[Federal Register Volume 88, Number 70 (Wednesday, April 12, 2023)]
[Rules and Regulations]
[Pages 21883-21890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-07233]



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 Rules and Regulations
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  Federal Register / Vol. 88, No. 70 / Wednesday, April 12, 2023 / 
Rules and Regulations  

[[Page 21883]]



CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Chapter X

[Docket No. CFPB-2023-0018]


Statement of Policy Regarding Prohibition on Abusive Acts or 
Practices

AGENCY: Consumer Financial Protection Bureau.

ACTION: Policy statement; request for comment.

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SUMMARY: The Consumer Financial Protection Act of 2010 (CFPA) prohibits 
any ``covered person'' or ``service provider'' from ``engag[ing] in any 
unfair, deceptive, or abusive act or practice'' and defines abusive 
conduct. An abusive act or practice: materially interferes with the 
ability of a consumer to understand a term or condition of a consumer 
financial product or service, or 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. Since the enactment of the CFPA, government enforcers and 
supervisory agencies have taken dozens of actions to condemn prohibited 
abusive conduct. This policy statement summarizes those actions and 
explains how the Consumer Financial Protection Bureau (CFPB) analyzes 
the elements of abusiveness through relevant examples, with the goal of 
providing an analytical framework to fellow government enforcers and 
supervisory agencies and to the market for how to identify violative 
acts or practices. While not required under the Administrative 
Procedure Act, the CFPB is opting to collect comments on the policy 
statement and may make revisions as appropriate after reviewing 
feedback received.

DATES: This policy statement is applicable as of April 12, 2023. 
Comments must be received by July 3, 2023.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2023-
0018, by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include 
Docket No. CFPB-2023-0018 in the subject line of the message.
     Mail/Hand Delivery/Courier: Comment Intake--Statement of 
Policy Regarding Prohibition on Abusive Acts or Practices, c/o Legal 
Division Docket Manager, Consumer Financial Protection Bureau, 1700 G 
Street NW, Washington, DC 20552. Because paper mail in the Washington, 
DC area and at the CFPB is subject to delay, commenters are encouraged 
to submit comments electronically.
    Instructions: The CFPB encourages the early submission of comments. 
All submissions must include the document title and docket number. In 
general, all comments received will be posted without change to https://www.regulations.gov. All submissions, including attachments and other 
supporting materials, will become part of the public record and subject 
to public disclosure. Proprietary information or sensitive personal 
information, such as account numbers or Social Security numbers, or 
names of other individuals, should not be included. Submissions will 
not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Bradley Lipton, Senior Counsel, Legal 
Division, at 202-435-7700. If you require this document in an 
alternative electronic format, please contact 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    In 2010, Congress passed the Consumer Financial Protection Act of 
2010 (CFPA) and banned abusive conduct.\1\ The CFPA's prohibition on 
abusive conduct was the most recent instance of congressional tailoring 
of the Federal prohibitions intended to ensure fair dealing and protect 
consumers and market participants in the United States.\2\
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    \1\ CFPA section 1036(a)(1)(B), 12 U.S.C. 5536(a)(1)(B). In CFPA 
section 1031, Congress prohibited covered persons and services 
providers from committing or engaging in unfair, deceptive, or 
abusive acts or practices in connection with the offering or 
provision of consumer financial products or services. CFPA section 
1031(d) sets forth the general standard for determining whether an 
act or practice is abusive. See 12 U.S.C. 5531(d).
    \2\ See, e.g., FTC v. Standard Educ. Soc'y, 86 F.2d 692, 696 (2d 
Cir. 1936), rev'd in part on other grounds, 302 U.S. 112, 116 (1937) 
(describing the congressional prohibitions intended to regulate 
methods of fair dealing in the marketplace). Certain other Federal 
consumer financial laws, including the Fair Debt Collection 
Practices Act (FDCPA) and the Home Ownership and Equity Protection 
Act (HOEPA), reference either the term ``abusive'' or ``abuse.'' See 
15 U.S.C. 1692d (FDCPA), 15 U.S.C. 1639(p)(2)(B) (HOEPA). The 
Telemarketing and Consumer Fraud and Abuse Prevention Act also 
directed the Federal Trade Commission (FTC) to ``prescribe rules 
prohibiting deceptive telemarketing acts or practices and other 
abusive telemarketing acts or practices.'' 15 U.S.C. 6102(a)(1).
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    Since the beginning of the 20th century, Congress has amended these 
prohibitions in response to evolving norms, economic events, and 
judicial interpretations, guiding those tasked with enforcing the law. 
Beginning with the creation of the Federal Trade Commission, and the 
development of the ``unfair methods of competition'' \3\ and ``unfair 
or deceptive acts or practices'' \4\ prohibitions, Congress has

[[Page 21884]]

