Until the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, there was no concept of a trilogy of Unfair, Deceptive, or Abusive Acts or Practices (“UDAAP”) in Federal law, at least not in its current form. For many years prior to the Dodd-Frank Act, Federal Trade Commission (FTC) regulations included the concept of unfair and deceptive practices, but the FTC rarely used this provision against finance companies. Finance companies did not worry about this as long as they kept local state regulators happy.
However, in the post-Dodd-Frank world, things have changed. Congress granted the CFPB very broad authority to proscribe “unfair, deceptive and abusive acts and practices” by rulemaking. For finance companies, the scary thing about this is that the CFPB’s UDAAP authority is broad enough to encompass most any policy or directive that the CFPB decides to take. For example, the CFPB is considering using its UDAAP authority to extend certain provisions of debt collection laws to original creditors. Put simply, UDAAP is the CFPB’s wildcard.
The CFPB Supervision and Examination Manual discusses the CFPB’s UDAAP authority as follows:
- In the Statutory and Regulation-Based Procedures section of the Manual, UDAAP is listed first. This is not an accident. UDAAP is literally and figuratively at the top of examiners’ lists.
- The CFPB defines each element of UDAAP. An act or practice is unfair if (i) it causes or is likely to cause substantial injury to consumers, (ii) the injury is not reasonably avoidable by consumers, and (iii) the injury is not outweighed by countervailing benefits to consumers or to competition. Examples of unfairness would be a finance company refusing to release a lien after the consumer makes final payment or dishonoring a live check offer.
- A deceptive act or practice occurs when (i) representations or practices mislead or are likely to mislead consumers, (ii) consumer reliance is reasonable under the circumstances, and (iii) the misleading representation is material. Examples of deception include inadequate disclosure of material rent-to-own terms or misrepresentation about loan terms.
- Abusive acts or practices are those that (i) materially interfere with the ability of consumers to understand a term or condition of a financial services product, or (ii) take unreasonable advantage of the superior bargaining position of the finance company. The Manual does not give examples which leads to the concern that abusive acts or practices are in the eye of the beholder. Some have suggested that repetitive refinancing is an example of abusive acts or practices.
Interestingly, a loan and its terms may be in technical compliance with other Federal laws and state laws but still be a UDAAP in the mind of the CFPB.
All finance companies should consider adopting a UDAAP policy. Other good practices include reviewing transaction-related documents, marketing and advertising (including scripts) and training policies and procedures, in light of the CFPB’s UDAAP standards.