There are lessons for all financial institutions from the Wells Fargo Case

sept27blogA Three Part Series- Part One- Understanding the Power of UDAAP

The recent news about a huge fine levied against Wells Fargo financial institution presents a cautionary tale for all financial institutions regardless their size. The law and regulation that were used to construct the enforcement actions against the financial institution and the subsequent fees and fines come from the Unfair, Deceptive, Abusive Acts or Practices Act (“UDAAP”). UDAAP is an extremely powerful regulation and it is important to remember that with these types of violations the considerations are different from other areas. A product or a practice can be technically in compliance with the spirits of a regulation, but still have UDAAP implications.

A brief description of UDAAP

At the end of the Great Depression, there was a public outcry for changes in regulations that dealt with all manner of financial institutions. During the financial crash consumers found many of the promises that had been made by business were not kept. Insurance companies did not pay as promised, department stores that had promised refunds for returns reneged, financial institutions closed overnight and business in general were able to avoid payments to consumers that they promised. Neither state governments nor individuals had many options when they found they had been misled or defrauded. A consumer who was defrauded often found fine print in the contract immunized the seller or creditor. Consumers could fall back only on claims such as common law fraud, which requires rigorous and often insurmountable proof of numerous elements, including the seller’s state of mind. Even if a consumer could mount a claim, and even if the consumer won, few states had any provisions for reimbursing the consumer for attorney fees. As a result, even a consumer who won a case against a fraudulent seller or creditor was rarely made whole. Without the possibility of reimbursement from the seller, consumers could not even find an attorney in many cases. [1]

Among the changes requested were laws that prevented practices that were deceptive or fraudulent. Eventually it fell to the Federal Trade Commission, FTC, to write regulations for consumer protection on a federal level. Unfair and Deceptive Act statutes were passed in recognition of these deficiencies. States worked from several different model laws, all of which adopted at least some features of the Federal Trade Commission Act by prohibiting at least some categories of unfair or deceptive practices. But all go beyond the FTC Act by giving a state agency the authority to enforce these prohibitions, and all but one also provides remedies consumers who have been cheated can invoke. In addition to the FTC regulations, state laws and court decisions help to shape the definition of unfair or deceptive business practices.

The Predecessor

The original UDAP (with one “A”) Unfair, Deceptive Acts or Practices is derived from Regulation AA, also known as the Credit Practices Rule. The regulation was divided into two subparts;

Subpart A outlines the process for submitting consumer complaints to the Board of Governors of the Federal Reserve System’s Division of Consumer and Community Affairs
Subpart B puts forth the credit practice rules pertaining to the lending activities of financial institutions. It defines certain unfair or deceptive acts or practices that are unlawful in connection with extensions of credit to consumers
Certain provisions in their consumer credit contracts, including confessions of judgment, waivers of exemptions, assignments of wages and security interests in household goods unfair or deceptive practices involving co-signers
Pyramiding late charges, in which a delinquency charge is assessed on a full payment even though the only delinquency stems from a late fee that was assessed on an earlier installment

Through the last half of the 20th century, UDAP regulation was largely the purview of the Federal Trade Commission. Financial institution regulatory agencies generally issued guidance for financial institutions to follow and some the practices that we mention above were specifically prohibited. However, the truth of the matter was that UDAP enforcement was not exactly a matter of grave concern in the financial institution industry.


The financial meltdown of 2009 lead to many changes in regulations including the passage of the Dodd-Frank Act. Among the changes brought about by Dodd-Frank, was the supercharging of UDAP. The regulation became the Unfair Deceptive Abusive Actions, Practices, or UDAAP.

UDAAP with two ‘A’s goes beyond extensions of credit and introduces an enterprise-wide focus on all the products and services offered by your institution. The CFPB has been given the authority to bring enforcement actions under UDAPP. Considered at a high level, UDAAP is more of a concept than an individual set of regulations. The idea is that dealings with the public must be fair and that financial institutions should in fact look after the best interests of its customers.

Another key difference is that UDAAP coverage makes it unlawful for any provider of consumer financial products or services to engage in unfair, deceptive or abusive act or practices; therefore, this regulation may be applicable far beyond financial institutions.

Under the new UDAAP regime, financial institutions can be liable for the actions of the third party processors that they hire. This is one of the many reasons why vendor management has become such an important area.

Even though there a great number of laws that deal with required disclosures on financial products such as loans and certificates of deposit, these laws generally do not deal with the fairness of the terms or the possibility that a consumer may unwittingly agree to additional fees and terms that go well beyond the agreed to interest rate. UDAAP is designed to address this problem.

The Basics

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.
Briefly, what this means is if a customer has to pay fees or costs because of some act by the financial institution that is deemed unfair, then a substantial injury has occurred. The description of the regulation does say the injury does not necessarily have to be monetary, it can be emotional. However, there are no current examples of this second form of substantial injury. This is the section of the regulation that is most often applied to overdraft programs. Even in the cases where financial institutions allow overdrafts only after getting a customer’s permission and providing monthly statements that show the amounts of overdraft fees that have been paid, a substantial injury can be found.

What is “deceptive” ?

The practice misleads or is likely to mislead.
A “reasonable” consumer would be misled.
The presentation, omission or practice is material.
According to the CFPB, to determine whether an act or practice has actually misled or is likely to mislead a Consumer, the totality of the circumstances is considered. Deceptive acts or practices can take the form of a representation or omission. The Bureau also looks at implied representations, including any implications that statements about the consumer’s debt can be supported. Ensuring claims are supported before they are made will minimize the risk of omitting material information and/or making false statements that could mislead consumers.

Any programs that have the possibility of late fees or additional fees as the result of balances, usage charges or any fees that are in addition to the initial fees all have the possibility being misleading. We have found this section is most often cited when the language used in disclosures does not match the language in advertisements or on the website. For example, in one case, a financial institution called a fee a “maintenance fee” in its advertisements, but called the fee a “monthly” fee in the disclosures it gave customers at the time they opened the accounts. This was cited as a deceptive disclosure.

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 CFPB description of this portion of the regulation notes a consumer can have a reasonable reliance on a financial institution to act in his or her best interests. This means for products or services which are offered that have the ability to add fees or costs, there is an affirmative duty to make sure the customer knows what it is they are getting into. It is also critical to pay particular attention to the second part of rule which defines abusive; a practice that takes advantage of a customer’s lack of understanding of fees and costs of a product. This part of the rule requires Financial institutions to be vigilant not only about disclosures they give to customers, but also about the level of fees 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.

Part Two-The role management must play in preventing UDAAP violations

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