Since its inception, the Consumer Financial Protection Bureau, in the process of enforcing numerous laws under the Dodd-Frank Act, has focused extensively on "Unfair, Deceptive, or Abusive Acts and Practices"—UDAAP.
CFPB has relied on its UDAAP authority under 12 USC Section 5536 to open investigations, initiate proceedings, and enter into a number of broad-ranging consent orders requiring payment of millions of dollars in damages and restitution.
Out of more than 40 of the enforcement matters that CFPB has made public, nearly half include allegations of violations of Dodd-Frank’s UDAAP provisions. These enforcement matters have garnered nearly $1.7 billion dollars in restitution for injured consumers.
Notably, the challenge with UDAAP compliance for many institutions is that the standards are intentionally over-broad, flexible, and vague. That is to say, federal agencies have even brought UDAAP claims that mirror consumer financial services laws where the laws initially did not apply—effectively expanding their reach and making UDAAP a catch-all.
And if that weren’t enough bad news for the financial services industry, regulators have expressly stated that compliance with a consumer financial services law is not a defense to a UDAAP violation.
Parsing the meaning of UDAAP
Indeed, CFPB has made crystal clear to financial institutions that complying with all of the applicable federal consumer protections is not enough to escape UDAAP's broad reach. Accordingly, because CFPB and other regulators have refused to issue a comprehensive guide to define prohibited activity under the UDAAP, for guidance financial institutions and firms must look to actions filed by CFPB.
By reading between the lines, a financial institution can attempt to understand the exercise of CFPB’s authority under UDAAP based upon the allegations in enforcement actions and the statements contained in the CFPB’s Examination Manual and agency guide.
Other sources that have become valuable resources to financial institutions and providers are:
1. CFPB Consent Orders based on alleged UDAAP violations
2. Agency enforcement actions filed in the federal courts
3. Specific prohibited practices cited in CFPB’s Examination Manual
4. Bulletins and similar informational statements that elaborate on CFPB’s priorities under UDAAP1
However, even these sources cannot provide a well-rounded guideline for compliance officers who wish to have a clear path to walk.
However, as mentioned previously, a financial institution can look to sources like previously filed CFPB enforcement actions to help determine what practices and tactics might be considered a violation of UDAAP. For instance, CFPB recently filed three separate lawsuits against foreclosure relief companies regarding violations of UDAAP.
The prohibited actions cited in the lawsuit concern misrepresentations of: 2
• Consumers' eligibility for a mortgage or loan modification
• The likelihood of success and the savings that a consumer could obtain by modifying a loan
• Charging and collecting illegal upfront fees for promises modifications
• Provisions in agreements concerning legal representation when the consumer never spoke with an attorney or had their modification reviewed by an attorney3
Sorting out what you find
After an analysis of enforcement actions brought by CFPB and opinions from the industry, it is clear there are some actions that financial institutions can take to protect themselves from the vulnerability that has been created under UDAAP:4
• Be sure the consumer understands absolutely everything with regard to your product or service, including disclosures and fee structures.
• Enhance scrutiny of your products and services targeted towards low income consumers and individuals who have experienced financial difficult in the past. These individuals will more likely than not be included as those with a lesser degree of financial sophistication.
• Understand the level of education, financial knowledge, and vulnerability of your target audience.
• Comb through consumer complaints received by your institution. These complaints drive the regulation and rule-making of CFPB.
While there are no hard and fast rules available to shield your company from liability under UDAAP, the industry and institutions can take action in the form of preventative measures to ensure that their vulnerability is at the lowest level possible. This can easily be done through monitoring CFPB enforcement actions, reviewing Consent Judgments, and monitoring their own practices.
About the author
Sabrina Atkins is a litigation associate in the Atlanta office of Baker Donelson. She assists clients on a variety of commercial and real estate litigation matters, with a particular focus on residential mortgage litigation. In this capacity, Atkins defends mortgage servicers against allegations of lender liability and wrongful foreclosure. [email protected]
Read Lyn Farrell’s “Get UDAAP early warning: Best judges of what looks like a problem likely already work for your bank” in the May 2015 Banking Exchange digital magazine