UDAAP Risks:
Consider Vulnerable Classes
WE’RE ALL EXTREMELY CONCERNED with UDAAP these days, almost to the point of obsession. It permeates most compliance discussions, and Consumer Financial Protection Bureau (CFPB) enforcement actions are being publicized. Much
of the worry surrounds the uncertainty of the whole UDAAP (Unfair, deceptive,
or abusive acts and practices) concept: What exactly is an abusive practice? Will
the CFPB publish regulations to clearly define terms or outline what practices will
be considered UDAAP? If not regulations, will we at least get something to go on?
The answers thus far are we’re not
sure, no, and it’s looking favorable. To the
last point, it was gratifying to see the CFPB
issue a bulletin to provide guidelines to
the industry in connection with its initial
enforcement action on “add-on product”
marketing to credit card customers.
UDAAP spans all of your bank’s
products and services. Don’t make the
mistake of thinking that only a particular
product or service can be unfair, deceptive, or abusive. The audiences to whom
any particular product or service is
marketed to, or is used by, is just as important. Take a look at the statutory definition of “abusive” from Section 1031(d)
of the Dodd-Frank Act, which states:
“The act or practice [is abusive if it]
“materially interferes with the ability of a
consumer to understand a term or condition … or … takes unreasonable advantage
of … a lack of understanding on the part
of the consumer, … the inability of the
consumer to protect the interests of the consumer … or … the reasonable reliance by
the consumer on a covered person to act in
the interests of the consumer.”
The common elements in this definition are the bank’s interference in the consumer’s decision-making ability, thereby
preventing the consumer to look after his
or her own interests, and taking advantage
of the consumer’s reliance on the bank.
Consider what groups are particularly
vulnerable to improper marketing or sales
Don’t make the
mistake of thinking
that only a particular
product or service
can be unfair,
deceptive, or abusive.
concepts. A subset of this group is consumers on social security or other fixed
income sources. Not to say that consumers on fixed incomes lack the ability to
understand complex concepts, but some
in this group might be looking for ways
to increase returns or otherwise be more
prone to overlook their own interests.
The harm is also magnified in these cases.
An additional trap is to take advantage
of the belief that older customers are more
likely to trust the bank, perhaps because of
a longstanding relationship. Abusing that
trust can easily result in UDAAP.
pitches, or might not be able (for whatever
reason) to effectively choose the best option that your bank has to offer for them.
Think about these “vulnerable classes”
the same way you would protected classes
under fair lending rules. These are groups
that deserve particular attention to ensure
they are treated in the most evenhanded
and fair way possible. The following is
a list of some “vulnerable class” factors
(there are likely more). Notice some are
covered by other laws and regulations
that provide additional protections:
Financial distress.
Speaking of income stresses and looking
for help, consumers in financial distress
can be particularly vulnerable to ideas
that are not necessarily “in the interests
of the consumer,” to quote the “abusive”
definition. Delinquent borrowers are
clearly a subset of this group because
they’re in trouble already. When searching for help, they can be more vulnerable to abusive practices.
Non-English speaking.
Anytime a consumer is less likely to
understand the nuances of a financial
product due to language limitations, the
ability to take advantage of that consumer increases.
Age (both older and younger).
UDAAP risk exists on both ends of the
spectrum. Younger consumers, including students (which could be a separate
category in itself) are generally inexperienced with financial products and
concepts, and are thus more vulnerable.
Some older consumers may exhibit decreasing abilities to understand complex
Less financially sophisticated.
This is a harder category to define, but
it’s one of those situations where you
know it when you see it. It might be the
consumer who asks questions that demonstrate a less-than-firm grasp of basic
financial concepts, or just general bewilderment as to what’s going on.
Are there any objective indicators
of this? Some might argue lower credit
scores fit here, but it’s hard to ascertain
whether the low score is due to a lack of
