Among the many acronyms, abbreviations, and jargon in the consumer finance industry, there are the obvious ones, and then there the assemblages of characters that look like the results of random pounding on a keyboard. “UDAAP” falls into the second category of UDAAPs—but it’s not nearly as complicated as it looks when you understand the examination procedures. In theory, at least, UDAAP is actually relatively straightforward.
UDAAP stands for “unfair, deceptive, or abusive acts and practices.” The Consumer Financial Protection Bureau, which regulates the consumer finance market, usually pluralizes the term—”UDAAPs”—when referring to these acts and practices collectively; others forgo the “s.” Either way, the CFPB, which enforces consumer protection laws by monitoring compliance with UDAAP regulations among financial institutions. decides what counts as a UDAAP and what doesn’t, based on the agency’s assessment of how the act or practice in question affects and potentially misleads consumers.
The idea of UDAAP blossomed out of the 2008–2009 financial crisis. The term “unfair, deceptive, or abusive” appears 12 times in the text of the Dodd–Frank Wall Street Reform and Consumer Protection Act, primarily under Title X of the Dodd-Frank Act, which established the CFPB’s authority. CFPB. Indeed, protecting consumers from UDAAPs has been a core objective of the CFPB since day 1.
While companies place a substantial focus on EHS management (and with good reason), crossing the line in F&I can do substantial damage to your dealership's reputation, plus fines starting at $10,000, and the potential for criminal charges.
What Counts as a UDAAP?
So, what qualifies as a UDAAP? How can you ensure your organization doesn’t engage in unfair, deceptive, or abusive acts and practices? For better or worse, that’s up to the CFPB. The agency has written that “[a]n act or practice is unfair when:
- It causes or is likely to cause substantial injury to consumers,
- The injury is not reasonably avoidable by consumers; and
- The injury is not outweighed by countervailing benefits to consumers or to competition.”
If you think the list above is a recipe for broad, near-autocratic rule-making, you’re not alone. Critics have warned that unspecific UDAAP reasoning imparts the CFPB with unchecked authority, since what is and isn’t unfair, deceptive, or abusive is frequently a subjective question. And while the CFPB’s published guidance notes that “emotional impact and other subjective types of harm will not ordinarily amount to substantial injury,” it leaves some room for subjectivity: “[I]n certain circumstances emotional impacts may amount to or contribute to substantial injury. In addition, actual injury is not required; a significant risk of concrete harm is sufficient.”
How Does the CFPB Define “Abusive?”
To substantiate this point, consider the relevant statutory language. According to the UDAAP provisions in Title X of the Dodd–Frank Wall Street Reform and Consumer Protection Act, “abusive” refers to practices that significantly harm consumers, as defined by the CFPB’s policy statement.
“…an act that materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or takes an unreasonable advantage of 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 alliance by the consumer on a covered person to act in the interest of the consumer.”
The Act’s definition of “abusive” is longer than the “deceptive” and “unfair” provisions because lawmakers intended it to be as broad as possible—to catch anything else that would maybe otherwise fall between the cracks of the deceptive and unfair, but the CFPB still believes it to be wrong somehow.
Does the CFPB Regulate Auto Dealers?
No, auto dealers are not directly regulated by the CFPB, but the CFPB does enforce consumer finance laws and regulations that apply to the auto industry. That doesn’t mean that dealers are off the hook!
The CFPB has authority over many aspects of auto financing, including advertising, credit applications, and loan terms. Dealerships must adhere to regulations such as the Equal Credit Opportunity Act (ECOA), Truth in Lending Act (TILA), and Fair Credit Reporting Act (FCRA.)
The Federal Trade Commission (FTC) is the primary federal regulator of auto dealers. The FTC has taken action against auto dealers for unfair and deceptive sales practices, raising UDAAP concerns among consumers. The FTC also has a Used Car Rule that applies to most car dealers who sell used vehicles. Additionally, the FTC is looking at the CFPB’s model to directly regulate dealers in it’s CARS Rule regulations.
Examples of unfair, deceptive, or abusive acts or practices that may lead to UDAAP concerns.
Statutory language aside, the CFPB’s list of examples of UDAAP violations may better illustrate the agency’s reasoning in related enforcement actions against financial institutions. Some of the agency’s examples include…
- Failing to post payments timely or properly or to credit a consumer’s account with payments that the consumer submitted on time and then charging late fees to that consumer.
- Taking possession of property without the legal right to do so.
- Revealing the consumer’s debt, without the consumer’s consent, to the consumer’s employer and/or co-workers.
- Falsely representing the character, amount, or legal status of the debt.
You can find further examples here (PDF).
If you have more questions about what UDAAP is and how to avoid potential risks of the “catch all” phrasing check out KPA’s Advertising Sales and Finance Solutions and contact us today, especially in light of recent federal trade commission guidelines.
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