Rule2023-07233
Statement of Policy Regarding Prohibition on Abusive Acts or Practices
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
April 12, 2023
Effective
April 12, 2023
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Act of 2010 (CFPA) prohibits any "covered person" or "service provider" from "engag[ing] in any unfair, deceptive, or abusive act or practice" and defines abusive conduct. An abusive act or practice: materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or 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. Since the enactment of the CFPA, government enforcers and supervisory agencies have taken dozens of actions to condemn prohibited abusive conduct. This policy statement summarizes those actions and explains how the Consumer Financial Protection Bureau (CFPB) analyzes the elements of abusiveness through relevant examples, with the goal of providing an analytical framework to fellow government enforcers and supervisory agencies and to the market for how to identify violative acts or practices. While not required under the Administrative Procedure Act, the CFPB is opting to collect comments on the policy statement and may make revisions as appropriate after reviewing feedback received.
Full Text
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<title>Federal Register, Volume 88 Issue 70 (Wednesday, April 12, 2023)</title>
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[Federal Register Volume 88, Number 70 (Wednesday, April 12, 2023)]
[Rules and Regulations]
[Pages 21883-21890]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-07233]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 88, No. 70 / Wednesday, April 12, 2023 /
Rules and Regulations
[[Page 21883]]
CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Chapter X
[Docket No. CFPB-2023-0018]
Statement of Policy Regarding Prohibition on Abusive Acts or
Practices
AGENCY: Consumer Financial Protection Bureau.
ACTION: Policy statement; request for comment.
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SUMMARY: The Consumer Financial Protection Act of 2010 (CFPA) prohibits
any ``covered person'' or ``service provider'' from ``engag[ing] in any
unfair, deceptive, or abusive act or practice'' and defines abusive
conduct. An abusive act or practice: materially interferes with the
ability of a consumer to understand a term or condition of a consumer
financial product or service, or 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. Since the enactment of the CFPA, government enforcers and
supervisory agencies have taken dozens of actions to condemn prohibited
abusive conduct. This policy statement summarizes those actions and
explains how the Consumer Financial Protection Bureau (CFPB) analyzes
the elements of abusiveness through relevant examples, with the goal of
providing an analytical framework to fellow government enforcers and
supervisory agencies and to the market for how to identify violative
acts or practices. While not required under the Administrative
Procedure Act, the CFPB is opting to collect comments on the policy
statement and may make revisions as appropriate after reviewing
feedback received.
DATES: This policy statement is applicable as of April 12, 2023.
Comments must be received by July 3, 2023.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2023-
0018, by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#a1939193928ce0c3d4d2c8d7c4cfc4d2d2f1cecdc8c2d8f2d5c0d5c4ccc4cfd5e1c2c7d1c38fc6ced7"><span class="__cf_email__" data-cfemail="390b090b0a14785b4c4a504f5c575c4a4a695655505a406a4d584d5c545c574d795a5f495b175e564f">[email protected]</span></a>. Include
Docket No. CFPB-2023-0018 in the subject line of the message.
<bullet> Mail/Hand Delivery/Courier: Comment Intake--Statement of
Policy Regarding Prohibition on Abusive Acts or Practices, c/o Legal
Division Docket Manager, Consumer Financial Protection Bureau, 1700 G
Street NW, Washington, DC 20552. Because paper mail in the Washington,
DC area and at the CFPB is subject to delay, commenters are encouraged
to submit comments electronically.
Instructions: The CFPB encourages the early submission of comments.
All submissions must include the document title and docket number. In
general, all comments received will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>. All submissions, including attachments and other
supporting materials, will become part of the public record and subject
to public disclosure. Proprietary information or sensitive personal
information, such as account numbers or Social Security numbers, or
names of other individuals, should not be included. Submissions will
not be edited to remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Bradley Lipton, Senior Counsel, Legal
Division, at 202-435-7700. If you require this document in an
alternative electronic format, please contact
<a href="/cdn-cgi/l/email-protection#24676274667b6547474157574d464d484d505d64474254460a434b52"><span class="__cf_email__" data-cfemail="b1f2f7e1f3eef0d2d2d4c2c2d8d3d8ddd8c5c8f1d2d7c1d39fd6dec7">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Background
In 2010, Congress passed the Consumer Financial Protection Act of
2010 (CFPA) and banned abusive conduct.\1\ The CFPA's prohibition on
abusive conduct was the most recent instance of congressional tailoring
of the Federal prohibitions intended to ensure fair dealing and protect
consumers and market participants in the United States.\2\
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\1\ CFPA section 1036(a)(1)(B), 12 U.S.C. 5536(a)(1)(B). In CFPA
section 1031, Congress prohibited covered persons and services
providers from committing or engaging in unfair, deceptive, or
abusive acts or practices in connection with the offering or
provision of consumer financial products or services. CFPA section
1031(d) sets forth the general standard for determining whether an
act or practice is abusive. See 12 U.S.C. 5531(d).
\2\ See, e.g., FTC v. Standard Educ. Soc'y, 86 F.2d 692, 696 (2d
Cir. 1936), rev'd in part on other grounds, 302 U.S. 112, 116 (1937)
(describing the congressional prohibitions intended to regulate
methods of fair dealing in the marketplace). Certain other Federal
consumer financial laws, including the Fair Debt Collection
Practices Act (FDCPA) and the Home Ownership and Equity Protection
Act (HOEPA), reference either the term ``abusive'' or ``abuse.'' See
15 U.S.C. 1692d (FDCPA), 15 U.S.C. 1639(p)(2)(B) (HOEPA). The
Telemarketing and Consumer Fraud and Abuse Prevention Act also
directed the Federal Trade Commission (FTC) to ``prescribe rules
prohibiting deceptive telemarketing acts or practices and other
abusive telemarketing acts or practices.'' 15 U.S.C. 6102(a)(1).
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Since the beginning of the 20th century, Congress has amended these
prohibitions in response to evolving norms, economic events, and
judicial interpretations, guiding those tasked with enforcing the law.
Beginning with the creation of the Federal Trade Commission, and the
development of the ``unfair methods of competition'' \3\ and ``unfair
or deceptive acts or practices'' \4\ prohibitions, Congress has
[[Page 21884]]
passed laws to regulate fair dealing, and the agencies tasked with
administering those laws have issued policy statements to offer
guidance on the agencies' approach to enforcing those prohibitions.\5\
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\3\ In 1914, Congress passed the FTC Act, which declared as
unlawful ``unfair methods of competition'' but did not define the
term ``unfair.'' Act of Sept. 26, 1914, ch. 311, sec. 5(a), 38 Stat.
717, 719 (codified at 15 U.S.C. 45(a)). Congress intended that this
prohibition would capture conduct that caused competitive harm yet
remain flexible enough to allow the law to develop and avoid
circumvention. As the Supreme Court explained in 1934, ``[n]either
the language nor the history of the Act suggests that Congress
intended to confine the forbidden methods to fixed and unyielding
categories,'' and Congress, in defining the powers of the FTC,
``advisedly adopted a phrase which . . . does not admit of precise
definition, but the meaning and application of which must be arrived
at by . . . the gradual process of judicial inclusion and
exclusion.'' FTC v. R.F. Keppel & Bro., 291 U.S. 304, 310, 312
(1934) (internal quotation marks omitted).
\4\ In 1938, in the Wheeler-Lea Act, Congress amended the FTC
Act to declare as unlawful ``unfair or deceptive acts or
practices.'' Wheeler-Lea Act, ch. 49, sec. 3, 52 Stat. 111, 111-14
(1938); 15 U.S.C. 45(a). As it had done previously with ``unfair
methods of competition,'' Congress did not define this term, instead
intending for it to be developed over time. See Am. Fin. Servs.
