The Consumer Financial Protection Bureau (CFPB) last week reversed a Trump administration policy on how it assesses and punishes abusive practices in the financial services industry.
“Going forward, the CFPB intends to exercise its supervisory and enforcement authority consistent with the full scope of its statutory authority under the Dodd-Frank Act as established by Congress,” the agency said in a press release Thursday.
The announcement rescinds a January 2020 policy statement on the abusiveness standard issued by former CFPB Director Kathy Kraninger. In that statement, Kraninger said “uncertainty remains as to the scope and meaning of abusiveness” as defined in Dodd-Frank, and that applying the abusiveness standard in supervisory or enforcement actions “may impede or deter the provision of otherwise lawful financial products or services that could be beneficial to consumers.”
Kraninger had said the CFPB should apply the abusiveness standard in supervisory and enforcement matters “only when the harm to customers outweighs the benefits” or when there has been a “lack of good faith effort to comply with the law.”
The new statement, signed by Acting Director Dave Uejio, rejects that approach.
“The 2020 Policy Statement was inconsistent with the Bureau’s duty to enforce Congress’s standard and rescinding it will better serve the CFPB’s objective to protect consumers from abusive practices,” the agency said in its press release. “… 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.”
“They went out of their way to say the policy [under Kraninger] was completely counterproductive to the CFPB’s mission. That is bold statement to make about your former colleagues.”
Alexandra Megaris, Partner, Venable
Those who represent clients before the CFPB said the change in tone is striking.
“I think it signals the CFPB wants to make a strong break with the previous administration,” said Eamonn Moran, of counsel with the firm Morgan Lewis and former counsel in the CFPB’s Office of Regulations. “It looks to me like the agency doesn’t want to be put in a box in terms of pursuing enforcement actions for what they claim to be abusive conduct.”
In four years under former President Donald Trump, the CFPB rarely used its authority to punish firms it deemed had engaged in abusive acts or practices, Moran said. Kraninger’s 2020 statement on the subject was a codification of established practice at the CFPB under the previous administration and therefore largely symbolic, he said.
The rescinding of that statement is similarly symbolic, Moran said, but could also be taken as a warning to industry that the CFPB under President Joe Biden “will exercise the full extent of its powers under the Dodd-Frank Act.” The agency will likely return to the more aggressive enforcement posture it held during the tenure of former Director Richard Cordray, who left his post early in the Trump presidency.
Alexandra Megaris, a partner with law firm Venable, said the new statement “means abusiveness as a stand-alone claim is back on the table.”
Megaris said the CFPB’s enforcement decisions have typically paired actions considered abusive with those characterized as unfair and deceptive. Abusive acts and practices are defined in the Dodd-Frank Act as “taking unreasonable advantage” of someone, like having a customer sign an agreement when the company or its representative knows they cannot understand it. Under Biden, this standard will more likely apply to practices involving customers who speak languages other than English, the elderly, and minority populations, she said.
Dodd-Frank also allows the abuse standard to be applied to businesses that promise to act in a customer’s best interest. This may be applied to companies acting in an advisory capacity, Megaris said, or are somehow acting as a broker or middleman to help customers obtain financial services.
Uejio was appointed acting director at the CFPB by Biden in January. Biden’s nomination for the full-time role, Rohit Chopra, advanced from a Senate committee last week and is currently before the full Senate. A vote could come this week.
While other agencies like the Securities and Exchange Commission, Commodity Futures Trading Commission, and banking regulators have made a point of reducing penalties for companies that self-disclose violations and self-remediate the issue, the CFPB under Cordray often did not, Megaris said.
“That has put companies in a conundrum. They want to do the right thing, but the cost-benefit analysis is out of whack,” she said.
On a political note, the timing of the CFPB statement was curious, Megaris said, coming as it did before Chopra has been confirmed.
“They went out of their way to say the policy [under Kraninger] was completely counterproductive to the CFPB’s mission,” she said. “That is bold statement to make about your former colleagues.”