Marketing in the Age of UDAAP

The beginning of the New Year brings about new energy, new plans for “Taking on and ruling the world” and new ideas for how to make the New Year the best ever!  For many banks this new energy includes new ideas for how to market their banks and to obtain new customers.  For our clients, while we encourage innovation and reaching out to the customers, we also offer a word of caution.  Be careful, what you market and especially, how you market!  

The Unfair Deceptive Abusive Acts or Practices rule (“UDAAP”) is a burgeoning area of regulatory pursuit. This is one of those very sophisticated areas of regulation that look at the impact of practices versus simple compliance with the letter of the law.    Much like Fair Lending laws, it is possible to be in technical compliance with UDAAP and still have a regulatory problem, if the impact of a particular practice causes harm. 

UDAP versus UDAAP

While the Federal Trade Commission (FTC) has the authority to protect consumers against unfair or deceptive acts or practices (UDAP) in commerce generally; tis responsibility is delegated to the federal banking regulators for national banks, savings associations, and credit unions.   In the past, though this authority existed, it was rarely used to produce enforcement actions in the banking area.   There have been very few regulations or rules that have been published in this area, so the definitions that are used come from policy statements of the FTC.  These statements define the first two aspects of the rule.  According to these pronouncements: 

What is “unfair’?

• The practice causes or is likely to cause substantial injury.
• The injury cannot reasonably be avoided.
• The injury is not outweighed by any benefits.

What is “deceptive”?

• The practice misleads or is likely to mislead.
• A “reasonable” consumer would be misled.
• The presentation, omission or practice is material.

What do these standards mean for products?  Note that these definitions generally refer to conditions that are terms of the product.  Any product can be subject to a UDAAP claim, but the ones that most often fall under these two standards are ones that have add on fees or interest charges that are triggered by conditions within the product.  Here is a list of the products that get the most scrutiny under the rubric of UDAAP: 

• Overdraft programs
• Check/debit processing order
• Loan payment processing
• ATM fees
• Loans with balloon payments
• Credit life and disability insurance sales
• Rewards programs
• Gift card sales
• Credit Card programs

Recently, the CFPB was given rulemaking authority in this area and has added a definition for the second “A” in UDAAP. 

What is “abusive”?

• The practice materially interferes with the consumers ability to understand a term or condition of a product or service.
• The practice takes unreasonable advantage of a consumer’s lack of understanding of the risk, costs and conditions of a products or service.

The focus of this part of the rule has been on the advertising that financial institutions use to promote products.   When the products that are offered have complicated terms, the information given to consumers has to fully and completely explain the worst case scenario for the customer.   If the advertising material or disclosure given to the customer is misleading or inaccurate, then a UDAAP concern can be found.  

We believe that it is also critical to pay particular attention to the second part of rule that defines abusive; a practice that takes advantage of a customer’s lack of understanding of fees and costs of a product.   We believe that this part of the rule requires that banks to vigilant not only about disclosures they give to customers, but also about the level of fees that are being charged to the customer.   An add-on interest charge may make economic sense.  It may also be designed with a legitimate business purpose in mind.  The fee can be applied to all customers that have a specific type of account and therefore, not a violation of fair lending or equal credit opportunities laws.  However, these types of fees can adversely impact customers of limited means.  As a result, these sorts of additional charges on an account can represent a UDAAP concern. 

Fees associated with overdrafts a particular matter of concern for regulators.   Even in cases when customers have been made aware of the facts that fees will be charged and have agreed to pay the overdraft fees, it is clear that regulators will consider large fees paid by customers who consistently overdraw accounts to be a matter for UDAAP review.   [1]

Some Quick Tips:  

Recent enforcement actions under UDAPP include actions for the lack of vendor management[2], telemarketing[3] and the previously mentioned overdrafts.   These actions suggest the need for compliance officers to monitor several areas when considering UDAAP compliance: 

Vendors: if they are being used to do marketing compliance staff should review the material being used to ensure that it is accurate and complete;

Marketing:  Compliance staff should also do the same for marketing materials that are being used in house;

Credit Add-on products:  Credit insurance, credit score tracking and the like increase the inherent risk of consumer products.  Compliance testing should include these products;

Overdrafts: Compliance officers should monitor the overdraft programs to ensure that fees as well as the number of transactions do not rise to the level of abusive. 

 

 

 

 

 

 

 

 

 

 

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[1] A $137.5 million Settlement has been reached in several class action lawsuits about the order in which RBS Citizens Bank, N.A., including its Citizens Bank and Charter One brands, and Citizens Bank of Pennsylvania ("Citizens Bank") posted Debit Card Transactions to consumer deposit accounts. 100BBR 827

[2] July 2012: CFPB and The Office of the Comptroller of the Currency (OCC) fined Capital One $60 million in penalties and forced it to pay restitution of $150 million. Regulators found that Capital One’s outsourced customer center was misrepresenting credit card add-on products to subprime customers. Its telemarketing scripting contained

many inaccuracies.

 

[3] September 2012: CFPB and FDIC fined Discover $14 million in civil penalties and forced it to pay a restitution of $200 million. Regulators found issues with the telemarketing sales of credit card add-on products, such as credit insurance, credit score tracking, and identity theft protection with claims that customers were enrolled without consent or that agents were suggesting the products were free.