Ass'n v. FTC, 767 F.2d 957, 978 (D.C. Cir. 1985) (AFSA) (``[N]either
Congress nor the FTC has seen fit to delineate the specific `kinds'
of practices which will be deemed unfair . . . . Instead the FTC has
adhered to its established convention, envisioned by Congress, of
developing and refining its unfair practice criteria on a
progressive, incremental basis.'').
\5\ See, e.g., Letter from the FTC to Hon. Wendell Ford and Hon.
John Danforth, Comm. on Commerce, Science and Transportation, U.S.
Senate, Commission Statement of Policy on the Scope of the Consumer
Unfairness Jurisdiction (Dec. 17, 1980), reprinted in Int'l
Harvester Co., 104 F.T.C. 949, 1070-76 (1984), <a href="https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness">https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness</a> (Policy
Statement on Unfairness); Letter from the FTC to Hon. John D.
Dingell, Chairman, Comm. on Energy and Commerce, U.S. House of
Representatives (Oct. 14, 1983), reprinted in Cliffdale Assocs.,
Inc., 103 F.T.C. 110, 174-84 (1984), <a href="https://www.ftc.gov/legal-library/browse/ftc-policy-statement-deception">https://www.ftc.gov/legal-library/browse/ftc-policy-statement-deception</a> (Policy Statement on
Deception).
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For centuries, lenders and investors generally had an incentive to
ensure that a borrower had the ability to repay a debt. But innovations
in capital markets and fixed income instruments altered this alignment
of incentives.\6\ The advent of complex securitization led to lenders
no longer bearing risk when a borrower defaulted because they had sold
the underlying asset, and passed on the exposure to investors. Fair
dealing laws in the U.S. have long sought to address the risks and
harms from market failures.
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\6\ See Financial Crisis Inquiry Commission, The Financial
Crisis Inquiry Report, at 191-192 (2011), <a href="https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf">https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf</a> (describing how synthetic
collateralized debt obligations, which gained popularity in the mid-
2000s, involved ``two types of investors with opposing interests:
those who would benefit if the assets performed, and those who would
benefit if the mortgage borrowers stopped making payments and the
assets failed to perform'').
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The 2007-2008 financial crisis tested U.S. consumer protection
laws, government watchdogs, and the ability of the existing authorities
to address the predatory lending that was a root cause of the
collapse.\7\ The financial crisis was set in motion by a set of
avoidable interlocking forces--but at its core were mortgage lenders
profiting (by immediately selling on the secondary market) on loans
that set people up to fail because they could not repay.\8\ Millions of
Americans saw their home values drop and their jobs eliminated as a
result of forces largely out of their control.
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\7\ See id. at xvii, xxiii-xxiv.
\8\ See id. at 104-111, 113-18; see also S. Rep. No. 111-176, at
11 (2010), <a href="https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1">https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1</a> (``Th[e] financial crisis was
precipitated by the proliferation of poorly underwritten mortgages
with abusive terms, followed by a broad fall in housing prices as
those mortgages went into default and led to increasing
foreclosures.'').
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In response, Congress concluded that the manner in which agencies
had enforced the prohibitions on unfair and deceptive acts or practices
was too limited to be effective at preventing the financial crisis, and
once again amended existing law to better meet new challenges.\9\ In
the CFPA, Congress granted authority over unfair or deceptive acts or
practices to the States, the Federal banking agencies, and the newly
created Consumer Financial Protection Bureau (CFPB). Congress also
added a prohibition on abusive acts or practices.\10\
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\9\ For example, in 2007, Federal Deposit Insurance Corporation
(FDIC) Chairwoman Sheila Bair explained in congressional testimony
that unfairness ``can be a restrictive legal standard'' and proposed
that Congress consider ``adding the term `abusive,' '' which she
noted existed in the Home Ownership and Equity Protection Act, and
which ``is a more flexible standard to address some of the practices
that make us all uncomfortable.'' Sheila C. Bair, Improving Federal
Consumer Protection in Financial Services, House Committee on
Financial Services (June 13, 2007), <a href="https://www.govinfo.gov/content/pkg/CHRG-110hhrg37556/html/CHRG-110hhrg37556.htm">https://www.govinfo.gov/content/pkg/CHRG-110hhrg37556/html/CHRG-110hhrg37556.htm</a>.
\10\ See, e.g., S. Rep. No. 111-176, at 172 (Apr. 30, 2010),
<a href="https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1">https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1</a> (``Current law prohibits unfair or deceptive acts or
practices. The addition of `abusive' will ensure that the Bureau is
empowered to cover practices where providers unreasonably take
advantage of consumers.''); Public Law 111-203, pmbl. (listing, in
the preamble to the Dodd-Frank Act, one of the purposes of the Act
as ``protect[ing] consumers from abusive financial services
practices''); see also S. Rep. No. 111-176, at 9 n.19, <a href="https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1">https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1</a> (``Today's consumer protection regime . . . could not stem a
plague of abusive and unaffordable mortgages.''); id. at 11 (``This
financial crisis was precipitated by the proliferation of poorly
underwritten mortgages with abusive terms.''); H.R. Rep. No. 111-
367, at 91 (Dec. 9, 2009) (``Th[e] disparate regulatory system has
been blamed in part for the lack of aggressive enforcement against
abusive and predatory loan products that contributed to the
financial crisis, such as subprime and nontraditional mortgages.'');
H.R. Rep. No. 111-517, at 876-77 (June 29, 2010), <a href="https://www.congress.gov/congressional-report/111th-congress/house-report/517">https://www.congress.gov/congressional-report/111th-congress/house-report/517</a> (Conf. Rep.) (``The Act also prohibits financial incentives . .
. that may encourage mortgage originators . . . to steer consumers
to higher-cost and more abusive mortgages.'').
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Since the enactment of the CFPA, government enforcers and
supervisory agencies have taken dozens of actions to condemn prohibited
abusive conduct. The CFPB is issuing this Policy Statement to summarize
those actions and explain how the CFPB analyzes the elements of
abusiveness through relevant examples, with the goal of providing an
analytical framework to fellow government enforcers and to the market
for how to identify violative acts or practices.\11\
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\11\ This Policy Statement is the CFPB's first formal issuance
that summarizes precedent on abusive acts or practices and provides
an analytical framework for identifying abusive acts or practices.
The CFPB previously issued a Policy Statement on Abusive Acts or
Practices in 2020, see 85 FR 6733 (Feb. 6, 2020) (2020 Policy
Statement), rescinded in 86 FR 14808 (Mar. 19, 2021), <a href="https://files.consumerfinance.gov/f/documents/cfpb_abusiveness-policy-statement-consolidated_2021-03.pdf">https://files.consumerfinance.gov/f/documents/cfpb_abusiveness-policy-statement-consolidated_2021-03.pdf</a>. The 2020 Policy Statement
communicated how the CFPB intended to exercise prosecutorial
discretion regarding some issues related to abusiveness. However,
the 2020 Policy Statement did not summarize existing precedent on
abusive acts or practices or provide an analytical framework for
identifying abusive acts or practices.
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II. Analysis
Under the CFPA, there are two abusiveness prohibitions.\12\ An
abusive act or practice: (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:
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\12\ The second of the two prohibitions has three independent
disjunctive grounds for finding abusiveness.
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<bullet> A lack of understanding on the part of the consumer of the
material risks, costs, or conditions of the product or service;
<bullet> The inability of the consumer to protect the interests of
the consumer in selecting or using a consumer financial product or
service; or
<bullet> The reasonable reliance by the consumer on a covered
person to act in the interests of the consumer.\13\
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\13\ CFPA section 1031(d), 12 U.S.C. 5531(d).
