Thank you for inviting me to speak with you all today. I especially want to thank Professor Dalié Jiménez for organizing today’s event.
Given the events over the last few weeks involving Silicon Valley Bank, Signature Bank, and Credit Suisse, I apologize that I am unable to be with you in person. The recent bank failures have raised questions about the fragility and safety of the financial system. U.S. regulators have taken a number of extraordinary measures to protect depositors and restore confidence. We continue to carefully monitor the markets and evaluate how to adjust existing supervision and regulation of very large financial institutions.
We have seen before how inadequate oversight of financial firms can lead to devastating results. You may know that Orange County, California, was the home of many major subprime mortgage outfits, some even headquartered in Irvine. Many of them are now defunct, but the financial pain caused by failures of regulation is still felt today. This brings me to the focus of my remarks.
Today, I’ll be speaking about the federal standards of fair dealing in American commerce, and in particular, Congress’s latest addition to those standards—the prohibition on abusive acts or practices, which is the topic of a recent policy statement issued by the Consumer Financial Protection Bureau.
The policy statement explains the prohibition on abusive practices banned after the subprime mortgage meltdown. I want to share with you about the meaning of the prohibition on abusive practices. First, I will discuss the history of the standards of fair dealing and of the prohibition on abusive acts or practices, including how it sought to reach conduct that might not otherwise be considered “unfair.” Then, I will discuss our objectives in proposing the policy statement. Finally, I will outline some of the key aspects of the prohibition.
History of the Prohibition on Abusive Conduct
In the wake of the financial crisis in 2010, Congress passed the CFPB’s authorizing statute, the Consumer Financial Protection Act, which banned abusive conduct. However, this prohibition didn’t appear out of nowhere. It is rooted in a history that goes back over 100 years. Congress has long tailored federal prohibitions in response to changes happening on the ground.
It’s worth going into some detail here. In the late 19th and early 20th centuries, abuses of corporate power, monopolization, and all sorts of other unfair business practices became kitchen table issues for many Americans. False advertising of shady cure-all “patent medicines” was also rampant. Americans grew concerned, as companies like Standard Oil Trust, United States Steel, and American Tobacco Company became behemoths. They bought their rivals, drove other competitors out of business, and swallowed up whole industries.
This era of relatively lax business regulation and increasing consolidation meant that the control of economically and socially significant industries was placed in the hands of few, without many checks. Unsurprisingly, this less competitive and less regulated environment led to harmful price fixing and market allocation schemes, resulting in higher prices for necessities and deceptive marketing for all sorts of goods. It was a particularly low moment for American enterprise, as small firms and honest players could not compete.
To promote fair competition and protect people from these business excesses, in 1914 Congress stepped in and codified and strengthened common law standards of fair dealing, which drew upon notions of fairness and a moral economic vision of competition by creating the Federal Trade Commission. Congress tasked the new administrative agency with enforcing a broad ban on “unfair methods of competition.” This was a pattern that would be repeated.
A few decades later, Congress added more to the FTC’s authority when the public demanded action from the government as the problem of false advertising worsened, as miracle weight-loss drugs and sham tonics purporting to cure baldness and produce various illusory health benefits continued to flood the market.
This time, Congress tackled the problem by passing the Wheeler-Lea Act, and codifying a ban on “unfair or deceptive acts or practices.” Congress made clear that these standards of fair dealing applied not just between businesses, but also between businesses and people.
Decades later, federal regulators, still operating with the old unfairness and deception authorities, would face an existential threat to the U.S. and world economy. By immediately selling mortgages on the secondary market, lenders were profiting on loans that set people up to fail because they could not repay.
We know this recent history all too well. When the housing market experienced a downturn, the bubble burst, and the losses in mortgages and mortgage-related securities reverberated throughout international markets, leading to a stock market crash and the Great Recession, relegating millions of Americans to a generation of lost economic potential.
We saw predatory lending practices at companies like Ameriquest Mortgage, which was the country’s largest originator of subprime loans, and New Century, which was based in Irvine. New Century illegally falsified borrowers’ income documentation, a practice that was representative of the era. In the aftermath, over six million Americans lost their homes to foreclosure.
This brings us back to the post-financial crisis period. As they did before in response to the threats of consolidation and false advertising, Congress once again tailored federal prohibitions to meet new challenges by adding the prohibition on abusive conduct to the federal standards of fair dealing in consumer financial services.
Now, in addition to unfairness and deception, government enforcers would have an additional tool to combat the changes to business practices, including the proliferation of set up to fail products such as the mortgages that were the basis of the economic meltdown. This was a key part of the public’s efforts to fix the failures of our financial regulatory regime.
But even prior to the financial crisis, government officials had called for a more administrable prohibition to address gaps and weaknesses in the regulatory system and to reach conduct that might not otherwise be considered “unfair” or “deceptive.” While unfairness and deception reach a broad set of problematic practices, misguided enforcement policies and interpretations by FTC Commissioners had, over time, undermined their effectiveness.
