8 Steps to Reduce
UDAAP Compliance Violations
According to the Consumer Financial Protection Bureau (CFPB), unfair, deceptive, or abusive acts and practices (UDAAPs) can cause significant financial injury to consumers, erode consumer confidence, and undermine the financial marketplace. Under the Dodd-Frank Act, it is unlawful for any provider of consumer financial products or services or a service provider to engage in any unfair, deceptive, or abusive act or practice.
The CFPB and other regulators, such as the Federal Trade Commission (FTC), keep a close eye on financial institutions, fintechs, and other consumer finance companies, ensuring they protect consumers against UDAAP by monitoring their sales and marketing efforts.
Here are 8 steps every company should take to help reduce exposure to UDAAP and other compliance violations.
1. Learn
It’s pivotal to understand what kind of actions are considered “unfair,” “deceptive” and/or “abusive” in order to help avoid them.
The following information is excerpted from the CFPB’s UDAAP examination procedures manual. For full context and information, access the manual here.
Unfair
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
- The injury is not outweighed by countervailing benefits to consumers or to competition
In March of 2022, the CFPB updated its UDAAP examination procedures to include discrimination under unfairness, because “consumers cannot reasonably avoid discrimination.”
Examples of unfair acts and practices:
Mortgage company refusing to release lien after the consumer makes final payment
The Federal Trade Commission (FTC) brought an enforcement action against a mortgage company based on allegations, described below, that the company repeatedly failed to release liens after consumers fully paid the amount due on their mortgages.
- Substantial injury. Consumers sustained the economic injury when the mortgage servicer did not release the liens on their properties after the consumers had repaid the total amount due on the mortgages.
- Not outweighed by benefits. Countervailing benefits to competition or consumers did not result from the servicer’s alleged failure to appropriately service the mortgage loan and release the lien promptly.
- Not reasonably avoidable. Consumers had no way to know in advance of obtaining the loan that the mortgage servicer would not release the lien after full payment. Moreover, consumers generally cannot avoid the harm caused by an improper practice of a mortgage servicer because the servicer is chosen by the owner of the loan, not the borrower. Thus, consumers cannot choose their loan servicer and cannot change loan servicers when they are dissatisfied with the quality of the loan servicing
Credit card issuer dishonoring convenience checks without notice
The Office of Thrift Supervision (OTS) and Federal Deposit Insurance Corporation (FDIC) brought enforcement actions against a credit card issuer that sent convenience checks with stated credit limits and expiration dates to customers. For a significant percentage of consumers, the issuer reduced credit lines after the checks were presented, and then the issuer dishonored the consumers’ checks.
- Substantial injury. Consumers paid returned-check fees and may have experienced a negative impact on credit history.
- Not outweighed by benefits. The card issuer later reduced credit limits based on credit reviews. Based on the particular facts involved in the case, the harm to consumers from the dishonored convenience checks outweighed any benefit of using new credit reviews.
- Not reasonably avoidable. Consumers reasonably relied on their existing credit limits and expiration dates on the checks when deciding to use them for a payment. Consumers had received no notice that the checks they used were being dishonored until they learned from the payees. Thus, consumers could not reasonably have avoided the injury.
Bank maintaining relations with third parties who engage in fraudulent activities
The Office of the Comptroller of the Currency (OCC) brought an enforcement action in a case involving a bank that maintained deposit account relations with telemarketers and payment processors, based on the following allegations. The telemarketers regularly deposited large numbers of remotely created checks drawn against consumers’ accounts. A large percentage of the checks were not authorized by consumers. The bank failed to establish appropriate policies and procedures to prevent, detect, or remedy such activities.
- Substantial injury. Consumers lost money from fraudulent checks created remotely and drawn against their accounts.
- Not outweighed by benefits. The cost to the bank of establishing a minimum level of due diligence, monitoring, and response procedures sufficient to remedy the problem would have been far less than the amount of injury to consumers that resulted from the bank’s avoiding those costs.
- Not reasonably avoidable. Consumers could not avoid the harm because the harm resulted principally from transactions to which the consumers had not consented.
Deceptive
A representation, omission, act, or practice is deceptive when:
- The representation, omission, act, or practice misleads or is likely to mislead the consumer
- The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances
- The misleading representation, omission, act, or practice is material
How do you tell if a representation, omission, act, or practice is likely to mislead the consumer? Use the 4 P’s test to find out:
- Is the statement prominent enough for the consumer to notice?
