Insights

In January 2020, under the Trump administration, the Consumer Financial Protection Bureau (CFPB) issued a policy statement outlining how the CFPB would enforce Unfair, Deceptive or Abusive Acts and Practices (UDAAP). This policy statement was released after the Trump administration announced it would provide clarity on the meaning of “abusiveness” and the standard for enforcing abusive acts and practices. In the policy statement, the CFPB defined “abusive practice” as one where “the harm to consumers from the conduct outweighs any benefits of the conduct.” It also stated that the agency would seek monetary relief only “when there is a lack of good faith effort to comply with the law.” Impliedly, this policy statement was allowing more leeway to lenders and supervised entities as it loosely applied UDAAP to the financial services industry.                  

Fast forward to 2021, under President Biden’s administration, the CFPB rescinded the previous policy statement. The agency has stated that the previous policy statement does not “justify the potential harm to consumers and the marketplace.” While the agency had previously taken a more balanced approach to consumer protection policies, it has now reverted to stricter regulatory scrutiny of consumer protection laws. The CFPB has now indicated that it intends to follow the statutory standard for what the Bureau has authority to declare an “abusive act” as set forth in section 1031(d) of the Dodd-Frank Act. The agency also noted that it will still consider good faith, in addition to company size, and other factors it typically considered in its prosecutorial discretion. However, it aims to “exercise its supervisory and enforcement authority consistent with the full scope of its statutory authority under the Dodd-Frank Act enacted by Congress.” This rescission is a direct pushback on the loose enforcement of UDAAP under the Trump administration.

Differing from the last 4 years of supervision by the CFPB, we are now seeing an increase in CFPB enforcement action against regulated entities and even never-before regulated entities, such as providers of income share agreements or Big Tech companies that were subpoenaed for information regarding their payments systems. The Biden administration is using UDAAP as a way to focus enforcement on activities where there are no rules or regulations and applying UDAAP standards to solve perceived wrongs in areas like fair competition, banking, and consumer protection. Going forward, we expect the CFPB will be aggressive in seeking consumer redress from financial institutions. As was true during the former Democratic administration, the CFPB is proving to be uber-aggressive in its examinations, so regulated entities, and even non-regulated entities that touch financial services, must be prepared. What this means for banks and non-bank financial institutions is that they will need to ensure there is strict monitoring, testing, and updating of their compliance management systems, particularly in high risk areas like fair lending. Compliance programs will need to align with the best practices found in the CFPB Examination Procedures, including robust testing and monitoring for UDAAP risk.

Having an experienced third party review compliance programs and business lines for CFPB preparedness is more important now than in previous years. Compliance risks can significantly harm any business and create unnecessary financial risk and reputational risk. However, these risks can be mitigated by working with an experienced compliance and legal team to conduct regular audits of your CMS, bolstering your monitoring and testing program, and paying particular attention to high risk areas that are priorities at the CFPB like UDAAP and fair lending.