Clearly, there is growing momentum
on the part of not only federal regulators
but also state-based plaintiffs to
bring actions alleging uDAP.
dollar amount rather than using sequential order, a common practice among banks.) While there was some discussion of the bank’s transaction clearing policy disclosures, the argu- ments were more focused on the profitability of overdraft fees
to the bank. The court’s decision ultimately determined that
the fees were excessive and therefore an unfair and deceptive
business practice. The bank was ordered to pay $203 million
in restitution. The case is on appeal.
Meanwhile, 32 banks are named defendants in overdraft-
related actions that have now been consolidated into a multi-
district class action case venued in Florida (In re Checking
Account Overdraft Litigation, 2009). The actions generally
allege unfair or deceptive practices in connection with the
imposition of overdraft fees. This massive cluster of cases
will eventually run its course—but it must not go unnoticed
to banks focused on UDAP risks. Clearly, there is growing
momentum on the part of not only federal regulators but
also state-based plaintiffs to bring actions alleging UDAP.
The OTS published guidance on overdrafts (April 2010)
that encompassed lessons from both Woodforest and Wells.
It recommends, in addition to what we learned from those
cases, that banks explain alternatives to overdraft programs
and not use the term “free” if overdraft charges are possible.
Also, banks should allow customers to opt in to any overdraft
program and to promptly notify customers of any overdrafts.
UDAP-Related Rulemaking
We can glean some insight from the proposed and final
rulemaking on unfair and deceptive practices related to credit
cards that was finalized in three installments in 2009 and
2010. (While the banking regulators initially published the
proposed rule as an extension of Reg. AA, Congress passed
it as an amendment to Reg. Z. The regulators subsequently
republished the proposals and final rules under Reg. Z and
withdrew the Reg. AA proposal. )
The new credit card rules added requirements that limit
when credit card servicers can charge late fees. As we noted
earlier, one prong of the unfairness standard requires that
the practice cause or be likely to cause substantial consumer
injury. With that in mind, regulators focused on the timing fee
imposition as a key factor that could indicate an unfair practice.
In their analysis, the regulators observed that 35 percent of
active credit card accounts paid at least one late fee in 2005.
They concluded that the practice was injurious in that banks
generally do not allow sufficient time for customers to make
their payments after receiving their statements. It appears the
bar is very low for a fee-related practice to be considered unfair.
UDAP-related matters in the subprime lending area have
also been of concern. The focus here raised unfairness issues
based on lack of meaningful choices afforded to a subprime
borrower. (Remember that the second prong of an unfairness
finding requires that any injury caused by the practice cannot
be reasonably avoided.) The regulators concluded that the
general lack of market alternatives for subprime loans satisfied
this requirement, making subprime loans potentially unfair to
consumers with few other loan options.
One final example of changing supervisory thinking relates
to how banks allocate payments received for credit card balances, especially when those balances are subject to different
rates. In their analysis, rulemakers concluded that substantial
injury occurs because customers are paying more interest and
could potentially lose their promotional rates. The injury is
not avoidable because consumers have no control over allocation and disclosures are typically not sufficient. Finally, the
regulators determined that there is no countervailing benefit,
as consumers do not benefit from banks’ increased profits.
expanding the uDAP standard: abusive practices
In addition to the UDAP-related changes in Reg. Z’s credit
card rules, the passage of the Dodd-Frank Act casts an even
wider net. Title X of the act creates yet another standard that
may result in a UDAP violation: abusive acts or practices. This
term appears in two separate sections: Section 1036 makes
it unlawful for banks to engage in an unfair, deceptive, or
abusive acts or practices, and Section 1031 empowers the
new Consumer Financial Protection Bureau (CFPB) to write
regulations governing these practices.
Under the Dodd-Frank Act, the CFPB is empowered to
declare an act or practice abusive if it
■ ■ 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
• a lack of understanding on the part of the consumer of
the material risks, costs, or conditions of the product
or service
• the inability of the consumer to protect his or her interests
in selecting or using the financial product or service
• the reasonable reliance by the consumer on a covered
person to act in the interests of the consumer
