Consumer Board Reverses Trump-Era Hands-Off Regulation; Ramps Up Abuse Prevention
Bamboozlers beware. The government is emphasizing protection against corporate abuse of consumers by restoring a standard abandoned by the Former Guy.
Previously, the Consumer Finance Protection Bureau cracked down on predatory activities but vigilance was abandoned by Donald Trump.
The implications for financial services companies and the people who do business with them are significant.
“For consumers, I think it is excellent,” said Paul E. Kantwill, a former bureau official and now executive director of the Rule of Law Institute at Loyola University Chicago School of Law.
“A lot of the protection was not necessarily there, and its return is a very good thing.”
A company’s action could be considered abusive if it tries to bamboozle consumers or prey on their ignorance or their reasonable trust.
Although consumer protection concepts go back to the 19th century, the abusiveness concept developed in the wake of the Great Recession in 2008-2009. After big financial institutions helped drive the economy into the ground and hurt millions, Congress responded with the Dodd-Frank Wall Street Reform and Consumer Protection Act. It was the biggest industry regulatory package in many years.
Overseeing Financial Companies
As part of the effort, the legislation created the Consumer Finance Protection Bureau as a parallel to the FDA or FTC to ensure companies treated consumers properly and legally. It was the brainchild of Elizabeth Warren, the Massachusetts senator who as a law professor had dug deeply into abusive financial practices.
One innovative aspect of the bureau was the abusiveness prohibition. It states that a company’s action could be considered abusive if it tried to bamboozle consumers or prey on their ignorance or their reasonable trust.
Under that standard, a company can’t legally say something that is confusing just to avoid getting caught up in charges of fraud. That is what Wells Fargo and Fifth Third Bank were prosecuted for after opening millions of bogus checking, credit card and other accounts to collect unauthorized fees.
The bureau obtained a consent decree for payday lender Ace Cash Express in 2014 for alleged “unfair, deceptive, and abusive practices,” including excessive collection calls, disclosures of consumer debts to uninvolved third parties, and misrepresentation of actions, and threats of harm. The company agreed to significant changes in its practices.
But in January 2020, the Trump CFPB offered a “clarification” that opened a door to the kind of calculated frauds committed by Wells Fargo and Fifth Third Bank. The bureau suggested that consumers’ interests could be judged less important than some new business innovation and that the CFPB would “focus on citing or challenging conduct as abusive in supervision and enforcement matters only when ‘the harm to consumers outweighs the benefit’.” (Emphasis added.)
A ‘Light Touch’
The agency’s approach under Trump “was much more light-touch, much more pro-innovation,” said Stephen Newman, a partner at the Wall Street law firm of Stroock & Stroock & Lavan.
“The previous approach when the bureau was first established appeared to be much more hands-on. I think the concern of industry is a more hands-on approach will impair innovation.”
The agency at the time also said it would avoid dual pleading. That means it would distinguish abusiveness issues from unfairness or deceptiveness violations contained in the same set of facts.
Furthermore, the bureau said it would seek monetary relief “only when there has been a lack of a good-faith effort to comply with the law.”
The Trump-era interpretation of the law carried significant consequences, according to Loyola’s Kantwill, who was an assistant director of the bureau from December 2016 to July 2018.
“That’s the loophole in making the statement or adopting the policy,” Kantwill said. “It makes it very easy for someone to say, ‘We provided the appropriate disclosures and if the consumer had understood them, it should have done them no harm.’
“Obviously, when we’re talking about our most vulnerable consumers, that’s definitely not going to help.”
The Old Standard
In March 2021, in Joe Biden’s presidency, the bureau rescinded the Trump-era policy and said it would “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 use of the abusiveness standard already is returning the agency’s enforcement actions.
An April complaint issued against California debt-settlement business Settle It Inc. alleged that the company had engaged in “abusive acts or practices” by not mentioning financial connections to firms that were creditors for debt owned by some consumers. Instead, the firm disclosed that it was not owned or operated by any creditors—technically true but hairsplitting, deceptive language that might have met the Trump-era CFPB’s idea of a good-faith effort.