- Is the information presented in an easy-to-understand format that does not contradict other information in the package and at a time when the consumer’s attention is not distracted elsewhere?
- Is the placement of the information in a location where consumers can be expected to look or hear?
- Is the information in close proximity to the claim it qualifies?
Examples of deceptive acts and practices:
Inaccurate representation of home value estimates on marketing materials
In 2021, the CFPB took action against a reverse mortgage lender for using inflated and deceptive home estimates to lure consumers into taking out reverse mortgages. According to the CFPB, the reverse mortgage lender deceptively inflated home values in their marketing materials, made deceptive representations about the accuracy of home estimates, and violated a previous administrative consent order from 2016.
- Practice likely to mislead. The CFPB claimed that the company’s use of “Est[imated] Home Value” at the top of many of its marketing materials was likely to mislead consumers about the value of their home.
- Reasonable consumer perspective. A reasonable consumer would believe that the consumer had more equity in their home than was actually available and could reap more proceeds from the reverse mortgage than were actually available.
- Material representation. Misrepresentations were material because a consumer would likely enter into negotiations with the company based on the inflated estimate of their home value.
Inadequate disclosure of material lease terms in television advertising
The FTC brought actions against vehicle leasing companies alleging that their television advertisements represented that consumers could lease vehicles for “$0 down” when advertising a monthly lease payment. However, the FTC alleged that the “blur” of “unreadable fine print” that flashed on the screen at the end of the advertisement disclosed costs of at least $1,000.
- Representation or omission likely to mislead. The television advertisements featured prominent statements of “no money down” or “$0 down” at lease signing. The advertisement also contained, at the bottom of the screen, a “blur” of small print in which disclosures of various costs required by Regulation M (the Consumer Leasing Act) were made. The FTC alleged that the disclosures were inadequate because they were not clear, prominent, or audible to consumers.
- Reasonable consumer perspective. A reasonable consumer would believe that they did not have to put any money down and that all he owed was the regular monthly payment.
- Material representation. The stated “no money down” or “$0 down” plus the low monthly lease payment were material representations to consumers. The fact that the additional, material costs were disclosed at signing of the lease did not cure the deceptive failure to disclose in the television advertising, the FTC claimed.
Misrepresentation about loan terms
In 2004, the FTC sued a mortgage broker advertising mortgage refinance loans at “3.5% fixed payment 30-year loan” or “3.5% fixed payment for 30 years,” implying that the offer was for a 30-year loan with a 3.5% fixed interest rate. Instead, the FTC claimed that the broker offered adjustable rate mortgages (ARMs) with an option to pay various amounts, including a minimum monthly payment that represented only a portion of the required interest. As a result, unpaid interest was added to the principal of the loan, resulting in negative amortization.
- Practice likely to mislead. The FTC claimed that the advertisements were misleading because they compared payments on a mortgage that fully amortized to payments on a non-amortizing loan with payments that increased after the first year. In addition, the FTC claimed that after application, the broker provided Truth in Lending Act (TILA) disclosures that misstated the annual percentage rate (APR) and that failed to state that the loan was a variable rate loan.
- Reasonable consumer perspective. It was reasonable for consumers to believe that they would obtain fixed-rate mortgages, based on the representations.
- Material representation.The representations were material because consumers relied on them when making the decision to refinance their fully amortizing 30-year fixed loans. As a result, the consumers ended up with adjustable rate mortgages that would negatively amortize if they made payments at the stated 3.5% payment rate.
Abusive
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
- 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; or
- The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
The CFPB doesn’t provide explicit examples of abusive acts or practices in their manual. Historically, the abusive standard has been used significantly less than unfair and deceptive standards. Even during the Bureau's most aggressive period(s), “abusive” was not cited as a regulatory violation very often.
Back in 2020, the CFPB under Director Kathy Kraninger released a policy statement that provided a framework on how the Bureau intended to apply the “abusiveness” standard under UDAAP to help provide some clarity. But, in 2021 under a new administration and acting Director Uejio, the CFPB soon rescinded this same policy.
Watch this excerpt from a webinar with Tony Alexis, former Head of Enforcement at the CFPB and current Partner at Goodwin, as he provides his insights into the abusive standard and what to expect in the future.
