Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)

Overview

Unfair, deceptive, or abusive acts and practices (UDAAP) can cause significant financial injury to consumers, erode consumer confidence, and undermine the financial marketplace. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), it is unlawful for any provider of consumer financial products or services or a service provider to engage in any unfair, deceptive, or abusive act or practice. ^[1] The Dodd-Frank Act granted rulemaking authority regarding unfair, deceptive, or abusive practices to the Consumer Financial Protection Bureau (CFPB) ^[2],

The Dodd-Frank Act repealed the NCUA’s Credit Practices Rule (Part 706 of the NCUA Rules and Regulations), which had applied to federal credit unions, and repealed similar rules that previously applied to banks and savings associations. The rules specifically prohibited certain unfair credit practices and unfair or deceptive cosigner practices. However, the NCUA and other federal regulators issued Interagency Guidance stating that the practices previously addressed in those rules could still represent unfair or deceptive acts or practices under those agencies’ statutory authority to prohibit practices that violate any applicable law. (NCUA Letter to Federal Credit Unions 14-FCU-03) In addition, the Federal Trade Commission’s (FTC) Credit Practices Rule remains in effect with respect to state-chartered credit unions.

Note regarding citing violations of UDAAP: NCUA staff should use the general citation “Unfair, Deceptive, or Abusive Acts or Practices” when citing UDAAP violations found in Federal credit unions except for violations of regulations CFPB or the NCUA issues under its respective UDAAP authority.

The Role of Member Complaints in Identifying Unfair, Deceptive, or Abusive Acts or Practices

Member complaints help detect unfair, deceptive, or abusive acts and practices. They have been an essential source of information for examinations, enforcement, and rulemaking for regulators. Member complaints can indicate weaknesses in elements of the credit union’s compliance management system, such as training, internal controls, or monitoring.

While the absence of complaints does not ensure the absence of these practices, complaints may be one indication of UDAAP. For example, complaints alleging that members did not understand the terms of a product or service may be a red flag indicating that examiners should conduct a detailed review, especially when many members make similar complaints about the same product or service.

When reviewing complaints against a credit union, examiners should consider complaints lodged against subsidiaries, affiliates, and third parties about the products and services offered through the credit union or in its name. In particular, examiners should determine whether a credit union itself receives, monitors, and responds to complaints filed against itself or subsidiaries, affiliates, and third parties acting on behalf of the credit union.

Analyzing Complaints

Analysis of member complaints may assist in the identification of potential unfair, deceptive, or abusive acts and practices. Examiners should consider the context and reliability of complaints; every complaint does not indicate violation of law. When members repeatedly complain about a credit union’s product or service, however, examiners should flag the issue for possible further review. Moreover, even a single substantive complaint may raise serious concerns that would warrant further review. Complaints that allege, for example, misleading or false statements, or missing disclosure information, may indicate possible UDAAP needing review.

Another area that could indicate potential UDAAP is a high volume of charge-backs or refunds for a product or service. While this information is relevant to the member complaint analysis, it may not appear in the credit union’s complaint records.

Relationship to Other Laws

A UDAAP may also violate other federal or state laws. For example, pursuant to TILA, creditors must “clearly and conspicuously” disclose the costs and terms of credit. An act or practice that does not comply with these provisions of TILA may also be unfair, deceptive, or abusive.

Conversely, a transaction that is in technical compliance with other federal or state laws may nevertheless violate the prohibition against UDAAP. For example, an advertisement may comply with TILA’s requirements, but contain additional statements that are untrue or misleading, and compliance with TILA’s disclosure requirements does not insulate the rest of the advertisement from the possibility of being deceptive.

For on the text of UDAAP, use the links below to the following sections of the U.S.C under Title 12 Chapter 53 Subchapter V, Part C – Specific Bureau Authorities:

The NCUA Letter to Federal Credit Unions 14-FCU-03 can be found here (Opens new window) .

Definitions
Associated Risks
Examination Objectives
Examination Procedures
Checklist

Definitions

Unfair Acts or Practices - The Dodd-Frank Act standard for unfairness is that an 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. ^[3]

The act or practice must cause or be likely to cause substantial injury to consumers.
Substantial injury usually involves monetary harm but an act or practice that causes a small harm to many people may be deemed to cause substantial injury.

