by Jennifer Monty Rieker, Esq.
On July 21, 2011 the Consumer Financial Protection Bureau (CFPB) officially launched. Signed into law in July 2010, the CFPB is a division of the Federal Reserve, but is completely independent of the Federal Reserve’s Board of Governors.
The CFPB is tasked with enforcement of the Fair Debt Collection Practices Act, Truth in Lending Act, Fair Credit Reporting Act, and Home Owner’s Equity Protection Act. Previously separate government agencies enforced these acts, but now there will be one centralized bureau to enforce consumer regulations.
Dodd Frank also granted CFPB the ability to prohibit unfair, deceptive or ”abusive” acts or practices. Previously, federally regulated financial institutions were subject to the FTC Act which prohibited unfair and deceptive acts and practices (“UDAP”). This has now been expanded by Dodd Frank, adding the word “abusive” to the UDAP doctrine. Abusive is defined in § 1031(d) of the Dodd Frank Act as any act that:
(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
(2) Takes unreasonable advantage of –
- (A) A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
- (B) The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
- (C) The reasonable reliance by the consumer on a covered person to act in the interests of the consumer
Based on this definition, the UDAP doctrine may be widely expanded and may be the cause for new enforcement actions. Defining how an institution can take “unreasonable advantage” of a consumer can be widely litigated. Additionally, showing how a consumer had “reasonable reliance” will undoubtedly become a battle ground for all financial institutions. Because the CFPB has the ability to both regulate and bring enforcement actions, it has a wide latitude of power. This new addition of “abusive” will have a large impact on financial institutions on both the state and national level. Furthermore, state regulations of financial institutions may follow by also adding the new “abusive” standard.
As the next few months progress, it will be interesting to watch the actions of the CFPB, and to see the extent of enforcement and regulation that may occur, as well as whether state governments follow the same regulatory path.