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The statutory text of these two prohibitions can be summarized at a
high level as: (1) obscuring important features of a product or
service, or (2) leveraging certain circumstances to take an
unreasonable advantage. The circumstances that Congress set forth,
stated generally, concern gaps in understanding, unequal bargaining
power, and consumer reliance.\14\
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\14\ This Policy Statement uses the phrases ``gaps in
understanding,'' ``unequal bargaining power,'' and ``consumer
reliance'' as shorthand descriptors of the inquiries required under
the three subparagraphs of CFPA section 1031(d)(2). The CFPB does
not intend its use of these shorthand phrases to limit in any way
the scope of section 1031(d)(2)'s text.
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Unlike with unfairness but similar to deception, abusiveness
requires no showing of substantial injury to establish liability, but
is rather focused on conduct that Congress presumed to be harmful or
distortionary to the proper functioning of the market. An act or
practice need fall into only one of the categories above in order to be
abusive, but an act or practice could fall into more than one
category.\15\
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\15\ The conduct that underlies an abusiveness determination may
also be found to be unfair or deceptive, depending on the
circumstances.
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[[Page 21885]]
A. Materially Interfering With Consumers' Understanding of Terms and
Conditions
The first abusiveness prohibition concerns situations where an
entity \16\ ``materially interferes with the ability of a consumer to
understand a term or condition of a consumer financial product or
service.'' \17\ Material interference can be shown when 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.
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\16\ This Policy Statement refers to covered persons, service
providers, and persons that provide substantial assistance to
abusive conduct by a covered person or service provider as
``entity'' or ``entities.''
\17\ CFPA section 1031(d)(1), 12 U.S.C. 5531(d)(1).
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Acts or Omissions
Material interference may include actions or omissions that
obscure, withhold, de-emphasize, render confusing, or hide information
relevant to the ability of a consumer to understand terms and
conditions. Interference can take numerous forms, such as buried
disclosures, physical or digital interference, overshadowing, and
various other means of manipulating consumers' understanding.
Buried disclosures include disclosures that limit people's
comprehension of a term or condition, including but not limited to,
through the use of fine print, complex language, jargon, or the timing
of the disclosure.\18\ Entities can also interfere with understanding
by omitting material terms or conditions.\19\
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\18\ See, e.g., TD Bank, N.A., File No. 2020-BCFP-0007, at 16-20
(Aug. 20, 2020) (bank materially interfered with consumers' ability
to understand terms and conditions of overdraft-protection service
by withholding any written notice regarding those terms and
conditions until after eliciting an oral-enrollment decision that
followed a misleading or incomplete oral presentation regarding the
service).
\19\ See, e.g., TMX Finance LLC, File No. 2016-CFPB-0022, at 6
(Sept. 26, 2016) (lender's sales pitch and Payback Guide materially
interfered with consumers' ability to understand that the consumer
received a 30-day transaction, that the Payback Guide was not an
actual repayment plan, that the terms of the 30-day transaction were
not affected by the Payback Guide, and that renewing the transaction
over an extended period would substantially affect the overall cost
of the transaction, as well as several other aspects of the process,
by omitting those terms and conditions).
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Physical interference can include any physical conduct that impedes
a person's ability to see, hear, or understand the terms and
conditions, including but not limited to physically hiding or
withholding notices.\20\
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\20\ See, e.g., Complaint at 6, 18-19, CFPB v. All American
Check Cashing, Inc., No. 3:16-cv-00356 (S.D. Miss. May 11, 2016)
(check cashing company materially interfered with consumers' ability
to understand a term or condition by requiring employees to block
consumers' view of check cashing fees by counting money over the
receipt or to quickly remove the receipt).
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Digital interference can include impediments to a person's ability
to see, hear, or understand the terms and conditions when they are
presented to someone in electronic or virtual format. This form of
interference includes but is not limited to user interface and user
experience manipulations such as the use of pop-up or drop-down boxes,
multiple click-throughs, or other actions or ``dark patterns'' \21\
that have the effect of making the terms and conditions materially less
accessible or salient.
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\21\ See FTC Staff Report, Bringing Dark Patterns to Light
(Sept. 2022), <a href="https://www.ftc.gov/reports/bringing-dark-patterns-light">https://www.ftc.gov/reports/bringing-dark-patterns-light</a>.
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Overshadowing includes the prominent placement of certain content
that interferes with the comprehension of other content, including
terms and conditions.\22\
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\22\ See, e.g., First Amended Complaint at 12-13, 26-27, CFPB v.
TCF National Bank, No. 17-cv-00166 (D. Minn. Mar. 1, 2017) (bank
chose to use ``an account opening process that interfered with
customers' ability to consider the contents of the Notice when they
made their Opt-In decision'' by presenting consumers with the choice
to select overdraft service during a time when they were not looking
at the explanatory notice relating to their opt-in rights); see also
CFPB v. TCF Nat'l Bank, No. 17-cv-00166, 2017 WL 6211033, at *2-3
(D. Minn. Sept. 8, 2017) (denying bank's motion to dismiss
abusiveness claim).
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Material Interference
There are a number of methods to prove material interference with a
consumers' ability to understand terms or conditions, including but not
limited to those described below. First, while intent is not a required
element to show material interference, it 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.\23\ Second, material interference can be established with
evidence that the natural consequence of the act or omission would be
to impede consumers' ability to understand. And third, material
interference can also be shown with evidence that the act or omission
did in fact impede consumers' actual understanding. While evidence of
intent would provide a basis for inferring material interference under
the first method, it is not a required element to show material
interference.
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\23\ Cf. Policy Statement on Deception at 5, Federal Trade
Commission (``When evidence exists that a seller intended to make an
implied claim, the Commission will infer materiality.'').
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Certain terms of a transaction are so consequential that when they
are not conveyed to people prominently or clearly, it may be reasonable
to presume that the entity engaged in acts or omissions that materially
interfere with consumers' ability to understand. 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, an entity's provision of a product or service may
interfere with 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.
B. Taking Unreasonable Advantage
The second form of ``abusiveness'' under the CFPA prohibits
entities from taking unreasonable advantage of certain
circumstances.\24\ Congress determined that it is an abusive act or
practice when an entity takes unreasonable advantage of three
particular circumstances.\25\ The circumstances are:
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\24\ CFPA section 1031(d)(2), 12 U.S.C. 5531(d)(2).
\25\ See supra note 14.
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(1) A ``lack of understanding on the part of the consumer of the
material risks, costs, or conditions of the product or service.'' \26\
This circumstance concerns gaps in understanding affecting consumer
decision-making.
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\26\ CFPA section 1031(d)(2)(A), 12 U.S.C. 5531(d)(2)(A).
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(2) The ``inability of the consumer to protect the interests of the
consumer in selecting or using a consumer financial product or
service.'' \27\ This circumstance concerns unequal bargaining power
where, for example, consumers lack the practical ability to switch
providers, seek more favorable terms, or make other decisions to
protect their interests.
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\27\ CFPA section 1031(d)(2)(B), 12 U.S.C. 5531(d)(2)(B).
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(3) The ``reasonable reliance by the consumer on a covered person
to act in the interests of the consumer.'' \28\ This circumstance
concerns consumer reliance on an entity, including when consumers
reasonably rely on an entity to make a decision for them or advise them
on how to make a decision.
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\28\ CFPA section 1031(d)(2)(C), 12 U.S.C. 5531(d)(2)(C).
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Under the CFPA, it is illegal for an entity to take unreasonable
advantage of one of these three circumstances, even if the condition
was not created by the entity.\29\
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\29\ See CFPA section 1031(d)(2), 12 U.S.C. 5531(d)(2).
