This column is part of a series of articles on the new Consumer Financial Protection Bureau and the upcoming wave of regulations affecting the consumer financial industry.
There is little doubt that, with the recent opening of the Consumer Financial Protection Bureau, one of the top new compliance risks for the providers and servicers of consumer financial products and services is UDAAP. “What is UDAAP,” you say?
In the broadest sense, UDAAP is Dodd-Frank’s mandate to the bureau to ensure that all consumer financial products and services are fair. Yes, you read that right: fair. “Regulating fairness,” you say, “how is that possible?”
Over the next few installments in this series, I will try to answer that question by looking at the statutory UDAAP provisions of Title X of the Dodd-Frank Act, exploring the history and modern trends of similar fairness regulation and resulting litigation, and proposing solutions to assist in the mitigation of UDAAP risk. I say “try” because delivering certainty in the compliance with these fairness provisions is a tall order. And, in any event, certainty by the regulated may not be in the best interests of the regulators. After all, from the regulator’s perspective, isn’t it better to have the luxury of vagueness rather than the burden of specificity?
What is UDAAP?
“UDAAP,” the acronym, stands for “unfair, deceptive, or abusive acts or practices.” UDAAP is an expansion of the Federal Trade Commission Act’s “UDAP” provisions—unfair or deceptive acts or practices. Superficially, UDAAP differs from UDAP only by the addition of an extra “A” for “abusive.” However, as we will learn by digging a little deeper and placing UDAAP in its proper context, the risk posed by UDAAP is potentially much higher for the consumer financial services industry than UDAP ever was. The reasons are straightforward:
- A dedicated industry regulator
- Enhanced amorphousness
Unfair, Deceptive, Abusive
Let us start our journey by looking at the UDAAP definitions in Title X. An unfair act or practice is one that: (A) “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers, and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”
An abusive act or practice is one that:
(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
A lot of words, yes; but not much shape. Consider, for example, the indefiniteness of concepts like “substantial injury,” “not reasonably avoidable,” “not outweighed by countervailing benefits,” “material interference,” “unreasonable advantage,” “lack of understanding,” “material risks, costs, or conditions,” “inability of the consumer to protect the interests of the consumer,” and “reasonable reliance” —all of which are embedded in these definitions. Further, to make things even more opaque, Title X leaves the term deceptive undefined.
Is UDAAP to the bureau as pornography was to United States Supreme Court Justice Potter Stewart: The bureau will know it when it sees it? With these UDAAP terms, that is certainly a plausible risk.
What can the bureau do with UDAAP?
First, and as was detailed in a prior installment in this series, the bureau has significant enforcement powers. These powers, which include the ability to investigate, conduct hearings, and adjudications, litigate and seek various remedies, including civil penalties of up to $1,000,000 per day, may be used prevent UDAAP in connection with any transaction or offering of a consumer financial product or service.
Second, the bureau has the power—but not the obligation—to prescribe rules that pronounce unlawful any acts or practices that are found to be unfair, deceptive or abusive. These rules “may include requirements for the purpose of preventing such acts or practices.” The bureau is required to consult with federal banking or other appropriate federal agencies regarding the consistency of any proposed rule with prudential, market or systemic objectives administered by those agencies.
What can the bureau do with UDAAP? Probably anything it wants. The amorphousness of the concepts may open many doors to enforcement actions. And as compliance burdens and spending begin their steep ascent in the new bureau era, protecting against such actions becomes more important every day.
What to do? In our next installment, we will briefly review the history of UDAP and see what lessons we can learn and apply under UDAAP.