UDAAP stands for Unfair, Deceptive, or Abusive Acts or Practices. The Dodd-Frank Act added the term “abusive” to the existing Unfair, Deceptive Acts or Practices Act in response to issues arising from the mortgage crisis and from certain credit card practices. The Dodd-Frank also gave authority to the CFPB to take enforcement actions, in addition to the authority already provided to the FTC and the federal banking and credit union regulators, and the CFPB has been very active with a number of well-publicized cases against some very large financial players, such as Capital One Bank, Discover, and American Express.
By way of background, an act or practice is “unfair” if it:
- Causes or is likely to cause substantial injury to consumers;
- Cannot be reasonably avoided by consumers; and
- Is not outweighed by countervailing benefits to consumers or to competition.
An act or practice is deceptive where:
- A representation, omission or practice misleads or is likely to mislead the consumer;
- A consumer’s interpretation of the representation, omission, or practice is considered reasonable under the circumstances and; and
- The misleading representation, omission, or practice is material.
An “abusive” act or practice is something that materially interferes with the ability of the consumer to understand a term or condition of a product or service or takes unreasonable advantage of a consumer. A party may take “unreasonable advantage” of a consumer where:
- There is a lack of understanding on the part of a consumer about the risks, costs or conditions of the product or service;
- There is an inability on the part of the consumer to protect his or her interests in selecting or using a product or service; or
- There is reasonable reliance by the consumer on a party covered by the Act to act in his or her best interests.
Based on recent trends there are areas of operation within your credit union that are at higher risk for UDAAP violations or that may be more indicative of UDAAP issues. These areas are:
- Advertisements and solicitations;
- Account and loan disclosures;
- Servicing and collections;
- Managing and monitoring of third party service providers; and
- Consumer complaints.
In addition, there are certain products and services that are drawing a higher level of scrutiny than others based primarily on the volume of consumer complaints in these areas and based on findings in certain institutions. These products and services are:
- Overdraft programs;
- Check/debit processing order;
- Loan payment processing;
- ATM fees;
- Loans with balloon payments;
- Credit life & credit disability insurance sales;
- Rewards programs;
- Gift card sales; and
- Credit card programs
The best defense is a strong offense. You should conduct a UDAAP risk assessment for your institution and pay particular attention to the above areas, as well as ensuring you have a good process in place to review any consumer complaints you receive about your institution and about any of your third party vendors that interact with your account holders.