Compliance Update: Abusive Acts and Practices Highlights
In early April, the Consumer Financial Protection Bureau (CFPB) released guidance in the form of a policy statement in an effort to define the standard used when identifying unfair, deceptive or abusive acts or practices (commonly known as UDAAP).
In the policy statement, the CFPB defines an abusive act or practice as one that “materially interferes” with a consumer’s understanding of a term or condition of a financial product or service, or one that takes “unreasonable advantage of” a consumer’s understanding of a financial product or service. An act or practice needs to fall within only one of these categories to be deemed as abusive, but it may fall within both. A consumer does not have to suffer “substantial injury” to prove that an act or practice was abusive, rather just that the behavior at issue is presumed harmful based on standard industry practices.
The first form of abusiveness — material interference with a consumer’s understanding — involves “obscuring” information necessary for a consumer to fully understand all the terms or conditions of a financial product or service, through omission, physical or digital interference, or overshadowing.
The CFPB provided the following examples of acts or practices that may interfere with a consumer’s understanding of a financial product or service:
Using fine print or difficult language to bury the disclosures
Providing disclosures of additional terms and conditions after the consumer has agreed to the terms and conditions of a specific product
Failing to disclose the terms and conditions of the products or services
Purposefully obstructing a consumer’s view of an entire document or certain parts of disclosures or receipts containing specific terms or conditions of the product or service
Misusing pop-up or drop-down boxes and click-throughs to create confusion or difficulty
Placing favorable content in such a manner that it decreases the visibility of potentially less favorable content
The second form of abusiveness may occur when there is a “gap in understanding,” often resulting in harm to the consumer and benefit to the financial institution. A financial institution is prohibited from taking advantage of consumers who are unable to protect their interests, such as a situation in which a consumer may not have a choice regarding a financial institution’s third-party contracts or if a financial institution inflicts high costs or difficulty on a consumer trying to cancel a product or service.
There has been an increased focus by bank examiners across all regulatory agencies on potential UDAAP violations. It is important for your bank’s compliance and legal teams to review all the bank’s disclosures for clear and easy-to-understand language. Additionally, it is important to make sure that all information disclosed matches the bank’s actual practices and is in line with any communication provided to a consumer by a bank employee. Add-on products, products offered by third parties, and any products with additional fees should be closely reviewed to ensure that the consumer receives an actual benefit from any product for which an additional cost is incurred and that the consumer is able to cancel or terminate a product or service easily and without penalty.