We've written previously about the breadth of the authority of the CFPB, particularly its authority to declare “abusive acts” to be in violation of Section 1031 of the Dodd Frank Act. Recall that it is a violation of the law if

  • a practice of a financial services provider takes unreasonable advantage of a consumer's lack of understanding of a harmful product, or
  • the consumer doesn't have the ability to protect his interests in selecting or using a harmful product, or
  • the consumer is reasonable in reliance upon the financial services provider, and the product or service harms the consumer.

In any of these events, such a practice is “abusive” and a violation of the Dodd-Frank Act. The underlying premise sounds reasonable, except when it runs up against the accepted legal doctrine that a lender is not a fiduciary of a borrower—at least absent highly unusual circumstances. The Dodd-Frank Act basically overturns this legal doctrine.

The Bureau brought suit against Navient Corp., a student-lender. The CFPB claims that Naivent takes unreasonable advantage of student-borrowers in default, by steering those in default into forbearance agreements, rather than advising them about alternative repayment plans based on the student-borrower's income. And, the CFPB claims that Naivent does this to promote its own best interest, as opposed to what is in the best interest of the student-borrower. In the language of Dodd-Frank, the lender is taking unreasonable advantage of the student-borrower's lack of understanding of the product, and the consumer is acting reasonably in relying on the advice of the student-lender.

Prior to the advent of the Dodd-Frank Act, the law of most jurisdictions was pretty clear that a lender is not in a fiduciary relationship with a borrower…just as a car dealer is not in a fiduciary relationship with a car buyer, a home seller is not in a fiduciary relationship with a home buyer, Macy's is not a fiduciary to a Macy's customer. The point is that our system of bilateral contract negotiation—everything from the sale of a shirt to the sale of a house—turns on each party to the transaction promoting its own interest. Sure, our laws protect against fraud and deceit—as they rightfully should. But, our laws don't require the car dealer to tell the car shopper, “Hey, you're paying $1000 too much for this vehicle. Don't do it.” At least until now.

I am not a proponent of trying to outwit the customer. I am a proponent of truthful advertising and marketing of one's products and services, and then allowing the purchaser of such services and products to make the purchase decision.

If Navient has deceived or defrauded its student-borrowers, there are ample remedies available. However, applying an “abusive” standard is a determination too difficult to apply and fraught with problems for the future of business and commerce. There are major policy issues and centuries of settled law at stake here. If a buyer or a lender is placed into a fiduciary relationship with a seller or a borrower, the world of contract law has been turned on its head. And, this is why the Republican led Congress is intent on reversing the “abusive” standard under the Dodd-Frank Act.