The Meaning of "Abusive" Under Dodd-Frank: Fixing the Broken Market for Consumer Financial Products

Rebecca J. Schonberg, University of California - Berkeley

Abstract

The economic downturn of 2008 made the American consumer a focus of intense curiosity and concern. Congress addressed this concern when it introduced a new legal standard to protect consumers buying financial products. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) not only created the Consumer Financial Protection Bureau (CFPB) but also gave it authority to prevent “abusive” acts and practices. This standard is entirely new.

By recognizing the imbalance between consumers and lenders in terms of understanding, access to information, ability to alter the terms of an agreement, and capacity to evaluate and bear risk, the “abusive” standard pushes back against narratives that lay the blame for the financial collapse at the feet of consumers without taking into account the structure of the consumer financial products market. Specifically, gaps in consumer understanding reduce the ability to meaningfully distinguish between products, leading to the proliferation of products that appeal to common misperceptions and are in fact dangerous. As the market continues to reward lenders who charge high interest rates and penalty fees, those lenders continue to target the consumers they expect are most likely to default and pay high fees: those in financially precarious positions who can easily be pushed into serious trouble.

The “abusive” standard is intended to correct these market defects in three ways. First, it seeks to make consumer choices more meaningful by simplifying contractual language. If contracts were clearer, consumers’ consent would be more indicative of their actual preferences. Second, the “abusive” standard would give the CFPB power to modify products and take the most dangerous ones off the market entirely. Finally, the standard attempts to do what market forces alone may not: impose an explicit obligation on lenders to act in consumers’ interest.