UDAAP Risks In A CFPB (And Post-Seinfeld) World

*UDAAP Risks In A CFPB (And Post-Seinfeld) World*
**By Joel Haitz**

JoelH***The potential to inadvertently deceive your customers is risky. When two parties in a transaction have different expectations based on the terms of an agreement, one is likely to be injured when those expectations are not met. They might even feel deceived. And when they do, the consequence may be felt by your bottom line.

****In order to mitigate this risk (the risk of engaging in what the Consumer Financial Protection Bureau (CFPB) may see as unfair, deceptive, or abusive acts or practices (UDAAP)), we need to understand what a deceptive practice looks like.

****The Seinfeld episode “The Non-Fat Yogurt” provides a case study. Kramer invests in a non-fat yogurt shop. The yogurt is delicious. “How could this not have any fat? It’s too good!” George proclaims. But Jerry and Elaine start gaining weight. The yogurt is tested and turns out to be fattening. Mayoral candidate Rudy Giuliani blames his poor physical exam on the non-fat yogurt and vows to eliminate false advertising in the city. Business plummets.

****There’s no questioning the deceptive practice in “The Non-Fat Yogurt.” Back when it aired in 1993, it may have even been a satisfactory, albeit obvious, example of the type of acts your business must avoid to mitigate risks of deceptive claims. Today, however, it is much harder to define deceptive practices.

****The industry’s understanding of what qualifies as deception became less clear when the CFPB started deciding what it considers unfair and deceptive in the consumer financial market. The Dodd-Frank Act empowered the CFPB with the authority to prevent UDAAP. This may be the CFPB’s most powerful tool, and they’ve been busy using it, which offers more recent case studies.

****“22,500 bonus points-earn a bonus $300.” The institution is offering 22,500 bonus points, equal to a $300 bonus. The consumer accepts the offer, expecting 22,500 bonus points AND a $300 bonus. The customer only gets the 22,500 points. The CFPB deems the advertisement deceptive. The institution must pay the $300 as part of a $112.5 million Consent Order (which included other acts violating consumer financial law).

****This case, like many other CFPB UDAAP actions, doesn’t necessarily include clear, intentional deceptive activity. Similar to CFPB orders related to add-on financial products (debt protection, indentify theft protection, credit score tracking) that focus on marketing and suitability of services, the potential for a UDAAP claim involves a subjective analysis. Even if many customers understand the terms or want the product, a potential UDAAP claim may arise if others don’t get what they expect or if a regulatory authority thinks that product isn’t worth the price (for example, deposit advance and overdraft products).

****Because it’s more difficult to know what a potential UDAAP claim looks like, your institution needs to keep its eyes open and take affirmative steps to mitigate known risks. First, your institution must develop UDAAP awareness throughout every corner of the company (do it formally and with documentation). If you and your employees think through a consumer lens about whether a product, practice or disclosure could be misunderstood, you will start indentifying and eliminating acts that create UDAAP risk.

****Second, your institution should automate the customer-facing processes that inherently are high-risk for a UDAAP claim. UDAAP claims often arise from terms disclosed in writing and often those terms only appeared deceptive because of human error or oversight. Some examples include manually entering loan terms, checking-the-box to determine what features do and don’t apply, or relying on a procedure to make sure every required document gets in the loan package. Automating a customer-facing process can immediately lower your UDAAP risk, and free up resources to focus on what your business is here for — growing its bottom line.

****The potential to inadvertently deceive your customers is risky, but if you develop your UDAAP awareness and automate manual processes, a UDAAP claim is less likely to derail your long-term goals.