At a recent House Financial Services Committee hearing, Consumer Financial Protection Bureau Director Kathleen Kraninger testified that the agency uses consumer complaint data to aid enforcement investigations into unfair, deceptive or abusive practices. Kraninger’s testimony in itself is unremarkable — after all, policing these practices was statutorily included in the Dodd-Frank Act. However, based on the short history of the CFPB, her testimony may deserve some extra attention.
While both “unfair” and “deceptive” practices have well-developed regulatory implications, there is little case law, statutory or regulatory history to give context to the meaning of “abusive.” This regulatory vacuum leaves the financial services industry — and the CFPB — to proceed with few established standards.
So far, the CFPB has allowed a common law definition of abuse to emerge from guidance decisions and enforcement actions. At a CFPB symposium exploring the merits of this approach, some law professionals argued that this was the intent of Dodd-Frank’s authors. This boils down to companies, consumers and the CFPB learning together what abusive means, based on the ad-hoc decisions of CFPB regulators.
But there are numerous issues with this “definition-by-enforcement” approach. First and foremost, it is impossible for the CFPB to police every transaction at every point in time. Therefore, the primary line of defense against abusive practices must be the consumers themselves. Defining abuse would help consumers gain the knowledge and guidance needed to identify and report illegal behavior and defend themselves from bad actors, which coincides with the CFPB’s goal of enhanced consumer education.
A nebulous definition of abuse can also impede the effectiveness of CFPB supervisors. How can the CFPB begin to protect consumers if it doesn’t know which bad actors or behaviors it is looking for? Absent a coherent and focused agenda, the CFPB risks using scarce enforcement resources investigating non-abusive activities while neglecting truly bad actors.
Likewise, without clarity on what it means to abuse a consumer, firms have little insight into how to avoid those undesirable behaviors. Most drivers don’t want to speed, but often a posted speed limit is a helpful boundary to temper their driving. So, too, do financial services providers desire clear rules of the road so that they can ensure consumers remain unharmed by their financial products and services.
The “define-by-enforcement” approach also negatively impacts state governments. Congress empowered state attorneys general to enforce the Dodd-Frank Act. This means that what is considered abuse in California might not be considered the same in Colorado. No amount of investment in compliance by companies can remedy this tension.
This again leaves consumers vulnerable to harm. The goal of rules and regulations should be for firms to comply with the laws. Indeed, the financial services marketplace works best when companies, regulators, and consumers work together to avoid bad outcomes. But the regulatory status-quo trades good governance for flashy enforcement headlines.
More concerning, this uncertainty has disastrous effects on market innovation, which reduces consumers’ long-term well-being.
Robust market competition, in which firms constantly challenge one another to reduce prices and increase product quality, makes consumers better off. But firms are disincentivized to challenge the status-quo when the abusive standard isn’t well-defined; innovating would simply entail too much risk given the financial and reputational weight that CFPB enforcement actions hold. It’s worth considering how many beneficial innovations don’t exist today because firms faced excessive regulatory uncertainty resulting from the unclear abusive standard.
This is especially troubling given that the FDIC found that roughly 25 percent of Americans are unbanked or underbanked. A separate Federal Reserve report found that 60.4 million U.S. adults are unlikely to access “credit at choice.” These consumers’ needs are not being met by the status quo. They require a competitive market to expand consumer access to high-quality financial products and services.
If the CFPB is to succeed in making financial markets work for consumers, responsible providers and the economy as a whole, it’s time for the agency to write a rule defining the abusive standard.
This does not mean letting financial services providers off the hook. The CFPB would retain its immense supervisory and enforcement authorities to protect consumers. A robust and transparent process, which allows for consumer advocates and industry to provide input and feedback, would establish clear principles to better guide market behavior. Explicitly defining the abusive standard is an important step toward creating a market that better works for all.
Beau Brunson is director of policy and regulatory affairs at Consumers’ Research.
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