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.
Jump to: Learn | Review Often | Track Complaints | Act Quickly | Reach Out | Don't Repeat | Do It | Protect Your Brand
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.
An act or practice is unfair when:
In March of 2022, the CFPB updated its UDAAP examination procedures to include discrimination under unfairness, because “consumers cannot reasonably avoid discrimination.”
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.
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.
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.
A representation, omission, act, or practice is deceptive when:
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:
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.
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.
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.
An abusive act or practice:
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.
When it comes to something as complex as UDAAP compliance, things are ever-changing. Make sure to review the following items regularly:
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.
How your organization can use the CFPB's public Consumer Complaint Database to better understand how its complaint patterns and trends compare to others within its industry over time.
A deep dive into consumer complaint data collected from the CFPB's Consumer Complaint Database platform to highlight key trends, present notable observations, and provide actionable takeaways.
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.
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.
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.
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:
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.
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.”
Learn how PerformLine can help your organization optimize its compliance management program and be proactive in UDAAP and other regulatory compliance initiatives.