passed laws to regulate fair dealing, and the agencies tasked with 
administering those laws have issued policy statements to offer 
guidance on the agencies' approach to enforcing those prohibitions.\5\
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    \3\ In 1914, Congress passed the FTC Act, which declared as 
unlawful ``unfair methods of competition'' but did not define the 
term ``unfair.'' Act of Sept. 26, 1914, ch. 311, sec. 5(a), 38 Stat. 
717, 719 (codified at 15 U.S.C. 45(a)). Congress intended that this 
prohibition would capture conduct that caused competitive harm yet 
remain flexible enough to allow the law to develop and avoid 
circumvention. As the Supreme Court explained in 1934, ``[n]either 
the language nor the history of the Act suggests that Congress 
intended to confine the forbidden methods to fixed and unyielding 
categories,'' and Congress, in defining the powers of the FTC, 
``advisedly adopted a phrase which . . . does not admit of precise 
definition, but the meaning and application of which must be arrived 
at by . . . the gradual process of judicial inclusion and 
exclusion.'' FTC v. R.F. Keppel & Bro., 291 U.S. 304, 310, 312 
(1934) (internal quotation marks omitted).
    \4\ In 1938, in the Wheeler-Lea Act, Congress amended the FTC 
Act to declare as unlawful ``unfair or deceptive acts or 
practices.'' Wheeler-Lea Act, ch. 49, sec. 3, 52 Stat. 111, 111-14 
(1938); 15 U.S.C. 45(a). As it had done previously with ``unfair 
methods of competition,'' Congress did not define this term, instead 
intending for it to be developed over time. See Am. Fin. Servs. 
Ass'n v. FTC, 767 F.2d 957, 978 (D.C. Cir. 1985) (AFSA) (``[N]either 
Congress nor the FTC has seen fit to delineate the specific `kinds' 
of practices which will be deemed unfair . . . . Instead the FTC has 
adhered to its established convention, envisioned by Congress, of 
developing and refining its unfair practice criteria on a 
progressive, incremental basis.'').
    \5\ See, e.g., Letter from the FTC to Hon. Wendell Ford and Hon. 
John Danforth, Comm. on Commerce, Science and Transportation, U.S. 
Senate, Commission Statement of Policy on the Scope of the Consumer 
Unfairness Jurisdiction (Dec. 17, 1980), reprinted in Int'l 
Harvester Co., 104 F.T.C. 949, 1070-76 (1984), https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness (Policy 
Statement on Unfairness); Letter from the FTC to Hon. John D. 
Dingell, Chairman, Comm. on Energy and Commerce, U.S. House of 
Representatives (Oct. 14, 1983), reprinted in Cliffdale Assocs., 
Inc., 103 F.T.C. 110, 174-84 (1984), https://www.ftc.gov/legal-library/browse/ftc-policy-statement-deception (Policy Statement on 
Deception).
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    For centuries, lenders and investors generally had an incentive to 
ensure that a borrower had the ability to repay a debt. But innovations 
in capital markets and fixed income instruments altered this alignment 
of incentives.\6\ The advent of complex securitization led to lenders 
no longer bearing risk when a borrower defaulted because they had sold 
the underlying asset, and passed on the exposure to investors. Fair 
dealing laws in the U.S. have long sought to address the risks and 
harms from market failures.
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    \6\ See Financial Crisis Inquiry Commission, The Financial 
Crisis Inquiry Report, at 191-192 (2011), https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf (describing how synthetic 
collateralized debt obligations, which gained popularity in the mid-
2000s, involved ``two types of investors with opposing interests: 
those who would benefit if the assets performed, and those who would 
benefit if the mortgage borrowers stopped making payments and the 
assets failed to perform'').
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    The 2007-2008 financial crisis tested U.S. consumer protection 
laws, government watchdogs, and the ability of the existing authorities 
to address the predatory lending that was a root cause of the 
collapse.\7\ The financial crisis was set in motion by a set of 
avoidable interlocking forces--but at its core were mortgage lenders 
profiting (by immediately selling on the secondary market) on loans 
that set people up to fail because they could not repay.\8\ Millions of 
Americans saw their home values drop and their jobs eliminated as a 
result of forces largely out of their control.
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    \7\ See id. at xvii, xxiii-xxiv.
    \8\ See id. at 104-111, 113-18; see also S. Rep. No. 111-176, at 
11 (2010), https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1 (``Th[e] financial crisis was 
precipitated by the proliferation of poorly underwritten mortgages 
with abusive terms, followed by a broad fall in housing prices as 
those mortgages went into default and led to increasing 
foreclosures.'').
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    In response, Congress concluded that the manner in which agencies 
had enforced the prohibitions on unfair and deceptive acts or practices 
was too limited to be effective at preventing the financial crisis, and 
once again amended existing law to better meet new challenges.\9\ In 
the CFPA, Congress granted authority over unfair or deceptive acts or 
practices to the States, the Federal banking agencies, and the newly 
created Consumer Financial Protection Bureau (CFPB). Congress also 
added a prohibition on abusive acts or practices.\10\
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    \9\ For example, in 2007, Federal Deposit Insurance Corporation 
(FDIC) Chairwoman Sheila Bair explained in congressional testimony 
that unfairness ``can be a restrictive legal standard'' and proposed 
that Congress consider ``adding the term `abusive,' '' which she 
noted existed in the Home Ownership and Equity Protection Act, and 
which ``is a more flexible standard to address some of the practices 
that make us all uncomfortable.'' Sheila C. Bair, Improving Federal 
Consumer Protection in Financial Services, House Committee on 
Financial Services (June 13, 2007), https://www.govinfo.gov/content/pkg/CHRG-110hhrg37556/html/CHRG-110hhrg37556.htm.
    \10\ See, e.g., S. Rep. No. 111-176, at 172 (Apr. 30, 2010), 
https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1 (``Current law prohibits unfair or deceptive acts or 
practices. The addition of `abusive' will ensure that the Bureau is 
empowered to cover practices where providers unreasonably take 
advantage of consumers.''); Public Law 111-203, pmbl. (listing, in 
the preamble to the Dodd-Frank Act, one of the purposes of the Act 
as ``protect[ing] consumers from abusive financial services 
practices''); see also S. Rep. No. 111-176, at 9 n.19, https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1 (``Today's consumer protection regime . . . could not stem a 
plague of abusive and unaffordable mortgages.''); id. at 11 (``This 
financial crisis was precipitated by the proliferation of poorly 
underwritten mortgages with abusive terms.''); H.R. Rep. No. 111-
367, at 91 (Dec. 9, 2009) (``Th[e] disparate regulatory system has 
been blamed in part for the lack of aggressive enforcement against 
abusive and predatory loan products that contributed to the 
financial crisis, such as subprime and nontraditional mortgages.''); 
H.R. Rep. No. 111-517, at 876-77 (June 29, 2010), https://www.congress.gov/congressional-report/111th-congress/house-report/517 (Conf. Rep.) (``The Act also prohibits financial incentives . . 
. that may encourage mortgage originators . . . to steer consumers 
to higher-cost and more abusive mortgages.'').
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    Since the enactment of the CFPA, government enforcers and 
supervisory agencies have taken dozens of actions to condemn prohibited 
abusive conduct. The CFPB is issuing this Policy Statement to summarize 
those actions and explain how the CFPB analyzes the elements of 
abusiveness through relevant examples, with the goal of providing an 
analytical framework to fellow government enforcers and to the market 
for how to identify violative acts or practices.\11\
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    \11\ This Policy Statement is the CFPB's first formal issuance 
that summarizes precedent on abusive acts or practices and provides 
an analytical framework for identifying abusive acts or practices. 
The CFPB previously issued a Policy Statement on Abusive Acts or 
Practices in 2020, see 85 FR 6733 (Feb. 6, 2020) (2020 Policy 
Statement), rescinded in 86 FR 14808 (Mar. 19, 2021), https://files.consumerfinance.gov/f/documents/cfpb_abusiveness-policy-statement-consolidated_2021-03.pdf. The 2020 Policy Statement 
communicated how the CFPB intended to exercise prosecutorial 
discretion regarding some issues related to abusiveness. However, 
the 2020 Policy Statement did not summarize existing precedent on 
abusive acts or practices or provide an analytical framework for 
identifying abusive acts or practices.
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II. Analysis

    Under the CFPA, there are two abusiveness prohibitions.\12\ 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:
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    \12\ The second of the two prohibitions has three independent 
disjunctive grounds for finding abusiveness.
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     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.\13\
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    \13\ CFPA section 1031(d), 12 U.S.C. 5531(d).
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    The statutory text of these two 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. The circumstances that Congress set forth, 
stated generally, concern gaps in understanding, unequal bargaining 
power, and consumer reliance.\14\
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    \14\ This Policy Statement uses the phrases ``gaps in 
understanding,'' ``unequal bargaining power,'' and ``consumer 
reliance'' as shorthand descriptors of the inquiries required under 
the three subparagraphs of CFPA section 1031(d)(2). The CFPB does 
not intend its use of these shorthand phrases to limit in any way 
the scope of section 1031(d)(2)'s text.
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    Unlike with unfairness but similar to deception, abusiveness 
requires no showing of substantial injury to establish liability, but 
is rather focused on conduct that Congress presumed to be harmful or 
distortionary to the proper functioning of the market. An act or 
practice need fall into only one of the categories above in order to be 
abusive, but an act or practice could fall into more than one 
category.\15\
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    \15\ The conduct that underlies an abusiveness determination may 
also be found to be unfair or deceptive, depending on the 
circumstances.