Actual injury is not always required. A significant risk of concrete harm is also sufficient. Trivial or speculative harms are insufficient for a finding of substantial injury. Emotional impact and other subjective types of harm will not ordinarily amount to substantial injury. Nevertheless, in certain circumstances, such as unreasonable debt collection harassment, emotional impacts may amount to or contribute to substantial injury.
Consumers must not be reasonably able to avoid the injury.
An act or practice is not considered unfair if members may reasonably avoid injury. Members cannot reasonably avoid injury if the act or practice interferes with their ability to effectively make decisions or to take action to avoid injury. Normally the marketplace is self-correcting; it is governed by consumer choice and the ability of individual consumers to make their own private decisions without regulatory intervention. However, if material information about a product, such as pricing, is modified after, or withheld until after, the consumer has committed to purchasing the product, the consumer cannot reasonably avoid the injury. Moreover, consumers cannot avoid injury if they are coerced into unwanted purchases or if a transaction occurs without their knowledge or consent.

The key question is not whether a consumer could have made a better choice, but whether an act or practice hinders a consumer’s decision-making. For example, not having access to important information could prevent consumers from comparing available alternatives, choosing those that are most desirable to them, and avoiding those that are inadequate or unsatisfactory. In addition, if almost all market participants engage in a practice, a consumer’s incentive to search elsewhere for better terms is reduced, and the practice may not be reasonably avoidable.

A consumer is expected to take reasonable action to avoid injury. While a consumer might avoid harm by hiring independent experts to test products in advance or by bringing legal claims for damages in every case of harm, these actions are too expensive to be practical and are therefore not reasonable.
The injury must not be outweighed by countervailing benefits to consumers or competition.
To be unfair, the act or practice must be injurious in its net effects — that is, the injury must not be outweighed by any offsetting consumer or competitive benefits produced. Offsetting benefits may include lower prices to the consumer or a wider availability of products and services resulting from competition.

Costs that would be incurred for measures to prevent the injury also are taken into account in determining whether an act or practice is unfair. These costs may include the costs to the credit union in taking preventive measures and the costs to society as a whole of any increased burden and similar matters.

Public policy may be considered with other evidence to determine whether an act or practice is unfair. However, public policy considerations alone may not serve as the primary basis for determining that an act or practice is unfair.

Deceptive Acts or Practices - A representation, omission, actor practice is deceptive when

The representation, omission, act, or practice misleads or is likely to mislead the consumer;
The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
The misleading representation, omission, act, or practice is material. ^[4]

There must be a representation, omission, act, or practice that misleads or is likely to mislead the consumer.
Deception is not limited to situations in which a consumer has already been misled. Instead, an act or practice may be deceptive if it is likely to mislead consumers.

It is necessary to evaluate an individual statement, representation, or omission not in isolation, but rather in the context of the entire advertisement, transaction, or course of dealing, to determine whether the overall net impression is misleading or deceptive. A representation may be an express or implied claim or promise, and it may be written or oral. If material information is necessary to prevent a consumer from being misled, it may be deceptive to omit that
information.

Written disclosures may be insufficient to correct a misleading statement or representation, particularly where the consumer is directed away from qualifying limitations in the text or is counseled that reading the disclosures is unnecessary. Likewise, oral or fine print disclosures or contract disclosures may be insufficient to cure a misleading headline or a prominent written representation. Similarly, a deceptive act or practice may not be cured by subsequent
truthful disclosures.

Acts or practices that may be deceptive include: making misleading cost or price claims; offering to provide a product or service that is not in fact available; using bait-and-switch techniques; omitting material limitations or conditions from an offer; or failing to provide the promised services.

The FTC’s “four Ps” test can assist in the evaluation of whether a representation, omission, act, or practice is likely to mislead:
- Is the statement prominent enough for the consumer to notice?
- Is the information presented in an easy-to-understand format that does not contradict other information in the package and at a time when the consumer’s attention is not distracted elsewhere?
- Is the placement of the information in a location where consumers can be expected to look or hear?
- Finally, is the information in close proximity to the claim it qualifies? ^[5]
The representation, omission, act, or practice must be considered from the perspective of a reasonable consumer.
In determining whether an act or practice is misleading, one also must consider whether the consumer’s interpretation of or reaction to the representation, omission, act, or practice is reasonable under the circumstances. In other words, whether an act or practice is deceptive depends on how a reasonable member of the target audience would interpret the representation. When representations or marketing practices target a specific audience, such as older Americans, young people, or financially distressed consumers, the communication must be reviewed from the point of view of a reasonable consumer of that group.