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[[Page 21886]]
The ordinary meaning of the phrase ``take advantage of'' is
generally ``to make use of for one's own benefit.'' \30\ An advantage
can include a variety of monetary and non-monetary benefits to the
entity or its affiliates or partners, including but not limited to
increased market share, revenue, cost savings, profits,\31\
reputational benefits, and other operational benefits to the entity.
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\30\ E.g., CFPB v. ITT Educ. Servs., Inc., 219 F. Supp. 3d 878,
918 (S.D. Ind. 2015) (quoting this as one of the definitions from
Webster's Third New Int'l Dictionary 2331 (3d ed.1993)).
\31\ Advantage-taking may occur when an entity pursues the
prospect of monetary gain, even if ultimately it does not accrue a
profit. In ordinary usage, one can take advantage of one of the
specified statutory circumstances, even if that benefit is not
successfully realized. The CFPA's legislative history provides an
example of this situation, when discussing abuses in the subprime
mortgage industry. The legislative history notes that some ``abusive
practices may well be profitable in the short term, but are ticking
time bombs waiting to explode'' upon banks. S. Rep. No. 111-176, at
17 (2010) (internal quotation marks omitted). Thus, abusive acts or
practices may not ultimately be profitable for the covered party. If
an abusive act or practice takes advantage of one of the specified
statutory circumstances but fails to turn a profit, for example due
to incompetence in carrying out the scheme, it would be in line with
congressional intent and the ordinary usage of the phrase ``takes
unreasonable advantage of'' to consider the act or practice to be
eligible for an abusiveness finding on that basis.
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The CFPA prohibits taking ``unreasonable'' advantage of the
specified statutory circumstances. The term ``reasonable'' means
``[f]air, proper, or moderate under the circumstances,'' \32\ and
conversely, ``unreasonable'' means ``exceeding the bounds of reason or
moderation.'' \33\
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\32\ Reasonable, Black's Law Dictionary (11th ed. 2019).
\33\ Unreasonable, Webster's Third New Int'l Dictionary 2507 (3d
ed. 1993).
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In crafting the abusiveness prohibition, Congress identified
categories of practices that distort the market and ultimately harm
consumers. Therefore, unlike unfairness, government enforcers do not
need to independently prove that an act or practice caused substantial
injury in order to establish liability under the abusiveness
prohibition.\34\
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\34\ See CFPA section 1031(c)(1)(A), 12 U.S.C. 5531(c)(1)(A).
The amount of harm is relevant, however, to crafting remedies. Also,
harm in some cases may bolster a determination that an entity is
taking unreasonable advantage of consumers within the meaning of
CFPA section 1031(d)(2).
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Evaluating unreasonable advantage involves an evaluation of the
facts and circumstances that may affect the nature of the advantage and
the question of whether the advantage-taking was unreasonable under the
circumstances.\35\ Such an evaluation does not require an inquiry into
whether advantage-taking is typical or not.\36\ And even a relatively
small advantage may be abusive if it is unreasonable. There are also a
number of analytical methods, including but not limited to those
described below, that can be used to evaluate unreasonable advantage-
taking.
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\35\ Cf., e.g., Swift & Co. v. Wallace, 105 F.2d 848, 854-55
(7th Cir. 1939) (`` `[U]nreasonable' is not a word of fixed content
and whether preferences or advantages are unreasonable must be
determined by an evaluation of all cognizable factors which
determine the scope and nature of the preference or advantage.'').
\36\ While evidence of large or atypical advantage-taking is not
required under the reasonableness inquiry, it may nonetheless be
relevant.
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First, when Congress formulated the CFPA, one of its main concerns
was financial products and services that may be ``set up to fail.''
Before the 2007-2008 financial crisis, mortgage lenders were willing to
make loans on terms that people could not afford in part due to the
ability to off-load default risk into the secondary market. This led to
significant harm to the household sector, which was ultimately
transmitted to the broader financial system.
The CFPA's legislative history explains that, had the CFPB existed,
``the CFPB would have been able to see and take action against the
proliferation of poorly underwritten mortgages with abusive terms.''
\37\ Partly in response to the financial crisis, Congress prohibited
certain abusive business models and other acts or practices that--
contrary to many consumer finance relationships where the company
benefits from consumer success--misalign incentives and generate
benefit for a company when people are harmed.\38\ In many
circumstances, it is unreasonable for an entity to benefit from, or be
indifferent to, negative consumer outcomes resulting from one of the
circumstances identified by Congress.
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\37\ S. Rep. No. 111-176, at 229 (2010), <a href="https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1">https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1</a>.
\38\ See, e.g., Complaint at 26-29, CFPB v. Aequitas Capital
Management, Inc., No. 3:17-cv-01278 (D. Or. Aug. 17, 2017) (action
against lender to students at for-profit schools that reaped revenue
despite the high default rate of the loans that the students were
induced to take out).
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Second, the CFPA's legislative history emphasized that, as a result
of CFPB oversight, ``a consumer can shop and compare products based on
quality, price, and convenience without having to worry about getting
trapped by fine print into an abusive deal.'' \39\ Unreasonable
advantage-taking includes using the statutory circumstances to acquire
particular leverage over people or deprive consumers of legal
rights.\40\ Relatedly, advantage-taking may be unreasonable when an
entity caused one of the circumstances described in CFPA section
1031(d)(2).\41\
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\39\ S. Rep. No. 111-176, at 229 (2010), <a href="https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1">https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1</a>.
\40\ E.g., First Amended Complaint at 40-41, CFPB v. Think
Finance, LLC, No. 4:17-cv-00127 (D. Mont. Mar. 28, 2018) (It was
abusive for a company to attempt to collect loans that, unbeknownst
to the consumers, could not lawfully be collected because they were
void.).
\41\ See, e.g., Complaint at 9-10, CFPB v. SettleIT, Inc., No.
8:21-cv-00674 (C.D. Cal. Apr. 13, 2021) (A debt-settlement company
took unreasonable advantage of consumers' reasonable reliance when
it ``told consumers that it would work in their interests only,''
thus inducing consumers to rely on the company, but actually
prioritized the settlement of debts owed to lenders with which it
was affiliated.).
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One may also assess whether entities are obtaining an unreasonable
advantage by considering whether they are reaping more benefits as a
consequence of the statutorily identified circumstances, or whether the
benefit to the entity would have existed if the circumstance did not
exist.\42\ In other words, entities should not get a windfall due to a
gap in understanding, unequal bargaining power, or consumer reliance.
Having said that, section 1031(d)(2) does not require an investigative
accounting of costs and benefits or other form of quantification to
make a finding. Instead, one may rely on qualitative assessment to
determine whether an entity takes an unreasonable advantage.
---------------------------------------------------------------------------
\42\ See, e.g., CFPB, Supervisory Highlights: Issue 28, Fall
2022, at 22 (Nov. 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-28_2022-11.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-28_2022-11.pdf</a> (mortgage
servicers took unreasonable advantage of consumers' lack of
understanding when they profited from insufficiently disclosed
phone-payment fees that were materially greater than the cost of
other payment options). In JPay, LLC, File No. 2021-CFPB-0006 (Oct.
19, 2021), the CFPB found an abusive practice where a firm leveraged
an exclusive contract to charge fees on prepaid cards used to
provide money to individuals being released from prison or jail. The
prepaid cards replaced the feeless option of receiving such money as
cash or by check that previously had been offered by prisons and
jails. Under these circumstances, the entire fee accruing to JPay
was considered an ``unreasonable advantage.''