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[[Page 21885]]

A. Materially Interfering With Consumers' Understanding of Terms and 
Conditions

    The first abusiveness prohibition concerns situations where an 
entity \16\ ``materially interferes with the ability of a consumer to 
understand a term or condition of a consumer financial product or 
service.'' \17\ Material interference can be shown when an act or 
omission is intended to impede consumers' ability to understand terms 
or conditions, has the natural consequence of impeding consumers' 
ability to understand, or actually impedes understanding.
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    \16\ This Policy Statement refers to covered persons, service 
providers, and persons that provide substantial assistance to 
abusive conduct by a covered person or service provider as 
``entity'' or ``entities.''
    \17\ CFPA section 1031(d)(1), 12 U.S.C. 5531(d)(1).
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Acts or Omissions
    Material interference may include actions or omissions that 
obscure, withhold, de-emphasize, render confusing, or hide information 
relevant to the ability of a consumer to understand terms and 
conditions. Interference can take numerous forms, such as buried 
disclosures, physical or digital interference, overshadowing, and 
various other means of manipulating consumers' understanding.
    Buried disclosures include disclosures that limit people's 
comprehension of a term or condition, including but not limited to, 
through the use of fine print, complex language, jargon, or the timing 
of the disclosure.\18\ Entities can also interfere with understanding 
by omitting material terms or conditions.\19\
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    \18\ See, e.g., TD Bank, N.A., File No. 2020-BCFP-0007, at 16-20 
(Aug. 20, 2020) (bank materially interfered with consumers' ability 
to understand terms and conditions of overdraft-protection service 
by withholding any written notice regarding those terms and 
conditions until after eliciting an oral-enrollment decision that 
followed a misleading or incomplete oral presentation regarding the 
service).
    \19\ See, e.g., TMX Finance LLC, File No. 2016-CFPB-0022, at 6 
(Sept. 26, 2016) (lender's sales pitch and Payback Guide materially 
interfered with consumers' ability to understand that the consumer 
received a 30-day transaction, that the Payback Guide was not an 
actual repayment plan, that the terms of the 30-day transaction were 
not affected by the Payback Guide, and that renewing the transaction 
over an extended period would substantially affect the overall cost 
of the transaction, as well as several other aspects of the process, 
by omitting those terms and conditions).
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    Physical interference can include any physical conduct that impedes 
a person's ability to see, hear, or understand the terms and 
conditions, including but not limited to physically hiding or 
withholding notices.\20\
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    \20\ See, e.g., Complaint at 6, 18-19, CFPB v. All American 
Check Cashing, Inc., No. 3:16-cv-00356 (S.D. Miss. May 11, 2016) 
(check cashing company materially interfered with consumers' ability 
to understand a term or condition by requiring employees to block 
consumers' view of check cashing fees by counting money over the 
receipt or to quickly remove the receipt).
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    Digital interference can include impediments to a person's ability 
to see, hear, or understand the terms and conditions when they are 
presented to someone in electronic or virtual format. This form of 
interference includes but is not limited to user interface and user 
experience manipulations such as the use of pop-up or drop-down boxes, 
multiple click-throughs, or other actions or ``dark patterns'' \21\ 
that have the effect of making the terms and conditions materially less 
accessible or salient.
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    \21\ See FTC Staff Report, Bringing Dark Patterns to Light 
(Sept. 2022), https://www.ftc.gov/reports/bringing-dark-patterns-light.
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    Overshadowing includes the prominent placement of certain content 
that interferes with the comprehension of other content, including 
terms and conditions.\22\
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    \22\ See, e.g., First Amended Complaint at 12-13, 26-27, CFPB v. 
TCF National Bank, No. 17-cv-00166 (D. Minn. Mar. 1, 2017) (bank 
chose to use ``an account opening process that interfered with 
customers' ability to consider the contents of the Notice when they 
made their Opt-In decision'' by presenting consumers with the choice 
to select overdraft service during a time when they were not looking 
at the explanatory notice relating to their opt-in rights); see also 
CFPB v. TCF Nat'l Bank, No. 17-cv-00166, 2017 WL 6211033, at *2-3 
(D. Minn. Sept. 8, 2017) (denying bank's motion to dismiss 
abusiveness claim).
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Material Interference
    There are a number of methods to prove material interference with a 
consumers' ability to understand terms or conditions, including but not 
limited to those described below. First, while intent is not a required 
element to show material interference, it is reasonable to infer that 
an act or omission materially interferes with consumers' ability to 
understand a term or condition when the entity intends it to 
interfere.\23\ Second, material interference can be established with 
evidence that the natural consequence of the act or omission would be 
to impede consumers' ability to understand. And third, material 
interference can also be shown with evidence that the act or omission 
did in fact impede consumers' actual understanding. While evidence of 
intent would provide a basis for inferring material interference under 
the first method, it is not a required element to show material 
interference.
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    \23\ Cf. Policy Statement on Deception at 5, Federal Trade 
Commission (``When evidence exists that a seller intended to make an 
implied claim, the Commission will infer materiality.'').
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    Certain terms of a transaction are so consequential that when they 
are not conveyed to people prominently or clearly, it may be reasonable 
to presume that the entity engaged in acts or omissions that materially 
interfere with consumers' ability to understand. That information 
includes, but is not limited to, pricing or costs, limitations on the 
person's ability to use or benefit from the product or service, and 
contractually specified consequences of default.
    Additionally, an entity's provision of a product or service may 
interfere with consumers' ability to understand if the product or 
service is so complicated that material information about it cannot be 
sufficiently explained or if the entity's business model functions in a 
manner that is inconsistent with its product's or service's apparent 
terms.

B. Taking Unreasonable Advantage

    The second form of ``abusiveness'' under the CFPA prohibits 
entities from taking unreasonable advantage of certain 
circumstances.\24\ Congress determined that it is an abusive act or 
practice when an entity takes unreasonable advantage of three 
particular circumstances.\25\ The circumstances are:
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    \24\ CFPA section 1031(d)(2), 12 U.S.C. 5531(d)(2).
    \25\ See supra note 14.
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    (1) A ``lack of understanding on the part of the consumer of the 
material risks, costs, or conditions of the product or service.'' \26\ 
This circumstance concerns gaps in understanding affecting consumer 
decision-making.
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    \26\ CFPA section 1031(d)(2)(A), 12 U.S.C. 5531(d)(2)(A).
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    (2) The ``inability of the consumer to protect the interests of the 
consumer in selecting or using a consumer financial product or 
service.'' \27\ This circumstance concerns unequal bargaining power 
where, for example, consumers lack the practical ability to switch 
providers, seek more favorable terms, or make other decisions to 
protect their interests.
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    \27\ CFPA section 1031(d)(2)(B), 12 U.S.C. 5531(d)(2)(B).
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    (3) The ``reasonable reliance by the consumer on a covered person 
to act in the interests of the consumer.'' \28\ This circumstance 
concerns consumer reliance on an entity, including when consumers 
reasonably rely on an entity to make a decision for them or advise them 
on how to make a decision.
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    \28\ CFPA section 1031(d)(2)(C), 12 U.S.C. 5531(d)(2)(C).
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    Under the CFPA, it is illegal for an entity to take unreasonable 
advantage of one of these three circumstances, even if the condition 
was not created by the entity.\29\
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    \29\ See CFPA section 1031(d)(2), 12 U.S.C. 5531(d)(2).

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[[Page 21886]]

