UDAAP and the CFPB Regulations

Nicolas Cesare
Gavel sits atop a book full of government regulations.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Inspired by the subprime mortgage crisis of the early 2000s, and the global financial crisis of 2008, Dodd-Frank aimed to put in place new regulations and entities for the financial sector of the U.S. economy. Among these are the Consumer Financial Protection Bureau (CFPB), its regulations, and the UDAAP regulations.

Table of Contents

What Does UDAAP Stand For?

UDAAP is a set of regulations for people and businesses that offer financial services to consumers. UDAAP stands for “unfair, deceptive, or abusive acts and practices.” These are behaviors by actors in the financial sector that Dodd-Frank identifies as unfair to consumers, and therefore regulates against.

What Constitutes a UDAAP?

Dodd-Frank lays out guidelines for defining UDAAPs and in 2013 the CFPB provided some clarification about what constitutes an unfair, deceptive, or abusive practice by actors in financial markets.

Unfair Acts or Practices: Standards and Examples

According to Dodd-Frank and clarified by the CFPB, an act or practice done by a business in the financial sector is unfair when it:

  • Causes or is likely to cause substantial injury to consumers.
  • Consumers are unable to avoid the substantial injury.
  • The substantial injury in question is not outweighed by other considerations, such as benefits to the consumer or to the business’s competition.

Here, substantial injury is usually taken to mean some kind of financial harm to the consumer — such as fees or other unnecessary costs — as a result of the unfair act or practice. However, emotional harm can also contribute to substantial injury, such as the difficulty that a consumer faces in fighting a company’s unfair practices.

An example of an unfair practice would be a student loan servicing company that guides borrowers to apply for forbearance on their student loan debt, rather than applying for an income-driven repayment plan. Such a practice would cause injury to consumers insofar as they would end up paying more money on their student loans in the long run, the student loan servicer makes it difficult to change to a better repayment plan, and the practice doesn’t benefit the borrower in any other way. In fact, this is exactly what Navient has been accused of doing in a recent lawsuit brought by the CFPB and several states.

Deceptive Acts or Practices: Standards and Examples

The standards for deceptive acts and practices are:

  • The act or practice misleads or is likely to mislead consumers.
  • Any reasonable person would interpret the company’s acts and practices in a way different from what they actually are.
  • The consumer is misled in a material way, meaning that the information used to mislead them is information that is generally likely to affect a consumer’s behavior.

Determining when an act or practice is truly misleading to consumers is tricky work. In making decisions about alleged deceptive acts or practices, the CFPB looks at things like lying by omission, untrue implications made by a financial services company, and whether or not a company’s claims about how they can benefit consumers can be substantiated.

An example of a deceptive act or practice would be a credit card company that advertises a card with 0 percent APR, but does not deliver a card that, in fact, has a 0 percent APR, or only has it for some consumers under certain unstated circumstances. This act would be deceptive as long as it was likely to mislead customers of the credit card company, the customers who were misled or likely to be misled were being reasonable in their beliefs about the credit card, and there is material such as commercials, advertisements, or documents mailed to consumers that supports the misled consumer’s narrative.

Abusive Acts or Practices: Standards and Examples

There are two standards by which an act or practice might be considered abusive by the CFPB. In order to be labelled as abusive, the act or practice must only fulfill one of these. The first is if the act or practice interferes with the ability of a consumer to understand a terms and conditions of the product that the company offers. The second is if an act or practice:

  • Takes unreasonable advantage of a consumer’s lack of understanding about the risks, costs, or conditions associated with a product or service.
  • Takes advantage of a consumer’s inability to protect their interests own on financial markets.
  • Takes advantage of a consumer’s reasonable expectation that a company or person in the financial sector will act with the consumer’s interest in mind.

An example of an abusive act or practice would be if a company failed to post clear due dates for a customer’s payments and then went on to charge late fees to customers who missed these poorly advertised due dates.

Keep in mind that an act or practice can be unfair, deceptive, and abusive all at once, or any combination of the above. However, each type of act or practice is still distinct from the other two and is held to different legal standards.

CFPB Regulations

In addition to the UDAAP, the CFPB has many regulations the govern what companies and individuals who offer financial products and services can and cannot do. These regulations are intended to protect consumers by limiting the ability of actors in the financial sector to treat them unfairly.

Regulation B: Equal Credit Opportunity Act

The Equal Credit Opportunity Act protects the rights of consumers with regard to credit transactions. It prevents lenders, credit reporting companies, and and other businesses that deal with credit from discriminating against consumers with respect to their race, color, religion, national origin, sex, marital status, or age.

