Understanding UDAAP
Written documentation of policies and procedures relating to third party service providers should include:
- Performance reviews and/or audits - Compensation programs - Monitoring initiatives - Third-party agreements and contractual performance standards
Check Your Understanding
1. Ask Yourself: Is an act or practice considered unfair if the consumer can reasonably avoid injury? No, because the consumer can reasonably avoid injury... so it would be fair.
1. Substantial Injury - More Information
Actual injury is not required in every case. A significant risk of definable harm is also sufficient. However, trivial or merely speculative harms are typically insufficient for a finding of substantial injury. Emotional impact and other more subjective types of harm also will not ordinarily amount to substantial injury. Nevertheless, in certain circumstances, such as unreasonable debt collection harassment, emotional impacts may amount to or contribute to substantial injury.
Disclosures
All initial and subsequent disclosures organizations provide to customers should be reviewed for UDAAP compliance. Customer agreements and change in terms notices should also be reviewed.
The CFPB has jurisdiction over:
- Banks - Credit unions - Securities firms - Payday lenders - Mortgage servicing companies - Foreclosure relief services - Debt collectors - Credit card companies One of the primary ways the CFPB protects consumers is through *the Unfair and/o Deceptive or Abusive Acts and Practices rule.*
The standard for unfairness in the Rule is that 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. - We'll examine these points a little more over the next few pages.
Allegations The Bureau and the Agencies allege that this credit company deceived customers by:
- Misleading consumers into thinking they would receive $300 for signing up for a certain credit card program. - Violating the FCRA by not reporting certain consumer disputes to credit bureaus. - Discriminating against applicants based on age. violating the Credit CARD Act by charging late fees based on a percentage of the debt on certain cards. - Giving customers inaccurate information and advice regarding paying old debts to improve credit scores .
Check Your Understanding
1. Ask Yourself: What types of documentation should a UDAAP compliance program contain? 2. Type your response in the text box below... - Organization charts and process flowcharts designed to avoid unfair, deceptive, and abusive practices - Written policies and procedures detailing how the organization avoids and intends to avoid unfair, deceptive, and abusive practices - Organizational monitoring and audit procedures designed to identify and avoid unfair, deceptive, and abusive practices
2. Consumers Can't Avoid Injury - More Information
A key question is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer's decision-making. For example, not having access to important information could prevent consumers from comparing available alternatives, choosing those that are most desirable to them, and avoiding those that are inadequate or unsatisfactory. In addition, if almost all market participants engage in a practice, a consumer's incentive to search elsewhere for better terms is reduced, and the practice may not be reasonably avoidable. The actions that a consumer is expected to take to avoid injury must be reasonable. While a consumer might avoid harm by hiring independent experts to test products in advance or by bringing legal claims for damages in every case of harm, these actions generally would be too expensive to be practical for individual consumers and, therefore, are not reasonable.
Controls
All internal control processes should be documented. Computer systems that provide further controls should also be documented.
2. Consumers Can't Avoid Injury
An act or practice is not considered unfair if consumers may reasonably avoid injury. Consumers cannot reasonably avoid injury if the act or practice interferes with their ability to effectively make decisions or to take action to avoid injury. Normally the marketplace is self-correcting; it is governed by consumer choice and the ability of individual consumers to make their own private decisions without regulatory intervention. If material information about a product, such as pricing, is modified after, or withheld until after, the consumer has committed to purchasing the product; however, the consumer cannot reasonably avoid the injury. Moreover, consumers cannot avoid injury if they are coerced into purchasing unwanted products or services or if a transaction occurs without their knowledge or consent.
Learning Objectives:
By the end of this module, you should be able to: - Define UDAAP - Explain what an unfair or deceptive act or practice is - Identify acts and practices that prompt CFPB to take UDAAP enforcement action - Create and maintain a UDAAP compliance program
More Information
Costs that would be incurred for measures to prevent the injury also are taken into account in determining whether an act or practice is unfair. These costs may include the costs to the institution in taking preventative measures and the costs to society as a whole of any increased burden and similar matters.
A National Bank
In July of 2012, the CFPB ordered a national bank to return $140 million to approximately two million customers and pay a fine of $25 million dollar civil money penalty to the Bureau's civil penalty fund. CFPB determined that the call center vendors the bank employed were violating the UDAAP rule when selling certain add-on products for the bank's credit cards. The Bureau determined that call center agents misled customers to believe that these add-on products would improve credit scores and/or credit limits. Furthermore, customers were not always told that the add-on products were optional; sometimes customers were even enrolled in add-on programs without their explicit consent.
A National Credit Card
In September of 2012, the CFPB alleged that a major national credit card was violating the UDAAP rule in a similar manner to the bank we discussed on the previous page - telemarketers working for the credit card company were using misleading language to convince consumers to purchase add-on products. Furthermore, the Bureau alleged that the company's telemarketers were speaking too quickly during the part of the phone call where mandatory disclosures are provided to consumers. In the end, the credit card company agreed to settle with the Bureau and pay $14 million civil money penalty and $200 million dollars back to customers.