2. Review Often
When it comes to something as complex as UDAAP compliance, things are ever-changing. Make sure to review the following items regularly:
- Regulatory guidelines as they could be updated and amended over time (such as the CFPB’s UDAAP examination manual)
- Enforcement actions and investigations from regulators, like the FTC and the CFPB to learn the dos and don’ts from real-life cases
- Products, services, policies, and procedures frequently to ensure they are within UDAAP guidelines
- Algorithms and AI for potential discrimination
- Consumer complaints submitted to your company directly and to the regulators, such as the CFPB and FTC
- Communications from internal and external entities across all marketing channels to monitor any potential UDAAP violations
3. Track Complaints
According to the CFPB, consumer complaints play a key role in the detection of unfair, deceptive, or abusive practices. Consumer complaints have been an essential source of information for examinations, enforcement, and rule-making for regulators. As a general matter, consumer complaints can indicate weaknesses in elements of the institution’s compliance management system, such as training, internal controls, or monitoring.
For example, the presence of complaints alleging that consumers did not understand the terms of a product or service may be a red flag. Because the perspective of a reasonable consumer is one of the tests for evaluating whether a representation, omission, act, or practice is potentially deceptive, consumer complaints alleging misrepresentations or misunderstanding may provide a window into the perspective of the reasonable consumer.
Track the complaints submitted about your company in the CFPB Consumer Complaint Database, which is available to the public, to proactively catch and fix any gaps in your compliance program and to resolve any issues in a timely manner.
Check out these additional resources for consumer complaints and how to use them in your compliance program.
Complaint Database Cheat Sheet
CFPB Complaint Risk Signal Report
4. Act Quickly
Once a potential UDAAP violation is found, or once a consumer complaint has been filed, acting quickly is key.
Aim to resolve complaints made directly to your company in a timely manner so that consumers aren’t compelled to move to higher authorities. According to the CFPB, “financial service providers should be responsive to complaints and inquiries received from consumers. In addition, entities should monitor and analyze complaints to understand and correct weaknesses in their programs that could lead to consumer risks and violations of law.”
Once an act by your company is implicated to show UDAAP violations, investigate and correct it immediately and provide a swift solution to affected consumers. Investigate the root cause of those complaints and what you can do to fix them to prevent future UDAAP violations.
5. Reach Out
In a recent webinar, Tony Alexis referenced the movie Platoon when they’re going out on an ambush and the Sergeant said, “No matter what, if you get lost, don't shout out.”
But, in this particular environment, compliance professionals need to shout out. Speak to your supervisors and other people that can help you, especially those who have had the same experience. Speak out to outside consultants, like PerformLine or other firms. Use your resources and reach out to the people who can give you an answer, or who can otherwise point you in the right direction to find your answer and provide other resources.
6. Rinse and Don’t Repeat
Recently, the CFPB has restated their efforts to crack down on repeat offenders—”recidivists,” as Director Chopra put it.
In a lecture given to students at the University of Pennsylvania Law School, Chopra shared his plans to reign in repeat offenders who continuously break the law and view monetary penalties as merely a “cost of business” rather than a punishment.
As it relates to UDAAP, one can still be considered a repeat offender if they commit deception on the first enforcement, and then unfairness on the next, for example. It doesn't have to be the same exact prong under UDAAP to be considered a repeat offense.
If your organization ever finds itself under an examination or enforcement action from the CFPB over UDAAP concerns, it’s critical to take the steps necessary to “rinse” your compliance program of any gaps or procedural issues to prevent any repeat offenses.
7. Tell the Customer What You’re Going to Do and Then Do It
As complex as UDAAP can seem, compliance is easy—according to John Henson, General Counsel at ConsumerAffairs.
John’s simple approach to UDAAP compliance is as follows:
- Tell the customer what you’re going to do.
- Do what you said you were going to do.
If there is a gap between these two steps, then that signals that there’s something off in the customer experience. This two-step process will help your team cover ground for not only UDAAP, but for other consumer protection laws as well, such as fair lending.
Listen to this podcast with John Henson as he talks through his simple approach to compliance.
8. Protect Your Brand
When it comes to navigating the complex UDAAP landscape, strong compliance programs are critical to any particular financial service team and activities need to be monitored regularly.
Make sure your compliance management program is buttoned up and that you're taking the necessary steps to avoid UDAAP violations in your marketing efforts.
Consider the addition of a comprehensive automated compliance monitoring solution to your existing compliance program to discover and remediate potential issues before they become a real problem.
At a minimum, successful monitoring alerts a business to UDAAP risks immediately after they arise. Prompt repair and reporting out is critical.”
(Goodwin Law)
Learn how PerformLine can help your organization optimize its compliance management program and be proactive in UDAAP and other regulatory compliance initiatives.