Financial institutions face a sweeping approach to what the Consumer Financial Protection Bureau considers abusive conduct under a new policy statement.
The April 3 action is the latest step in a long path of the agency's work to address what it sees as abusive behavior by banks under the Consumer Financial Protection Act, which the agency has used to apply consent orders against some of the largest banks, such as Regions Bank,
Banks and other financial institutions need to look closely at the statement's examples of consumer financial services transactions that could be considered abusive because the CFPB document interprets the law with "a very broad, very flexible definition of abusiveness that can apply to lots and lots of things," said Chris Willis, who co-leads the Financial Services Regulatory Practice Group at Troutman Pepper. "It underscores the fact that the bureau wants to leave itself maximum flexibility to find abusiveness wherever it chooses to."
Compliance challenges
Overall, the expansive statement leaves a lot of uncertainty regarding what the CFPB has the power to consider abusive, which will create compliance challenges for financial institutions, said Eamonn Moran, senior counsel at Norton Rose Fulbright and a former CFPB official.
The new policy statement largely centers around financial institutions' role in interfering with a consumer's understanding of the terms and conditions of a product or service, giving the financial institution an "unreasonable advantage." The CFPB said it considers the use of buried disclosures, fine print, complex language and jargon to be examples of material interference. The agency also said digital "dark patterns" are troublesome, pointing to examples like pop-ups, drop-downs, pre-checked boxes for default options and hiding important information through multiple click-throughs.
Those codified details put banks in a difficult position as they walk the fine line between thoroughly explaining a product to consumers in a way that is not too long and complex, attorneys said.
"It's challenging to be able to explain things, because if you really want to explain them accurately and precisely, then your descriptions are going to be longer and more complex," said Ori Lev, partner at Mayer Brown and a member of the firm's Financial Services Regulatory & Enforcement practice and Consumer Financial Services group. "If you want to frame them in simple language, then you're going to run the risk of being accused of not having been precise enough."
The statement also gives the CFPB expansive power to determine what is abusive based solely on consumer complaints, even if the bank's disclosures are thorough.
"They don't say a certain number of consumers have to misunderstand. It's just, whatever consumers don't understand, it may be abusive. That could be met in many, many instances," even if the financial institution is making good disclosures regarding its products and services, Willis said.
Further, the CFPB has the prerogative to decide that a product does not have significant benefits, and then consequently, any consumer who bought the product did so under a misunderstanding.
To avoid landing in regulatory hot water, banks "should pay special attention to those terms of a transaction that are so consequential, such as pricing or costs and consequences of default, as well as product complexity and ensuring the business model aligns and is consistent with the product or service's apparent terms," Moran said.
Statement continues CFPB crackdown
While this is the first time the CFPB has formally outlined the way it plans to approach abusive conduct, the agency's crackdown on abusiveness is not new. The CFPB has taken action against a handful of banks for such conduct, issuing complaints and consent orders and assessing hundreds of millions in penalties.
In July 2022, the agency assessed a $37.5 million penalty against U.S. Bancorp subsidiary U.S. Bank NA, alleging that it took "unreasonable advantage" of consumers by opening credit cards, lines of credit and deposit accounts without their knowledge or consent. Months later, in September 2022, the CFPB assessed a $191 million penalty against Regions Financial Corp. subsidiary Regions Bank, alleging that the bank took "unreasonable advantage" of consumers' lack of understanding in imposing at least $141 million in overdraft fees.
In the footnotes of the new statement, the CFPB cited cases against Regions Bank and U.S. Bank NA, among many others, to support the newly announced framework.
However, that focus on prior complaints and consent orders makes the outlook for the application of the new framework unclear since those past orders have rarely been subject to judicial scrutiny, according to a post from law firm Orrick Herrington & Sutcliffe LLP.
"It is not clear to what extent courts, other regulators and industry will embrace the policy statement's approach to abusiveness," the post said. However, the document indicates "where the CFPB will focus its enforcement and supervisory authority."