Regulation C: Home Mortgage Disclosure

The Home Mortgage Disclosure Act requires mortgage lenders to report information about their borrowers to the agencies that regulate them. This helps to make mortgage lenders more transparent so that other regulations can be enforced when needed.

Regulation D: Alternative Mortgage Parity

The Alternative Mortgage Transaction Parity Act preempts state level laws that would only allow banks to offer conventional fixed rate mortgages. Instead, it allows banks to offer adjustable-rate mortgages, balloon payment mortgages, and interest-only mortgages on top of conventional ones.

Regulation E: Electronic Fund Transfers

The Electronic Fund Transfer Act protects the rights and consumers while establishing their responsibilities in EFTs as well. Importantly, it recognizes the right of consumers to determine who their EFT payments go to and it bans lenders from requiring customers to pay using EFT.

Regulation F: Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act protects consumers from abusive forms of debt collection. This includes limiting the hours during with a debt collector may contact consumers, requiring debt collectors to clearly identify themselves in communications with consumers, and many other standards which help consumers deal with debt collection agencies.

Regulation G: S.A.F.E. Mortgage Licensing Act – Federal Registration of Residential Mortgage Loan Originators

The Secure and Fair Enforcement for Mortgage Licensing Act required all U.S. states to create and manage a system for licensing mortgage lenders or otherwise use the  National Mortgage Licensing System and Registry.

Regulation H: S.A.F.E. Mortgage Licensing Act – State Compliance and Bureau Registration System

States that did not want to use the federal mortgage originator licensing system were required to create their own, either by August 1, 2009 or August 1, 2010, depending on when state legislatures met.

Regulation I: Disclosure Requirements for Depository Institutions Lacking Federal Deposit Insurance

According to Regulation I, banks and credit unions — essentially, any financial institution that accepts consumer deposits — that is not federally insured through the FDIC must disclose information about about their practices to the CFPB. It also requires the institution to get written acknowledgement from its customers about their lack of FDIC insurance.

Regulation J: Land Registration

Except in certain exempt cases, Regulation J requires property owners to produce a Property Report and make it available to buyers when selling their property. This regulation is intended to reduce the administrative burden on property buyers.

Regulation K: Purchasers’ Revocation Rights, Sales Practices and Standards

Regulation K grants property buyers the ability to revoke a contract or lease at any point before midnight on the seventh day after the signing of that contract or lease. This regulation also prohibits sellers from misleading buyers in their attempt to sell or lease a piece of property.

Regulation L: Special Rules of Practice

Like Regulations J and K, Regulation L also pertains to the sale of property. In particular, it establishes procedures for filing corrections to the Statement of Record for a given piece of property.

Regulation M: Consumer Leasing

Regulation M protects consumers when it comes to leasing property. It grants consumers the right to leasing terms so that they may be compared to the terms of competitors, limits balloon payments on leases, and requires property owners to be clear about lease terms in their advertising.

Regulation N: Mortgage Acts and Practices — Advertising

Regulation N protects consumers from misleading or false advertising from mortgage lenders. Among other things, it prohibits lenders from misleading consumers about the interest on a given mortgage, fees or additional costs attached to a mortgage, and details about the consumer’s expected payments.

Regulation O: Mortgage Assistance Relief Services

Similar to Regulation N, Regulation O protects consumers when it comes to their mortgages. In particular, it prohibits agencies that offer mortgage assistance from misleading consumers or abusing them.

Regulation P: Privacy of Consumer Financial Information

Regulation P protects the financial information of consumers. It does this by requiring financial institutions to be transparent with consumers about how they treat consumer information, defines the conditions under which financial institutions can disclose private information to third parties, and gives consumers the tools to prevent their information from being disclosed.

Regulation V: Fair Credit Reporting

The Fair Credit Reporting Act was passed to protect the information of consumers. In particular, the information gathered by credit reporting bureaus. Importantly, it gives consumers the tools that they need to correct inaccuracies on their credit reports. It also limits the conditions under which an employer can obtain a background check during the hiring process.

Regulation X: Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act protects homeowners by forcing property sellers to be more transparent and requiring mortgage lenders to be more transparent about their procedures with consumers.

Regulation Z: Truth in Lending

Regulation Z concerns transparency for lenders. It requires lenders to disclose the processes by which they calculate the costs associated with a loan to a consumer based on that consumer’s credit score.

Regulation DD: Truth in Savings

Regulation DD requires depository institutions such as banks and credit unions to be transparent with the terms and conditions on their savings accounts. This is intended to help consumers when it comes to choosing between competing banks as a home for their savings.

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