Check Your Understanding
Is the following statement true or false? All enforcement actions brought by the CFPB in 2012 involved credit card add-on products. *True* False
Check Your Understanding
Is the following statement true or false? UDAAP applies strictly to credit card companies. True *False*
Check Your Understanding
Is the following statement true or false? UDAAP applies strictly to credit card companies. True False
Check Your Understanding
Is the following statement true or false? When determining if an act or practice is injurious to customers, the Bureau considers the cost of measures to prevent the injury. *True* False
The Dodd-Frank Act
Makes it illegal for any provider of consumer financial products or services or a service provider to engage in any unfair, deceptive or abusive acts or practices.
Products:
New products and changes in terms and conditions for existing products need to be reviewed carefully for UDAAP compliance. UDAAP compliance programs should include written documentation of all product reviews.
Sample Violations:
Now that you have an understanding of what the UDAAP rule is and the types of acts and practices it seeks to protect consumers from, it's time to look at how the rule works in the real world. In this section we will explore UDAAP further by examining some real life violations. We will take a look at the first three UDAAP enforcement actions the Bureau took after the creation of the rule. - A National Bank - A National Credit Card - Another National Credit Card Company
Advertising
Organizations should conduct thorough reviews of all advertising materials to ensure UDAAP compliance. Specific attention should be paid to promotional materials and marketing scripts for new products. All reviews of advertising materials should be documented.
Consumer Complaints
Providing consumers with a reasonable means to file a complaint and creating a process to respond to those complaints are a vital component of a UDAAP compliance program. Organizations should also develop a means to respond to complaints made by a consumer to third party such as the CFPB or the Better Business Bureau.
Settlement
The CFPB ordered this company to pay out $85 million dollars to 250,000 customers. The company was also ordered to implement policies and procedures to comply with consumer protection laws and use independent auditors to ensure compliance. Additionally, the company was ordered to pay $27.5 million to the Agencies.
The Consumer Financial Protection Bureau (CFPB)
The Consumer Financial Protection Bureau was a creation of the *Dodd-Frank Act of 2010*. The CFPB has a mandate to regulate consumer protection in the financial services industry.
The Unfair and Deceptive Acts and Practices Rule
The Unfair and Deceptive Acts and Practices Rule exists to protect consumers from actions by financial service providers deemed to be unfair.
1. Substantial Injury
The act or practice must cause or be likely to cause substantial injury to consumers. - Substantial injury usually involves monetary harm. - Monetary harm includes, for example, costs or fees paid by consumers as a result of an unfair practice. An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury.
Check Your Understanding
The employee conduct portion of your UDAAP compliance program should include _________________. - Initial and ongoing training initiatives - Performance reviews and/or audits - Discipline policies and records of disciplinary actions - Compensation programs - Monitoring initiatives
Another National Credit Card Company
The final enforcement action taken in 2012 by the CFPB was against another national credit card company. In this case, the CFPB was joined by the FED, the OCC, and the FDIC. The Bureau, along with the investigating Agencies, allege that this credit card company engaged in a plan to deceive consumers on multiple levels.
3. Injury Must not be Outweighed by Benefits The injury must not be outweighed by countervailing benefits to consumers or competition.
To be unfair, the act or practice must be injurious in its net effects — that is, the injury must not be outweighed by any offsetting consumer or competitive benefits that are also produced by the act or practice. Offsetting consumer or competitive benefits of an act or practice may include lower prices to the consumer or a wider availability of products and services resulting from competition.
Creating an UDAAP Compliance Program
UDAAP compliance management programs are designed to include measures aimed at avoiding unfair, deceptive and abusive practices. Over the next few pages we will examine CFPB expectations for UDAAP compliance policies and procedures. A thorough understanding of CFPB expectations for UDAAP compliance programs is necessary to creating a quality UDAAP compliance program.
Documentation:
UDAAP compliance programs should include: - Organization charts and process flowcharts designed to avoid unfair, deceptive, and abusive practices ,- Written policies and procedures detailing how the organization avoids and intends to avoid unfair, deceptive, and abusive practices - Organizational monitoring and audit procedures designed to identify and avoid unfair, deceptive, and abusive practices
What is Unfair and Deceptive or abusive Acts and Practices (UDAAP)?
UDAAP is a financial service industry acronym for Unfair and Deceptive or abusive Acts and Practices. The Dodd-Frank Act implemented a rule that makes it *illegal for businesses in the financial sector to engage in acts and practices that are deemed unfair and/or deceptive.* In this section, we will introduce you to the UDAAP rule as implemented by Dodd-Frank.
Understanding UDAAP
Unfair, deceptive, or abusive acts and practices (UDAAPs) can cause significant financial injury to consumers, erode consumer confidence, and undermine the financial marketplace.
Summary In this module we have discussed UDAAP.
You have learned about: - The UDAAP rule - The agency that oversees the UDAAP rule: CFPB - The enforcement actions that the CFPB has brought against companies for UDAAP violations - How to create and manage a quality UDAAP compliance program.
Employee Conduct
Your UDAAP compliance program should include written documentation of all policies and procedures in place relating to employee conduct. This should include: - Initial and ongoing training initiatives - Performance reviews and/or audits - Discipline policies and records of disciplinary actions - Compensation programs - Monitoring initiatives
Service Provider Conduct
Your UDAAP compliance program should include written documentation of all policies and procedures in place relating to the conduct of third party service providers. Considering that all three major UDAAP enforcement actions in 2012 involved the conduct of third party service providers, this is an area you should focus on.