Department News COMPLIANCE
Understanding UDAAP By Carol Barnett, Senior Vice President of Compliance Services
Background Section 5 of the Federal Trade Commission Act prohibits “unfair or deceptive acts or practices” in or affecting commerce, impacting transactions with businesses and consumers. Section 1031(a) of the Dodd-Frank Act provides that the Consumer Financial Protection Bureau may use its supervisory and enforcement authority to prevent unfair, deceptive or abusive acts or practices under federal law in connection with any transaction with a consumer for a consumer financial product or service. Banks have largely had to rely on reviewing enforcement actions and court cases, examination procedures and guidance documents, as there is no implementing regulation. Each agency has its own exam procedures, and the CFPB has recently greatly expanded its analysis of UDAAP in an update to its examination manual in March. Te Federal Deposit Insurance Corporation updated the UDAAP section of its exam manual in June. A recent spate of class action lawsuits also has focused attention on this concept.
Standards Tere are different legal standards that apply in determining whether a practice is unfair, deceptive or abusive. Below is a summary from the CFPB Exam Manual.
An act or practice is unfair when: 1. it causes or is likely to cause substantial injury to consumers; 2. the injury is not reasonably avoidable by consumers; and 3. the injury is not outweighed by countervailing benefits to consumers or to competition.
A representation, omission, act or practice is deceptive when: 1. the representation, omission, act or practice misleads or is likely to mislead the consumer;
2. the consumer’s interpretation of the representation, omission, act or practice is reasonable under the circumstances; and
3. the misleading representation, omission, act or practice is material.
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An abusive act or practice: • 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: 0 a lack of understanding on the part of the consumer of the material risks, costs or conditions of the product or service;
0 the inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or
0 the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
Te CFPB’s exam manual provides more details and examples of practices that could be deemed to be unfair or deceptive. Consumer complaints also are identified as playing a key role in identifying potential UDAAP violations.
Relationship to Other Laws An unfair or deceptive practice also may violate other federal laws. For example, if Reg Z disclosures are not provided or are incorrect, that practice may be a Reg Z violation in addition to being considered unfair or deceptive.
Conversely, a transaction that is in technical compliance with a federal or state law may result in UDAAP violations. For example, a fee listed on a bank’s Reg DD disclosure may meet the technical requirement of the regulation, but if the language used in describing the fee is misleading to the consumer, it could lead to UDAAP allegations.
This article is for information purposes and does not contain or convey legal advice. The information should not be used or relied upon in regard to any particular situation without consultation with your bank attorney. MBA Compliance Services and its Compliance Force program offer various programs to aid banks with compliance needs. For more information, call 573-636-8151.
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