Compliance Blog

The Consumer Financial Protection Bureau (CFPB or bureau) released a policy statement outlining the elements of abusive acts or practices and offered a framework that may help credit unions identify practices that may fall under the scope of “abusive." The CFPB outlines what it considers the two abusive prohibitions. The second of the two has “three independent disjunctive grounds for finding abusiveness.” First, an abusive act or practice is one that “[m]aterially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.” The next is a practice or act that takes:

What does this look like at a high level or in practice? The CFPB suggests that, at a high level, it is a financial institution “obscuring important features of a product or service, or…leveraging certain circumstances to take an unreasonable advantage.” In practice, the CFPB maintains it is when there is a gap in the consumer’s understanding, unequal bargaining power between the parties, and the consumer relies on an institution to help or make a decision for the consumer. One thing to note is that the CFPB may also still consider an act or practice both deceptive or unfair as well as abusive.

Materially Interfering with Consumers’ Understanding of Terms and Conditions

Material inference may occur when “an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes understanding.” The CFPB identifies the following acts as some that may fall under the practice of material interference: burying disclosures, overshadowing, and physical or digital interference. For example, the practice of burying disclosures occurs when disclosures are written in a way that may affect someone’s understanding of the terms. Another type of material interference that is likely worth mentioning given that many disclosures are provided electronically is digital interference. Digital interference occurs when there are “impediments to a person’s ability to see, hear, or understand the terms and conditions when they are presented to someone in electronic or virtual format.” The bureau maintains this type of interference is generally focused on user interface and user experience manipulation. In practice, digital interference may happen when using pop-up or drop-down boxes or other user experiences or interfaces that make “the terms and conditions materially less accessible or salient.”

Taking Unreasonable Advantage

Taking unreasonable advantage may occur in three circumstances identified by the bureau. First, gaps in understanding (lack of understanding) may materialize when a consumer does not understand the material risks, costs, or conditions of the product or service. Second, a consumer may find themselves with unequal bargaining power (inability of consumers to protect their interest) when the consumer is limited in his or her ability to “…switch providers, seek more favorable terms, or make other decisions to protect their interests.” Third, consumer reliance (reasonable reliance) occurs when the consumer relies on the institution or advice from the institution on what decision to make.

Lack of Understanding

When there is a lack of understanding and gaps between the consumer and entity exist relating to the material risk, costs, and conditions of a product or service, the CFPB believes that these gaps may make transactions exploitative. The CFPB argues these gaps in understanding the risk, costs, and conditions of products and services may lead to consumer harm in the form of consequences such as default and reputational harm. The CFPB suggests a violation may exist for some consumers even if other consumers do understand the risks, costs, and conditions of the service or product. This results from differences in the types of risks, costs, and conditions consumers face. 

Inability of Consumers to Protect Their Interest

The CFPB provides that when a consumer loses his or her autonomy there is a risk that an institution may take “unreasonable advantage of the unequal bargaining power.” In this situation, autonomy exists when a consumer can protect his or her monetary or non-monetary interests. The CFPB maintains a consumer has an interest in “limiting the amount of time or effort necessary to obtain” a product or remedial measures related to the use of the product or service, such as the time spent on the phone with customer support. The CFPB also considers situations where it is impractical for consumers to protect their own interest.

The customer relationship is another area of concern for the CFPB. This is where the CFPB views bargaining power as an issue. The bureau argues the consumer’s interests are at stake when the consumer has a lack of meaningful choice of financial institutions. The CFPB suggests bargaining power is an issue when a consumer cannot “exercise meaningful choice” and has “no competitive recourse” if there are any issues with the institution. However, the CFPB is careful to say the lack of choice is not an outright abusive practice. 

Reasonable Reliance

Reasonable reliance may occur when there is a reasonable expectation that an institution will act in the consumer’s interest or advise the consumer on how to make the decision. Reasonable reliance may exist when the institution holds themselves out as acting in the consumer’s best interest. An entity may hold itself out as acting in the best interest through statements and advertisements. The CFPB maintains that it is reasonable for a person to rely on the statement because institutions may “create[] an expectation of trust.” The other circumstance that may create reasonable reliance in the consumer is when the institution acts on behalf of the consumer or helps the consumer. For example, an institution acting as a consumer’s agent, representative, or intermediary within a market may lead the consumer to rely on the institution.

The CFPB’s policy statement on abusive acts or practices will hopefully highlight behaviors that may fall under the CFPB’s microscope and allow credit unions to better anticipate any regulatory or compliance issues. If there are any additional questions about abusive acts or practices, please do not hesitate to contact NAFCU’s regulatory compliance team at compliance@nafcu.org. 

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