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a. Lack of Understanding
The first circumstance, of which entities cannot take
``unreasonable advantage,'' as defined in the CFPA, concerns ``a lack
of understanding on the part of the consumer of the material risks,
costs, or conditions of the product or service.'' \43\ When there are
gaps in understanding regarding the material risks, costs, or
conditions of the entity's product or service, entities may not take
unreasonable advantage of that gap. Such gaps could include those
between an entity and a consumer. Certain types of gaps in
understanding can create
[[Page 21887]]
circumstances where transactions are exploitative.
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\43\ CFPA section 1031(d)(2)(A), 12 U.S.C. 5531(d)(2)(A).
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Gaps in understanding as to ``risks'' encompass a wide range of
potential consumer harms. ``Risks'' include but are not limited to the
consequences or likelihood of default \44\ and the loss of future
benefits.\45\ Gaps in understanding related to ``costs'' include any
monetary charge to a person as well as non-monetary costs such as lost
time, loss of use, or reputational harm.\46\ And gaps in understanding
with respect to ``conditions'' include any circumstance, context, or
attribute of a product or service, whether express or implicit.\47\ For
example, ``conditions'' could include the length of time it would take
a person to realize the benefits of a financial product or service,\48\
the relationship between the entity and the consumer's creditors,\49\
the fact a debt is not legally enforceable,\50\ or the processes that
determine when fees will be assessed.\51\
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\44\ See, e.g., Complaint at 13-14, 18, CFPB v. Pension Funding
LLC, No. 8:15-cv-01329 (C.D. Cal. Aug. 20, 2015) (explaining that
because pension advance companies ``obscured the true nature of the
transactions, failed to disclose and misrepresented the costs of the
loans, and gave consumers misleading advice, consumers could not
clearly understand the risks or costs of the loans or effectively
compare the loans to potential less costly alternatives,'' and
describing how companies aggressively pursued consumers who
defaulted).
\45\ See, e.g., Amended Complaint at 6, CFPB v. Access Funding,
No. 1-16-cv-03759-JFM (D. Md. Dec. 13, 2017) (``Consumers received a
steeply discounted lump sum in return for signing away their future
payment streams. The lump sums Access Funding provided consumers
typically represented only about 30% of the present value of those
future payments.'').
\46\ See, e.g., Fort Knox Nat'l Co., File No. 2015-CFPB-0008, at
8 (Apr. 20, 2015) (entities took unreasonable advantage of
consumers' lack of understanding by charging fees that they ``did
not adequately disclose''); CFPB, Supervisory Highlights: Issue 28,
Fall 2022, at 22 (Nov. 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-28_2022-11.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-28_2022-11.pdf</a> (mortgage
servicers took unreasonable advantage of consumers' lack of
understanding when they profited from insufficiently disclosed
phone-payment fees that were materially greater than the cost of
other payment options); First Amended Complaint at 14, CFPB v.
Freedom Debt Relief, LLC, No. 3:17-cv-06484 (N.D. Cal. June 1, 2018)
(``Freedom did not disclose to consumers before they enrolled in its
program that they might be required to negotiate with creditors on
their own, including by deceiving their creditors, in order to
settle their debts.'').
\47\ See, e.g., First Amended Complaint at 40-41, CFPB v. Think
Finance, LLC, No. 4:17-cv-00127-BMM (D. Mont. Mar. 28, 2018)
(consumers' ``legal obligation to repay is a material term, cost, or
condition of a loan,'' and online lenders ``took unreasonable
advantage of consumers' lack of understanding regarding the voidness
of [their] loans'' under State usury or licensing laws to charge
higher, illegal interest rates); Zero Parallel, LLC, File No. 2017-
CFPB-0017, at 6 (Sept. 6, 2017) (``Zero Parallel's sale of Leads
resulting in, or likely to result in, loans that are void in whole
or in part under the laws of the consumer's state of residence based
on state-licensing requirements or interest-rate limits takes
unreasonable advantage of a lack of understanding on the part of the
consumer of the material risks, costs, and conditions of the
loans.''); see also CFPB v. Think Finance, LLC, No. CV-17-127-GF-
BMM, 2018 WL 3707911, at *8 (D. Mont. Aug. 3, 2018) (denying Think
Finance defendants' motion to dismiss abusiveness claim).
\48\ See, e.g., CFPB v. American Debt Settlement Solutions, No.
9:13-ev-80548-DMM, at 8 (S.D. Fla. June 6, 2013) (Stipulated Final
Judgment and Order) (``ADSS's acts or practices are abusive . . .
because . . . ADSS has knowingly enrolled in its debt-relief
programs consumers whose financial conditions make it highly
unlikely that they can complete the programs, and ADSS has
nonetheless collected fees from consumers who had inadequate income
to complete their debt settlement programs.''); Complaint at 15,
CFPB v. American Debt Settlement Solutions, No. 9:13-cv-80548-DMM
(S.D. Fla., May 30, 2013) (``This practice takes unreasonable
advantage of consumers' lack of understanding of how long it will
take ADSS to settle their debts and therefore how much money they
will spend before realizing any benefits from enrolling in ADSS's
debt-relief program.'').
\49\ See, e.g., Amended Complaint at 14, CFPB v. Access Funding,
No. 1-16-cv-03759-JFM (D. Md. Dec. 13, 2017) (``Consumers did not
understand that Smith was not providing independent professional
advice or that he did not take their individual circumstances or
interests into account. They also did not understand that their
interests would likely be better served by a truly independent
advisor.'').
\50\ See First Amended Complaint at 40-41, CFPB v. Think
Finance, LLC, No. 4:17-cv-00127 (D. Mont. Mar. 28, 2018) (It was
abusive for a company to attempt to collect loans that, unbeknownst
to the consumers, could not lawfully be collected because they were
void.); Colfax Capital Corp., File No. 2014-CFPB-0009, at 11-12
(July 29, 2014) (it was abusive for company to service and collect
on consumer financing agreements that State laws rendered void or
limited the consumer's obligation to repay).
\51\ See, e.g., Regions Bank, File No. 2022-CFPB-0008, at 15
(Sept. 28, 2022) (``Due to [the bank's] counter-intuitive, complex
transaction processing, many consumers did not understand [the
bank's] overdraft practices or expect Authorized-Positive Overdraft
Fees. [The bank] took unreasonable advantage of this lack of
understanding by assessing at least $141 million in Authorized-
Positive Overdraft fees during the Relevant Period.'').
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While acts or omissions by an entity can be relevant in determining
whether people lack understanding,\52\ the prohibition in section
1031(d)(2)(A) does not require that the entity caused the person's lack
of understanding through untruthful statements or other actions or
omissions.\53\ Under the text of section 1031(d)(2)(A), the consumer's
lack of understanding, regardless of how it arose, is sufficient. If
people lack understanding, entities may not take unreasonable advantage
of that lack of understanding. The lack of understanding can be caused
by third parties and can exist even when there is no contractual
relationship between the person and the entity that takes unreasonable
advantage of the person's lack of understanding.\54\
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\52\ See, e.g., Amended Complaint at 15-16, Bureau of Consumer
Fin. Prot. v. Certified Forensic Loan Auditors, LLC, No. 2:19-cv-
07722 (C.D. Cal. Nov. 13, 2019) (entities took unreasonable
advantage of consumers' lack of understanding regarding the
residential-mortgage industry and foreclosure-defense law by making
misrepresentations and concealing material facts regarding the
mortgage-relief services they offered); see also Bureau of Consumer
Fin. Prot. v. Certified Forensic Loan Auditors, LLC, No. 2:19-cv-
07722-ODW, 2020 WL 2556417, at *4 (C.D. Cal. May 20, 2020) (denying
Certified Forensic Loan Auditors defendants' motion to dismiss
abusiveness claim).
