Notice & Comment

Paradigms, Politics, and Policy Statements at the CFPB, by Luke Herrine

As readers of this blog surely know, the Consumer Financial Protection Bureau has been under sustained legal and political attack from the financial institutions it regulates since its very creation. At first, litigation side of these attacks on the Bureau’s structure failed. But with the consolidation of a solid anti-administrative-state majority, the tide has begun to turn: Seila LawCommunity Financial Services, and surely more to come. Yet, perhaps realizing that these cases do not really depend on how careful it is, the Bureau has only become bolder in recent years.

An clear marker of this new boldness came at the beginning of this month in the form of a draft Policy Statement interpreting the Bureau’s authority over “abusive acts or practices.”

At first glance, the Statement might seem ho-hum, even pro forma. The CFPB has authority over “unfair, deceptive, or abusive acts and practices” (“UDAAPs”), an extended version of the authority the Federal Trade Commission has over “unfair or deceptive acts or practices” (“UDAPs”). The FTC already issued Policy Statements elaborating on the meaning of “unfair” and “deceptive” in 1980 and 1983, respectively. The CFPB has incorporated these standards into its own practice (the three-part test for unfairness has actually been incorporated into both statutes). So a statement on abusiveness might seem to just fill in the gap.

And, unlike with unfairness or deception, the Policy Statement is not being used to articulate the elements of a broad single-word prohibition. The CFPA, which adds the abusiveness authority to UDAP, sets out the elements necessary to establish a violation thereof. (It limits the application of the authority situations in which a regulated entity (1) “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service”, (2) “take reasonable advantage of a lack of understanding”, (3) “takes unreasonable advantage of the inability of the consumer to protect” their interests, or (4) “takes unreasonable advantage of” a consumer’s “reasonable reliance” that a financial firm will act in the consumer’s interest.) Monday’s Policy Statement merely interprets these prongs and situates them in context. In its own words, it is meant “to summarize [the Bureau’s actions that condemn abusive conduct] and explain how the CFPB analyzes the elements of abusiveness.” It does not announce any new legal standard (binding or otherwise).

But appearances can be deceiving. This statement is a bellwether of something grander: an ongoing paradigm shift in how the Bureau understands its mission, which itself seems to be part of a broader shift in how federal consumer protection agencies understand their missions.

To get a sense of the stakes, it will be useful to say take the history of UD(A)AP Policy Statements a bit more slowly. The first such Statement–that regarding “unfair acts or practices”–was itself a bellwether of a (previous) paradigm shift. In 1980, the Federal Trade Commission faced the possibility that Congress would eliminate its authority over unfairness. A then-unprecedented lobbying campaign had riled up many members of Congress about the Commission’s alleged paternalism. The Commission’s funding had already been cut twice and the scope of its future authority was in question. Ronald Reagan’s recent electoral victory meant that some of the harshest critics of the Commission–and of the previous regime’s approach to economic regulation generally–were about to take control. 

So, in response to a request from Senators Wendell Ford and John Danforth (then Chair and Vice-Chair of the Consumer Subcommittee of the Commerce Committee), the Commission unanimously articulated the three-part test that now serves as the statutory definition of unfairness: to be unfair, a practice must (1) cause “substantial injury”, (2) that injury ought not be “outweighed by countervailing benefits”, and it must not be “reasonably avoidable” by the consumer. The articulation of this test is commonly seen as the moment at which the Commission abandoned the consumerist anti-corporatism of the 1970s in favor of the neoliberal ideal of “consumer sovereignty”. Although I have argued that the Policy Statement was not itself the announcement of the shift to consumer sovereignty, it certainly augured change. The nature of the shift was obvious by the time Reagan appointed Chicago Schooler James Miller III to Chair of the Commission in 1981.

Starting with Miller’s tenure, the FTC took a mostly hands-off approach to consumer protection, letting the market “self correct” except in situations with enduring information asymmetries that prevented consumers from policing firm behavior on their own. It was often said that moral considerations should be off the table (welfare economics supposedly did not involve moral judgments), lest bureaucrats become “nannies.”

It was after this regime change that the Commission issued its Policy Statement on deception. The Commission only resorted to a Policy Statement when it could not convince the relatively more liberal Congress to incorporate its three-part test into an amendment to the FTC Act. And even then the Statement only passed over dissents from the holdover Commissioners from the consumerist ‘70s. They objected to the “reasonable consumer” standard and its unrealistic assumptions about consumers’ ability to protect themselves.

These Policy Statements and the focus on consumer sovereignty they brought with them went largely unchallenged for decades. Indeed, in the neoliberal era consumer protection withered as an academic discipline. Then the Global Financial Crisis of 2007 called everything into question.

Suddenly then-Professor Elizabeth Warren’s idea for a new agency exclusively devoted to setting quality standards for consumer financial services went from academic chatter to the top of the Democratic Party’s agenda. And Shelia Bair’s suggestion that adding abusiveness authority came to be seen as the proper way to address UDAP’s limits. Based on my conversations with Obama Treasury officials responsible for drafting much of the CFPA, the four elements of abusiveness enumerated above were meant to address four of the most important ways that the unfairness authority had come up short by assuming too much about consumers’ ability to protect their own interests. It was an initial step away from the consumer sovereignty framework.