Moreover, a representation may be deceptive if the majority of consumers in the target class do not share the consumer’s interpretation, so long as a significant minority of such consumers is misled. When a seller’s representation conveys more than one meaning to reasonable consumers, one of which is false, the seller is liable for the misleading interpretation.

Exaggerated claims or “puffery,” however, are not deceptive if the claims would not be taken seriously by a reasonable consumer.
The representation, omission, or practice must be material.
A representation, omission, act, or practice is material if it is likely to affect a consumer’s choice of, or conduct regarding, the product or service. Information that is important to consumers is material.

Certain categories of information are presumed to be material. In general, information about the central characteristics of a product or service – such as costs, benefits, or restrictions on the use or availability – is presumed to be material. Express claims made with respect to a financial product or service are presumed material. Implied claims are presumed to be material when evidence shows that the credit union intended to make the claim (even though intent to deceive is not necessary for deception to exist).

Claims made with knowledge that they are false are presumed to be material. Omissions will be presumed to be material when the credit union knew or should have known that the consumer needed the omitted information to evaluate the product or service.

If a representation or claim is not presumed to be material, it still would be considered material if there is evidence that it is likely to be considered important by consumers.

Abusive Acts or Practices - The Dodd-Frank Act makes it unlawful for any covered person or service provider to engage in an “abusive act or practice.” ^[6] The prohibition against abusive acts or practices has only been in effect since 2011. An abusive act or practice:

Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or
Takes unreasonable advantage of
- The consumer’s lack of understanding of the material risks, costs, or conditions of the product or service,
- The consumer’s inability to protect his or her interests in selecting or using a consumer financial product or service, or
- The consumer’s reasonable reliance on a covered person to act in the interests of the consumer. ^[7]

Note: Although abusive acts also may be unfair or deceptive, examiners should be aware that the legal standards for abusive, unfair, and deceptive are separate.

Associated Risks

Compliance risk - may increase when the credit union fails to comply with UDAAP.

Transaction risk - can occur when the credit union does not have adequate internal controls in place and as a result suffers a loss.

Reputation risk - may increase when the credit union incurs fines and penalties or receives decreased member confidence as a result of failure to comply with UDAAP.

Strategic risk - can occur when the board of directors does not perform due diligence in reviewing policies and procedures, and existing and prospective products and services for compliance with UDAAP.

Examination Objectives

To assess the quality of the credit union’s compliance risk management systems, including internal controls and policies and procedures, for avoiding UDAAP.
To identify acts or practices that materially increase the risk of consumers/members being treated in an unfair, deceptive, or abusive manner.
To gather facts that help determine whether a credit union engages in acts or practices when offering or providing consumer financial products or services that are likely to be unfair, deceptive, or abusive.
To determine, in consultation with management, whether an unfair, deceptive or abusive act or practice has occurred and whether further supervisory or enforcement actions are appropriate.

Examination Procedures

Based on the results of the risk assessment of the credit union, examiners should review for potential UDAAP, taking into account a credit union’s marketing programs, product and service mix, member base, and other factors, as appropriate. Even if the risk assessment has not identified potential UDAAP, examiners should be alert throughout an examination for situations that warrant review.

Initial Document Review

Identify potential areas of UDAAP concerns by, obtaining and reviewing copies of the following, to the extent relevant to the examination:

Training materials.
Lists of products and services, including descriptions, fee structure, disclosures, notices, agreements, and periodic and account statements.
Procedure manuals and written policies, including those for servicing and collections.
Minutes of the meetings of the Board of Directors and of management committees, including those related to compliance.
Internal control monitoring and auditing materials.
Compensation arrangements, including incentive programs for employees and third parties.
Documentation related to new product development, including relevant meeting minutes of Board of Directors, and of compliance and new product committees.
Marketing programs, advertisements, and other promotional material in all forms of media (including print, radio, television, telephone, Internet, or social media advertising).
Scripts and recorded calls for telemarketing and collections.
Organizational charts, including those related to affiliate relationships and work processes.
Agreements with affiliates and third parties that interact with consumers on behalf of the credit union.
Member complaint files.
Documentation related to software development and testing, as applicable.