\53\ See, e.g., Zero Parallel, LLC, File No. 2017-CFPB-0017, at
6 (Sept. 6, 2017) (it was abusive to sell leads resulting or likely
to result in loans that were void in whole or in part under the laws
of the consumer's State of residence).
\54\ See, e.g., Am. Complaint at 2, CFPB v. D & D Marketing
Inc., No. 2:15-cv-09692 (C.D. Cal. June 30, 2016) (lead aggregator
``failed to vet or monitor its lead generators and lead purchasers,
exposing consumers to the risk of having their information purchased
by actors who would use it for illegal purposes,'' ``allowed its
lead generators to attract consumers with misleading statements,''
and ``took unreasonable advantage of consumers' lack of
understanding of the material risks, costs, or conditions of the
loan products for which they apply'').
---------------------------------------------------------------------------
The statutory text of the prohibition does not require that the
consumer's lack of understanding was reasonable to demonstrate abusive
conduct.\55\ Similarly, the prohibition does not require proof that
some threshold number of people lacked understanding to establish that
an act or practice was abusive.
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\55\ Although establishing that a reasonable consumer would lack
understanding of the material risks, costs, or conditions of a
product or service is not a prerequisite to establishing liability
under CFPA section 1031(d)(2)(A), government enforcers or
supervisory agencies may rely on the fact that a reasonable consumer
would lack such understanding to establish that consumers did not
understand.
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A person may lack understanding of risks, costs, or conditions,
even if they have an awareness that it is in the realm of possibility
that a particular negative consequence may follow or a particular cost
may be incurred as a result of using the product or service.\56\ But
consumers generally do not expect companies to benefit from or be
indifferent to certain negative consequences, including but not limited
to default. Moreover, consumers may not understand that a risk is very
likely to happen or that--though relatively rare--the impact of a
[[Page 21888]]
particular risk would be severe.\57\ The inquiry under section
1031(d)(2)(A) is whether some consumers in question have a lack of
understanding, not all consumers or even most consumers. Since there
can be differences among consumers in the risks, costs, and conditions
they face and in their understanding of them, there may be a violation
with respect to some consumers even if other consumers do not lack
understanding.
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\56\ 82 FR 54472, 54740 (Nov. 17, 2017) (``2017 Payday Rule''),
ratified by 85 FR 41905 (July 13, 2020), upheld in Cmty. Fin. Servs.
Ass'n of Am., Ltd. v. CFPB, 558 F. Supp. 3d 350, 362 (W.D. Tex.
2021), aff'd in relevant part, 51 F.4th 616 (5th Cir. 2022). The
CFPB explained in the preamble to a rule rescinding part of the 2017
Payday Rule that ``[t]he [rescission] rulemaking addresse[d] the
legal and evidentiary bases for particular rule provisions
identified in this final rule. It d[id] not prevent the Bureau from
exercising tool choices, such as appropriate exercise of supervision
and enforcement tools, consistent with the Dodd-Frank Act and other
applicable laws and regulations. It also d[id] not prevent the
Bureau from exercising its judgment in light of factual, legal, and
policy factors in particular circumstances as to whether an act or
practice meets the standards for abusiveness under section 1031 of
the Dodd-Frank Act.'' 85 FR 44382, 44415 n.286 (July 22, 2020).
\57\ 82 FR at 54740.
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Lastly, one can demonstrate a person's lack of understanding in a
number of ways. For example, direct evidence of lack of understanding,
including but not limited to complaints and consumer testimony, can
suffice. Evidence or analysis showing that reasonable consumers were
not likely to understand can likewise be used to establish lack of
understanding. One can also demonstrate lack of understanding by
considering course of conduct and likely consequences. For example, if
a transaction would entail material risks or costs and people would
likely derive minimal or no benefit from the transaction, it is
generally reasonable to infer that people who nonetheless went ahead
with the transaction did not understand those material risks or
costs.\58\
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\58\ See CFPB, Supervisory Highlights: Issue 19, Summer 2019, at
3 (Sept. 2019), <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-19_092019.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-19_092019.pdf</a> (``By purchasing a
product [guaranteed asset protection] they would not benefit from
[because of the low loan-to-value ratio of their auto loans],
consumers demonstrated that they lacked an understanding of a
material aspect of the product.'').
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b. Inability of Consumers To Protect Their Interests
The second circumstance, of which entities cannot take
``unreasonable advantage,'' as defined in the CFPA, concerns ``the
inability of the consumer to protect the interests of the consumer in
selecting or using a consumer financial product or service.'' \59\ When
people are unable to protect their interests in selecting or using a
consumer financial product or service, they can lack autonomy. In these
situations, there is a risk that entities will take unreasonable
advantage of the unequal bargaining power.\60\ Thus, Congress has
outlawed taking unreasonable advantage of circumstances where people
lack sufficient bargaining power to protect their interests. Such
circumstances may occur at the time of, or prior to, the person
selecting the product or service, during their use of the product or
service, or both.
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\59\ CFPA section 1031(d)(2)(B), 12 U.S.C. 5531(d)(2)(B).
\60\ Consumers may also be unable to protect their interests
when the inequality in bargaining power flows from circumstances or
vulnerabilities that are present for individual or particular groups
of consumers.
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The consumer ``interests'' contemplated in section 1031(d)(2)(B)
include monetary and non-monetary interests, including but not limited
to property, privacy, or reputational interests.\61\ People also have
interests in limiting the amount of time or effort necessary to obtain
consumer financial products or services or remedy problems related to
those products or services. This includes, but is not limited to, the
time spent trying to obtain customer support assistance.\62\
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\61\ See, e.g., Wells Fargo Bank, N.A., File No. 2016-CFPB-0015,
at 6-7 (Sept. 8, 2016) (noting that respondent's ``acts of opening
unauthorized deposit accounts and engaging in simulated funding took
unreasonable advantage of consumers' inability to protect their
interests . . . in having an account opened only after affirmative
agreement[ ] [and] protecting themselves from security and other
risks'').
\62\ See, e.g., Complaint at 15, CFPB v. PayPal, Inc., No. 1:15-
cv-01426-PDB (D. Md. May 19, 2015) (consumers unable to protect
their interests where ``Defendants purported to allow consumers to
control the allocation of payments by requesting that their payments
be allocated to specific balances, but consumers seeking to make
such requests often could not reach a customer-service
representative'').
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A consumer's ``inability'' to protect their interests includes
situations when it is impractical for them to protect their interests
in selecting or using a consumer financial product or service.\63\ For
example, when the steps a person would need to take to protect their
interests are unknown to the person \64\ or are especially onerous,\65\
they are likely unable to protect their interest. Furthermore, people
who do not have monetary means may be unable to protect their interests
if the only practical method for doing so requires payment of
money.\66\ Of course, merely serving people without monetary means is
not abusive. However, it may be abusive to take unreasonable advantage
of a person's lack of monetary means to protect their interests.\67\
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\63\ 82 FR at 54743 (``The Bureau also rejects the
interpretation, presented by commenters, that the prong of
`inability of the consumer to protect the interests of the consumer
in selecting or using a consumer financial product or service' can
be met only when it is literally impossible for consumers to take
action to protect their interests. . . . [T]he Bureau believes the
clause `inability of the consumer to protect' is . . . reasonably
interpreted to mean that consumers are unable to protect their
interests when it is impracticable for them to do so in light of the
circumstances.''); see also ITT Educ. Servs., 219 F. Supp. 3d at 919
(holding that the phrase ``inability . . . to protect the interests
of the consumer'' does not refer merely to ``the theoretical power
[of consumers] to defend their interests''; it also encompasses
circumstances where ``a consumer is unable to protect herself not in
absolute terms, but relative to the excessively stronger position of
the defendant'').