In 2007, then-Chair of the Federal Deposit Insurance Corporation, Sheila Bair, explained that where information is minimally disclosed, some courts have held that a practice might not be unfair because consumers can avoid injury by choosing another product or service. She also explained that for the unfairness cost-benefit analysis, lenders often argue that providing credit is a benefit, even if questions can be raised about a borrower’s long-term ability to repay. To address some of these concerns, Bair suggested Congress add the term “abusive” to address new risks in the marketplace.
The term itself, “abusive,” was not a new concept. In fact, it existed in federal law and regulation, including in the Home Ownership and Equity Protection Act, the Fair Debt Collection Practices Act, and the Telemarketing Sales Rule.
It was also in some ways a return to the original framework of consumer protection ingrained in the American tradition. By identifying certain categories of practices that distort the market, Congress’s prohibition on abusive practices was once again using the law to guide what is permitted based on Congress’ understanding of what fair dealing and market reality, rather than theoretical economic models.
I draw your attention to this history because it’s pivotal to understanding how the prohibition on abusive conduct is rooted in early 20th century attempts to regulate fair dealing. It’s also part of a long history of Congress granting additional tools to government enforcers to address market failures resulting from changes in business practices.
Objectives of the New Policy Statement on Abusive Conduct
So, what has happened since Congress stepped in to ban abusive conduct? The CFPB has brought a number of enforcement actions against law breaking companies. Applying the prohibition to specific real-world facts helps elucidate how enforcers evaluate potential wrongdoing.
But we wanted to do more. Our objectives with the policy statement on abusive practices were to summarize the existing precedent, provide a practical analytical framework for identifying abusive conduct, and also to offer some simple rules of thumb. I think these objectives are critical because while bringing cases and taking companies that ignore the law to court can serve to condemn and deter abusive conduct, its explanatory potential has limits. We wanted to assist our fellow government enforcers and the market more broadly by drawing out some of the key principles from our decade of enforcement work.
I should note that what we’re doing here isn’t new. There is a rich tradition of federal consumer protection agencies issuing authoritative policy statements to help advance understanding of complex legal prohibitions.
We can look back to the 1980s for some instructive examples. In that decade, the FTC issued a series of policy statements that helped set the tone for the application of its unfairness and deception authority. In 1980, the FTC issued an Unfairness Policy Statement, which included a cost-benefit test and de-emphasized focus on whether conduct is immoral. Then in 1983, the FTC set out to similarly clarify its deception authority by setting forth certain presumptions, including that express claims are material, which were later adopted by courts.
These documents proved to be immensely influential in providing guidance to courts and the market about how to enforce the bans on unfairness and deception. In my view, setting aside the ideological assumptions they reflected, part of the reason why the policy statements proved successful and authoritative was because they were practical and because they created rules of thumb and presumptions about the law. In short, they were influential because they were helpful to practitioners, enforcers, and industry. We want today’s policy statement to be similarly helpful.
I hope that this policy statement will not only serve as a practical educational tool by summarizing the existing case law, but also more importantly, will provide a straight-forward and analytical framework that helps promote a visceral understanding of the prohibition.
Producing clearer and simpler guidance is an important goal for the CFPB. This philosophy is one that I’ve tried to advance across all of our work. We aspire to more clearly communicate the CFPB’s expectations in straight-forward terms. This helps strengthen the posture of all companies that we regulate, not just those with the most market power or resources. Big and small firms can compete fairly when the rules of the road are clear. It also helps prevent strategic or intentional “misunderstanding” that some companies use to ignore the law, disadvantaging honest, law-abiding companies.
Key Aspects of the Policy Statement
I’ll now discuss some key aspects of the policy statement and explain the public policy concerns motivating them. The law often turns on technical readings of individual words or abstract concepts, but it’s important that we not lose sight of the fact that the law reflects our values. I’m not going to spell out everything we said in the policy statement, but I do want to focus on four particular issues because I think they illustrate the contours of the abusive prohibition.
First, one important way that Congress made a value judgment is by banning conduct that essentially tricks people. It shouldn’t be controversial to say that honest business conduct shouldn’t rely on trickery. The policy statement explains how companies are prohibited from manipulating people by “materially interfere[ing],” or in other words obscuring important features of a product or service.
While trickery and manipulation can often run into the prohibitions on unfair or deceptive practices, an abusive practice will be situated in the context of the transaction. Did a human or digital interface engage in other ways to distract or shift the attention of the consumer to obscure key terms? Deception claims are more concerned with whether company communications create a misleading net impression. The abusive prohibition is more of a bright line and is focused on company conduct that obstructs people’s ability to digest information. Deception is more concerned with words, and abusive with actions, although both are relevant to both prohibitions.
Companies need to be especially attuned to their use of digital dark patterns. Dark patterns are design tricks and other psychological tactics to confuse and manipulate people into making choices they otherwise would not have made.
