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Dodd-Frank's "Abusive" Standard: The Dog that Didn't Bark

posted by Adam Levitin

The Trump Treasury Department's Dodd-Frank Act report spends more pages on the CFPB (including mortgage regulation) than on any other issue.  There's a whole bunch of blog posts that one could write about the Treasury report, but I want to limit myself here to one item that has long been on the GOP/industry complaint list about the CFPB:  that its power to proscribe "abusive" acts and practices is a problem because the term "abusive" is novel and undefined and that this creates uncertainty that is chilling economic growth.  Total hooey.  The Treasury's report is a lazy document is totally unconnected to the realities of how the CFPB has operated. It's a shame that some commentators are buying into it

Here's the story of the "abusive" power in a nutshell:  it's the dog that didn't bark.  The CFPB's critics have been complaining about the vagueness of the "abusive" power ever since the Dodd-Frank Act was in the legislative process.  Those arguments didn't hold a lot of water then because the term is defined by statute and has a history (namely HOEPA, the FDCPA, the Telemarketing Sales Rule, and the FTC's interpretation of "unfair" from 1962 to 1980), and the codification of "unconscionability" in the Uniform Consumer Credit Code.  But we now have the advantage of six years of CFPB enforcement activity to understand how the agency has used this power and what it means. Unfortunately, it seems that no one at Treasury bothered to look through the CFPB's enforcement actions to see how the agency has actually used its power to prosecute "abusive" acts and practices.  I did.  Here's the two things that stand out.  

First, the CFPB has been very sparing in alleging that acts and practices are "abusive".  The CFPB has brought around 185 enforcement actions to date.  Only 22 of these (less than 12% of all enforcement actions) have included counts alleging "abusive" acts and practices.  In all but one instance in these 22 cases, the very same behavior alleged to be "abusive" was also alleged to be "unfair" and/or "deceptive."  Unfair and deceptive are not new standards.  They have been around in the FTC Act since 1935.  While these standards weren't applied to banks for half a century (Regulation AA was from 1985), no institution, bank or non-bank, should be wholly surprised at what might be alleged to be unfair or deceptive.  And indeed, when the CFPB has brought unfairness charges, they have generally been in situations in which there is no consumer benefit whatsoever from the practice (e.g., Wells Fargo false accounts).  What this means is that the CFPB has not actually been surprising anyone when it has alleged "abusive" acts and practices because to date, the "abusive" power has been little more than a belt to go with the suspenders of "unfair and deceptive".  

Second, the behaviors alleged to be abusive are almost all in the context of pre-existing customer relationships.  (I include in this things like private student loans through the student's school.)  This is the angle about consumer finance that is almost always ignored. The real problems in consumer finance are less about consumers getting snookered into a product in the first place than by financial institutions taking advantage of existing consumers by changing terms, applying undisclosed fees, or, my favorite, Citizens Bank's "[we] keep the change" policy.  In other words, "abusive" is getting applied to function as a publicly enforceable duty of good faith and fair dealing, an implied term in all contracts. 

All of this suggests that there's really no crisis of uncertainty about what is "abusive".  To suggest, as the Trump Treasury Department's Dodd-Frank Act report does, that "Without meaningful standards that provide fair notice, many consumer financial firms are reluctant to innovate or offer new financial products or services," is utterly unsupported, and is really the result of lazy analysis.  The types of behavior that the CFPB has targeted are not behaviors that anyone would think are OK:  collecting debts that are unenforceable under state law or requiring servicemembers to litigate debt collection suits in a distant and inconvenient forum with which they have no connection, resulting, of course, in default judgments.  That's why you don't see any examples ever cited of legitimate business behavior getting improperly tagged as "abusive."  And the fact that almost all of the cases deal with the treatment of consumers in existing relationships with the financial institution means that the "abusive" cases have nothing to do with the offering of "new financial products or services."  They're all about mistreatment of consumers who bought into existing financial products or services.  And if innovation is the concern, well, there's the CFPB's Project Catalyst. Oh yeah, that's not mentioned in the Treasury report.  Treasury was too busy citing the Congressional testimony of the lawyer for PHH in its constitutional suit against the CFPB to actually look into the operations of the agency. 

Comments

Adam,

Certainly you jest in defending the CFPB's conduct in the wake of mortgage meltdown.

As a veteran of twenty years of litigation on the subject in the state of Ohio, I can tell you that the CFPB has been and is worthless.

You talk about the definition of the word "abuses" when in fact they ignore the most fundamental issue in the mortgage mess, eg "the standing to sue". Again, arranging the deck chairs on the Titanic.

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