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The CFPB and the Quaint Notion of Caveat Emptor – Bankers Beware!

Doing Business – Horse Trading and Lending Money
People selling or exchanging things to other people is as old as the hills, Buyers and sellers engaging in hoodwinking each other, in the trading process, is probably also that old, as well. Providing credit is a far more recent phenomenon with a storied history.

Adages such as Caveat Emptor (Buyer Beware) and You Can’t Cheat an Honest Man. (W.C. Fields) provide some of the common sense advice which humanity has long observed for their own protection when they buy, or sell, things.

The correlating question arises: Should a consumer ever buy something that he doesn’t understand? Furthermore, where does the responsibility lie for these purposes between the trading partners? In addition, to what degree is there lender liability?

In contract law, courts are generally not concerned with the value exchanged between the two traders. Consideration, the requisite quid pro quo, is needed as an element of a contract but the value of the exchange isn’t material.

The CFPB Rewrites the Rules
On April 3, the CFPB issued a Policy Statement on Abusive Acts or Practices. This seemingly innocuous Statement rends asunder the standards of fairness and legal standards that buyers and sellers have been recognizing for eons. It contains sweeping new interpretations and threats to commerce for any organization that engages in sales and providing the financing for those sales by, ostensibly, highlighting and defining the legal term of abusive.

When government agencies opine about the law they should do so with the objective of being clear so that the regulated industries understand how to behave. Unfortunately, this Policy Statement doesn’t provide constructive direction but it does provide grist for enterprising attorneys general and plaintiffs to sue businesses. It could be regulation by enforcement, at its worse, by construing a mercurial and evanescent term in such a manner.

UDAAP
In 2010, the Dodd-Frank Act created UDAAP, which stands for unfair, deceptive or abusive practices. Abusive was the added second “A” expanding UDAP to UDAAP. UDAP is the acronym for “unfair or deceptive acts and practices,” a law that began with the Federal Trade Commission Act in 1914. Unfair and deceptive have a century of being legally defined and, essentially, mean lying and cheating. The abusive term may increase liability substantially.

Abusive
In brief, this term addresses gaps in understanding, unequal bargaining power, and consumer reliance. To quote the CFPB:

“The statutory text of these … prohibitions can be summarized at a high level as:

(1) obscuring important features of a product or service, or
(2) leveraging certain circumstances to take an unreasonable advantage.
An abusive act or practice:
(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 lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or

The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”

The CFPB continues its explanation by stating that the term, abusive, doesn’t necessitate a showing of substantial injury to establish liability but liability may attach to conduct that is harmful to a properly functioning market.

The Policy Statement offers the following various points of interpretation and guidance:

1] The act in question doesn’t have to cause substantial injury in order for there to be liability. To quote the Statement:

“..government enforcers do not need to independently prove that an act or practice caused substantial injury in order to establish liability under the abusiveness prohibition.”

How damages would be assessed, even if there is no substantial injury is unclear. The statutory damages in the Dodd-Frank Act are draconian. Would a minor damage precipitate the application of these statutory damages, an unfair result?

2] Abusiveness can be demonstrated, as material interference, by an act or omission that interferes with a consumer’s understanding of the product or service. “Buried disclosures” is cited as such an example.

What the CFPB describes as “buried disclosures,” which may prevent consumers’ understanding, include complex language, jargon, timing of disclosures, or fine print. Many currently used legal contracts could be considered abusive by this standard.

3] The abusive application of interference may also include commonly used methods for computer disclosures such as drop-down menus, pop-up boxes, multiple click-throughs, or the sinister sounding term “dark patterns.” The term “dark patterns,” in this context, describes design practices that trick or manipulate users into making choices they would not otherwise have made and that may cause harm.

It would appear that providing extensive disclosures might, indeed, be violative of the abusive term.

4] Material interference doesn’t require intent on the part of the defendant.
In other words, if the defendant has no intention of interfering, or meddling, with a consumer’s understanding of a transaction, he may, nevertheless, possibly be held liable.

