Katherine E. Timon | Senior Compliance Advisor
What is UDAAP? It stands for unfair, deceptive or abusive acts and practices. Before Dodd Frank, it was just UDAP with one “A” meaning unfair and deceptive acts and practices which is found in Section 5 of the Federal Trade Commission Act (FTC Act). The extra “A” for “abusive” was added under Section 1031 of the Dodd-Frank Act. UDAP covers both consumer and commercial customers while UDAAP covers only consumers.
What exactly are these “acts and practices”? As a former UDAP prosecutor, all I can tell you is that it depends. There is no little checklist of what acts or practices are or are not a UDAAP. Rather, there is just a general description of unfairness, deception or abuse. That is the beauty of it if you are a prosecutor or examiner – and the terror of it if you are not. Let’s take some of the sting out of the terror by looking at the definitions to help understand what is meant by unfair, deceptive and abusive.
An act or practice is considered “unfair” if:
1. It causes or is likely to cause substantial injury to consumers.
Substantial injury usually involves monetary harm. A small amount of harm to a large number of people may be deemed substantial injury. An injury need not be actual, a significant risk of concrete harm is sufficient for a finding of substantial injury.
2. The injury is not reasonably avoidable by consumers.
Consumers cannot reasonably avoid injury if the act or practice interferes with their ability to effectively make decisions or to take action to avoid an injury. For example, it is unfair to withhold or alter material price information until after the purchase decision or to prevent an informed decision by the consumer or to subject consumers to undue influence or coerce them into purchasing unwanted products or services. It is unfair if the transaction occurs without the consumer’s consent or even their knowledge, and, certainly, if they have not been told how to avoid an unnecessary purchase.
3. The injury is not outweighed by countervailing benefit to consumers or to competition.
The net effect must be injurious and not be outweighed by any offsetting benefits to consumers or competition. Offsetting benefits may include lower prices or a wider availability of products and services.
Unfairness key: Does the questioned behavior hinder the consumer’s ability to make a decision?
Let’s define “deceptive.” An act or practice is deceptive if:
1. The representation, omission, or practice misleads or is likely to mislead the consumer
2. The consumer’s interpretation is reasonable under the circumstances
3. The misleading representation, omission, act or practice is material.
The representation may be in the form of express or implied claims or promises and may be written or oral. An omission of information may be deceptive if disclosure of the omitted information is necessary to prevent a consumer from being misled. The statement, representation or omission is not to be evaluated in isolation, but in the context of the entire advertisement, transaction, or course of dealing to determine whether it constitutes deception.
Written disclosures may not be sufficient to correct a misleading statement or representation, especially where the consumer is directed away from qualifying limitations in the text or is counseled that reading the disclosures is unnecessary. Fine print footnotes may be insufficient to cure a misleading headline or prominent written representation. A deceptive act or practice may not be cured by subsequent truthful disclosures. Acts or practices considered deceptive include: making misleading cost or price claims; using bait-and-switch techniques; offering to provide a product or service that is not in fact available; omitting material limitations or conditions from an offer; selling a product unfit for the purposes for which it is sold; and failing to provide promised services.
The consumer’s interpretation of, or reaction to, the representation, omission or practice must be reasonable under the circumstances. The test is whether the consumer’s expectations or interpretation are reasonable in light of the claims made.
A representation, omission or practice is material if it is likely to affect a consumer’s choice of the product or decision regarding the product or service. Information about costs, benefits or restrictions on the use or availability of a product or service is presumed material.
Deception key: Look at the entire advertisement, transaction, or course of dealing to determine how a reasonable consumer would respond.
“Abusive” is newly defined in the Dodd Frank Act Section 1031. An act, practice or omission is considered abusive if it:
1. Materially interferes with the consumer’s ability to understand a term or condition of a consumer financial product or service
2. Takes unreasonable advantage of a consumer’s lack of understanding of the material risks, costs or conditions of the product or service or takes unreasonable advantage of the consumer’s inability to protect his or her own interests in selecting or using a consumer financial product or service; or takes unreasonable advantage of a consumer’s reasonable reliance on a covered person to act in the consumer’s interests.
Because “abusive” is so new, there is little interpretation by regulators. Remember, it is not just advertising that gives rise to UD(A)AP violations. Anything can be the subject of a UD(A)AP prosecution. UD(A)AP violations can occur when your customer agreements and promotional materials contradict one another, or are confusing, as occurs when you use different names for the fees or charges in the agreement than those used in the ads or on rate sheets. If your acts or omissions can cause, or are even likely to cause customer confusion, then, you run the risk of a UD(A)AP violation.
A consumer needs to have both the good and the bad, in short, they need all the pertinent and material information about the product or service in order to make an informed decision as to whether or not to make a purchase. Information as to costs and fees are considered to be material. Limitations, qualifications and restrictions regarding the product or service are also material. Material information should be given prominently in the ad.
You can follow the Regulation Z or Regulation DD advertising rules and have all the required information in your ad and still violate UDAAP. How? You will violate UDAAP if these material bits of information are not given prominently in the ad. If you bury material information in a tiny footnote, you will violate UDAAP. Banking regulators turn to the FTC as the authority on UDAAP with its 75 years of experience with Section 5. There is an old FTC saying that goes, “what the body of the ad giveth, the footnote may not taketh away”.
Take off your employee glasses and view your ad or document as if you are a customer, or better yet, your grandmother. Look at the entire ad or document to see not only what it says, but what it implies and what impression it gives.