    The ordinary meaning of the phrase ``take advantage of'' is 
generally ``to make use of for one's own benefit.'' \30\ An advantage 
can include a variety of monetary and non-monetary benefits to the 
entity or its affiliates or partners, including but not limited to 
increased market share, revenue, cost savings, profits,\31\ 
reputational benefits, and other operational benefits to the entity.
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    \30\ E.g., CFPB v. ITT Educ. Servs., Inc., 219 F. Supp. 3d 878, 
918 (S.D. Ind. 2015) (quoting this as one of the definitions from 
Webster's Third New Int'l Dictionary 2331 (3d ed.1993)).
    \31\ Advantage-taking may occur when an entity pursues the 
prospect of monetary gain, even if ultimately it does not accrue a 
profit. In ordinary usage, one can take advantage of one of the 
specified statutory circumstances, even if that benefit is not 
successfully realized. The CFPA's legislative history provides an 
example of this situation, when discussing abuses in the subprime 
mortgage industry. The legislative history notes that some ``abusive 
practices may well be profitable in the short term, but are ticking 
time bombs waiting to explode'' upon banks. S. Rep. No. 111-176, at 
17 (2010) (internal quotation marks omitted). Thus, abusive acts or 
practices may not ultimately be profitable for the covered party. If 
an abusive act or practice takes advantage of one of the specified 
statutory circumstances but fails to turn a profit, for example due 
to incompetence in carrying out the scheme, it would be in line with 
congressional intent and the ordinary usage of the phrase ``takes 
unreasonable advantage of'' to consider the act or practice to be 
eligible for an abusiveness finding on that basis.
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    The CFPA prohibits taking ``unreasonable'' advantage of the 
specified statutory circumstances. The term ``reasonable'' means 
``[f]air, proper, or moderate under the circumstances,'' \32\ and 
conversely, ``unreasonable'' means ``exceeding the bounds of reason or 
moderation.'' \33\
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    \32\ Reasonable, Black's Law Dictionary (11th ed. 2019).
    \33\ Unreasonable, Webster's Third New Int'l Dictionary 2507 (3d 
ed. 1993).
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    In crafting the abusiveness prohibition, Congress identified 
categories of practices that distort the market and ultimately harm 
consumers. Therefore, unlike unfairness, 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.\34\
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    \34\ See CFPA section 1031(c)(1)(A), 12 U.S.C. 5531(c)(1)(A). 
The amount of harm is relevant, however, to crafting remedies. Also, 
harm in some cases may bolster a determination that an entity is 
taking unreasonable advantage of consumers within the meaning of 
CFPA section 1031(d)(2).
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    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.\35\ Such an evaluation does not require an inquiry into 
whether advantage-taking is typical or not.\36\ And even a relatively 
small advantage may be abusive if it is unreasonable. There are also a 
number of analytical methods, including but not limited to those 
described below, that can be used to evaluate unreasonable advantage-
taking.
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    \35\ Cf., e.g., Swift & Co. v. Wallace, 105 F.2d 848, 854-55 
(7th Cir. 1939) (`` `[U]nreasonable' is not a word of fixed content 
and whether preferences or advantages are unreasonable must be 
determined by an evaluation of all cognizable factors which 
determine the scope and nature of the preference or advantage.'').
    \36\ While evidence of large or atypical advantage-taking is not 
required under the reasonableness inquiry, it may nonetheless be 
relevant.
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    First, when Congress formulated the CFPA, one of its main concerns 
was financial products and services that may be ``set up to fail.'' 
Before the 2007-2008 financial crisis, mortgage lenders were willing to 
make loans on terms that people could not afford in part due to the 
ability to off-load default risk into the secondary market. This led to 
significant harm to the household sector, which was ultimately 
transmitted to the broader financial system.
    The CFPA's legislative history explains that, had the CFPB existed, 
``the CFPB would have been able to see and take action against the 
proliferation of poorly underwritten mortgages with abusive terms.'' 
\37\ Partly in response to the financial crisis, Congress prohibited 
certain abusive business models and other acts or practices that--
contrary to many consumer finance relationships where the company 
benefits from consumer success--misalign incentives and generate 
benefit for a company when people are harmed.\38\ In many 
circumstances, it is unreasonable for an entity to benefit from, or be 
indifferent to, negative consumer outcomes resulting from one of the 
circumstances identified by Congress.
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    \37\ S. Rep. No. 111-176, at 229 (2010), https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1.
    \38\ See, e.g., Complaint at 26-29, CFPB v. Aequitas Capital 
Management, Inc., No. 3:17-cv-01278 (D. Or. Aug. 17, 2017) (action 
against lender to students at for-profit schools that reaped revenue 
despite the high default rate of the loans that the students were 
induced to take out).
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    Second, the CFPA's legislative history emphasized that, as a result 
of CFPB oversight, ``a consumer can shop and compare products based on 
quality, price, and convenience without having to worry about getting 
trapped by fine print into an abusive deal.'' \39\ Unreasonable 
advantage-taking includes using the statutory circumstances to acquire 
particular leverage over people or deprive consumers of legal 
rights.\40\ Relatedly, advantage-taking may be unreasonable when an 
entity caused one of the circumstances described in CFPA section 
1031(d)(2).\41\
---------------------------------------------------------------------------

    \39\ S. Rep. No. 111-176, at 229 (2010), https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1.
    \40\ E.g., First Amended Complaint at 40-41, CFPB v. Think 
Finance, LLC, No. 4:17-cv-00127 (D. Mont. Mar. 28, 2018) (It was 
abusive for a company to attempt to collect loans that, unbeknownst 
to the consumers, could not lawfully be collected because they were 
void.).
    \41\ See, e.g., Complaint at 9-10, CFPB v. SettleIT, Inc., No. 
8:21-cv-00674 (C.D. Cal. Apr. 13, 2021) (A debt-settlement company 
took unreasonable advantage of consumers' reasonable reliance when 
it ``told consumers that it would work in their interests only,'' 
thus inducing consumers to rely on the company, but actually 
prioritized the settlement of debts owed to lenders with which it 
was affiliated.).
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    One may also assess whether entities are obtaining an unreasonable 
advantage by considering whether they are reaping more benefits as a 
consequence of the statutorily identified circumstances, or whether the 
benefit to the entity would have existed if the circumstance did not 
exist.\42\ In other words, entities should not get a windfall due to a 
gap in understanding, unequal bargaining power, or consumer reliance. 
Having said that, section 1031(d)(2) does not require an investigative 
accounting of costs and benefits or other form of quantification to 
make a finding. Instead, one may rely on qualitative assessment to 
determine whether an entity takes an unreasonable advantage.
---------------------------------------------------------------------------

    \42\ See, e.g., CFPB, Supervisory Highlights: Issue 28, Fall 
2022, at 22 (Nov. 2022), https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-28_2022-11.pdf (mortgage 
servicers took unreasonable advantage of consumers' lack of 
understanding when they profited from insufficiently disclosed 
phone-payment fees that were materially greater than the cost of 
other payment options). In JPay, LLC, File No. 2021-CFPB-0006 (Oct. 
19, 2021), the CFPB found an abusive practice where a firm leveraged 
an exclusive contract to charge fees on prepaid cards used to 
provide money to individuals being released from prison or jail. The 
prepaid cards replaced the feeless option of receiving such money as 
cash or by check that previously had been offered by prisons and 
jails. Under these circumstances, the entire fee accruing to JPay 
was considered an ``unreasonable advantage.''
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a. Lack of Understanding
    The first circumstance, of which entities cannot take 
``unreasonable advantage,'' as defined in the CFPA, concerns ``a lack 
of understanding on the part of the consumer of the material risks, 
costs, or conditions of the product or service.'' \43\ When there are 
gaps in understanding regarding the material risks, costs, or 
conditions of the entity's product or service, entities may not take 
unreasonable advantage of that gap. Such gaps could include those 
between an entity and a consumer. Certain types of gaps in 
understanding can create

[[Page 21887]]

circumstances where transactions are exploitative.
---------------------------------------------------------------------------

    \43\ CFPA section 1031(d)(2)(A), 12 U.S.C. 5531(d)(2)(A).
---------------------------------------------------------------------------

