In a new policy statement, the CFPB clarified the Dodd-Frank Act "abusiveness standard" for supervision and enforcement.
Dodd-Frank Section 1031(a) authorizes the CFPB to take enforcement actions against a regulated entity that engages in an "unfair, deceptive, or abusive act or practice" (sometimes referred to as "UDAAP") in connection with the sale or offering of a consumer financial product or service. The CFPB states that the term "abusive" was not well-defined in Dodd-Frank; nor was there an established body of law interpreting the term from which one could readily draw on as an analogy. According to the CFPB, the agency brought 32 enforcement actions that included an "abusiveness" claim, but 30 of those actions also charged unfairness or deception for essentially the same act, meaning that the term "abusive" remained, as a practical matter, still undefined even by practice. For reasons explained further in the CFPB's guidance, even the two remaining enforcement actions do not provide a meaningful guide to the meaning of the term "abusive."
In a policy statement, the CFPB provided a "common-sense" framework for how it intends to exercise supervisory and enforcement authority to defend against abusive acts or practices.
Commencing immediately, the CFPB will apply several principles in defending consumers against "abusiveness", including:
- citing conduct as "abusive" in supervision and enforcement matters under circumstances when the harm to consumers outweighs the benefit;
- generally avoiding (i) "dual pleading" of abusiveness and unfairness that originate from nearly all of the same facts and (ii) "stand alone" abusiveness violations that "demonstrate clearly the nexus between" factual evidence and the CFPB's legal analysis; and
- seeking monetary relief for abusiveness only when a company shows a lack of good-faith effort to comply with the law.
The CFPB's promise not to use an allegation of an "abusive" act as a throw-in to another violation is a very positive step, and not just in these limited circumstances. It would be a positive step generally for financial regulators to stop throwing in extra charges as freebies when they find a violation. To take two examples:
- FINRA seems to have established a practice of throwing in a violation of FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade") with numerous other more specific violations. (The Cabinet has 578 FINRA Enforcement Releases for the year 2019. Of these, a rather remarkable 497 mention FINRA Rule 2010.) The purpose of the Rule 2010 requirement that a firm act in accordance with "standards of commercial honor" is to allow the regulators to discipline a firm that has acted badly, even in a situation where the firm has not violated any specific rule. When FINRA simply throws Rule 2010 into virtually every enforcement case where an actual rule has been violated, Rule 2010 loses both purpose and meaning.
- The SEC appears to do the same thing by adding additional charges against an adviser for Form ADV disclosure violations in cases in which they were charged with material substantive violations. In "Financial Sherpa," the adviser and its principals were stealing from their clients in a number of egregious, substantive ways. While it is true that the adviser failed to disclose its dishonesty in its Form ADV filing, it is not so clear that throwing in a Form ADV charge substantively adds any clarity to the action. Actually, it may serve to prevent the SEC from clearly communicating when there are genuine problems with a Form ADV that stops short of failing to disclose that the adviser is committing fraud.