The term UDAAP (Unfair, Deceptive and Abusive Acts or Practices) is becoming a common term in daily conversation among the financial institution industry. What it means to the industry seems to be a mystery that depends on the interpretation of the day. Undoubtedly, UDAAP will impact all consumer products or services in some way.
The term “UDAP” (Unfair or Deceptive Acts or Practices) has been around for several years. Section 5(a) of the Federal Trade Commission (FTC) Act prohibits “unfair or deceptive acts or practices in or affecting commerce”. The FTC standards are broad and apply to any unfair or deceptive practices affecting consumers or commercial businesses.
The Dodd-Frank Act introduced UDAAP and directs the Consumer Financial Protection Bureau (CFBP) to issue regulations designed to prevent UDAAP. The additional “A” adds the term “abusive” to the mix. The CFPB’s role is to supervise financial institutions’ consumer products and services. Even though the old UDAP standards applied to commercial and consumer commerce, UDAAP will concentrate on products and services directed towards consumers.
UDAP and UDAAP are broad terms and difficult to define. Throughout the years, standards for what is unfair or deceptive have been interpreted by the courts. Going forward, UDAAP will be defined through the CFPB’s rulemaking authority and will be enforced by them and existing bank regulators. Even though the CFPB lacks a defined organizational structure, the financial industry is already experiencing enforcement of “UDAAP” by existing bank regulators. This enforcement, particularly what surrounds overdraft practices, is creating a great deal of frustration among the community bank environment.
It is clear that following disclosure requirements dictated by various consumer regulations does not create the safe harbor we once thought. Just because a bank has diligently disclosed the terms and conditions of a product and has followed through accordingly with the delivery of that product does not insulate them from being scrutinized and deemed to be unfair, deceptive, or abusive in some way. The definition of UDAAP is evolving and continues to be based, in large part, on interpretation. To help understand these speculative terms, the FTC and the Dodd-Frank Act have defined the terms unfair, deceptive and abusive.
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.
What is “deceptive”?
- The practice misleads or is likely to mislead.
- A “reasonable” consumer would be misled.
- The presentation, omission or practice is material.
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.
Any consumer product or service has the potential of being criticized for possible UDAAP violations, but ones currently receiving a lot of attention are:
- Overdraft programs
- Check/debit processing order
- Loan payment processing
- ATM fees
- Loans with balloon payments
- Credit life and disability insurance sales
- Rewards programs
- Gift card sales
- Credit Card programs
The topic of overdrafts has consumed media headlines and has been the focus of regulatory exams since the implementation of rules surrounding the payment of overdrafts created by ATM and one-time debit card transactions. Just when you thought you were following all of the rules, banks are being forced to reimburse overdraft fees determined to be “unfair”. If the overdraft program provides no benefit to the person who opted in to the payment of overdrafts created in this way compared to the person who opted-out, banks are being required to change their program AND reimburse affected customers. Changing your practice is not enough.
Managing your UDAAP Risk
There is no doubt UDAAP will continue to challenge the industry, so it is essential for financial institutions to evaluate their risks and do what they can to diminish the impact violations may have on their organization. Proactive steps banks can take are:
- Regularly review features of consumer products and services. Evaluate product features and promotional materials and determine if any terms fall within the broad definition of UDAAP.
- Evaluate new products for features that could be misunderstood or ones that have been omitted.
- Review revenue streams for trends that may suggest abusive practices.
- Evaluate written and oral methods of communicating product features to customers.
- Review third-party service provider agreements to develop a clear understanding of their practices surrounding the service being provided.
- Review all bank policies and procedures for practices that suggest unfair, deceptive, or abusive practices.
- Create a consumer-friendly culture within your organization.
- Evaluate customer complaints for signs of more serious systemic problems.
The challenges and unknowns surrounding this rapidly growing trend of increased consumer protection will no doubt take up a greater percentage of your resources in the years to come. But with careful review and proactive steps, you can reduce the risk of potential violations and the long-term affects they could have on your organization.