    Gaps in understanding as to ``risks'' encompass a wide range of 
potential consumer harms. ``Risks'' include but are not limited to the 
consequences or likelihood of default \44\ and the loss of future 
benefits.\45\ Gaps in understanding related to ``costs'' include any 
monetary charge to a person as well as non-monetary costs such as lost 
time, loss of use, or reputational harm.\46\ And gaps in understanding 
with respect to ``conditions'' include any circumstance, context, or 
attribute of a product or service, whether express or implicit.\47\ For 
example, ``conditions'' could include the length of time it would take 
a person to realize the benefits of a financial product or service,\48\ 
the relationship between the entity and the consumer's creditors,\49\ 
the fact a debt is not legally enforceable,\50\ or the processes that 
determine when fees will be assessed.\51\
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    \44\ See, e.g., Complaint at 13-14, 18, CFPB v. Pension Funding 
LLC, No. 8:15-cv-01329 (C.D. Cal. Aug. 20, 2015) (explaining that 
because pension advance companies ``obscured the true nature of the 
transactions, failed to disclose and misrepresented the costs of the 
loans, and gave consumers misleading advice, consumers could not 
clearly understand the risks or costs of the loans or effectively 
compare the loans to potential less costly alternatives,'' and 
describing how companies aggressively pursued consumers who 
defaulted).
    \45\ See, e.g., Amended Complaint at 6, CFPB v. Access Funding, 
No. 1-16-cv-03759-JFM (D. Md. Dec. 13, 2017) (``Consumers received a 
steeply discounted lump sum in return for signing away their future 
payment streams. The lump sums Access Funding provided consumers 
typically represented only about 30% of the present value of those 
future payments.'').
    \46\ See, e.g., Fort Knox Nat'l Co., File No. 2015-CFPB-0008, at 
8 (Apr. 20, 2015) (entities took unreasonable advantage of 
consumers' lack of understanding by charging fees that they ``did 
not adequately disclose''); CFPB, Supervisory Highlights: Issue 28, 
Fall 2022, at 22 (Nov. 2022), https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-28_2022-11.pdf (mortgage 
servicers took unreasonable advantage of consumers' lack of 
understanding when they profited from insufficiently disclosed 
phone-payment fees that were materially greater than the cost of 
other payment options); First Amended Complaint at 14, CFPB v. 
Freedom Debt Relief, LLC, No. 3:17-cv-06484 (N.D. Cal. June 1, 2018) 
(``Freedom did not disclose to consumers before they enrolled in its 
program that they might be required to negotiate with creditors on 
their own, including by deceiving their creditors, in order to 
settle their debts.'').
    \47\ See, e.g., First Amended Complaint at 40-41, CFPB v. Think 
Finance, LLC, No. 4:17-cv-00127-BMM (D. Mont. Mar. 28, 2018) 
(consumers' ``legal obligation to repay is a material term, cost, or 
condition of a loan,'' and online lenders ``took unreasonable 
advantage of consumers' lack of understanding regarding the voidness 
of [their] loans'' under State usury or licensing laws to charge 
higher, illegal interest rates); Zero Parallel, LLC, File No. 2017-
CFPB-0017, at 6 (Sept. 6, 2017) (``Zero Parallel's sale of Leads 
resulting in, or likely to result in, loans that are void in whole 
or in part under the laws of the consumer's state of residence based 
on state-licensing requirements or interest-rate limits takes 
unreasonable advantage of a lack of understanding on the part of the 
consumer of the material risks, costs, and conditions of the 
loans.''); see also CFPB v. Think Finance, LLC, No. CV-17-127-GF-
BMM, 2018 WL 3707911, at *8 (D. Mont. Aug. 3, 2018) (denying Think 
Finance defendants' motion to dismiss abusiveness claim).
    \48\ See, e.g., CFPB v. American Debt Settlement Solutions, No. 
9:13-ev-80548-DMM, at 8 (S.D. Fla. June 6, 2013) (Stipulated Final 
Judgment and Order) (``ADSS's acts or practices are abusive . . . 
because . . . ADSS has knowingly enrolled in its debt-relief 
programs consumers whose financial conditions make it highly 
unlikely that they can complete the programs, and ADSS has 
nonetheless collected fees from consumers who had inadequate income 
to complete their debt settlement programs.''); Complaint at 15, 
CFPB v. American Debt Settlement Solutions, No. 9:13-cv-80548-DMM 
(S.D. Fla., May 30, 2013) (``This practice takes unreasonable 
advantage of consumers' lack of understanding of how long it will 
take ADSS to settle their debts and therefore how much money they 
will spend before realizing any benefits from enrolling in ADSS's 
debt-relief program.'').
    \49\ See, e.g., Amended Complaint at 14, CFPB v. Access Funding, 
No. 1-16-cv-03759-JFM (D. Md. Dec. 13, 2017) (``Consumers did not 
understand that Smith was not providing independent professional 
advice or that he did not take their individual circumstances or 
interests into account. They also did not understand that their 
interests would likely be better served by a truly independent 
advisor.'').
    \50\ See First Amended Complaint at 40-41, CFPB v. Think 
Finance, LLC, No. 4:17-cv-00127 (D. Mont. Mar. 28, 2018) (It was 
abusive for a company to attempt to collect loans that, unbeknownst 
to the consumers, could not lawfully be collected because they were 
void.); Colfax Capital Corp., File No. 2014-CFPB-0009, at 11-12 
(July 29, 2014) (it was abusive for company to service and collect 
on consumer financing agreements that State laws rendered void or 
limited the consumer's obligation to repay).
    \51\ See, e.g., Regions Bank, File No. 2022-CFPB-0008, at 15 
(Sept. 28, 2022) (``Due to [the bank's] counter-intuitive, complex 
transaction processing, many consumers did not understand [the 
bank's] overdraft practices or expect Authorized-Positive Overdraft 
Fees. [The bank] took unreasonable advantage of this lack of 
understanding by assessing at least $141 million in Authorized-
Positive Overdraft fees during the Relevant Period.'').
---------------------------------------------------------------------------

    While acts or omissions by an entity can be relevant in determining 
whether people lack understanding,\52\ the prohibition in section 
1031(d)(2)(A) does not require that the entity caused the person's lack 
of understanding through untruthful statements or other actions or 
omissions.\53\ Under the text of section 1031(d)(2)(A), the consumer's 
lack of understanding, regardless of how it arose, is sufficient. If 
people lack understanding, entities may not take unreasonable advantage 
of that lack of understanding. The lack of understanding can be caused 
by third parties and can exist even when there is no contractual 
relationship between the person and the entity that takes unreasonable 
advantage of the person's lack of understanding.\54\
---------------------------------------------------------------------------

    \52\ See, e.g., Amended Complaint at 15-16, Bureau of Consumer 
Fin. Prot. v. Certified Forensic Loan Auditors, LLC, No. 2:19-cv-
07722 (C.D. Cal. Nov. 13, 2019) (entities took unreasonable 
advantage of consumers' lack of understanding regarding the 
residential-mortgage industry and foreclosure-defense law by making 
misrepresentations and concealing material facts regarding the 
mortgage-relief services they offered); see also Bureau of Consumer 
Fin. Prot. v. Certified Forensic Loan Auditors, LLC, No. 2:19-cv-
07722-ODW, 2020 WL 2556417, at *4 (C.D. Cal. May 20, 2020) (denying 
Certified Forensic Loan Auditors defendants' motion to dismiss 
abusiveness claim).
    \53\ See, e.g., Zero Parallel, LLC, File No. 2017-CFPB-0017, at 
6 (Sept. 6, 2017) (it was abusive to sell leads resulting or likely 
to result in loans that were void in whole or in part under the laws 
of the consumer's State of residence).
    \54\ See, e.g., Am. Complaint at 2, CFPB v. D & D Marketing 
Inc., No. 2:15-cv-09692 (C.D. Cal. June 30, 2016) (lead aggregator 
``failed to vet or monitor its lead generators and lead purchasers, 
exposing consumers to the risk of having their information purchased 
by actors who would use it for illegal purposes,'' ``allowed its 
lead generators to attract consumers with misleading statements,'' 
and ``took unreasonable advantage of consumers' lack of 
understanding of the material risks, costs, or conditions of the 
loan products for which they apply'').
---------------------------------------------------------------------------

    The statutory text of the prohibition does not require that the 
consumer's lack of understanding was reasonable to demonstrate abusive 
conduct.\55\ Similarly, the prohibition does not require proof that 
some threshold number of people lacked understanding to establish that 
an act or practice was abusive.
---------------------------------------------------------------------------