\64\ See, e.g., Wells Fargo Bank, N.A., File No. 2016-CFPB-0015,
at 6-7 (Sept. 8, 2016) (Bank's ``acts of opening unauthorized
deposit accounts and engaging in simulated funding took unreasonable
advantage of consumers' inability to protect their interests in
selecting or using consumer financial products or services,
including [their] interests in having an account opened only after
affirmative agreement, protecting themselves from security and other
risks, and avoiding associated fees.''); U.S. Bank, N.A., File No.
2022-CFPB-0006, at 10 (July 28, 2022) (Bank's ``conduct violated the
CFPA prohibition against abusive acts or practices because [the
bank] took unreasonable advantage of the consumers' inability to
protect their interests in selecting or using a product or service
by opening credit cards, lines of credit, and deposit accounts
without consumers' knowledge and consent.'').
\65\ See, e.g., Complaint at 15-16, CFPB v. Freedom Stores Inc.,
2:14-cv-00643 (E.D. Va. Dec. 18, 2014) (consumers were unable to
bargain for the removal of a venue-selection clause that designated
the State or Federal courts of Virginia, and which ``was almost
certain to produce default judgments and lead to garnishments
against consumers who were unable to appear and assert a defense'').
\66\ See, e.g., Ace Cash Express Inc., File No. 2014-CFPB-0008,
at 10-11 (July 10, 2014) (payday loan provider ``leveraged an
artificial sense of urgency to induce delinquent borrowers with a
demonstrated inability to repay their existing loan to take out a
new . . . loan with accompanying fees''); see also Complaint at 14,
CFPB v. S/W Tax Loans, Inc., No. 1:15-cv-00299-JB-WPL (D.N.M. Apr.
14, 2015) (``By failing to disclose their financial interests in the
high-cost loan products to which they were steering their cash-
strapped and vulnerable customers, Thomas and the Tax Franchise took
unreasonable advantage of their tax clients' inability to protect
their own interests . . . .'' (emphasis added)); Credit Practices
Rule, 49 FR 7740, 7747 (Mar. 1, 1984) (The results of leading
studies indicate ``that the precipitating cause of default is
usually a circumstance or event beyond the debtor's immediate
control. When such events occur, default is generally an involuntary
response.''); AFSA, 767 F.2d at 976 (upholding the Credit Practices
Rule, including the finding that ``default is ordinarily the product
of forces beyond a debtor's control'').
\67\ ITT Educ. Servs., 219 F. Supp. 3d at 887-89, 919-20 (for-
profit college took unreasonable advantage of students' inability to
protect their interests by first guiding its students into temporary
loans that they could not repay and then, once those became due,
coercing them into taking out financially irresponsible longer-term
loans); Complaint at 26-29, CFPB v. Aequitas Capital Management,
Inc., No. 3:17-cv-01278 (D. Or. Aug. 17, 2017) (lender to students
at for-profit schools reaped revenue despite the high default rate
of the loans that the schools induced students to take out).
---------------------------------------------------------------------------
The nature of the customer relationship may also render consumers
unable to protect their interests in selecting or using a consumer
financial product or service. People are often unable to protect their
interests when they do not elect to enter into a relationship with an
entity and cannot elect to instead enter into a relationship with a
competitor. These consumer relationships, including but not limited to
those with credit reporting companies, debt collectors, and third-party
loan servicers, are generally structured such that people cannot
exercise meaningful choice in the
[[Page 21889]]
selection or use of any particular entity as a provider. In these
circumstances, people cannot protect their interests by choosing an
alternative provider either upfront (i.e., they have no ability to
select the provider to begin with) or during the course of the customer
relationship (i.e., they have no competitive recourse if they encounter
difficulty with the entity while using the product or service).
Obviously, such relationships are not per se abusive; however, entities
may not take unreasonable advantage of the absence of choice in these
types of relationships.\68\ In addition, entities may not take
unreasonable advantage of the fact that they are the only source for
important information or services.\69\
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\68\ See, e.g., JPay, LLC, File No. 2021-CFPB-0006 (Oct. 19,
2021) (prison financial services company took unreasonable advantage
of its status as a single-source government contractor for prepaid
cards; the company charged fees even if consumers did not want to do
business with the company).
\69\ See CFPB, Supervisory Highlights: Issue 27, Fall 2022, at
8-9 (Sept. 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_student-loan-servicing-supervisory-highlights-special-edition_report_2022-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_student-loan-servicing-supervisory-highlights-special-edition_report_2022-09.pdf</a> (``Examiners found that institutions
engaged in abusive acts or practices by withholding official
transcripts as a blanket policy in conjunction with the extension of
credit. These schools did not release official transcripts to
consumers that were delinquent or in default on their debts to the
school . . . . Th[e] heightened pressure to produce transcripts
leaves consumers with little-to-no bargaining power while academic
achievement and professional advancements depend on the actions of a
single academic institution.''); Bank of America, N.A., File No.
2022-CFPB-0004, at 18 (July 14, 2022) (bank reversed permanent
credits for consumers' unemployment insurance prepaid debit cards,
and cardholders were ``unable to protect their interests because
they could not control how and when [the bank] would investigate and
resolve their notices of error'').
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Consumers may also lack power to protect their interests in
selecting or using a consumer financial product or service when
entities use form contracts, where contractual provisions are not
subject to a consumer choice.\70\ Similarly, where the person is unable
to bargain over a clause because it is non-negotiable, they may be
deprived of the ability to protect their interests.\71\
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\70\ See, e.g., Complaint at 15-16, CFPB v. Freedom Stores Inc.,
2:14-cv-00643 (E.D. Va. Dec. 18, 2014) (consumers were unable to
bargain for the removal of a venue-selection clause that designated
the State or Federal courts of Virginia, and which ``was almost
certain to produce default judgments and lead to garnishments
against consumers who were unable to appear and assert a defense'').
\71\ See, e.g., Complaint at 4, 7, CFPB v. Sec. Nat'l Auto.
Acceptance Co., No. 1:15-cv-401 (S.D. Ohio June 17, 2015) (alleging,
in support of abusiveness claim under CFPA section 1031(d)(2)(B),
that consumers ``had no opportunity to bargain for [the] removal''
of contractual language purporting to authorize lender to contact
commanding officers of military servicemembers who defaulted on
their loans); Credit Practices Rule, 49 FR 7740, 7745-47 (Mar. 1,
1984). In AFSA, the D.C. Circuit upheld the FTC's Credit Practices
Rule against challenge to FTC's exercise of its unfairness authority
in promulgating the rule. The D.C. Circuit noted: ``The Commission
further found . . . that due to certain characteristics of the
consumer credit market, it could not reasonably conclude that the
mix of remedies included in the contracts reflects consumer
preferences. Whereas consumers may bargain over terms such as
interest rates, and the amount or number of payments, their ability
and incentive to bargain over the boilerplate remedial provisions is
substantially limited. Several aspects of the credit transaction
combine to prevent consumers from making meaningful efforts to
search, compare, and bargain over remedial provisions. As noted,
standard form contracts are presented on a take it or leave it
basis. . . . Given the substantial similarity of contracts,
consumers have little ability or incentive to shop for a better
contract.'' 767 F.2d at 976-77 (citations omitted).
