Compliance requirements change. Your bank may have shifts in policies or personnel. Laws and regulations are created or recreated. Regulatory emphasis swings to and fro.
The last point might have the most significant influence following renewed initiatives for Unfair, Deceptive, or Abusive Acts or Practices Act (UDAAP) enforcement. On July 9, 2021, President Biden signed an executive order that encourages the Consumer Financial Protection Bureau (CFPB) to revive enforcement of UDAAP. We should expect other regulatory agencies to follow suit.
In March 2021, the CFPB rescinded a policy statement restraining the agency’s enforcement against “abusive” acts and practices. The CFPB stated that UDAAP broadly defines four types of prohibited abusive acts or practices:
Materially interfering with someone’s ability to understand a product or service
Taking unreasonable advantage of someone’s lack of understanding
Taking unreasonable advantage of someone who cannot protect themself
Taking unreasonable advantage of someone who reasonably relies on a company to act in their interests
While the regulatory agencies have procedures to examine for UDAAP created under the Dodd-Frank Act of 2010, there is no objective checklist to evaluate UDAAP compliance. Examiners must make a subjective assessment—basically, “We know it when we see it”—through verification of bank information for consistency, accuracy and completeness across the enterprise. Results must be compared with the definitions and standards for unfair, deceptive and abusive acts or practices as defined in UDAAP.
Consent orders resolve violations
Inconsistent practices, omissions in descriptions of how a product works and misstated or omitted terms and conditions in advertising, among other things, create fertile ground for UDAAP problems. While UDAAP violations discovered and addressed in routine examinations are not publicly available, we can look at what has triggered UDAAP consent orders in the past.
The CFPB issued a consent order against Sovereign Lending Group, Inc. (Sovereign), a California corporation licensed as a mortgage broker and lender in about 46 states and the District of Columbia. Sovereign’s principal means of advertising is through direct-mail campaigns targeted primarily at United States military servicemembers and veterans.
The CFPB found that Sovereign sent consumers hundreds of thousands of mailers for VA-guaranteed mortgages that contained false, misleading and inaccurate statements, or that lacked required disclosures, in violation of the Consumer Financial Protection Act’s (CFPA) prohibition against deceptive acts and practices, the Mortgage Acts and Practices—Advertising Rule (MAP Rule), and Regulation Z. The CFPB issued a similar consent order against Prime Choice Funding, Inc. (Prime Choice), a California corporation licensed as a mortgage broker or lender in about 35 states and the District of Columbia.
Wells Fargo Bank, N.A. entered into a consent order with the CFPB to settle allegations that it illegally opened consumer deposit and credit card accounts, and enrolled consumers in online bank services in violation of Dodd-Frank’s ban on UDAAP. The bank also entered into a consent order with the Office of the Comptroller of the Currency (OCC) for allegations that it engaged in unsafe or unsound practices in its risk management and oversight of sales practices, and unsafe or unsound sales practices.
While bank examinations are the primary source of UDAAP violations, consumer complaints can spark investigations of a bank’s practices or advertising. According to the CFPB Consumer Complaint Database records, between Dec. 1, 2020, and Dec. 1, 2021, consumers lodged 140 UDAAP-related complaints against financial institutions. The top five product categories were:
credit card or prepaid card (33)
credit reporting, credit repair services or other personal consumer reports (29)
mortgage (28)
checking or savings account (19)
debt collection (15)
Issues included incorrect information on a report; applying for mortgage financing or refinancing; managing an account; payment problems; debts not owed; loan closing; account opening; features, terms or conditions; advertising or false statements; fees or interest; and account closing.
Managing compliance
Community bankers should focus on consistency, accuracy and completeness to thwart UDAAP issues. Begin with a strong Compliance Management System foundation, including:
Training and awareness. Bank employees, bank management and third-party service providers must fully understand what kind of actions or issues could be considered unfair, deceptive or abusive under the law. Definitions of the key terms are critical and can be paired with examples to bring the meaning home.
Review, monitoring and audit. Even the best trained employees could miss an issue of inconsistency, accuracy or completeness that appears in an enterprise-wide view. Community banks must conduct periodic reviews across departments, products, services, policies and procedures. Layers of review, including departmental compliance monitoring and independent audits, bring value to the table.
UDAAP risk assessment. Community banks should ensure the periodic risk assessment includes checks for inconsistent, inaccurate or incomplete procedures, disclosures, advertising and documentation. Risk assessments can serve as a step-by-step guide to product, service and business line details, and sometimes provide a path to mitigating practices.
Complaints. Complaint data can help detect issues early. Community banks should endeavor to collect and evaluate information derived from formal written complaints and from complaints received in less formal discussions with customers. The consumer complaint pipeline should include tracking to ensure full evaluation of all formal complaints, a satisfactory and timely response, and that the bank has maintained a record of the entire file.
“There have been signs that the CFPB is returning to more robust enforcement of UDAAP,” says Rhonda Thomas-Whitley, vice president and regulatory counsel at ICBA. “For instance, rescission of the CFPB’s policy statement regarding restraint in the agency’s enforcement of the prohibition on ‘abusive’ acts and practices.”
UDAAP refresher
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, and
the injury is not outweighed by countervailing benefits to consumers or to competition.
A representation, omission, act or practice is deceptive when:
it misleads or is likely to mislead the consumer,
the consumer’s interpretation of it is reasonable under the circumstances, and
the misleading representation, omission, act or practice is material.
To be deceptive, there must be a representation, omission, act or practice that misleads, or is likely to mislead, the consumer from the perspective of the reasonable consumer. The representation, omission or practice must be material.
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:
a lack of understanding on the part of the consumer of the material risks, costs or conditions of the product or service,
inability of the consumer to protect his or her interests in selecting or using a consumer financial product or service, or
a reasonable reliance by the consumer on a covered person, such as a bank, to act in the interests of the consumer.
Not just a consumer compliance concern
While not charged under UDAAP for consumer protection, one action by the Federal Deposit Insurance Corporation (FDIC) cited a bank’s commercial business practices and charged it under Section 5 of the Federal Trade Commission Act, which has similar requirements.
The FDIC reached a settlement with Umpqua Bank in Roseburg, Ore., for engaging in unfair and deceptive practices in violation of Section 5 of the Federal Trade Commission Act. It determined that Umpqua Bank engaged in Section 5 violations related to unfair and deceptive collection practices involving commercial equipment financing through its wholly owned subsidiary, Financial Pacific Leasing, Inc.