Management and Policy-Related Examination Procedures

Policies, Procedures, and Due Diligence
Identify potential UDAAP concerns by reviewing all relevant written policies and procedures, member complaints received by the credit union, the NCUA, or CFPB, internal and external audit reports, statistical and management reports, and examination reports. Determine whether -
1. The scope of the credit union’s compliance audit includes a review of potential UDAAP.
2. The compliance audit work is performed consistent with the audit plan and scope.
3. The frequency and depth of audit review is appropriate to the nature of the activities and size of the credit union.
4. Management and the Board of Directors are made aware of and review significant deficiencies and their causes.
5. Management has taken corrective actions to follow up on any identified deficiencies.
6. The credit union’s compliance programs ensure that policies are being followed through its sampling of relevant product types and decision centers, including sales, processing, and underwriting.
7. The credit union has a process to respond to member complaints in a timely manner and determine whether consumer complaints raise potential UDAAP concerns.
8. The credit union has been subject to any enforcement actions or has been investigated by a regulatory or law enforcement agency for violations of consumer protection laws or regulations that may indicate potential UDAAP concerns.
Internal Controls
Through discussions with management and a review of available information, determine whether the credit union’s internal controls are adequate to prevent UDAAP. Determine whether -
1. The compliance management program includes measures aimed at avoiding UDAAP, including -
  - Organization charts and process flowcharts,
  - Policies and procedures, and
  - Monitoring and audit procedures.
2. The credit union conducts prior UDAAP reviews of advertising and promotional materials, including promotional materials and marketing scripts for new products.
3. The credit union evaluates initial and subsequent disclosures, including member agreements and changes in terms, for potential UDAAP concerns.
4. The credit union reviews new products and changes in the terms and conditions of existing products for potential UDAAP concerns.
5. The credit union has a thorough process for receiving and responding to consumer complaints and has a process to receive complaints made to third parties, such as the NCUA, CFPB, or HUD.
6. The credit union evaluates servicing and collections for UDAAP concerns.
7. The credit union has established policies and controls relating to employee and third-party conduct, including:
  - Initial and ongoing training;
  - Performance reviews or audits;
  - Discipline policies and records of disciplinary actions;
  - Third-party agreements and contractual performance standards;
  - Compensation programs; and
  - Monitoring.
8. The credit union’s internal control processes are documented.
9. Computer programs are tested and documented to ensure accurate and timely disclosures to consumers.
Potential Areas for Transaction Testing
Through a high-level assessment of the credit union’s products, services, and member base, identify areas for potential transaction testing. This process should determine whether -
1. The credit union does not consider ability to repay in underwriting a given credit product.
2. A product’s profitability depends significantly on penalty fees or “back-end” rather than upfront fees.
3. A product has high rates of repricing or other changes in terms.
4. A product combines features and terms in a manner that can increase the difficulty of consumer understanding of the overall costs or risks of the product and the potential harm.
5. Penalties are imposed on a member when the consumer terminates his or her relationship with the credit union.
6. Fees or other costs are imposed on a consumer to obtain information about his account.
7. A product is targeted to particular populations, without appropriate tailoring of marketing, disclosures, and other materials designed to ensure understanding by the consumers.

Transaction-Related Examination Procedures

If the management and policy-related examination procedures reveal procedural weaknesses or other UDAAP risks, conduct transaction testing, as necessary, using the following examination procedures. Use judgment in deciding to what extent to sample individual products, services, or marketing programs. Increase the sample size to achieve confidence that all aspects of the credit union’s products and services are reviewed sufficiently. Consult with the examiner-in-charge or your supervisor to obtain assistance with the sampling process.