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Consumers are often unable to protect their interests in selecting
or using a consumer financial product or service where companies have
outsized market power. When an entity's market share, the concentration
in a market more broadly, or the market structure prevents people from
protecting their interests by choosing an entity that offers
competitive pricing, entities may not use their market power to their
``unreasonable advantage.'' \72\
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\72\ See, e.g., JPay, LLC, File No. 2021-CFPB-0006 (Oct. 19,
2021) (prison financial services company took unreasonable advantage
of the market structure which allowed it, as a single-source
government contractor for prepaid cards, to charge fees even if
consumers did not want to do business with the company because
consumers were denied a choice on how their money would be given to
them upon release from incarceration).
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In addition, people are often unable to protect their interests in
using a product or service if they face high transaction costs to exit
the relationship. For example, the time, effort, cost, or risks
associated with extricating oneself from a relationship with entities
may effectively lock people into the relationship.
c. Reasonable Reliance
The third circumstance, of which entities cannot take
``unreasonable advantage,'' as defined in the CFPA, concerns ``the
reasonable reliance by the consumer on a covered person to act in the
interests of the consumer.'' \73\ This basis for finding abusiveness
recognizes that sometimes people are in a position in which they have a
reasonable expectation that an entity will act in their interest to
make decisions for them, or to advise them on how to make a decision.
Where people reasonably expect that a covered entity will make
decisions or provide advice in the person's interest, there is
potential for betrayal or exploitation of the person's trust.
Therefore, Congress prohibited taking unreasonable advantage of
reasonable consumer reliance. There are a number of ways to establish
reasonable reliance, including but not limited to the two described
below.
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\73\ CFPA section 1031(d)(2)(C), 12 U.S.C. 5531(d)(2)(C).
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First, reasonable reliance may exist where an entity communicates
to a person or the public that it will act in its customers' best
interest, or otherwise holds itself out as acting in the person's best
interest. Where an entity communicates to people that it will act in
their best interest, or otherwise holds itself out as doing so,
including through statements, advertising, or any other means, it is
generally reasonable for people to rely on the entity's explicit or
implicit representations to that effect.\74\ People reasonably assume
entities are telling the truth. The entity in these situations creates
an expectation of trust and the conditions for people to rely on the
entity to act in their best interest.
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\74\ See, e.g., ITT Educ. Servs., 219 F. Supp. 3d at 920-21
(denying motion to dismiss abusiveness claim under CFPA section
1031(d)(2)(C) where students reasonably relied on for-profit
college's financial-aid staff to act in their interests in signing
them up for loans); see also CFPB, Supervisory Highlights: Issue 27,
Summer/Fall 2022, at 14-15 (Sept. 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_student-loan-servicing-supervisory-highlights-special-edition_report_2022-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_student-loan-servicing-supervisory-highlights-special-edition_report_2022-09.pdf</a> (``A
servicer . . . engaged in an abusive act or practice by denying
[Teacher Loan Forgiveness (TLF)] applications where consumers used a
[nonstandard] format for their employment dates . . . . Consumers
reasonably rely on servicers to act in their interests, and this
servicer encouraged consumers to consult with their representatives
to assist in managing their accounts, including on its websites
where it provided information about TLF. Further, it was reasonable
for consumers who are applying for TLF to rely on their servicers to
act in the consumers' best interests because processing forgiveness
applications is a core function for student loan servicers, and they
are entirely in control of the evaluation policies and
procedures.'').
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Second, reasonable reliance may also exist where an entity assumes
the role of acting on behalf of consumers or helping them to select
providers in the market. In certain circumstances entities assume the
role of acting on behalf of people as their agents or representatives,
and people should be able to rely on those entities to act on their
behalf. In other circumstances entities often act as intermediaries to
help people navigate marketplaces for consumer financial products or
services.\75\ In these
[[Page 21890]]
situations, the entity, acting as an intermediary, can function as a
broker or other trusted source that the person uses in selecting,
negotiating for, or otherwise facilitating the procurement of consumer
financial products or services provided by third parties. Where the
entity's role in the marketplace is to perform these kinds of
intermediary functions, people should be able to rely on the entity to
do so in a manner that is free of manipulation.\76\ In both
circumstances, entities that engage in certain forms of steering or
self-dealing may be taking unreasonable advantage of the consumers'
reasonable reliance.\77\
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\75\ See, e.g., Complaint at 15-16, CFPB v. College Educ. Servs.
LLC, 8:14-cv-3078-T-36EAJ (M.D. Fla. Dec. 11, 2014) (College
Education Services' (CES) ``telemarketers held themselves out as
loan counselors and advisors with the expertise to establish custom-
tailored programs to address each student-loan debtor's specific
needs. CES created the illusion of expertise and individualized
advice to induce consumers to reasonably rely on the company to act
in their interests in seeking and selecting student loan debt-relief
plans. . . . CES took unreasonable advantage of the reasonable
reliance of consumers by enrolling and taking fees from consumers
whose loans were ineligible for consolidation . . . . CES also took
upfront fees to enroll some consumers in income-based repayment
plans or loan forgiveness programs for which they were not eligible.
In addition, CES placed some consumers in repayment plans that
increased their monthly student-loan payments, leaving those
consumers in a more financially precarious position than before.'').
\76\ See, e.g., U.S. Department of Treasury, Financial
Regulatory Reform, A New Foundation: Rebuilding Financial
Supervision and Regulation 68 (June 2009), <a href="https://fraser.stlouisfed.org/title/financial-regulatory-reform-5123">https://fraser.stlouisfed.org/title/financial-regulatory-reform-5123</a>
(``[C]onsumers may reasonably but mistakenly rely on advice from
conflicted intermediaries.'').
\77\ See, e.g., Amended Complaint at 13-15, CFPB v. Access
Funding, LLC, No. 1:16-cv-03759 (D. Md. Dec. 13, 2017) (consumers
seeking structured settlement advances were told by the advance
company that they needed independent advice and were directed to an
attorney who, though he held himself out as providing professional,
independent advice, was not independent and failed to disclose ties
to the company); see also, e.g., Complaint at 9-10, CFPB v.
SettleIT, Inc., No. 8:21-cv-00674 (C.D. Cal. Apr. 13, 2021)
(consumers seeking debt-settlement services relied on the company to
negotiate for debt reductions because the company told consumers
that it would work in their interests only, but the company failed
to disclose its financial connections to consumers' creditors);
Complaint at 15, CFPB v. Am. Debt Settlement Solutions, Inc., No.
9:13-cv-80548 (S.D. Fla. May 30, 2013) (consumers reasonably relied
on debt-settlement company to act in their interest by settling
their debts expeditiously).
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III. Regulatory Matters
This is a general statement of policy under the Administrative
Procedure Act (APA).\78\ While not required under the APA, the CFPB is
collecting comments and may make revisions to the policy statement at a
later time as appropriate in light of feedback received. The CFPB may
take no further action if no revisions are warranted. The policy
statement provides background information about applicable law and
articulates considerations relevant to the CFPB's exercise of its
authorities. It does not impose any legal requirements, nor does it
confer rights of any kind. It also does not impose any new or revise
any existing recordkeeping, reporting, or disclosure requirements on
covered entities or members of the public that would be collections of
information requiring approval by the Office of Management and Budget
under the Paperwork Reduction Act.\79\ Pursuant to the Congressional
Review Act,\80\ the CFPB will submit a report containing this policy
statement and other required information to the United States Senate,
the United States House of Representatives, and the Comptroller General
of the United States prior to its applicability date. The Office of
Information and Regulatory Affairs has designated this policy statement
as not a ``major rule'' as defined by 5 U.S.C. 804(2).
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\78\ See 5 U.S.C. 553(b).
\79\ 44 U.S.C. 3501 et seq.
\80\ 5 U.S.C. 801 et seq.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-07233 Filed 4-11-23; 8:45 am]
BILLING CODE 4810-AM-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.