    \55\ Although establishing that a reasonable consumer would lack 
understanding of the material risks, costs, or conditions of a 
product or service is not a prerequisite to establishing liability 
under CFPA section 1031(d)(2)(A), government enforcers or 
supervisory agencies may rely on the fact that a reasonable consumer 
would lack such understanding to establish that consumers did not 
understand.
---------------------------------------------------------------------------

    A person may lack understanding of risks, costs, or conditions, 
even if they have an awareness that it is in the realm of possibility 
that a particular negative consequence may follow or a particular cost 
may be incurred as a result of using the product or service.\56\ But 
consumers generally do not expect companies to benefit from or be 
indifferent to certain negative consequences, including but not limited 
to default. Moreover, consumers may not understand that a risk is very 
likely to happen or that--though relatively rare--the impact of a

[[Page 21888]]

particular risk would be severe.\57\ The inquiry under section 
1031(d)(2)(A) is whether some consumers in question have a lack of 
understanding, not all consumers or even most consumers. Since there 
can be differences among consumers in the risks, costs, and conditions 
they face and in their understanding of them, there may be a violation 
with respect to some consumers even if other consumers do not lack 
understanding.
---------------------------------------------------------------------------

    \56\ 82 FR 54472, 54740 (Nov. 17, 2017) (``2017 Payday Rule''), 
ratified by 85 FR 41905 (July 13, 2020), upheld in Cmty. Fin. Servs. 
Ass'n of Am., Ltd. v. CFPB, 558 F. Supp. 3d 350, 362 (W.D. Tex. 
2021), aff'd in relevant part, 51 F.4th 616 (5th Cir. 2022). The 
CFPB explained in the preamble to a rule rescinding part of the 2017 
Payday Rule that ``[t]he [rescission] rulemaking addresse[d] the 
legal and evidentiary bases for particular rule provisions 
identified in this final rule. It d[id] not prevent the Bureau from 
exercising tool choices, such as appropriate exercise of supervision 
and enforcement tools, consistent with the Dodd-Frank Act and other 
applicable laws and regulations. It also d[id] not prevent the 
Bureau from exercising its judgment in light of factual, legal, and 
policy factors in particular circumstances as to whether an act or 
practice meets the standards for abusiveness under section 1031 of 
the Dodd-Frank Act.'' 85 FR 44382, 44415 n.286 (July 22, 2020).
    \57\ 82 FR at 54740.
---------------------------------------------------------------------------

    Lastly, one can demonstrate a person's lack of understanding in a 
number of ways. For example, direct evidence of lack of understanding, 
including but not limited to complaints and consumer testimony, can 
suffice. Evidence or analysis showing that reasonable consumers were 
not likely to understand can likewise be used to establish lack of 
understanding. One can also demonstrate lack of understanding by 
considering course of conduct and likely consequences. For example, if 
a transaction would entail material risks or costs and people would 
likely derive minimal or no benefit from the transaction, it is 
generally reasonable to infer that people who nonetheless went ahead 
with the transaction did not understand those material risks or 
costs.\58\
---------------------------------------------------------------------------

    \58\ See CFPB, Supervisory Highlights: Issue 19, Summer 2019, at 
3 (Sept. 2019), https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-19_092019.pdf (``By purchasing a 
product [guaranteed asset protection] they would not benefit from 
[because of the low loan-to-value ratio of their auto loans], 
consumers demonstrated that they lacked an understanding of a 
material aspect of the product.'').
---------------------------------------------------------------------------

b. Inability of Consumers To Protect Their Interests
    The second circumstance, of which entities cannot take 
``unreasonable advantage,'' as defined in the CFPA, concerns ``the 
inability of the consumer to protect the interests of the consumer in 
selecting or using a consumer financial product or service.'' \59\ When 
people are unable to protect their interests in selecting or using a 
consumer financial product or service, they can lack autonomy. In these 
situations, there is a risk that entities will take unreasonable 
advantage of the unequal bargaining power.\60\ Thus, Congress has 
outlawed taking unreasonable advantage of circumstances where people 
lack sufficient bargaining power to protect their interests. Such 
circumstances may occur at the time of, or prior to, the person 
selecting the product or service, during their use of the product or 
service, or both.
---------------------------------------------------------------------------

    \59\ CFPA section 1031(d)(2)(B), 12 U.S.C. 5531(d)(2)(B).
    \60\ Consumers may also be unable to protect their interests 
when the inequality in bargaining power flows from circumstances or 
vulnerabilities that are present for individual or particular groups 
of consumers.
---------------------------------------------------------------------------

    The consumer ``interests'' contemplated in section 1031(d)(2)(B) 
include monetary and non-monetary interests, including but not limited 
to property, privacy, or reputational interests.\61\ People also have 
interests in limiting the amount of time or effort necessary to obtain 
consumer financial products or services or remedy problems related to 
those products or services. This includes, but is not limited to, the 
time spent trying to obtain customer support assistance.\62\
---------------------------------------------------------------------------

    \61\ See, e.g., Wells Fargo Bank, N.A., File No. 2016-CFPB-0015, 
at 6-7 (Sept. 8, 2016) (noting that respondent's ``acts of opening 
unauthorized deposit accounts and engaging in simulated funding took 
unreasonable advantage of consumers' inability to protect their 
interests . . . in having an account opened only after affirmative 
agreement[ ] [and] protecting themselves from security and other 
risks'').
    \62\ See, e.g., Complaint at 15, CFPB v. PayPal, Inc., No. 1:15-
cv-01426-PDB (D. Md. May 19, 2015) (consumers unable to protect 
their interests where ``Defendants purported to allow consumers to 
control the allocation of payments by requesting that their payments 
be allocated to specific balances, but consumers seeking to make 
such requests often could not reach a customer-service 
representative'').
---------------------------------------------------------------------------

    A consumer's ``inability'' to protect their interests includes 
situations when it is impractical for them to protect their interests 
in selecting or using a consumer financial product or service.\63\ For 
example, when the steps a person would need to take to protect their 
interests are unknown to the person \64\ or are especially onerous,\65\ 
they are likely unable to protect their interest. Furthermore, people 
who do not have monetary means may be unable to protect their interests 
if the only practical method for doing so requires payment of 
money.\66\ Of course, merely serving people without monetary means is 
not abusive. However, it may be abusive to take unreasonable advantage 
of a person's lack of monetary means to protect their interests.\67\
---------------------------------------------------------------------------