Marketing and Disclosures
Through a review of marketing materials, member agreements, and other disclosures, determine whether, before the consumer chooses to obtain the product or service -
1. All representations are factually based,
2. All materials describe clearly, prominently, and accurately -
  - costs, benefits, and other material terms of the products or services being offered,
  - related products or services being offered either as an option or required to obtained certain terms, and
  - material limitations or conditions on the terms or availability of products and services, such as time limitations for favorable rates, promotional features, expiration dates, prerequisites for obtaining particular products or services, or conditions for canceling services.
3. The member’s attention is drawn to key terms, including limitations and conditions that are important to enable the consumer to make an informed decision.
4. All materials clearly and prominently disclose the fees, penalties, and other charges that may be imposed and the reason for the imposition.
5. Contracts clearly inform members of contract provisions that permit changes in terms and conditions of the product or service.
6. All materials clearly communicate the costs, benefits, availability, and other terms in language that can be understood when products are targeted to particular populations, such as reverse mortgage loans for the elderly.
7. Materials do not misrepresent costs, conditions, limitations, or other terms either affirmatively or by omission.
8. The credit union avoids advertising terms that are generally not available to the typical targeted consumer.
Availability of Terms or Services as Advertised
Evaluate whether products and services that consumers are receiving are consistent with the disclosures and policies. For each product and service being reviewed, select a sample that -
1. Is sufficient in size to reach a supportable conclusion about such consistency,
2. Includes, as appropriate, transactions from different origination and underwriting channels — for example, different geographical areas or different sectors of the credit union’s organization structure, and
3. Includes approved and/or denied accounts.
4. Determine whether -
  1. Members are reasonably able to obtain the products and services, including interest rates or rewards, as represented by the credit union.
  2. Members receive the specific product or service that they request.
  3. Counter-offers clearly, prominently, and accurately explain the difference between the original product or services requested and the one being offered.
  4. Actual practices are consistent with stated policies, procedures, or account disclosures.
Availability of Actual Credit to the Member
Evaluate whether the credit union represents the amount of useable credit that the member will receive in a truthful way. Determine whether -
1. The available credit is sufficient to allow the member to use the product as advertised and disclosed to the member.
2. The fees and charges, typically imposed on the average targeted member, both initially and throughout the term of the loan, remain in a range that does not prevent the availability of credit.
3. The credit union honors convenience checks when used by the member in a manner consistent with introductory or promotional materials and disclosures.
Employees and Third Parties Interacting with Consumers
Evaluate how the credit union monitors the activities of employees and third-party contractors, marketing sales personnel, vendors, and service providers to ensure they do not engage in UDAAP with respect to member interactions. Interview employees and third parties, as appropriate. Specifically, determine whether -
1. The credit union ensures that employees and third parties who market or promote products or services are adequately trained so that they do not engage in UDAAP.
2. The credit union conducts periodic evaluations or audits to check whether employees or third parties follow the credit union’s training and procedures and has a disciplinary policy in place to deal with any deficiencies.
3. The credit union reviews compensation arrangements for employees, third-party contractors, and service providers to ensure that they do not create unintended incentives to engage in UDAAP, particularly with respect to product sales, loan originations, and collections.
4. Performance evaluation criteria do not create unintended incentives to engage in UDAAP, including criteria for sales personnel based on sales volume, size, terms of sale, or account performance.
5. The credit union implements and maintains effective risk and supervisory controls to select and manage third-party contractors and service providers.
Servicing and Collections
Evaluate whether servicing and collections practices raise potential UDAAP concerns, by determining whether -
1. The credit union has policies detailing servicing and collections practices and has monitoring systems to prevent UDAAP.
2. Call centers, either operated by the credit union itself or by third parties, effectively respond to members’ calls.
3. The credit union ensures that employees and third party contractors -
  - represent fees or charges on periodic statements in a manner that is not misleading,
  - post and credit member payments in a timely manner,
  - apply payments in a manner that does not unnecessarily increase member payments, without clear justification,
  - only charge members for products and services, such as insurance or credit protection programs, that are specifically agreed to,
  - mail periodic statements in time to provide the member ample opportunity to avoid late payments, and
  - do not represent to members that they may pay less than the minimum amount without clearly and prominently disclosing any fees for paying the reduced amount.
4. The credit union has policies to ensure compliance with the standards under the Fair Debt Collections Practices Act to prevent abusive, deceptive, or unfair debt collection practices.
5. Employees and third party contractors clearly indicate to members that they are calling about the collection of a debt.
6. Employees and third party contractors do not disclose the existence of a member’s debt to the public without the consent of the member, except as permitted by law.
7. The credit union avoids repeated telephone calls to members that annoy, abuse, or harass any person at the number called.
Unfair or Deceptive Credit Practices
Determine whether the credit union engages in credit practices that were prohibited under the FTC’s Credit Practices Rule and that are unfair or deceptive under general legal principles, including improper -
1. Confessions of judgment or similar waivers of the right to a hearing,
2. Waivers of exemption from attachment, execution, or other process,
3. Irrevocable assignments of wages, pensions, disability benefits, etc.,
4. Security interests in all of the member’s household goods or personal items such as family photographs, other than “luxury” items,
5. “Pyramiding” of late charges, or
6. Failure to inform cosigners of their potential liability.
Interviews with Members
If potential UDAAP issues are identified that would necessitate interviews with members, consult with regional management who will confer with Headquarters.