CFPB’s Proposed Payday Rule Rescission Reshapes UDAAPs

Among the most ill-defined but ubiquitous legal standards, UDAAPs — unfair, deceptive, or abusive acts or practices — remain the 800-pound gorilla of the consumer protection world. The Consumer Financial Protection Bureau has taken the reins on determining what falls in or out of the UDAAP realm, which was established by the Dodd-Frank Act.

In her short time as director of the CFPB, Kathy Kraninger has already indicated how the agency will view UDAAPs moving forward, providing powerful insight into future enforcement and proposed rules during her tenure. In revisiting a 2017 payday lending rule, the Kraninger-led CFPB took a deep dive into the analysis conducted by the prior Obama-appointed leadership of the agency, rejecting its weighing of the evidence and certain of its legal standards. The resulting proposal to rescind portions of the 2017 rule addressing payday, vehicle title and certain high-cost installment loans shows how the Kraninger CFPB will define UDAAPs.

The proposed rescission primarily targets the portion of the 2017 rule regarding mandatory underwriting provisions, which resulted, in part, from findings that certain short-term small-dollar loans were unfair and abusive unless the lender could make individual determinations regarding a specific borrower’s ability to repay a loan.[1] Though the rescission covers much ground, three aspects of the rescission have potential application outside of the four corners of the proposal: (1) the applicable evidentiary standard for UDAAP analysis; (2) what constitutes “reasonably avoidable” for purposes of unfairness; and (3) what “lack of understanding the risk” means for purposes of abusive acts or practices. Before delving into these changes to UDAAPs, though, some background is helpful.

Statutory Background: The Dodd-Frank Act

The Dodd-Frank Act sets out the foundational guideposts for UDAAPs. Under Dodd-Frank, unfair acts or practices (1) cause or likely cause substantial injury to consumers, which injury is (2) not reasonably avoidable by the consumer or (3) outweighed by countervailing benefits to consumers or competition.[2]

Prior CFPB guidance has added a little clarification that injuries need not be monetary and that actual injury is not required.[3] Deceptive acts or practices (which are additionally informed by Section 5 of the Federal Trade Commission Act) (1) materially (2) mislead or are likely to mislead a consumer whose (3) interpretation is reasonable under the circumstances.[4] Omissions and implications count, and the totality of the circumstances is considered.[5]

Looking to the reasonableness of the interpretation, the target audience is considered, and only a significant minority (and not a majority) of that population need be misled.[6] Abusive acts or practices (1) materially interfere with a consumer’s ability to understand terms and conditions or (2) take advantage of a consumer’s (a) lack of understanding of risk, (b) inability to protect their interests, or (c) reasonable reliance that the other party will act in the consumer’s interest.[7]

The fact that UDAAPs have a statutory origin with a handful of agency-issued guidance documents does nothing to put real meat on the bones for analysis, at least not in a meaningfully actionable manner, which is the real starting point for compliance measures. True, the Federal Trade Commission has issued a number of decisions and guidance documents, and myriad state-specific deceptive trade practices acts and other federal laws (such as the Fair Debt Collection Practices Act) provide comparators addressing similar ground from differing perspectives. However, the ability of the CFPB to independently enforce UDAAPs and the lack of well-developed case law (like exists in many instances for the FDCPA, for example) leaves businesses with an uncomfortable level of uncertainty on whether certain practices run afoul. Enter the rescission.

The Rescission: Factual Analysis

As to the facts, the rescission repeated over and again that the 2017 rule lacked sufficiently robust and reliable support. In setting out its reasons for recommending rescission, the CFPB noted that its “research has demonstrated that liquid savings and the ability to absorb a financial shock are closely tied to financial well-being.”[8]

Yet, “a substantial number of households do not have the ability to withstand financial shock without the use of credit or other alternatives,”[9] and the CFPB “is committed to ensuring that all consumers have access to consumer financial products and services and that the market for ‘liquidity loan products’ is fair, transparent, and competitive.”[10] To that end, the CFPB found that the 2017 rule had an actual adverse impact on the CFPB’s stated goals by “restricting access to credit and reducing competition for these products”[11] — a sentiment echoed by industry members and lenders who have consistently noted that demand exists for immediate liquidity.

The adoption of this counterproductive rule, according to the recession, largely drew support from a small handful of sources, including: (1) the CFPB’s “interpretation of limited data from a study by Professor Ronald Mann ... , which compared consumers’ predictions when taking out a payday loan about how long they would be in debt ...”; (2) “a survey of payday borrowers conducted by the Pew Charitable Trusts” showing “37 percent of borrowers ... had been in such financial distress that they would have taken a payday loan on ‘any terms offered’”; and, in some instances, (3) the CFPB’s own experience and expertise.[12]

Ultimately, the CFPB was “concerned about whether the evidence in this instance provides a ‘reasonable basis’ to find that (1) the identified injury ‘is not reasonably avoidable by consumer’ for purposes of an unfairness analysis; and (2) that there is either a ‘lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service’ or an ‘inability of the consumer to protect the interest of the consumer in selecting or using a consumer financial product or service’ for purposes of an abusiveness analysis.”[13]

In stating that such evidence was lacking, the CFPB emphasized that it “believes that it would be reasonable under the Dodd-Frank Act and prudent to have robust and reliable evidence to support key findings of about ‘lack of understanding’ and an ‘inability to protect’ as needed to establish abusiveness.”[14] As such, the CFPB concluded that three of the standards and findings necessary to the 2017 rule — “reasonable avoidability” (key for unfair acts), “lack of understanding” (key for abusive acts), and “inability to protect” (same) — all require robust and reliable evidence.