    \63\ 82 FR at 54743 (``The Bureau also rejects the 
interpretation, presented by commenters, that the prong of 
`inability of the consumer to protect the interests of the consumer 
in selecting or using a consumer financial product or service' can 
be met only when it is literally impossible for consumers to take 
action to protect their interests. . . . [T]he Bureau believes the 
clause `inability of the consumer to protect' is . . . reasonably 
interpreted to mean that consumers are unable to protect their 
interests when it is impracticable for them to do so in light of the 
circumstances.''); see also ITT Educ. Servs., 219 F. Supp. 3d at 919 
(holding that the phrase ``inability . . . to protect the interests 
of the consumer'' does not refer merely to ``the theoretical power 
[of consumers] to defend their interests''; it also encompasses 
circumstances where ``a consumer is unable to protect herself not in 
absolute terms, but relative to the excessively stronger position of 
the defendant'').
    \64\ See, e.g., Wells Fargo Bank, N.A., File No. 2016-CFPB-0015, 
at 6-7 (Sept. 8, 2016) (Bank's ``acts of opening unauthorized 
deposit accounts and engaging in simulated funding took unreasonable 
advantage of consumers' inability to protect their interests in 
selecting or using consumer financial products or services, 
including [their] interests in having an account opened only after 
affirmative agreement, protecting themselves from security and other 
risks, and avoiding associated fees.''); U.S. Bank, N.A., File No. 
2022-CFPB-0006, at 10 (July 28, 2022) (Bank's ``conduct violated the 
CFPA prohibition against abusive acts or practices because [the 
bank] took unreasonable advantage of the consumers' inability to 
protect their interests in selecting or using a product or service 
by opening credit cards, lines of credit, and deposit accounts 
without consumers' knowledge and consent.'').
    \65\ See, e.g., Complaint at 15-16, CFPB v. Freedom Stores Inc., 
2:14-cv-00643 (E.D. Va. Dec. 18, 2014) (consumers were unable to 
bargain for the removal of a venue-selection clause that designated 
the State or Federal courts of Virginia, and which ``was almost 
certain to produce default judgments and lead to garnishments 
against consumers who were unable to appear and assert a defense'').
    \66\ See, e.g., Ace Cash Express Inc., File No. 2014-CFPB-0008, 
at 10-11 (July 10, 2014) (payday loan provider ``leveraged an 
artificial sense of urgency to induce delinquent borrowers with a 
demonstrated inability to repay their existing loan to take out a 
new . . . loan with accompanying fees''); see also Complaint at 14, 
CFPB v. S/W Tax Loans, Inc., No. 1:15-cv-00299-JB-WPL (D.N.M. Apr. 
14, 2015) (``By failing to disclose their financial interests in the 
high-cost loan products to which they were steering their cash-
strapped and vulnerable customers, Thomas and the Tax Franchise took 
unreasonable advantage of their tax clients' inability to protect 
their own interests . . . .'' (emphasis added)); Credit Practices 
Rule, 49 FR 7740, 7747 (Mar. 1, 1984) (The results of leading 
studies indicate ``that the precipitating cause of default is 
usually a circumstance or event beyond the debtor's immediate 
control. When such events occur, default is generally an involuntary 
response.''); AFSA, 767 F.2d at 976 (upholding the Credit Practices 
Rule, including the finding that ``default is ordinarily the product 
of forces beyond a debtor's control'').
    \67\ ITT Educ. Servs., 219 F. Supp. 3d at 887-89, 919-20 (for-
profit college took unreasonable advantage of students' inability to 
protect their interests by first guiding its students into temporary 
loans that they could not repay and then, once those became due, 
coercing them into taking out financially irresponsible longer-term 
loans); Complaint at 26-29, CFPB v. Aequitas Capital Management, 
Inc., No. 3:17-cv-01278 (D. Or. Aug. 17, 2017) (lender to students 
at for-profit schools reaped revenue despite the high default rate 
of the loans that the schools induced students to take out).
---------------------------------------------------------------------------

    The nature of the customer relationship may also render consumers 
unable to protect their interests in selecting or using a consumer 
financial product or service. People are often unable to protect their 
interests when they do not elect to enter into a relationship with an 
entity and cannot elect to instead enter into a relationship with a 
competitor. These consumer relationships, including but not limited to 
those with credit reporting companies, debt collectors, and third-party 
loan servicers, are generally structured such that people cannot 
exercise meaningful choice in the

[[Page 21889]]

selection or use of any particular entity as a provider. In these 
circumstances, people cannot protect their interests by choosing an 
alternative provider either upfront (i.e., they have no ability to 
select the provider to begin with) or during the course of the customer 
relationship (i.e., they have no competitive recourse if they encounter 
difficulty with the entity while using the product or service). 
Obviously, such relationships are not per se abusive; however, entities 
may not take unreasonable advantage of the absence of choice in these 
types of relationships.\68\ In addition, entities may not take 
unreasonable advantage of the fact that they are the only source for 
important information or services.\69\
---------------------------------------------------------------------------

    \68\ See, e.g., JPay, LLC, File No. 2021-CFPB-0006 (Oct. 19, 
2021) (prison financial services company took unreasonable advantage 
of its status as a single-source government contractor for prepaid 
cards; the company charged fees even if consumers did not want to do 
business with the company).
    \69\ See CFPB, Supervisory Highlights: Issue 27, Fall 2022, at 
8-9 (Sept. 2022), https://files.consumerfinance.gov/f/documents/cfpb_student-loan-servicing-supervisory-highlights-special-edition_report_2022-09.pdf (``Examiners found that institutions 
engaged in abusive acts or practices by withholding official 
transcripts as a blanket policy in conjunction with the extension of 
credit. These schools did not release official transcripts to 
consumers that were delinquent or in default on their debts to the 
school . . . . Th[e] heightened pressure to produce transcripts 
leaves consumers with little-to-no bargaining power while academic 
achievement and professional advancements depend on the actions of a 
single academic institution.''); Bank of America, N.A., File No. 
2022-CFPB-0004, at 18 (July 14, 2022) (bank reversed permanent 
credits for consumers' unemployment insurance prepaid debit cards, 
and cardholders were ``unable to protect their interests because 
they could not control how and when [the bank] would investigate and 
resolve their notices of error'').
---------------------------------------------------------------------------

    Consumers may also lack power to protect their interests in 
selecting or using a consumer financial product or service when 
entities use form contracts, where contractual provisions are not 
subject to a consumer choice.\70\ Similarly, where the person is unable 
to bargain over a clause because it is non-negotiable, they may be 
deprived of the ability to protect their interests.\71\
---------------------------------------------------------------------------

    \70\ See, e.g., Complaint at 15-16, CFPB v. Freedom Stores Inc., 
2:14-cv-00643 (E.D. Va. Dec. 18, 2014) (consumers were unable to 
bargain for the removal of a venue-selection clause that designated 
the State or Federal courts of Virginia, and which ``was almost 
certain to produce default judgments and lead to garnishments 
against consumers who were unable to appear and assert a defense'').
    \71\ See, e.g., Complaint at 4, 7, CFPB v. Sec. Nat'l Auto. 
Acceptance Co., No. 1:15-cv-401 (S.D. Ohio June 17, 2015) (alleging, 
in support of abusiveness claim under CFPA section 1031(d)(2)(B), 
that consumers ``had no opportunity to bargain for [the] removal'' 
of contractual language purporting to authorize lender to contact 
commanding officers of military servicemembers who defaulted on 
their loans); Credit Practices Rule, 49 FR 7740, 7745-47 (Mar. 1, 
1984). In AFSA, the D.C. Circuit upheld the FTC's Credit Practices 
Rule against challenge to FTC's exercise of its unfairness authority 
in promulgating the rule. The D.C. Circuit noted: ``The Commission 
further found . . . that due to certain characteristics of the 
consumer credit market, it could not reasonably conclude that the 
mix of remedies included in the contracts reflects consumer 
preferences. Whereas consumers may bargain over terms such as 
interest rates, and the amount or number of payments, their ability 
and incentive to bargain over the boilerplate remedial provisions is 
substantially limited. Several aspects of the credit transaction 
combine to prevent consumers from making meaningful efforts to 
search, compare, and bargain over remedial provisions. As noted, 
standard form contracts are presented on a take it or leave it 
basis. . . . Given the substantial similarity of contracts, 
consumers have little ability or incentive to shop for a better 
contract.'' 767 F.2d at 976-77 (citations omitted).
---------------------------------------------------------------------------

    Consumers are often unable to protect their interests in selecting 
or using a consumer financial product or service where companies have 
outsized market power. When an entity's market share, the concentration 
in a market more broadly, or the market structure prevents people from 
protecting their interests by choosing an entity that offers 
competitive pricing, entities may not use their market power to their 
``unreasonable advantage.'' \72\
---------------------------------------------------------------------------