What do dark patterns look like? You’re probably familiar with many of these tactics: pre-checked boxes which default you into an option you didn’t want, hiding information behind multiple links, or making it difficult to cancel a subscription. This kind of obscuring is not only annoying – as the policy statement describes, it can also be illegal depending on the circumstances.
The prohibitions on unfair, deceptive, abusive acts or practices, were designed by Congress to address wrongful practices as business tactics and technology evolve. Digital dark patterns are new in the sense that they leverage contemporary technology to confuse people, but ultimately they involve the same type of obscuring that Congress has long been concerned about. Manipulating people is wrong, whether on paper or pixels.
Second, coming out of the financial crisis, Congress responded by prohibiting companies from setting people up to fail. When enacting measures to prevent abusive practices, Congress banned companies from leveraging someone’s lack of understanding or inability to protect themselves in order to take an unreasonable advantage. In doing so, Congress recognized that gaps in understanding or unequal bargaining power were circumstances that law breaking companies could exploit. Before the financial crisis, mortgage lenders profited by putting people into loans that consumers could not repay. Usually, lenders make money when people pay their bills. The incentives are aligned. But prior to the financial crisis, lenders using an originate-to-distribute business model immediately made money by selling loans on the secondary market to third parties. This made lenders’ balance sheets indifferent to consumer failure, and some lenders exploited that by profiting handsomely off making loans to people who lacked understanding that they wouldn’t be able to make their payments, or to people who were unable to protect their interests by paying the bill.
Third, more broadly, Congress made the value judgment to prohibit entities from leveraging circumstances where people have no choice but to deal with a specific company. In most markets, this can only happen when a firm has a monopoly—but in many consumer finance markets it is embedded in the market structure. For example, you may be able to choose your lender, but the lender chooses who services your loan. Sometimes the lender sells your loan to another loan holder or investment vehicle, and then that entity chooses the servicer. The same can be said for debt collectors. You have no control over to whom your lender refers your debt. Even though there may be many participants in these markets, you have no choice but to deal with a specific, single servicer or debt collector that you did not choose. Consumer reporting companies are similar. You have no choice but to have a consumer report. And while a lender can choose which credit bureau to pull your report from, you cannot.
Congress prohibited companies from leveraging unequal bargaining power, and that includes consumer reporting companies, servicers, and debt collectors who use the fact that their customers are captive to force people into less advantageous deals, extract excess profits, or reduce costs by providing worse service than they would provide if they were competing in an open market.
In 2021, the CFPB charged JPay, a prison financial services company, with abusive conduct. JPay had an exclusive contract to return funds on a prepaid card to people who were being released from jail or prison. The CFPB alleged a violation of the abusive prohibition because it found that JPay was using the fact that people had no other options to charge fees. In other words, consumers were captive to JPay, and JPay illegally used this to gain an unreasonable advantage to extract fees from these individuals.
And fourth, Congress prohibited companies from leveraging consumers’ reasonable reliance on them to their advantage. In banning this type of conduct, Congress was likely thinking of the mortgage steering that occurred prior to the financial crisis, when brokers that people trusted would accept side payments to steer borrowers to more expensive loans when they actually qualified for a better deal.
Intermediary relationships like these involving trusted advisors are important for helping people to make difficult financial decisions. In the modern economy where financial products are highly complex, this is more important than ever. For example, in 2014, the CFPB sued ITT Educational Services for violating the reasonable reliance prong of the ban on abusive practices. ITT was a for-profit college chain that positioned its financial advisors as subject matter experts on how to finance college. In other words, they appeared to be a trusted advisor. In reality, the CFPB’s investigation uncovered that ITT’s financial aid advisors pushed students into unaffordable loans that simply served ITT’s bottom line. Congress was aware of the risks these trusted advisors can pose to people, and also banned companies that have generated consumers’ trust from taking kickbacks or engaging in self-dealing.
Each of these concepts is spelled out in more detail in the policy statement, which synthesizes the agency’s enforcement experience to date. We are soliciting public input on this new statement.
Importantly, the CFPB does not have a monopoly when it comes to policing against abusive conduct. State attorneys general and state regulators can bring actions and seek relief for illegal abusive conduct, independently or in concert with the CFPB. Congress also empowered the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, and the Federal Reserve Board of Governors to supervise depository institutions under $10 billion in assets for compliance with this prohibition and to bring enforcement actions where appropriate.
The law specifies that the CFPB can also activate Federal Trade Commission enforcement over nonbanks and state attorney general enforcement over national banks by undertaking a rulemaking. We welcome input through our new petitions for rulemaking process for potential areas to activate this broader enforcement.
There’s been a great deal of ink spilled about the failure of federal financial regulators and enforcers to halt the widespread abuses that contributed to a devastating financial crisis nearly fifteen years ago. Not only did these regulatory failures harm individuals, families, and neighborhoods, it also hurt every business that engaged in fair and transparent dealing with prospective customers.
Congress made an important judgment about the types of conduct that should not be allowed to fester, and it is incumbent upon the CFPB, federal agencies, and the states to ensure that our markets reward fair dealing, rather than abuse. Thank you.