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CFPB Provides Guidance on UDAAP Abusive Standard

On January 24, 2020, the Consumer Financial Protection Bureau (CFPB) announced a new policy regarding the prohibition on abusive acts or practices. The CFPB has clarified how it will define, supervise and enforce “abusive” standards under Dodd Frank § 1031(a) and (d).  The Bureau’s announcement acknowledges that there has been uncertainty in this area. The Director intends the Policy Statement to help avoid adverse consequences which may “chill or overly deter covered persons from engaging in conduct that may be beneficial to consumers.” The Policy Statement is effective January 24, 2020 and will govern supervisory and enforcement conduct going forward. The full Policy Statement is available here.

Dodd Frank Abusiveness Standard

Section 1031(d) of Dodd Frank defines broad parameters for abusiveness. The practice may be determined to be abusive if it:

(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—

(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

See 12 U.S.C. 5531(d).

Bureau’s Historical Prosecution of Abusiveness

The Policy Statement provides background on the Bureau’s enforcement activities specific to abusiveness. Since 2011, the Bureau “has brought 32 enforcement actions that included an abusiveness claim, including as recently as fall 2019.” However, more than 90% of the actions included both abusiveness and unfairness or deception claims. According to the Bureau, “only two enforcement actions contained just an abusiveness claim.” Demonstrating the challenge of amorphousness, the Bureau acknowledges “in many of those 30 actions, the abusiveness claim arose from the same course of conduct as the unfairness or deception claim.”

2019 Symposium – Differing Perspectives

Director Kraninger has been active in seeking input from various constituents since taking the helm. In  June 2019, the Bureau held its Symposium on Abusive Acts or Practices. “Eight academics and practitioners with expertise in UDAAP issues engaged in dialogue…” According to the Statement topics included the following:

  • “the necessity of clarifying the abusiveness standard (and if so, whether rulemaking or another tool should be used),
  • the degree of uncertainty posed by the statutory language, the particular aspects of the standard most in need of clarification,
  • the practical consequences of this uncertainty on consumer financial markets, and how the Bureau should enforce the abusiveness standard.”
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Lenders and Collectors Beware: Missouri Expands Coverage of Consumer Protection Act

In companion opinions issued on August 19, 2014, the Supreme Court of Missouri held that unfair practices associated with residential foreclosures occur “in connection with” the original sale of a mortgage loan and therefore fall within the scope of the Missouri Merchandising Practices Act (“MMPA”).  See Conway v. CitiMortgage, Inc., — S.W.3d —-, No. SC 93951, 2014 WL 4086671 (Mo. banc Aug. 19, 2014); Watson v. Wells Fargo Home Mortg., Inc., — S.W.3d —-, No. SC 93769, 2014 WL 4086486 (Mo. banc Aug. 19, 2014).  In Watson, however, the court also held that unfair practices associated with loan modification negotiations between a lender and borrower do not occur “in connection with” the original sale and cannot form the basis for an MMPA claim.

The MMPA is a consumer fraud statute that provides both the Missouri Attorney General and consumers the right to bring actions against individuals who engage in unfair or deceptive practices “in connection with” the sale or advertisement of merchandise.  See R.S. Mo. § 407.010, et seq.  The statute permits consumers to recover damages for “ascertainable losses,” as well as punitive damages and attorneys’ fees.

In Conway and Watson, the Supreme Court of Missouri considered whether mortgage lenders may violate the MMPA by virtue of either: (1) their foreclosure-related practices, or (2) their loan modification negotiations with borrowers.  In Conway, the court concluded that, with respect to mortgage loans, the original “sale” continues throughout the life of the loan by virtue of the long-term relationship between the parties and the duties imposed upon each party by the loan documents.  As a result, the court held that any unfair practices associated with residential foreclosures occur “in connection with” the original sale even when the foreclosure occurs years afterward.  Furthermore, the court held that third parties who did not originate the loan, but only acquired the loan years later, could still be held liable under the MMPA.

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Sooner or Later, You Might Go Pew

For the last few years, the Pew Charitable Trust has been conducting studies of consumer financial services disclosures and urging banks and other financial institutions to adopt simplified disclosure forms. For example, in April 2012, Pew developed a model disclosure form for consumer checking accounts, and Pew reports that 26 major banks have already adopted the form (we are aware of additional banks to have adopted the form). In February 2014, Pew published a similar model disclosure form for prepaid card accounts.

Both of these Pew disclosures are similar to the “Schumer Box” disclosures used for credit cards, though of course less complicated since not written by a regulator. The prepaid form is specifically designed to be printed on the inside flap of the packaging used for many prepaid cards sold in retail locations, and is designed to be opened and reviewed by consumers prior to purchasing the card. If one assumes that consumers read disclosures at all, the Pew-style disclosures arguably are an improvement.

Pew also is recommending legislators and regulators to require banks to use such disclosures, or at least provide information about account terms, conditions and fees in a concise, easy-to-read format. While bankers do not need more regulation, there could be certain upsides to a rule this time, if only the regulators can do it right.

As it stands, Pew-style disclosures for deposit and lending products are dangerously close to being “advertisements” for purposes of Truth in Savings (TISA) and Truth in Lending (TILA). If deemed to be advertisements, then additional information is generally required in the material, somewhat defeating the simplifying purpose of the forms. At the same time, these simplified disclosures do not satisfy the account opening disclosure requirements of TISA or loan closing disclosure requirements of TILA, thus forcing banks to provide more disclosures rather than fewer. And the Pew disclosures certainly omit important contractual details, raising yet another risk that a court or regulator will deem the disclosure to violate various unfair, deceptive and even abusive acts and practices laws (UDAP and UDAAP).

A clear rule that Pew-style disclosures are not subject to advertising rules, with clear standards to minimize UDAP or UDAAP claims, could therefore be useful. The question is whether regulators can write such rules without adding needless complications and liability.

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Will 2014 be the year of UDAP and UDAAP?

Expect 2014 to be a banner year for enforcement actions under the Unfair or Deceptive Acts or Practices law (UDAP) and the new Unfair, Deceptive or Abusive Acts and Practices law (UDAAP).  While predicting regulatory trends can be difficult, we believe this to be a safe bet in light of the trends in 2013 and early indications in bank examinations already this year.

Below are some of the enforcement trends from last year and tips highlighting what can be done to reduce the risks of UDAP and UDAAP enforcement actions in 2014.

In 2013, the FDIC imposed civil money penalties against banks in 89 instances, 16 of which were for UDAP violations and many of those also required consumer restitution.  The only compliance area triggering more civil money penalties in 2013 was the Flood Disaster Protection Act, accounting for 27 of the 89 cases, which is roughly consistent with the percentages in that area since Katrina.

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