What You Should Know About UDAAP Banking Regulations
When Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) first became effective after Dodd-Frank, there were many enforcement actions taken against prominent financial institutions. In 2018, the CFPB levied a $1 billion fine against Wells Fargo for actions in its mortgage and auto loan businesses — the second largest fine ever assessed in the Bureau's history. However, the regulation has long been criticized for being too open to interpretation.
In 2018, CFPB Acting Director Mick Mulvaney addressed the confusion around “abusive” at an industry event in Washington: "I think we’re going to announce some rulemaking on what that term means. I think ‘unfair’ is fairly well-established in the law, ‘deceptive’ is very well-established in the law and to my knowledge, I don’t think ‘abusive’ is nearly as established in the law."
In April, CFPB Director Kathy Kraninger announced that the Bureau would be hosting a public symposia series that will focus on clarifying the meaning of "abusive" under UDAAP. At this time, the Bureau has not announced any dates for the symposia.
At its core, UDAAP can be summarized as inaccurate information, omitted information, and misinterpretation of information.
According to the CFPB's Examination Procedures, an act or practice can be considered unfair if it:
- Causes or is likely to cause substantial injury to consumers
- Substantial injury usually involves costs or fees paid by consumers as a result of an unfair practice. While monetary harm is not required, a risk of harm can also be deemed sufficient.
- Injury cannot be reasonably avoidable by consumers
- This involves interfering with a consumer's ability to effectively make decisions by withholding information. For example, withholding pricing or modifying pricing until the consumer commits to purchasing the product.
- Injury is not outweighed by benefits to consumers or competition
- The net effect of the practice must not cause harm. For example, if the outcome of a particular practice results in lower prices to the consumer, then it would likely not be considered unfair.
A representation, omission, act or practice can be considered deceptive if it:
- Misleads or is likely to mislead the consumer
- Is the overall net impression misleading or deceptive?
- The consumer's interpretation is reasonable under the circumstances
- Would a reasonable member of the target audience interpret the representation as deceptive?
- The act or practice is material
- Is the omission, act or practice important to affecting the consumer's choice?
An act or practice can be considered abusive if it:
- Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or
- Takes unreasonable advantage of:
- A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
- The inability of the consumer to protect its interests in selecting or using a consumer financial product or service;
- The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
UDAAP Risk Indicators
Consumer complaints are one of the key indicators in detecting unfair, deceptive, or abusive practices and can indicate weaknesses in an institution's compliance management system.
UDAAP is broad in reach and scope. Therefore, organizations should closely monitor:
- Marketing and advertising content
- Product terms and fees
- Written policies and procedures
- Credit products
- Underwriting standards and procedures
- Collection practices
- Third parties
- Communication channels
While UDAAP has been around for almost a decade (longer if you consider the FTC Act), it is still criticized by compliance professionals for having definitions that leave too much room for interpretation. In the future, these definitions are likely to receive more clarification as hinted at by the CFPB. By monitoring your institution's communication, advertising, and product offerings, you can significantly reduce your risk. We look forward to seeing how the CFPB clarifies "abusive" later this year.