The primary takeaway from the CFPB’s review of its own prior factual record is that Kraninger’s CFPB is going to require robust and reliable evidence for unfair and abusive acts. While this standard does not translate neatly to other more familiar burdens of proof or standards of review, it does give a clear sense of heightened scrutiny on behalf of the CFPB. It is not sufficient that support for a proposed regulation, even if coming from more than one source, exists. It must come from reliable, reputable sources, reasonably free from doubt and with some corroboration.

The Rescission: Unfairness

Turning to legal analysis, the 2017 rule found that “for an injury to be reasonably avoidable consumers must ‘have reason generally to anticipate the likelihood and severity of the injury and the practical means to avoid it.’”[15] This standard additionally (and fatally) required individualized application on both the consumer and the payday lender.

In other words, the payday lender had the burden of providing sufficient information for the consumer to make individualized determinations of their repayment ability. The rescission is direct in proposing to abandon that prior CFPB approach to unfairness, claiming conclusions in the 2017 rule were “problematic ... and [the CFPB] now preliminarily proposes a better approach to applying the reasonable avoidability standard, incorporating the lessons of relevant precedent by the FTC.”[16]

Indeed, looking to the FTC as a source for precedent and persuasive analysis is a common theme among the reimagined look at unfairness — a helpful step of incorporating already existing guidance into an otherwise minimally populated space. The rescission makes more explicit its incorporation of FTC rulings and case law addressing similar ground by directly quoting as “informative” the Ninth Circuit’s proposition that “an injury is reasonably avoidable if consumers have reason to anticipate the impending harm and the means to avoid it.”[17]

In light of FTC guidance and case law, the rescission found the 2017 rule’s requirement that consumers understand their individualized risk “as determined by their ability to accurately predict how long they would be in debt” off-base. For the new CFPB, “consumers need not have a specific understanding of their individualized likelihood and magnitude of harm ...”[18]

The newly endorsed standard that can be extracted and extrapolated from the rescission goes like this: “an injury is reasonably avoidable if [consumers] have an understanding of the likelihood and magnitude of risks of harm associated with [the product] sufficient for them to anticipate those harms and understands the necessity of taking reasonable steps to prevent resulting injury.” Clearly, individualized analysis is out; using FTC guidance and applicable case law is in. And the new standard requires a more familiar form of balancing. If a consumer both understands potential harm and the need to avoid it, the act or practice is reasonably avoidable and therefore not a UDAAP.

The Rescission: Abusive Acts

The 2017 rule interpreted Dodd-Frank to state that “consumers lack understanding if they fail to understand either the personal ‘likelihood of being exposed to the risks’ of the product or service in question or ‘the severity of the kinds of costs and harms that may occur.’”[19] Again, the 2017 rule imposed a personal, individualized standard. In turning away from that standard, the rescission noted that “[u]nlike the elements of unfairness ... the elements of abusiveness do not have a long history or governing precedents.”[20]

The solution: “treat[ abusiveness] similar to reasonable avoidability.” In other words, “consumers have a sufficient understanding ... if they appreciate the general risks of harm associated with the products sufficient for them to consider taking reasonable steps to avoid that harm.”[21] Though facially similar, the new reading of abusiveness (at least as to “lack of understanding”) appears softer than the reasonable avoidability standard discussed above. Whereas reasonable avoidability requires a level of understanding by the consumer, for purposes of abusiveness, the consumer need only “appreciate” risks of harm so as to be able to consider acting to avoid that harm.

While it’s unclear how Kraninger’s CFPB will view the differences between “appreciating” risks compared to “understanding” them, incredibly helpful is tying unfairness to abuse analysis because of the depth associated with unfairness under the rescission. The new unfairness landscape incorporates the reasoning of the FTC and relevant case law. By porting that into the abuse arena, the CFPB allows for increased certainty as to what will be abusive. That said, the new standard also leaves open the question of what exactly remains of abusiveness that’s not simply swept up into reasonable avoidability — an issue already flagged by some commentators.

Conclusion

The rescission covers quite a lot of ground, most of which will likely stay relegated to either payday lending or the specific proposal to take back the 2017 rule. However, this article has noted three elements of the rescission that seem to have transportability into other areas, and those defending claims that a UDAAP occurred should be sure to look to the rescission regarding weighing the evidence, reasonable avoidability and lack of understanding the risk. In doing so, they should feel more comfortable in citing to FTC statements and relevant case law just as the CFPB has done in the rescission.


[1] 84 FR 4252, 4262.
[2] 12 U.S.C. §§ 5531, 5536.
[3] CFPB Exam Manual at UDAAP 2; FTC v. Accusearch, Inc. Case No. 06-cv-105-D, 2007 WL 4356786, at *7–8 (D. Wyo. Sept. 28, 2007).
[4] 12 U.S.C. §§ 5531; CFPB Manual at UDAAP 5.
[5] CFPB Manual at UDAAP 5.
[6] Id. at 6.
[7] 12 U.S.C. § 5531(d); CFPB Exam Manual 9.
[8] 84 FR 4252, 4261.
[9] Id. at 4262.
[10] Id.
[11] Id.
[12] Id. at 4262–63.
[13] Id. at 4264.
[14] Id.
[15] Id. at 4262.
[16] Id. at 4269.
[17] Id.
[18] Id.
[19] Id. at 4275.
[20] Id.
[21] Id.