A SURVEY OF UNFAIR,
DECEPTIVE, AND ABUSIVE
PRACTICES
ADAM D. MAAREC
SEPTEMBER 10, 2014
OVERVIEW
COMPLIANCE
&
UDAAP ENFORCEMENT
2
OVERVIEW
1.
BACKGROUND
3
OVERVIEW
2.
IDENTIFYING UDAAP:
ENFORCEMENT
4
OVERVIEW
3.
IDENTIFYING UDAAP:
BULLETINS
5
OVERVIEW
4.
WHAT’S NEXT?
6
BACKGROUND
 Section 5 of the FTC prohibits UDAP
– Wheeler-Lea Act of 1938 expanded FTC powers from
preventing unfair competition to UDAP
• FTC enforces against many non-banks
• Banking regulators enforce against banks
 State authorities enforce state UDAP statutes
 Dodd-Frank changes regulatory focus
7
THE CATALYST
Democracy Journal, Summer
2007
8
CFPB’S MISSION: PROTECT AMERICANS
EDUCATE
ENFORCE
STUDY
9
CFPB’S ENFORCEMENT POWERS
Transferred laws:
- TILA, ECOA, FDCPA, Privacy in GLBA, RESPA,
and others
12 U.S.C. 5481(12) “enumerated consumer laws”
New authority:
- Power to prohibit unfair, deceptive, and
abusive acts and practices
Dodd-Frank Act § 1031 (codified at 12 U.S.C. §§ 5531(a); 5536(a)(1))
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WHO IS SETTING UDAAP PRECEDENT?
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COP ON THE BEAT
 Warren’s charge to stop “tricks and traps”
 CFPB’s enforcement action count (complaints
and settlements):
– 2012 – 6
– 2013 – 20
– 2014 (first 6 months) - 7
 UDAAP-based actions
– 16 in 2012 & 2013
• 9 were settlements
– 3 in first half of 2014
• 2 were settlements
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WHAT’S THE BIG DEAL?
 Malleable concepts that
depend on facts and
circumstances
– UDAAP-based rulemakings
have been limited
• Remedies to enforce credit
obligations
• Telemarketing
– Know it when you see it
 UDAAP = Enforcement
– Cases set precedent
13
WHAT’S THE BIG DEAL?
 Body of CFPB settlements –
looks and feels like common
law BUT:
– Lacks checks and balances
– No judge
– Subjective interpretations with
little rationale
– No admissions by parties
– New policy but no notice &
comment
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STATES STEP IN
States are using
federal UDAAP powers
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IDENTIFYING UDAAP
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“UNFAIR” PRACTICES
-
Defined by Dodd-Frank Act
An act or practice that:
“[1]causes or is likely to cause substantial injury to
consumers [2] which is not reasonably avoidable
by consumers [and [3] the] injury is not
outweighed by countervailing benefits to
consumers or to competition.”
