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22 April 2015

UDAA – Coming into Focus

In March of 2015, the CFPB released its Supervisory Highlights publication.  This publication details recent findings and enforcement actions taken by the CFPB.  One of the stated goals of releasing this publication is to inform the public (read banking public) about recent trends in the area of supervision.   In addition, although it is not one of the stated purposes, the content of the publications should serve as a red flag to compliance officers that there are areas of emphasis at the CFPB.  Now, we often hear that the CFPN is the prudential regulatory at community banks, but we believe that it has been well established that may of the actions taken at the CFPB make their way to the community bank regulators.  Moreover, if there is a “hot topic” in compliance, it should be considered by compliance officer even if it doesn’t make it way to the most recent compliance examination.  One of the areas that stand out in the most recent edition are the cases that deal with Unfair Deceptive Abusive Acts or Practices, aka UDAAP.  We believe two cases mentioned in the publication help to bring UDAAP into focus.  First a quick background on UDAAP.

UDAP – The Original

At the end of the Great Depression, there was a public outcry for changes in regulations that dealt with all manner of financial institutions.  During the financial crash consumers found out that many of the promises that had been made by business were not kept.  Insurance companies did not pay as promised; department stores that had promised refunds for returns reneged, banks closed overnight and business in general were able to avoid payments to consumers that they had seemingly promised. Neither state governments nor individuals had many options when they found that they had been misled or defrauded.  A consumer who was defrauded often found that fine print in the contract immunized the seller or creditor. Consumers could fall back only on claims such as common law fraud, which requires rigorous and often insurmountable proof of numerous elements, including the seller’s state of mind. Even if a consumer could mount a claim, and even if the consumer won, few states had any provisions for reimbursing the consumer for attorney fees. As a result, even a consumer who won a case against a fraudulent seller or creditor was rarely made whole. Without the possibility of reimbursement from the seller, consumers could not even find an attorney in many cases.[1]

UDAAP Origins – A public outcry

The financial meltdown of 2009 lead to many changes in regulations including the passage of the Dodd-Frank Act.  Among the changes brought about by Dodd-Frank, was the supercharging of UDAP!  The regulation became the Unfair Deceptive Abusive Actions or Practices or UDAAP.

UDAAP with two ‘A’s goes beyond extensions of credit and introduces an enterprise-wide focus on all the products and services offered by your institution.  The CFPB has been given the authority to bring enforcement actions under UDAPP.  Considered at a high level, UDAAP is more of a concept than an individual set of regulations.  The idea is that dealings with the public must be fair and that financial institutions should; in fact, look after the best interests of its customers.

Even though there a great number of laws that deal with required disclosures on financial products such as loans and certificates of deposit, these laws generally do not deal with the fairness of the terms or the possibility that a consumer may unwittingly agree to additional fees and terms that go well beyond the agreed to interest rate.  UDAAP is designed to address this problem.

The Basics

The basic definitions for UDAAP are as follows;

What is “unfair’?

  • The practice causes or is likely to cause substantial injury.
  • The injury cannot reasonably be avoided.
  • The injury is not outweighed by any benefits.
  • Briefly, what this means is that if a customer has to pay fees or costs because of some act by the bank that is deemed unfair, and then a substantial injury has occurred.  The description of the regulation does say that the injury does not necessarily have to be monetary, it can be emotional.  However, there are no current examples of this second form of substantial injury.  This is the section of the regulation that is most often applied to overdraft programs.  Even in the cases where banks allow overdrafts only after getting a customer’s permission and providing monthly statements that show the amounts of overdraft fees that have been paid, a substantial injury can be found.

What is “deceptive”?

  • The practice misleads or is likely to mislead.
  • A “reasonable” consumer would be misled.
  • The presentation, omission or practice is material.
  • According to the CFPB, to determine whether or

To determine whether an act or practice has actually misled or is likely to mislead a consumer, the totality of the circumstances is considered. Deceptive acts or practices can take the form of a representation or omission. The Bureau also looks at implied representations, including any implications that statements about the consumer’s debt can be supported. Ensuring that claims are supported before they are made will minimize the risk of omitting material information and/or making false statements that could mislead consumers.

Any programs that include the possibility of late fees or additional fees as the result of balances, usage charges or any fees that are in addition to the initial fees all have the possibility being misleading.  We have found that this section is most often cited when the language used in disclosures does not match the language in advertisements or on the website.  For example, in one case, a bank called a fee a “maintenance fee” in its advertisements, but calls the fee a “monthly” fee in the disclosures that it gave customers at the time they opened the accounts.  This was cited as a deceptive disclosure.

What is “abusive”?

  • The practice materially interferes with the consumers ability to understand a term or condition of a product or service.
  • The practice takes unreasonable advantage of a consumer’s lack of understanding of the risk, costs and conditions of a products or service.
  • The CFPB description of this portion of the regulations notes that a consumer can have a reasonable reliance on a financial institution to act in his or her best interests.   This means that for products or services that are offered that have the ability to add fees or costs, there is an affirmative duty to make sure that the customer knows what it is that they are getting into.

Two Cases That Illustrate

There are two cases in the journal that help to illustrate how UDAAP might become an issue at your bank.

The first case involved debt collection which is another area of focus of the CFPB: 

In one or more examinations, examiners identified a practice that created a risk of deception. When attempting to collect on delinquent accounts, collectors offered consumers a recurring ACH payment option. When informing consumers about this payment option, collectors promoted the consumers’ ability to adjust or cancel a recurring ACH payment with only 24 hours’ notice. This representation, however, contradicted both an express representation in monthly periodic statements provided to consumers and internal policies and procedures, which stated that a minimum of 72 hours’ notice was required. The contradiction in oral and written disclosures of the timeframe required to cancel or adjust a recurring ACH created a risk of deception.

In the second overdraft fees were described: 

At one or more institutions, examiners found deceptive practices relating to the disclosure of overdraft processing logic for electronic transactions. Examiners noted that these disclosures created a misimpression that the institutions would not charge an overdraft fee with respect to an electronic transaction if the authorization of the transaction did not push the customer’s available balance into overdraft status. But the institutions assessed overdraft fees for electronic transactions in a manner inconsistent with the overall net impression created by the disclosures. Examiners therefore concluded that the disclosures were misleading or likely to mislead, and because such misimpressions could be material to a reasonable consumer’s decision-making and actions, examiners found the practice to be deceptive. Furthermore, because consumers were substantially injured or likely to be so injured by overdraft fees assessed contrary to the overall net impression created by the disclosures (in a manner not outweighed by countervailing benefits to consumers or competition), and because consumers could not reasonably avoid the fees (given the misimpressions created by the disclosures), the practice of assessing the fees under these circumstances was found to be unfair.

While both of these cases may seem complex, they present a common theme; the disclosures that you give to customers from the outset must reflect the worst case scenario for that customer.  When you bank is considering a product or even a new fee, it is critical that customer receive a warning way before the fee is imposed and have an opportunity to determine what the highest possible fee might be.  It is also clear that in cases where low to moderate income customers have limited options to avoid a fee, it is wise to reconsider whether or not the fee is fair based upon the above criteria.

UDAP is a huge and ever growing area, but as supervisory results continue to be known, the regulation comes into focus.

[1] A 50-State Report on Unfair and Deceptive Acts and Practices Statutes, Carolyn L. Carter 2009