Remember UDAP before UDAAP?

Who remembers UDAP before UDAAP? UDAP (Unfair or Deceptive Acts or Practices) and UDAAP (Unfair, Deceptive, or Abusive Acts or Practices) standards were both established to protect consumers from harmful business practices, but they have distinct differences in origin and scope.

“UDAP” originates from Section 5(a) of the Federal Trade Commission Act of 1938, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” 15 USC Sec. 45(a)(1). The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010 expanded the scope from “unfair or deceptive” to “unfair, deceptive, or abusive” or “UDAAP” in the wake of the 2008 financial crisis. 12 U.S.C. Sections 5531, 5536

As for scope, the FTC Act’s UDAP applies to all U.S. persons, partnerships and corporations, covering a wide range of industries with certain exceptions – the Act specifically excludes banks and federal credit unions. However, coverage does extend to state chartered credit unions. The Federal Trade Commission (FTC) has UDAP enforcement authority under the FTC Act.

The Dodd-Frank Act’s UDAAP specifically applies to providers of consumer financial products or services and service providers. The Dodd-Frank Act gave the Consumer Financial Protection Bureau (CFPB) UDAAP rulemaking authority and, with respect to entities within its jurisdiction, enforcement authority to prevent UDAAPs in connection with offering or providing consumer financial products and services.

In addition, the National Credit Union Administration (NCUA) and the banking regulators have authority to take enforcement action against their regulated institutions when it comes to UDAAP violations. See also: Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) | NCUA

Breaking Down U-D-A-A-P

An act or practice is “unfair” if:

1.    It causes or is likely to cause substantial injury to consumers;
2.    The injury is not reasonably avoidable by consumers; and
3.    The injury is not outweighed by countervailing benefits to consumers or to competition.

For example, the FTC brought an enforcement action under the “unfairness standard” against a mortgage company for its failure to release liens after consumers fully paid the amount due on their mortgages. In this case, the FTC alleged that the consumers sustained substantial economic injury (overpayment, loss of homes) that they could not have reasonably predicted or avoided; and countervailing benefits to competition or consumers did not result from the servicer’s alleged failure to appropriately service the loan and release the lien promptly.

A representation, omission, act, or practice is “deceptive” when:

1.    It is likely to mislead the consumer; 
2.    The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
3.    The misleading representation, omission, act, or practice is material.

For example, the FTC brought actions against vehicle leasing companies alleging that their TV ads misrepresented the amount consumers would have to pay when signing a lease, i.e., the advertised “$0 down” at lease signing was actually at least $1,000 down in small, blurred text at the end of the on-screen disclosures. According to the FTC, the inadequate disclosure of lease terms in the TV ad would mislead a reasonable consumer, and the disclosure of additional costs at lease signing could not cure the alleged violation. See also: Could Your Marketing Materials Be Considered “Deceptive??” | America's Credit Unions

Lastly, an “abusive” act or practice:

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:

• The consumer’s lack of understanding of the material risks, costs, or conditions of the product or service,
• The consumer’s inability to protect his or her interests in selecting or using a consumer financial product or service, or
• The consumer’s reasonable reliance on a covered person to act in the interests of the consumer. 

For example, an online payday lender failed to comply with state licensing and usury laws and therefore lacked legal authority to collect on payments on loans. Upon default, the lender attempted to collect on the loans. The CFPB alleged that the lender’s collection efforts were abusive because they materially interfered with consumers’ ability to understand that they were not under a legal obligation to repay the loan amounts that were void under state law.

Please note that while abusive acts may also be unfair or deceptive, the legal standards for abusive, unfair, and deceptive are separate. Determining whether an institution has a potential violation is fact-specific, so it’s always a good idea to consult with your credit union’s legal counsel when issues surrounding UDAAPs arise.

What’s the future of UDAAP?

Good question. UDAAP enforcement was a high priority under the Biden Administration and previous CFPB leadership. However, most industry observers expect less aggressive UDAAP enforcement going forward under the Trump Administration. That doesn’t mean UDAAP or the CFPB are going away – it’s just that the agency (in whatever form) may be more focused only on the most egregious violations. But this is only speculation. No crystal ball here.

Notably, the Federal Housing Finance Agency (FHFA) recently rescinded its 2024 UDAP compliance advisory bulletin. Rescinded Advisory Bulletins | FHFA The agency will instead focus on the safety and soundness of government sponsored entities, rather than duplicating the FTC’s and CFPB’s existing consumer protection authority. See FHFA, HUD Announce Policy Changes; Treasury Phasing Out Paper Checks | America's Credit Unions

Also notable, in February, a bill (H.R. 1652) was introduced in the House to clarify standards for UDAAP enforcement actions brought by the CFPB. No action yet on this bill, but it is worth noting. It has been referred to the House Financial Services Committee.

Lastly, don’t forget about state UDAP/UDAAP laws – with possible changing priorities at the CFPB, more enforcement may shift to the states. The New York State Attorney General recently advanced the Fostering Affordability and Integrity through Reasonable Business Practices Act “to better protect consumers and small businesses from unfair, deceptive, and abusive practices.” We may see more states move in this direction.

Bottom line: we have a lot of moving parts to keep an eye on in the months ahead. Questions? Suggestions for future blog posts? Please reach out to the Compliance Team at compliance@americascreditunions.org.