unfair practices Regulators have more recently begun to rely on the unfair- ness standard, which defines an unfair practice as one that ■ ■ causes or is likely to cause substantial consumer injury, where ■ ■ the injury cannot be reasonably avoided and ■ ■ the injury is not outweighed by benefits to consumers or competition This standard generally focuses on the bank’s course of conduct or business practices that result in financial harm. Here, the focus is generally on the lack of consumer choice, or situations where consumers appear to be taken advantage of—by being coerced into making a purchasing decision or
by being powerless to avoid financial harm at the hands of
the bank. (See sidebar for examples of practices that have
been deemed unfair. )
Practices That have Been
found to Be unfair
Predatory lending
Servicing and collections issues due to the
lack of consumer choice in servicers
■ ■ posting late fees for on-time payments
■ ■ collecting unauthorized fees, e.g., for
insurance that is already in place
■ ■ not quoting payoff amounts or otherwise
misrepresenting the amount owed
■ ■ fees that are too high for the service
received
Remember When?
UDAP compliance standards have evolved over the years. As
noted above, there was a time when UDAP compliance was
primarily centered on a bank’s disclosure practices—with a
focus on accurate advertising copy, well-worded disclaimers,
and the like. The goal was to be certain that marketing messages and other disclosures were not misleading or deceptive.
In response, banks generally developed a series of compliance
controls focused on the marketing function—to ensure that
the bank’s promotional materials and product-related statements accurately described the products’ features and benefits.
In today’s regulatory regime, regulators continue to cite and
prosecute UDAP cases based on this more traditional UDAP
analysis, so a bank must not lose focus on ensuring that its
marketing and product promotion practices are sound. But
in recent years there seems to have been a shift—or perhaps
an expansion of the traditional interpretation of UDAP—
beyond the realm of appropriate disclosures and into a more
paternalistic pattern. We will explore this development and
suggest ways to protect yourself in this ever-expanding field.
New Directions in Enforcement
The traditional interpretation of UDAP began to shift in 2008
when regulators used it to establish a duty to protect customers and customers’ customers from fraud, although there was
never an allegation that the financial institution in question
was the perpetrator.
Protecting customers from fraudsters
In the MoneyGram case (July 2008), MoneyGram was tagged
with a UDAP concern for failing to protect its customers from
unscrupulous third parties who were using the money ser-
vices business as a vehicle for fraud. In the end, MoneyGram
provided an assurance of voluntary compliance. MoneyGram
committed to including a warning on all person-to-person
transfers to prevent fraud-induced transfers such as lotteries
and other scams. MoneyGram also developed a new plat-
form that automatically alerts agents to high-risk situations
based on the dollar amount and destination of the funds. In
these high-risk transfers, the agents are trained to ensure the
customer is not the victim of fraud. Customers who believe
they may have been scammed after they have sent funds via
MoneyGram can reverse the transaction until the funds have
been retrieved by the reputed fraudster. Finally, MoneyGram
agreed to establish a $1.1 million fund to help educate its
customers on third-party risks.
The Wachovia case (April 2008) takes this new duty to
protect one step further. The bank was fined $125 million for
allowing its customers to defraud their own customers (who
were not necessarily Wachovia’s customers). Wachovia had
been servicing telemarketers and payment processors, some
of whom produced remotely created checks for Wachovia to
process. Four of these payment processors had high chargeback
rates (up to 50 percent), causing customer complaints that
the transfers had not been authorized. The bank did not act
to shut down its customers. Wachovia also paid civil money
penalties of $10 million and established an education fund
with $8. 9 million. Wachovia’s actions were deemed unfair
by virtue of the fact that it banked the payment processors,
had reason to know of their unscrupulous behavior, and
also profited from those relationships through fees charged.
expanding the bank’s duty of care
The following year, as the economy started to shift downward,
UDAP maintained its high profile. In addition to regulator
actions, attorneys general were using state-based UDAP
statutes as a sword. Many of these suits claimed that banks
had a duty to protect their customers from foreclosure and
therefore needed to come to workout agreements, waive their
right of repayment under the initial loan terms, and strike
more “fair” bargains with consumers. There were also civil
suits by several municipalities that sought to create a suitability standard for mortgages—attempting to hold lenders
to a higher standard of fairness and disclosure than Truth in
Lending would require. Overall, there appears to be a growing
