The Dodd-Frank Act prohibits unfair, deceptive, or abusive acts or practices in connection with consumer financial products and services. While Section 5 of the Federal Trade Commission Act (FTC Act) has long prohibited acts or practices that are unfair or deceptive, the Dodd-Frank Act was the first federal law to prohibit acts or practices that are abusive.
As a preliminary matter, the Dodd-Frank Act defines an abusive act or practice as one that: (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of the consumer's lack of understanding or reasonable reliance. However, the Dodd-Frank Act provides no additional guidance surrounding this novel concept of abusiveness, creating uncertainty throughout the financial services industry.
The CFPB's recent policy statement is meant to provide clarification to the industry by articulating certain principles relevant to supervision and enforcement. In particular, the CFPB will take the following measures in connection with its investigations into a financial institution's abusive acts or practices:
Citing or challenging abusive conduct only when the harm to consumers outweighs the benefit;
Avoiding "dual pleading" of conduct as unfair and abusive, and instead alleging "stand alone" abusiveness where clearly supported by analysis; and
Seeking monetary penalties only in cases where a financial institution has demonstrated a lack of good-faith compliance (except consumer redress will be sought in all cases where injury has occurred).
Notwithstanding the above guidance, the CFPB has left open the possibility of future rulemaking to further define the abusiveness standard under the Dodd-Frank Act. In the interim, the financial services industry should refer to the CFPB policy statement for guidance. In addition, for steps to ensure compliance with the Dodd-Frank prohibition on unfair, deceptive, or abusive acts or practices, see UDAAP Compliance Checklist.