    \72\ See, e.g., JPay, LLC, File No. 2021-CFPB-0006 (Oct. 19, 
2021) (prison financial services company took unreasonable advantage 
of the market structure which allowed it, as a single-source 
government contractor for prepaid cards, to charge fees even if 
consumers did not want to do business with the company because 
consumers were denied a choice on how their money would be given to 
them upon release from incarceration).
---------------------------------------------------------------------------

    In addition, people are often unable to protect their interests in 
using a product or service if they face high transaction costs to exit 
the relationship. For example, the time, effort, cost, or risks 
associated with extricating oneself from a relationship with entities 
may effectively lock people into the relationship.
c. Reasonable Reliance
    The third circumstance, of which entities cannot take 
``unreasonable advantage,'' as defined in the CFPA, concerns ``the 
reasonable reliance by the consumer on a covered person to act in the 
interests of the consumer.'' \73\ This basis for finding abusiveness 
recognizes that sometimes people are in a position in which they have a 
reasonable expectation that an entity will act in their interest to 
make decisions for them, or to advise them on how to make a decision. 
Where people reasonably expect that a covered entity will make 
decisions or provide advice in the person's interest, there is 
potential for betrayal or exploitation of the person's trust. 
Therefore, Congress prohibited taking unreasonable advantage of 
reasonable consumer reliance. There are a number of ways to establish 
reasonable reliance, including but not limited to the two described 
below.
---------------------------------------------------------------------------

    \73\ CFPA section 1031(d)(2)(C), 12 U.S.C. 5531(d)(2)(C).
---------------------------------------------------------------------------

    First, reasonable reliance may exist where an entity communicates 
to a person or the public that it will act in its customers' best 
interest, or otherwise holds itself out as acting in the person's best 
interest. Where an entity communicates to people that it will act in 
their best interest, or otherwise holds itself out as doing so, 
including through statements, advertising, or any other means, it is 
generally reasonable for people to rely on the entity's explicit or 
implicit representations to that effect.\74\ People reasonably assume 
entities are telling the truth. The entity in these situations creates 
an expectation of trust and the conditions for people to rely on the 
entity to act in their best interest.
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    \74\ See, e.g., ITT Educ. Servs., 219 F. Supp. 3d at 920-21 
(denying motion to dismiss abusiveness claim under CFPA section 
1031(d)(2)(C) where students reasonably relied on for-profit 
college's financial-aid staff to act in their interests in signing 
them up for loans); see also CFPB, Supervisory Highlights: Issue 27, 
Summer/Fall 2022, at 14-15 (Sept. 2022), https://files.consumerfinance.gov/f/documents/cfpb_student-loan-servicing-supervisory-highlights-special-edition_report_2022-09.pdf (``A 
servicer . . . engaged in an abusive act or practice by denying 
[Teacher Loan Forgiveness (TLF)] applications where consumers used a 
[nonstandard] format for their employment dates . . . . Consumers 
reasonably rely on servicers to act in their interests, and this 
servicer encouraged consumers to consult with their representatives 
to assist in managing their accounts, including on its websites 
where it provided information about TLF. Further, it was reasonable 
for consumers who are applying for TLF to rely on their servicers to 
act in the consumers' best interests because processing forgiveness 
applications is a core function for student loan servicers, and they 
are entirely in control of the evaluation policies and 
procedures.'').
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    Second, reasonable reliance may also exist where an entity assumes 
the role of acting on behalf of consumers or helping them to select 
providers in the market. In certain circumstances entities assume the 
role of acting on behalf of people as their agents or representatives, 
and people should be able to rely on those entities to act on their 
behalf. In other circumstances entities often act as intermediaries to 
help people navigate marketplaces for consumer financial products or 
services.\75\ In these

[[Page 21890]]

situations, the entity, acting as an intermediary, can function as a 
broker or other trusted source that the person uses in selecting, 
negotiating for, or otherwise facilitating the procurement of consumer 
financial products or services provided by third parties. Where the 
entity's role in the marketplace is to perform these kinds of 
intermediary functions, people should be able to rely on the entity to 
do so in a manner that is free of manipulation.\76\ In both 
circumstances, entities that engage in certain forms of steering or 
self-dealing may be taking unreasonable advantage of the consumers' 
reasonable reliance.\77\
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    \75\ See, e.g., Complaint at 15-16, CFPB v. College Educ. Servs. 
LLC, 8:14-cv-3078-T-36EAJ (M.D. Fla. Dec. 11, 2014) (College 
Education Services' (CES) ``telemarketers held themselves out as 
loan counselors and advisors with the expertise to establish custom-
tailored programs to address each student-loan debtor's specific 
needs. CES created the illusion of expertise and individualized 
advice to induce consumers to reasonably rely on the company to act 
in their interests in seeking and selecting student loan debt-relief 
plans. . . . CES took unreasonable advantage of the reasonable 
reliance of consumers by enrolling and taking fees from consumers 
whose loans were ineligible for consolidation . . . . CES also took 
upfront fees to enroll some consumers in income-based repayment 
plans or loan forgiveness programs for which they were not eligible. 
In addition, CES placed some consumers in repayment plans that 
increased their monthly student-loan payments, leaving those 
consumers in a more financially precarious position than before.'').
    \76\ See, e.g., U.S. Department of Treasury, Financial 
Regulatory Reform, A New Foundation: Rebuilding Financial 
Supervision and Regulation 68 (June 2009), https://fraser.stlouisfed.org/title/financial-regulatory-reform-5123 
(``[C]onsumers may reasonably but mistakenly rely on advice from 
conflicted intermediaries.'').
    \77\ See, e.g., Amended Complaint at 13-15, CFPB v. Access 
Funding, LLC, No. 1:16-cv-03759 (D. Md. Dec. 13, 2017) (consumers 
seeking structured settlement advances were told by the advance 
company that they needed independent advice and were directed to an 
attorney who, though he held himself out as providing professional, 
independent advice, was not independent and failed to disclose ties 
to the company); see also, e.g., Complaint at 9-10, CFPB v. 
SettleIT, Inc., No. 8:21-cv-00674 (C.D. Cal. Apr. 13, 2021) 
(consumers seeking debt-settlement services relied on the company to 
negotiate for debt reductions because the company told consumers 
that it would work in their interests only, but the company failed 
to disclose its financial connections to consumers' creditors); 
Complaint at 15, CFPB v. Am. Debt Settlement Solutions, Inc., No. 
9:13-cv-80548 (S.D. Fla. May 30, 2013) (consumers reasonably relied 
on debt-settlement company to act in their interest by settling 
their debts expeditiously).
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III. Regulatory Matters

    This is a general statement of policy under the Administrative 
Procedure Act (APA).\78\ While not required under the APA, the CFPB is 
collecting comments and may make revisions to the policy statement at a 
later time as appropriate in light of feedback received. The CFPB may 
take no further action if no revisions are warranted. The policy 
statement provides background information about applicable law and 
articulates considerations relevant to the CFPB's exercise of its 
authorities. It does not impose any legal requirements, nor does it 
confer rights of any kind. It also does not impose any new or revise 
any existing recordkeeping, reporting, or disclosure requirements on 
covered entities or members of the public that would be collections of 
information requiring approval by the Office of Management and Budget 
under the Paperwork Reduction Act.\79\ Pursuant to the Congressional 
Review Act,\80\ the CFPB will submit a report containing this policy 
statement and other required information to the United States Senate, 
the United States House of Representatives, and the Comptroller General 
of the United States prior to its applicability date. The Office of 
Information and Regulatory Affairs has designated this policy statement 
as not a ``major rule'' as defined by 5 U.S.C. 804(2).
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    \78\ See 5 U.S.C. 553(b).
    \79\ 44 U.S.C. 3501 et seq.
    \80\ 5 U.S.C. 801 et seq.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-07233 Filed 4-11-23; 8:45 am]
BILLING CODE 4810-AM-P