5] Terms and conditions which are not prominent, or explicated, may also be actionable such as pricing or costs, limitations on the consumer’s ability to access the full benefit of the product or service, and default terms.

To what degree, current legal requisites of disclosure provide safe harbor, against the abusive allegations, remain to be elucidated.

Furthermore, the Statement averred that it is illegal for the business entity to take “unreasonable advantage” of some of these circumstances even if the condition wasn’t created by that business entity. In an attempt to explain this term, the Statement opines, “Evaluating unreasonable advantage involves an evaluation of the facts and circumstances that may affect the nature of the advantage and the question of whether the advantage-taking was unreasonable under the circumstances.” Unreasonable advantage needn’t be typical and can be a minor advantage.

6] Consumers’ lack of understanding, which is illegal should businesses exploit that lack, can include cases where the offending businesses have no contractual relationship with these consumers. It is argued that if consumers don’t understand the risk or cost, and there is no benefit accrued to consumers, it is possible to infer that an act or omission materially interferes with consumers’ ability to understand a term or condition. In other words, the entity intends it to interfere based upon this fact pattern.

Contracts of adhesion, form contracts, and other such legal instruments, where consumers can’t bargain for changes in the terms or conditions may, consequently, be illicit.

7] An illustrative example, for the apparent vague, and maddening, interpretation of abusive, provided in the Statement, was a quote of FDIC Chairman Sheila Bair when she exclaimed that abusive, in contrast to deceptive and unfair “… is a more flexible standard to address some of the practices that make us all uncomfortable.”

Illusory standards are difficult to follow for the business community.

Potential Abusive Practices – Reading between the Lines
An interesting phenomenon of the CFPB is its use of interpretation of the law to expand its authority. This expansion of authority also extends to state attorneys general and plaintiffs. In expansive and practical terms, the CFPB asserts that the following products and practices could be found to be abusive. If true, an allegation of “abusive” will be the favored weapon in the arsenal of consumer advocates seeking to sue the business community for these perceived infractions:

• Complicated products and transactions
• Too many disclosures
• If a consumer doesn’t benefit from a product or service
• Consumers’ “unequal bargaining power”
• Gaps in understanding, which are risks, and include default
• Servicing of a product or service when a customer can’t select the servicer such as credit reporting companies, debt collectors, or third-party loan servicers
• Form contracts
• Fine print and complex language
• Pop-ups or drop-down boxes
• Multiple click-throughs
• If an entity benefits from “increased market share, revenue, cost savings, profits, reputational benefits, and other operational benefits;”
• Negative consumer outcomes
• Length of time it takes for consumers to obtain the financial product or service
• Arbitration
• Failure of businesses to act as fiduciaries
• Lack of material harm (no substantial injury is required).

Conclusion: Something Wicked this Way Comes
It’s clear from this statement that caveat emptor has gone to meet its maker. It’s also clear that consumers have been relieved of their obligations to protect themselves in any way from the business community when buying a product or service based upon this Statement. What is not clear is how businesses can protect themselves from allegations of abusiveness. Numularii Emptor (Bankers Beware!) and Omnis Emptor (Everyone Beware!).

Terrence O'Loughlin
Terrence O'Loughlin
Terry O’Loughlin, J.D., M.B.A., director of compliance for The Reynolds and Reynolds Company, has nearly 30 years of legal and regulatory experience in motor vehicle-related fields. From 1989-2006, O’Loughlin served with the Florida Office of the Attorney General, investigating and prosecuting automobile dealers, manufacturers, and financing and leasing companies. He led a task force that examined more than 100,000 motor vehicle files and settled with over 1,600 vehicle dealers for more than $15,000,000.00. O’Loughlin helped to draft and served as mediator of Florida’s Motor Vehicle Lease Disclosure Act. He has served as a consultant to the Federal Reserve Board’s Leasing Education Committee and has routinely advised numerous states’ agencies on motor vehicle fraud. Admitted to both the Pennsylvania and Florida Bars, O’Loughlin graduated from the University of Pittsburgh and received his graduate degrees from the University of Dayton.
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