One of the most misunderstood concepts in banking compliance seems to be Unfair, Deceptive, and Abusive Acts and Practices (UDAAP). Since Dodd-Frank added "abusive" to the old, often-ignored Unfair and Deceptive Acts and Practices under Section 5 of the FTC Act and gave the CFPB regulatory and enforcement authority over UDAAP, financial institutions have been worried when the UDAAP monster is going to attack them. It's not just the CFPB that is aggressively enforcing UDAAP; all the federal regulators are getting into the action. There is really not a handy check list for when something is or is not a UDAAP; it's very subjective and will vary based on the facts and circumstances. For this reason, many financial institutions see innocent shadows as the UDAAP monster waiting to leap from the closet. I hope this article will shed a little light in the compliance closet. While the UDAAP monster is real, it's not as scary as many financial institutions are making it out to be.
Don't get me wrong, UDAAP is a real monster that can strike quickly and without warning. While the CFPB has defined unfair, deceptive, and abusive, the definitions leave a lot of wiggle room allowing an examiner to find a UDAAP in a lot of seemingly innocent acts and practices. While I strongly disagree with the recent trend of regulation through enforcement actions, because the regulators have not issued much guidance on what UDAAP is, gleaning guidance from enforcement actions is what we are left with. Unfortunately, the enforcement actions often lack a thorough explanation of all the facts and circumstances surrounding the action, making the fact intensive UDAAP analysis difficult for parties not privy to all the information (i.e. those of us trying to glean guidance from the action). To understand why I don't think UDAAP is as scary as many financial institutions make it out to be, we need to first look at the definitions of unfair, deceptive, and abusive.
An act or practice is unfair when it causes or is likely to cause substantial injury to consumers, the injury is not reasonably avoidable by consumers, and the injury is not outweighed by countervailing benefits to consumers or to competition. An injury is substantial when there is monetary harm, such as fees or costs paid by consumers as a result of the act or practice. The injury does not need to involve a substantial amount of money to be substantial; a small amount of harm caused to a large number of people can be a substantial injury. An injury does not actually have to occur for an act or practice to be unfair. As long as there is a sufficient risk of a concrete harm, and act or practice can be unfair. Non-monetary injuries can also be substantial, but it must be an actual injury; emotional impact and other subjective types of harm will not ordinarily amount to substantial injury. An injury is not reasonably avoidable by consumers when an act or practice interferes with or hinders a consumer's ability to make informed decisions or take action to avoid that injury. If the injury is caused by a transaction that occurs without the consumer's knowledge or consent, is not reasonably avoidable. If the consumer can only avoid the injury by spending a large amount of money or other significant resources, the injury is not reasonably avoidable. An act or practice is not unfair if the injury it causes or is likely to cause is outweighed by its consumer or competitive benefits. That is, the net effect of act or practice must be injurious. Offsetting consumer or competitive benefits of an act or practice may include lower prices to the consumer or a wider availability of products and services resulting from competition.
An act or practice is deceptive when it misleads or is likely to mislead the consumer, the consumer's interpretation is reasonable under the circumstances, and the misleading act or practice is material. In evaluating whether an act or practice has actually misled or is likely to mislead a consumer, you must consider the totality of the circumstances. An omission may be sufficient to cause an act or practice to be deceptive. As can an implied representation. To determine if the consumer's interpretation of the information was reasonable under the circumstances, you look to the perspective of a reasonable member of the target audience. When representations target a specific audience, such as older Americans or financially distressed consumers, the representation or omission must be considered from the perspective of a reasonable member of the target audience. Additionally, a statement or information can be misleading even if not all consumers, or not all consumers in the targeted group, would be misled; as long as a significant minority would be misled by the representation or omission. If a representation is ambiguous (i.e. it conveys more than one meaning) to reasonable consumers and one representation is false, the representation is deceptive. Material information is information that is likely to affect a consumer's choice of, or conduct regarding, the product or service. Information that is likely important to consumers is material. A disclosure or other qualifying statement, in the right circumstances, may prevent consumers from being misled by a representation or omission that, on its own, would be deceptive. The CFPB has stated that it considers the following factors in assessing whether the disclosure or other qualifying statement is adequate to prevent the deception: (i) whether the disclosure is prominent enough for a consumer to notice; (ii) whether the information is presented in a clear and easy to understand format; (iii) the placement of the information; and (iv) the proximity of the information to the other claims it qualifies.
An act or practice is abusive when it materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or it takes unreasonable advantage of a consumer's:
- Lack of understanding of the material risks, costs, or conditions of the product or service;
- Inability to protect his or her interests in selecting or using a consumer financial product or service; or
- Reasonable reliance on a covered person to act in his or her interests.
The guidance does not really explain any more than just this. Abusive is the biggest unknown in all of this. There is precedent for what is unfair or deceptive. Not so much for abusive.
Some have suggested that the regulators believe an act or practice is a UDAAP when they just don't like it, they don't consider the product or service to be valuable to consumers, or they don't think a payment is necessary. This is why the UDAAP monster is so scary. And, to a certain extent, they are not wrong. But to make a UDAAP, they still have to squeeze it into one of these definitions. If it doesn't fit, it's not a UDAAP. Therein lies the secret to why I don't believe the monster is not as scary as you think. If you describe all material fees and disclosures related to a product, the consumer has a meaningful choice in whether to obtain the product or service, and you are watching out for potential confusion on the part of a consumer, the likelihood that an examiner will be able to say something is a UDAAP goes way down.
While on the subject of things that aren't UDAAPs, I want to discuss something I see a lot. The "unFAIR" in UDAAP is not related to the "fair" in fair lending. While fair lending requires you to treat similarly situated borrowers the same, nothing in UDAAP requires you to treat all consumers exactly the same. Nothing in UDAAP prevents you from giving one consumer a better rate than another. While a UDAAP can occur by causing a small injury to a lot of people, it is the act itself that is either unfair, deceptive, or abusive, not the disparity between products and services offered to consumer. If Silly Example Bank offers me a fair rate on my savings account, the fact that you are getting a better rate does not make my rate unfair. This does bring up a concept that is gaining popularity right now, fair banking (or more popularly lately, fair and responsible banking). I am running out of room in this article to give it justice and I will have to discuss this more in a later article, but succinctly, fair banking is fair lending principles