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CFPB's Anti-Abuse Authority: A Promising Development in Substantive Consumer Protection

posted by Jean Braucher

The Consumer Financial Protection Bureau is doing something promising with its anti-abuse authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  It is going after credit industry exploitation of consumers, particularly when business models involve using confusing terms that disclosure cannot adequately address.  See my paper on this topic. So I was not surprised to see George Will attacking this development.   We can't have smart, effective consumer protection, no matter how popular it might be.

In a column published in many newspapers this week,Will wrote: “The CFPB's mission is to prevent practices it is empowered to ‘declare’ are ‘unfair, deceptive, or abusive.’ Law is supposed to give people due notice of what is proscribed or prescribed, and developed law does so concerning ‘unfair’ and ‘deceptive’ practices. Not so, ‘abusive.’”

The flaws in Will's critique are legion. First, the CFPB has given lots of notice of what it is doing, in a detailed examination handbook.

Second, we shouldn't oppose new, smarter regulation because “developed law” does not define it.  But to get real, the CFPB's anti-abuse authority is actually well defined in a data-driven way, the signature method of the CFPB. The abuse concept is based on a wealth of social science literature documenting the credit industry’s science of exploiting consumer error stemming from standard human cognitive biases.

Will also seems to have missed out on the more than 20-year-old conversation about responsive regulation, meaning a dialogue between regulators and industry about acceptable practices.   He just shows a crude hatred of any regulation, no matter what the need. Have we learned nothing about the need for better consumer financial protection since the housing bubble of 2004-2007, which produced a worldwide recession due to exploitation of hapless US consumers?

So what is CFPB doing with it anti-abuse authority? Just as bank examiners have authority to look into financial institutions’ practices that affect their safety and soundness and then persuade them to change risky ones, consumer financial protection examiners working for CFPB can examine whether these institutions are developing tricks and traps for consumers. It can then pressure them to stop, before too much risk materializes. Enforcement is a backup strategy, likely to be used sparingly against egregious offenders.

Effective consumer protection requires responsive regulation.  If regulators only target specific practices, human creativity shows infinite capacity to invent new ones with the same exploitative effects.

But back to George Will.  He seems to be ignorant of the fact that the law of unfairness and deception took a very long time to get to a reasonably settled state. In addition, by design, the legal definitions of each of these concepts leave regulators and courts a lot of discretion. The aim is prevention, not just after-the-fact relief through lawsuits, which never fully compensate for harm done.

Unfairness and deception became part of consumer protection law nearly 75 years ago. In 1938, the Wheeler-Lea Act amended the original Federal Trade Commission Act of 1914 to empower the FTC to police unfair and deceptive acts and practices (UDAPs).  The consumer movement of the 1960s and 1970s led to state enactment of little FTC Acts that gave state attorneys general and other consumer protection officials similar enforcement powers and in most cases also gave consumers the right to sue when they were deceived or otherwise cheated.

The FTC spent more than 40 years defining its policing powers concerning unfair and deceptive practices. It was only in the 1980s that it issued policy statements on both powers (in response to congressional threats to defund the FTC because of its prescient efforts to regulate advertising of sugar-drenched cereals on TV shows for children).

The Dodd-Frank Act picked up the unfairness and deception concepts developed by the FTC and state consumer protection officials and gave them to the new consumer financial protection agency, CFPB.  CFPB has explicitly adopted the FTC policy statements’ definitions.

CFPB also got the new abusiveness power in the Dodd-Frank Act, so that all told it now has what are called UDAAP powers.  The FTC has no explicit parallel power, although it should, and states should be enacting the anti-abuse standard into their consumer protection acts, too.

Unfairness, deception and abusiveness are overlapping legal standards, but under the FTC policy statements, the emphasis in unfairness is on substantial injury (which can be by small injury to many consumers) and whether consumers can avoid it, and the emphasis in deception is on likelihood that consumers are being misled. Both of these concepts are potentially constrained because arguably disclosure of nasty terms is sufficient.

Abusiveness is defined in some detail in the Dodd Frank Act, and CFPB has taken great pains to spell out the concept even more in its examination handbook.  The emphasis with the abuse power is on whether consumer errors are being systematically exploited in ways consumers don’t understand, often by complex pricing policies.

Examples abound in recent credit industry practices, ones where high default rates were expected.  Credit card pricing used to focus on low teaser rates to get debtors into what has been called “the sweatbox” of debt, in which the consumer pays very high interest for a period, so that the issuer makes money even on borrowers who eventually default. After the Great Recession and the reduced consumer confidence that followed, creditors adapted to consumers’ greater caution about debt by changing their pricing to emphasize lower long-term rates while adding many confusing extra charges to which consumers did not pay attention.

During the housing bubble, subprime mortgage lenders emphasized low or zero downpayments, with low interest for two or three years followed by resetting to a high rate. As with credit cards before the recession, lenders used low initial rates in the same way cheese is used in a mousetrap. Many consumers failed to appreciate the risk, and then they were caught by falling home values when the housing market snapped. Another form of consumer error, a particularly gross one, was common—taking out a subprime loan when the borrower could have qualified for a prime one. Errors in the use of payday loans are also common—including using high-cost payday loans when liquid assets or cheaper credit products are available and getting trapped by the fact that these loans do not typically provide for installment repayment—resulting in multiple rollovers with a new fee charged each time. 

Many of these practices are plausibly also unfair and deceptive, but the new abusiveness power best captures the problem—that terms are designed based on patterns of consumer error that creditors have studied and then taken advantage of. Disclosure won’t solve this sort of consumer protection problem; substantive regulation is needed to prevent creditors from setting a trap.

Another part of George Will’s critique of CFPB has to do with the way Congress funded it through the Federal Reserve Board to insulate it from credit industry pressure.  Congress did so because it knew its own weakness in withstanding big money lobbying. Consumer protection is incredibly popular, so this approach is actually pro-(small d) democratic.  A nationwide poll of likely voters last year found that 93 percent of respondents wanted clear explanations of credit rates and fees (not possible without simplification of terms), 77 percent wanted it to be harder for lenders to offer risky or confusing loans, and 74 percent wanted a single, and thus strong, federal consumer financial protection agency.  


I love "lenders used low initial rates in the same way cheese is used in a mousetrap".

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