2015 CFPB Enforcement Actions Provide Insight for UDAAP Compliance
UDAAP: Is there a more concerning or confusing acronym in current financial regulatory jargon? This vague yet all-encompassing regulation is still in its infancy compared to many compliance laws, but its bite is proving as injurious as its initial bark had foreshadowed.
The Consumer Financial Protection Bureau (CFPB) continues to use Unfair, Deceptive, and Abusive Acts or Practices (UDAAP) as a primary tool for punishing providers of consumer financial products and services when it determines that their actions have harmed consumers. In our recent blog, Surviving UDAAP: CSI’s Guide to Compliance, we outlined seven tips for improving UDAAP compliance, among them monitoring enforcement actions (EAs).
This is an arduous task, and one we know most compliance officers don’t have the time to do. So we’ve tackled it for you, uncovering the trends and patterns emerging from the CFPB’s 2015 EAs to date.
WHAT’S TRENDING IN UDAAP?
While the CFPB’s 2012 Supervision and Examination Manual defines unfair, deceptive, and abusive acts—and even provides examples of unfair and deceptive practices—the guidance is still relatively vague. This forces financial institutions to look beyond specific guidance to understand how best to comply with UDAAP. And the steady stream of EAs being issued by the CFPB is a great place to start.
In 2014, the CFPB took action 29 times against various providers of consumer financial products and services. In the majority of those actions, the agency used the terms unfair or deceptive to describe the institutional practice in question.
It’s important to note here that the CFPB is not the only regulatory agency that enforces UDAAP. In a Feb. 10 UDAAP Roundup, K&L Gates noted, “In 2014 alone, federal regulators resolved approximately 50 UDAP/UDAAP cases involving various forms of consumer financial services. These settlements resulted in over $2.5 billion in civil money penalties and consumer redress.”[i]
However, our analysis focused on the most recent actions taken by the CFPB as the lead authority on UDAAP. Through mid-April, the CFPB had taken action nine times this year, putting 2015 on track to match or exceed 2014’s EA volume. Five trends quickly emerged from the data:
- One Action Equals Two Violations: In all nine 2015 actions to date, the institution at fault was cited for violating UDAAP in addition to such other regulations as the Truth-in-Lending Act (TILA) or the Real Estate Settlement Procedures Act (RESPA). This was not the case in 2014, when several CFPB EAs had no mention of UDAAP. This “double whammy” effect allows the CFPB to impose costlier penalties than would be possible of just one regulation were cited. This trend is particularly troubling because UDAAP penalties are quite steep—as much as $1 million per day for knowingly violating the regulation. And the CFPB gives itself wide clearance on this double whammy effect in its examination manual. On the one hand, it confirms the one action/two violations possibility when it states that “an unfair, deceptive, or abusive act or practice may also violate other federal or state laws.” But it also gives itself leeway when no other violation is found by noting that “conversely, a transaction that is in technical compliance with other federal or state laws may nevertheless violate the prohibition against UDAAP.”[ii]
- Every Institution, Every Practice Is Susceptible: Many articles since UDAAP’s enactment after the Dodd-Frank Act have pointed out that it goes far beyond its predecessor, UDAP, by extending to all financial institutions and to all consumer financial products and services. This fact has never been clearer than when you look at this year’s EAs from the CFPB, which total $27,658,000 in civil money penalties and more than $14 million in consumer redress. The EA recipients include several mortgage lenders, including a non-bank mortgage company; a credit card company; and two of the largest banks in the United States. Also included are such non-traditional financial institutions as debt collectors and a tax lending service, which fall under UDAAP requirements.
The four largest fines ($24 million, $2 million, $600,000 and $250,000) all were related to mortgage products and their advertising, which corresponds to the number one grievance on the CFPB’s complaint database. This is not a coincidence. Since it began accepting complaints, those related to mortgages are more than double any other category. This should raise a red flag for any community bank, credit union, regional bank or other financial institution that offers mortgages. In discussing one of the EAs, CFPB Director Richard Cordray warned that, “deceptive advertising has no place in the mortgage marketplace.” He went on to say that, “today’s action sends a clear message that misleading consumers is illegal, unacceptable, and will not be tolerated.”[iii]
- Deception Is at the Heart of the Matter: Part of the difficulty with UDAAP compliance is that the regulation defines three distinct acts that may overlap, but have separate legal standards. An unfair act causes or is likely to cause the consumer substantial injury, which is not reasonably avoidable and not outweighed by any benefit. In defining unfair in its examination manual, the CFPB notes that, “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.”ii
Deceptive, which was cited more often than either unfair or abusive in the CFPB’s 2015 EAs thus far (eight out of nine), is defined as any act that misleads or is likely to mislead a consumer, whose interpretation is reasonable and who suffers material harm. The CFPB also appeared to place more emphasis on deceptive practices over the other two terms in a press release presenting its Supervisory Highlights – Winter 2015. Director Cordray noted that, “the CFPB will continue to monitor bank and nonbank markets to ensure deception is rooted out, deficiencies are corrected, remediation is given to consumers, and violations are stopped in their tracks.”[iv]
And while deceptive practices have been cited most often this year, the CFPB provided two enlightening examples of abusive activity in its EAs. Per UDAAP, the act of materially interfering with a consumer’s ability to understand a term or condition of a financial product or service is abusive. The practice also can include taking advantage of the consumer’s lack of understanding, inability to protect himself and/or reasonable reliance on the covered person to act in his best interests. The first example of an abusive act this year involved a debt collector, whom the CFPB alleged “violated the law by attempting to collect debts that were not owed to them and by harassing and lying to consumers in that process. Federal law prohibits the use of abusive conduct or any false, deceptive, or misleading representation or means in connection with the collection of any debt.”[v] In the second example, a tax lending service was accused of “grossly understating loan rates and … deceiving them (consumers) about the status of their tax refunds.”
