusive' Practices in the Financial Services Marketplace

On April 3, 2023, the Consumer Financial Protection Bureau ("CFPB" or the "Bureau") published a policy statement on abusiveness in the financial services marketplace.[1] The statement summarizes actions taken by government enforcers and supervisory agencies against entities engaged in abusive conduct, and it explains how the agency analyzes abusiveness. The Bureau intended to provide other regulators with a framework to identify violations and to "ensure fair dealing and protect consumers and market participants" in the wake of the 2007-08 financial crisis.

What is Abusive in a Financial Services Context?

The two types of abusive acts or practices concern the provision of a consumer financial product or service that: (1) obscures important features of a product or service, or (2) leverages certain circumstances to take an unreasonable advantage, including leveraging "gaps in understanding, unequal bargaining power, and consumer reliance."[2] Moreover, the agency considers abusiveness similar to deception, so the CFPB is "focused on conduct that Congress presumed to be harmful or distortionary to the proper functioning of the market."

From the Bureau's general perspective, an abusive act or practice is defined as something that: (1) materially 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 lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
• The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
• The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.[3]

Abuse by Material Interference with the Consumers' Understanding

The Bureau defines material interference as an act or omission that is intended to impede, has a natural consequence of impeding, or actually impedes a "consumers' ability to understand terms or conditions" of a consumer financial product or service. Acts or omissions can include those that "obscure, withhold, de-emphasize, render confusing, or hide information." The Bureau provided the following examples:

• Buried Disclosures — limiting comprehension through the use of fine print, complex language, jargon, or the timing of the disclosure;
• Physical Interference — physically impeding a person's ability to see, hear, or understand the terms and conditions (e.g., hiding or withholding notices);
• Digital Interference — technologically impeding a person's ability to see, hear, or understand the terms and conditions in electronic or virtual format (e.g., through use of pop-ups, drop-down boxes, multiple click-throughs, or "dark patterns"); or
• Overshadowing — prominently placing certain content that interferes with comprehending other content, including terms and conditions.

According to the Bureau, a consumer's lack of understanding is sufficient to demonstrate abusive conduct regardless of how it arose and "entities may not take unreasonable advantage of that lack of understanding." There are multiple methods by which material interference can be evaluated:

• "[I]t is reasonable to infer that an act or omission materially interferes with consumers' ability to understand a term or condition when the entity intends it to interfere";
• "[M]aterial interference can be established with evidence that the natural consequence of the act or omission would be to impede consumers' ability to understand"; or
• "[M]aterial interference can also be shown with evidence that the act or omission did in fact impede consumers' actual understanding."

While evidence of intent could provide a basis for inferring material interference, intent is not required.

Moreover, some transaction information is considered "so consequential" that failing to properly convey it may be reasonably considered material interference. "That information includes, but is not limited to, pricing or costs, limitations on the person's ability to use or benefit from the product or service, and contractually specified consequences of default." Additionally, providing "a product or service may interfere with a consumers' ability to understand if the product or service is so complicated that material information about it cannot be sufficiently explained or if the entity's business model functions in a manner that is inconsistent with its product's or service's apparent terms."

Abuse by Taking Unreasonable Advantage

The other standard for abusiveness is "taking unreasonable advantage," which falls into three sub-categories: 1) gaps in understanding, 2) unequal bargaining power, and 3) consumer reliance. All three of these are based on assumed asymmetry of knowledge, means, and power between consumers and covered entities, even if the conditions under which they occurred were not created by the entity itself.

First, "gaps in understanding" affecting consumer decision-making means a lack of knowledge of:

1)    material risks, such as the consequences or likelihood of default, loss of future benefits;

2)    costs — monetary harm, non-monetary harm (lost time, lost value, reputational harm); or

3)    conditions of the product or service — length of time to realize benefits of a product or service, relationship between entity and consumer's creditors, the fact a debt is not legally enforceable, or the processes that determine when fees will be assessed.

When assessing these items, the Bureau looks to determine if entities are receiving a windfall as a consequence of the circumstances (i.e., stemming from the gaps in understanding) or whether this benefit would have existed regardless; the Bureau does not require a quantified finding and will accept a qualitative assessment to determine whether such an advantage exists. This may be demonstrated through consumer complaints and testimony, evidence or analysis showing that reasonable consumers may not understand.

Second, "taking unreasonable advantage" relates to unequal bargaining power, which is defined as the inability of consumer to switch providers, seek more favorable terms, or other decisions to protect their own interests which can "include monetary and non-monetary interests, including but not limited to property, privacy, or reputational interests."[4] This unreasonable advantage can occur before or at the time a product or service is selected or used. Furthermore, the Bureau looks at how much effort is needed to obtain a product or service, to remedy issues related to them, and how relationships are structured to allow for meaningful choice in the selection or use of a service provider. However, the relationship becomes abusive if entities take advantage of the lack of choice in a relationship or of the fact that the provider is the only source of important information or services. Additionally, other considerations of unequal bargaining power include: non-negotiable contract provisions; if an entity has outsized market power; or if consumers face high transaction costs to exit a relationship.

The final sub-category of "taking unreasonable advantage" is a consumer's reliance on a covered entity. In this case, there is a reasonable expectation that the entity will act in the consumer's interest because the entity has said it will act in the consumer's best interest or it serves as an agent or trusted intermediary in the market. In short, "consumers generally do not expect companies to benefit from or be indifferent to certain negative consequences...[and consumers] may not understand that a risk is very likely to happen or that—"though relatively rare—the impact of a particular risk would be severe."

The following are examples of how to establish a consumer's reasonable reliance:

• "[A]n entity communicates to a person or the public that it will act in its customers' best interest, or otherwise holds itself out" as doing so; or
• "[A]n entity assumes the role of acting on behalf of consumers or helping them to select providers in the market."

The CFPB also may take into account an evaluation of the facts or circumstances, but "does not require an inquiry into whether advantage-taking is typical or not."

Conclusion

The policy statement shows a continued trend towards a robust and active enforcement posture by the Bureau, particularly in the areas of unfair and deceptive acts or practices. We will continue to monitor and communicate on these updates.

[1] CFPB, Policy Statement on Abusiveness (April 03, 2023), https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/.

[2] Id.; 12 U.S.C. 5531(d).

[3] 12 U.S.C. 5531(d).

[4] Id., 1031(d)(2)(B).