But the mere creation of the CFPB and the abusiveness authority did not yet amount to a paradigm shift. The agency was not really designed to be the financial services equivalent of the Consumer Product Safety Commission that Warren originally suggested. That is mostly due to the impact of lobbying, but also in part because the conceptual foundations for a deeper rethinking had not really been laid. Consumer protection was a marginalized discipline within law schools, and the closest thing to a break with the consumer sovereignty paradigm immediately before the crisis was nudge-focused behavioral economics. 

Even so, what progress was made during President Obama’s term–over strenuous opposition from the financial industry–was immediately targeted by the ideologues appointed by President Trump. And, sure enough, a central effort under Director Kathleen Kraninger (whose sole qualification for role of Director seems to have been loyalty to Mick Mulvaney, Trump’s main advisor on economic policy), was the drafting of a “Statement of Policy Regarding Prohibition of Abusive Acts or Practices.”

This new Policy Statement–the first since the 1980s (setting aside the antitrust side of the FTC’s authority)–was supposedly meant to “provide greater clarity” so that the “uncertainty” surrounding the meaning of “abusive” did not stifle innovation. Concretely, what it did was impose an additional cost-benefit test on top of the statutory standards and reduce damage awards for businesses violating the standard in “good faith”. In short, it sought to reinstate a consumer sovereignty framework.

This Statement was almost immediately rescinded when President Biden took office. That rescission was sufficient to leave the meaning of the standard as it was before Kraninger’s intervention. So why the new Statement?

One reason–not exciting, but important–is that the Statement helps provide clarity to frontline enforcers, to agencies at the state and federal level with related authorities, and to “market participants.” The Statement serves as a Restatement of sorts. That’s boring, but useful. Especially since much of the relevant law is made through unreported stipulations and administrative adjudications, I don’t think it would be such a bad thing if the FTC and the CFPB made it a regular practice to periodically update the public on how it has used these authorities. 

But the more exciting reason (to me, anyway) is that the Bureau has begun to move beyond the consumer sovereignty framework.

For example, in dealing with the question of what consumers are likely to understand, the Statement does not treat it as an extraordinary event that otherwise fully informed and rational consumers would somehow miss the detail of a given transaction, but rather treats understanding as a spectrum, with firms able to exploit various levels of misunderstanding. It allows enforcers to presume that consumers did not fully understand a transaction if the benefits are relatively small compared to the risks. It even raises the possibility that a product may be so complex that it is beyond the understanding of most consumers–that is, it is presumptively confusing. Such products are, in the language of the Statement, “set up to fail.” All of which opens the way for what Lauren Willis has referred to as “performance-based consumer law”: that which shifts the onus onto firms to demonstrate that consumers are getting products that they understand and/or that are well calibrated to their situations.

Even more telling is the Statement’s discussion of unequal bargaining power. It considers situations in which consumers do not choose–and cannot opt out of–their relationships with financial firms, including those with debt collectors, with loan servicers, and with credit reporting agencies. It also considers how ongoing relationships with lenders creates dependency, which gives rise to the possibility of exploitation. In doing so, it considers how firms’ power can exist even in competitive markets and even when there is no clear information asymmetry. It blurs boundaries between antitrust and consumer protection, treating power in the market as an ongoing problem that regulators concerned with fairness should confront, even if they are not charged with policing “market power” in the neoclassical sense.

More abstractly, the Statement articulates the purpose of the abusiveness authority in terms of “fair dealing” rather than “consumer choice” or “efficiency”. In doing so, it cites an old Learned Hand opinion that explicitly frames the FTC’s predecessor authority in moral and deliberative terms. I can’t hesitate noting that, in doing so, it echoes my ownarguments (in conversation with those of Sanjukta PaulSandeep Vaheesan, and others in the antitrust world) that a moral economy alternative to consumer sovereignty would put norms of fair dealing at the center of its analysis.

This framing comes out even more clearly in the speech that Director Chopra made announcing the Policy Statement. Chopra mentions “fair dealing” throughout his speech (including the title), referring favorably to “moral economic visions of competition” and unfavorably to “theoretical economic models” that have displaced that tradition. He connects the Bureau’s authority with the traditions and the concerns of anti-monopolism and emphasizes the importance of grounding the Bureau’s workings in concepts of fairness that resonate with non-specialists.

Perhaps it is motivated reasoning on my part, but when I read alongside sympathetic speeches from Sam Levine, the Director of the FTC’s Bureau of Consumer Protection (and former counsel to Chopra when he was at the FTC), that repudiate the original Unfairness Policy Statement’s focus on markets as “self correcting” and embrace a more prescriptive and interventionist role for consumer protection, I cannot help but see a broader change in perspective. This change in perspective is not unrelated to the shift to a more power-skeptical approach to antitrust at the FTC–an approach itself reflected in a recently updated Policy Statement (this one on “unfair methods of competition”). 

It remains to be seen how these changes in perspective will play out in practice and how enduring they will be. One thing we can be sure of, though, is that they will be met with opposition, at least some of which will be rendered as part of the ongoing challenge to any administrative authority to set standards with any teeth.

Luke Herrine is an Assistant Professor of Law at the University of Alabama.

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