- Identifying Your Relationships Is Critical: In 2015, as in 2014, the CFPB issued EAs in relation to referral kickbacks. What is telling about the 2015 EAs is that, in addition to citing the institutions for a RESPA violation, the CFPB added a UDAAP violation for the institutions’ failure to identify their referral relationships to consumers. In response, a National Mortgage News article stated, “what is more noteworthy about this case is that the CFPB found that the lender had committed an unfair and deceptive act by failing to disclose the financial relationship between the parties in connection with the communications to borrowers … What this means is that lenders in any type of marketing or referral relationship – even when services are legitimately provided and paid for via a lawful MSA relationship – must disclose the compensation or risk a claim that the failure to disclose the financial relationship was unfair or deceptive.”[vi]
- Clarifying Actual Relationships Is Critical, Too: Three of the nine 2015 actions hinged on implied relationships. So not only is it vital that institutions identify actual relationships, but they must also be very careful about any implication that a relationship exists when it does not. In two of the three cases, the institutions implied a relationship with a government agency, an allegation the CFPB apparently finds particularly harmful as it imposed $250,000 CMPs on both. One institution included logos of federal agencies on its advertising envelopes, a practice the CFPB said led consumers to believe that the information was coming from those agencies. The other institution was cited for “misleading consumers with advertisements implying U.S. government approval of their products.”[vii] In the third case, the institution “deceptively implied an affiliation with unions by, among other things, using pictures of nurses, firefighters, and other public servants, in its advertising.”[viii] This trend underscores the need for institutions to be fully transparent and truthful in their advertising and other customer communications.
WHAT’S NEXT FOR UDAAP
As noted above, there is a correlation between UDAAP violations and the CFPB’s complaint database. In its examination manual, the agency expressly states that “consumer complaints play a key role in the detection of unfair, deceptive, and abusive practices,”ii but until recently the database information was limited to a few basic facts.
In late March, however, the CFPB announced that consumers now have the ability to include a narrative when lodging a complaint. These firsthand accounts from the consumer’s perspective will be verified and then published on the CFPB’s website starting later this year. Given that so much of the nuance of UDAAP rests with the consumer’s perspective, this announcement suggests that the CFPB has only just begun to enforce its UDAAP authority.
In order to successfully walk the UDAAP tightrope, members of the consumer financial services industry will need to account for the trends outlined in this article, and keep a very close eye on UDAAP developments from the CFPB and other regulators.
Amber Goodrich serves as a compliance strategist for CSI Regulatory Compliance, and has more than 10 years of financial industry experience. She is a Certified Regulatory Compliance Manager (CRCM) and Certified Bank Secrecy Act (BSA) Professional (CBAP), and holds a wealth of knowledge in bank operations, compliance and enterprise risk management.
[i] http://www.klgates.com/files/Publication/33a49d4b-671a-4ddc-913a-06b08cd09ef8/Presentation/PublicationAttachment/aec3430f-d33a-4c32-ada8-1147aa967090/UDAAP_Round-Up_2014_Year_in_Review.pdf; K&L Gates; UDAAP Round-Up: 2014 Year in Review; by Soyong Cho, Stephanie Robinson, Anjali Garg, Christopher Shelton; and Kathryn Baugher; Feb. 10, 2015.
[ii] http://files.consumerfinance.gov/f/201210_cfpb_supervision-and-examination-manual-v2.pdf; Consumer Financial Protection Bureau; Supervision and Examination Manual Version 2.0; Oct. 1, 2012.
[iii] http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-mortgage-lender-for-deceptive-advertising/; CFPB Newsroom; CFPB Takes Action Against Mortgage Lender for Deceptive Advertising; Apr. 9, 2015.
[iv] http://www.consumerfinance.gov/newsroom/cfpb-report-outlines-legal-violations-uncovered-by-supervision/; CFPB Newsroom; CFPB Report Outlines Legal Violations Uncovered by Supervision; Mar. 11, 2015.
[v] http://www.consumerfinance.gov/newsroom/cfpb-sues-participants-in-robo-call-phantom-debt-collection-operation/; CFPB Newsroom; CFPB Sues Participants in Robo-Call Phantom Debt Collection Operation; Apr. 8, 2015.
[vi] http://www.nationalmortgagenews.com/news/origination/the-relationship-between-marketing-and-udaap-1045223-1.html; National Mortgage News; The Relationship Between Marketing and UDAAP; by Ari Karen; Feb. 23, 2015.
[vii] http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-mortgage-companies-for-misrepresenting-u-s-government-affiliation/; CFPB Newsroom; CFPB Takes Action Against Mortgage Companies for Misrepresentation of Government Affiliation; Feb. 12, 2015.
[viii] http://www.consumerfinance.gov/newsroom/cfpb-takes-action-to-shut-down-sham-credit-card/; CFPB Newsroom; CFPB Takes Action to Shut Down Sham Credit Card; Feb. 3, 2015.