Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) is truly the CFPB’s wildcard as we have discussed in a previous post. In today’s post, we further review why companies are having such a hard time dealing with UDAAP.
Adopting a policy that sufficiently addresses UDAAP has become a 21st Century challenge for creditors of all stripes. There is a pretty simple reason why.
UDAAP is a compliance challenge unlike any other in the financial services world. Compliance staff is used to being able to clearly determine whether or not the company is complying with the law. But for UDAAP, there is no checklist or box to mark-off in a policy. There is no roadmap to follow to say that the company is in compliance.
The Dodd-Frank Act has shifted the focus from technical compliance with regulations (e.g., correctly stating the APR or using the correct type-size in disclosures) to principles-based compliance (e.g., “fairness,” which is a subjective concept—and your idea of fair may not be the CFPB’s idea of fair).
We do have definitions of the words “unfair,” “deceptive,” and “abusive.” The concept of unfairness was codified in the FTC Improvement Act of 1994. Deception has been defined in an FTC Policy Statement. And, both of these terms have been the subject of court cases adding context to their meanings.
The Dodd-Frank Act added the term “abusive” to the list. Abusive defines a practice that materially interferes with the ability of a consumer to understand a term or condition of the product or service, or a practice that takes unreasonable advantage of (i) a lack of understanding on the part of the consumer of the material risks, costs or condition of the product or service, (ii) the inability of the consumer to protect his or her interest, or (iii) the reasonable reliance by the consumer on the creditor.
At first read, this certainly sounds reasonable, especially in light of the CFPB’s mission. But, these terms are inherently subjective; and the CFPB has essentially adopted the “least sophisticated” consumer standard of the Fair Debt Collection Practices Act as the yardstick for measuring.
At best, Dodd-Frank’s prohibition against UDAAP calls for fair treatment. At worst, UDAAP is now a suitability standard that is a part of federal consumer financial law.
Financial institutions now have to work the concept of “fair treatment” into every decision. And, just how do you do that? How do you draft for that? How do you train for that? How do you monitor and test for that?
And that is why companies are having such a hard time dealing with UDAAP.