12 USC § 5531(c)(1)
See also FTC Policy Statement on Unfairness (December 17, 1980)
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EXAMPLE: UNFAIRNESS IN PRODUCT EXECUTION
 CREDIT MONITORING PRODUCT
 Consumer purchases monitoring of credit report
information at three credit bureaus from card
issuer
 Card issuer does not track activity at one or
more credit bureaus
– Customers never notified
– Customers pay full price for the product without
receiving full benefits
 Injury, unavoidable, no countervailing benefits
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“DECEPTIVE” PRACTICES
-
Defined in the CFPB’s Exam Manual
a material representation, omission, act or
practice that misleads or is likely to mislead a
consumer, provided the consumer’s
interpretation is reasonable under the
circumstances
CFPB Examination Manual V.2, UDAAP 5 (October 2012)
See also FTC Policy Statement on Deception (October 14, 1983)
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EXAMPLE: DECEPTIVE TELEMARKETING SALES
 INSERT VIDEO CLIP
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EXAMPLE: DECEPTIVE TELEMARKETING SALES
 DEBT PROTECTION PRODUCTS
 Misrepresentations of materials terms that
influence purchase decision
– Mischaracterization of benefits
• Death benefit
– $25,000 vs. amounts outstanding up to $25,000
• Duration
– 12 or 24 months of benefits vs. three
– Inadequate consent: enrollment before key terms
disclosed; mischaracterized free look periods
– Claims process mischaracterized
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OTHER EXAMPLES OF UNFAIR OR DECEPTIVE PRACTICES
 Misleading cost or price claims
 Omitting material limitations
 Failing to provide promised services
 Bait and switch
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
 Offering a service that is not actually available
 Selling a product unfit for its purpose
Unfair or Deceptive Acts or Practices by State-Chartered Banks, FDIC FIL 2004
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“ABUSIVE” PRACTICES
 Defined by Dodd-Frank Act
 An act or practice that:
“[1] materially interferes with the ability of a
consumer to understand a term or condition of a
consumer financial product or service;”
OR
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“ABUSIVE” PRACTICES
 An act or practice that:
“[2] takes unreasonable advantage of [either]:
– “a lack of understanding on the part of the consumer of the
material risks, costs, or conditions of the product or service;
– “the inability of the consumer to protect the interests of the
consumer in selecting or using a consumer financial product
or service; or
– “the reasonable reliance by the consumer on a covered
person [such as a bank or other financial institution] to act in
the interests of the consumer.”
12 USC § 5531(d)
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EXAMPLE: ABUSIVE ACTS IN DEBT-RELIEF
 DEBT-RELIEF SERVICES
 Consumer pays fee for debt-relief services after
being told debt could be settled in 3-6 months
 Abusive practice: to knowingly enroll consumers
whose financial conditions made it highly
unlikely that they could complete the program
– Inadequate income to support repayment
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EXAMPLE: ABUSIVE ACTS IN DEBT COLLECTION
 DEBT-COLLECTION
 On-line payday loan agreements that were:
– “subject solely to the exclusive laws and jurisdiction of the
Cheyenne River Sioux Tribe, Cheyenne River Indian
Reservation…”
 CFPB said loans were void in some states due to
licensing or usury violations
 Abusive practice: collecting on loans when taking
“unreasonable advantage of consumers’ lack of
understanding about the impact of applicable
state laws on the parties’ rights and obligations”
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UNIVERSAL PROBLEMS
INADEQUATE COMPLIANCE
MANAGEMENT SYSTEMS
Failure to prevent, identify,
and correct problems
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CFPB BULLETINS ADDRESSING UDAAP
 Prohibition of UDAAP in the Collection of
Consumer Debts
–
–
–
–
–
–
Collecting unauthorized debts, i.e. late fees
Untimely posting payments and charging late fees
Illegally taking possession of property
Revealing consumer debt to employers or co-workers
Falsely representing debt amount or status
Misrepresentations regarding:
• Source of communications – attorney or a government
agency
• Reporting to credit agencies
• Waiver or forgiveness offers
CFPB Bulletin 2013-07
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ADDITIONAL UDAAP GUIDANCE
 Marketing of Credit Card Promotional APR Offers
– 0% balance transfer offers
• If a promotional balance transfer is not paid in full,
consumer will lose grace period on future purchases and
pay interest even if new purchase balance is paid in full
– Deception: Misrepresenting the true cost of promotional
interest rate offers
• Transaction fee in Reg Z disclosure is the only fee
• Promotional rate is the only rate charged
– Failure to disclose contingent costs
– Abusive: Taking unreasonable advantage of consumers by
failing to adequate disclose conditions & exploiting this
lack of understanding
– Above & Beyond Reg Z – Requires additional discloses re:
effect of promotional APR offers on grace period for new
purchases
CFPB Bulletin 2014-02
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NO SAFE HARBORS
No clear rules of the
road
Banks pull back, exit
amid uncertainty
Safety needed to
return
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PREVENTING UDAAP VIOLATIONS
TO ENSURE
COMPLIANCE:
1) TRACK UDAAP
2) ROBUST CMS
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SURVEY OF UDAAP ACTIONS
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