Five years ago, in the aftermath of the Great Recession, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act significantly revamped financial regulation in the United States and created a new agency of government, the Consumer Financial Protection Bureau (CFPB), which is charged with protecting consumers from financial risks and harms.
Everything about the CFPB is unprecedented—from the scope of its authority to the lack of its Congressional oversight. As the CFPB puts it, it is truly a “21st Century Agency.” And, to a certain degree that is the way it should be, an unprecedented agency in response to an unprecedented problem. However, the CFPB is not without controversy, and our federal government is based on checks and balances for a reason.
In my law practice, I represent financial institutions and creditors. My clients are very interested in what the CFPB is doing and how they are doing it. Over the last several years, and increasingly more frequently, the CFPB's use of one specific section of the Dodd-Frank Act is particularly troubling.
The Act empowered the CFPB to prohibit unfair, deceptive or abusive acts or practices (UDAAP). As a consequence, this means that a financial institution is breaking the law if it engages in an act or practice ultimately deemed by the CFPB to be unfair, deceptive or abusive.
In theory, this is a good thing. Companies should not act unfairly, deceive customers or engage in abusive practices. The problem is that without defined and clear standards, the law becomes subject to the policy agenda of the CFPB. The CFPB's own examination guide explains, “[A] transaction that is in technical compliance with other federal or state laws may nevertheless violate the prohibition against UDAAP.” In other words, a financial institution can be acting completely within the letter of the law and still break the law in the eyes of the CFPB.
This concept is not entirely new. Going back to the 1930's, an amendment to the Federal Trade Commission Act gave the FTC a similar power to enforce “unfair or deceptive acts or practices”. What is new is the way the CFPB is using this authority.
Many of the recent CFPB actions include a UDAAP component. This means that when the CFPB investigates a company, it is looking for acts or practices it deems to be unfair, deceptive or abusive. So, the agency is demanding full access to everything—truly, the proverbial fishing expedition.
Companies breaking the law should be punished; and, the CFPB serves an important function of protecting consumers. However, the broad use of UDAAP power is a dangerous and unfair trend, especially given the lack of Congressional oversight and accountability (mainly due to the CFPB's funding mechanism). The agency is using its authority to both punish companies and further its agenda without the normal checks and balances.
This is compounded by the CFPB's unprecedented enforcement power. As of July 2015, the CFPB touts that it has secured $10.8 billion in relief for consumers. This includes fines levied against some of the largest companies in the country, but it also includes many that are not-so-large. All financial institutions under the CFPB's umbrella run the risk of civil penalties and remedial penalties so severe that the company cannot continue doing business. And in many cases, that appears to be the CFPB's intent—to a certain degree, a form of social engineering
In the wake of the Great Recession, financial institutions are an easy target. No tears are shed for corporations, especially in the financial services industry. But at a certain point, the pendulum swings too far, and financial institutions' problems become problems for consumers. If it becomes exceedingly difficult to do business, consumers will have fewer credit options at a much greater cost. We are fast approaching that point.
The CFPB's use of its unprecedented UDAAP authority is yet another recent example of a federal agency overstepping its bounds. So much for checks and balances!