CFPB reverses course on UDAAP enforcement

Under former Director Richard Cordray, the Consumer Financial Protection Bureau took frequent action against companies who had violated its Unfair, Deceptive, and Abusive Acts and Practices standards. But many in the financial services industry complained that the standards were ambiguous and requested clarification from the bureau.

In January of 2020, then-Director Kathy Kraninger provided that clarity, announcing that the bureau was changing its approach to enforcing its standards and limiting its own ability to pursue claims for abusive financial practices.

That friendlier approach was reversed on Thursday, when the CFPB announced it is rescinding the 2020 policy statement (Statement of Policy Regarding Prohibition on Abusive Acts or Practices) with the intent to exercise greater enforcement “consistent with the full scope of its statutory authority under the Dodd-Frank Act.”

According to the CFPB, the policy statement, which fundamentally limited the CFPB’s own ability to apply the abusive standard, or at least the frequency at which it does, was inconsistent with the Bureau’s duty to enforce Congress’s standard.

“For example, the 2020 Policy Statement stated that the CFPB would decline to seek civil money penalties and disgorgement for certain abusive acts or practices,” the CFPB said. “The CFPB deters abusive practices and compensates certain harmed consumers using penalties, so the Policy Statement undermined deterrence and was contrary to the CFPB’s mission of protecting consumers.”

Many financial regulators had previously had the ability to pursue claims against companies under the “Unfair or Deceptive Acts or Practices” or “UDAP” standard.  But things changed for the financial services industry after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added the “abusive” category and put it under the regulation of the CFPB.

Going forward, the CFPB said it intends to consider good faith, company size and “all other factors” it typically considers in its discretion.

“But a policy of declining to enforce the full scope of Congress’s definition of an abusive practice harms both the consumers who were taken advantage of and the honest companies that have to compete against those that violate the law,” the CFPB said.

In June of 2019, the CFPB held its “Abusive Acts or Practices Symposium,” covering a range of consumer financial services topics. One particular panel focused on whether there was even a need to clarify the abusive standard, as it is already statutorily defined, but panelists noted that the industry has struggled with examples of how abusiveness is different from “unfairness” or “deception.” Because the standard is unclear to the industry, one panelist even argued that many companies choose to limit products or offerings to avoid unknown compliance risks. 

At the time of its Policy Statement in 2020, the bureau said a firmer definition of abusive practices would enable the bureau to more effectively manage its scarce resources.

Carrie Hunt, the National Association of Federally-Insured Credit Unions‘ vice president of government affairs, said the CFPB’s actions will once again open a door to uncertainty for financial institutions.

“While the Dodd-Frank Act provides broad definitions of prohibited behaviors under UDAAP, these are not clear rules of the road,” Hunt said.

“NAFCU will continue to work with the bureau and reiterate its longstanding call for specific examples and defined guidance on prohibited practices so that the CFPB can prevent abusive behaviors, as opposed to just going after the bad actors in the marketplace,” said Hunt.

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