Consumer Law

The Obama's Administration Consumer Financial Protection Agency Bill and Abusive Practices

By Jeff Sovern

by Jeff Sovern

Subtitle C of the Obama administration's bill to create a Consumer Financial Protection Agency would give the CFPA the power to promulgate rules "identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service."  The bill would also permit the agency to take action to prevent someone from engaging in such a practice.  The phrase "unfair and deceptive" has a long history in litigation under the Federal Trade Commission Act, and in fact the bill copies the FTC Act's definition of unfair, drawn in turn from a 1980 FTC Policy Statement, that acts cannot be declared unfair unless "the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers ot to competition."  So those phrases seem relatively well understood.  But what are abusive practices?  The Fair Debt Collection Practices Act bars abuse in debt collection, § 1692d, but presumably the CFPA's authority to ban abusive practices would extend beyond debt collection.  For example, suppose the CFPA declared that it is an abusive practice to provide for a balloon payment in a mortgage in which the borrower has no real expectation of a substantially higher income when the balloon payment comes due (as might be true of a medical student, for example).  Should courts uphold such a determination?  Here's a definition of abusive from dictionary.com:

It seems unlikely that the word as used in the bill should be confined to use of bad language, and obviously it isn't directed to physical abuse.  That third definition--wrongly used; corrupt--seems more relevant.  Most practices that satisfy that definition would also seem unfair.  But abusive must mean something that is neither unfair nor deceptive; otherwise, why include it?  And it should also mean something different from unconscionable, because the drafters didn't use that term either.  My own guess is that it would give the CFPA the power to ban clauses that permit a business to take advantage of a consumer because the business has power the consumer doesn't, perhaps because of information asymmetries.  But it's just a guess.

Full post as published by CL&P Blog on July 20, 2009 (boomark / email).