VIDEO: What is an Abusive Act or Practice Under UDAAP?
In this Compliance Clip (video), Adam explains the basics of an abusive act or practice and discusses how to learn more on the topic. For those wanting to take a deep dive into understanding UDAAP, our 4 1/2 hour program, UDAAP Bootcamp, is now available in our store.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about what is an abusive act or practice under UDAAP.
Unfair, deceptive or abusive acts and practices has been something that's been around for years under the UDAP without the A for abusive, so unfair and deceptive acts and practices. In fact, unfair and deceptive have had long established three-prong tests that really dates back a couple of decades and because the unfair and deceptive act and practices rules come from the Federal Trade Commission Act that dates back to the early 1900s. In other words, we've had years and years of court cases and understanding of what is an unfair or a deceptive act or practice.
Abusive, on the other hand, is different. The abusive standard was implemented with the Dodd-Frank Act of 2010 and so this is a more recent development as it relates to UDAAP, which means that financial institutions have struggled to understand the ins and outs of abusive. So our question today is “what is abusive under the unfair, deceptive, or abusive acts and practices rule as it relates to financial institutions?”
Now, the Dodd-Frank Act defined an abusive actor practice as being something that materially interferes with the ability of a consumer to understand a term or condition of a financial product or service. In addition, it would take unreasonable advantage of the lack of understanding of a consumer regarding material risks, costs, or conditions; it would take unreasonable advantage of the inability of a consumer to protect their own interests; or it would take unreasonable advantage of reasonable reliance by the consumer for a covered person to act in the consumer’s best interest.
So, this is the guidance that we received with the Dodd-Frank Act of 2010 telling us what is an abusive act or practice. For over a decade financial institutions wondered what this really means because this is pretty broad, this is pretty general and, in fact, the unfair problem and the deceptive prong of UDAAP both have two three-prong tests. So there's a separate three-prong test for unfairness and a separate three-prong test for deceptive that help us further understand these provisions of UDAAP. Abusive, however, did not have this additional guidance.
In early 2023, the CFPB issued a policy statement that explains the legal prohibitions on abusive conduct in consumer financial markets and it summarizes a decade of their experience and how they are interpreting the abusive standard under UDAAP. Now, this policy statement provides financial institutions with guidance that is a bit similar to the long-standing three-pronged task for both unfair and deceptive and it helps give us a little bit more information than what we had specifically from the rule. In general form, all we really have time for in this short compliance clip is what we've discussed so far.
So the basics that are found in the Dodd-Frank Act is what an abusive act or practice is. But if you want more information, the CFPB has provided this policy statement that takes a little bit deeper dive in breaking down those pieces of what in fact is an abusive act or practice. Now, if you're interested in taking an even deeper dive into the abusive standard of UDAAP and, really, UDAAP as a whole, we have a program in our store that is called UDAAP Bootcamp and this program covers everything related to unfair, deceptive and abusive acts and practices.
Now, of course, UDAAP is important because this is a high risk area in most financial institutions. The reason it's high risk is really two-fold. First and foremost, the rule is still evolving. As we saw in 2023, we saw additional guidance from the CFPB as it relates to the abusive prong of UDAAP. In 2022, we saw some new trends as what the regulators were identifying as an unfair and deceptive or abusive act and practice as it relates to non sufficient fund fees, multiple representment items and overdraft fees in general. So, and even before that, we saw some different changes with the CFPB's interpretation of UDAAP applying to deposit accounts, but there's been some court cases that have changed that, so the rule in and of itself is very evolving. It's changing on a regular basis. And this program brings us up to date into the current environment of unfair, deceptive or abusive acts and practices.
Now, the second reason that UDAAP is high risk is it's very difficult to identify those specific acts or practices that elevate your risk of a UDAAP violation. What the guidance that's provided to us does is it does a really good job of helping us determine whether an already identified act or practice is, in fact, a UDAAP violation. So something we've already identified. Is it, in fact, a violation of the UDAAP rules? What the guidance doesn't do is help point us in the direction of examples that could be considered a violation of UDAAP. So what we've done in our program is we are talking about, of course, the rules. And this is how we structured our program, the first half is we talk about the rules. We talk about a fair deceptive and abusive and look at the guidance. So we talk about how complaints relates to this, how it relates to other laws. And in the second half of the program, I think this is the most beneficial piece of our UDAAP Bootcamp, we look at over 50 identified and known UDAAP violations or things that can elevate your risk of UDAAP. We look at both deposit UDAAP concerns as well as lending UDAAP concerns. And we've compiled this list of all over 50 items and I go through as the instructor talking about these items. So really trying to attack this program from the two reasons why Udap is such a high risk. And so challenging is number one, the rules have been evolving. So the first half we talk about the rules. And then secondly, it's hard to identify issues as it relates to UDAAP. So the second half of our program, which is quite long, talks about over 50 potential violations that you could identify in your organization as it relates to unfair, deceptive, or abusive acts and practices.
So if you're interested in taking a really deep dive into unfair, deceptive rules or abusive acts and practices, take a look at our UDAAP Bootcamp in our store. That's found at www.compliancecohort.com/store. That's it for this Compliance Clip.