United States: Consumer Financial Services: UDAAP Round-Up

Letter to Readers

Welcome to the latest edition of the UDAAP Round-Up. This newsletter is designed to provide you with a periodic resource to stay abreast of federal activities regarding the prohibition on unfair, deceptive, or abusive acts or practices ("UDAAPs") in the consumer financial services space. In this edition, we cover notable policy, enforcement, and supervisory developments from April through September 2023.

During this period, we saw 18 UDAAP/UDAP complaints and consent orders from the Consumer Financial Protection Bureau ("CFPB" or the "Bureau"), the Federal Trade Commission ("FTC" or "Commission"), and the Office of the Comptroller of the Currency ("OCC"),¹ numerous UDAAP supervisory findings from the CFPB, and UDAP/UDAAP-related guidance from the CFPB, FTC, and OCC.

Background on UDAAP/UDAP Authority and Elements

For those who are new to the UDAAP space, welcome. Below, we provide a high-level overview of the CFPB's and FTC's authority and basic definitions, which provide context for the information that follows.

Section 5 of the FTC Act prohibits unfair and deceptive acts and practices ("UDAPs") in or affecting commerce.² The FTC has enforcement authority with respect to nonbank financial services companies under the FTC Act. Penalties for violation of the FTC Act include cease-and-desist orders (the violation of which is subject to civil penalties) and injunctive relief.³

Title X of the Dodd-Frank Act provides the CFPB's UDAAP supervisory and enforcement authority, and prohibits any covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.⁴ The Dodd-Frank Act also prohibits any person knowingly or recklessly providing substantial assistance to a covered person in the commission of a UDAAP.⁵ A "covered person" is defined as "any person that engages in offering or providing a consumer financial product or service" or service provider affiliate thereof.⁶ The DoddFrank Act provides the CFPB various remedies for violations of federal consumer financial laws, including: (1) rescission or reformation of contract; (2) refunds of money or return of real property; (3) restitution; (4) disgorgement or compensation for unjust enrichment; (5) payment of damages or other monetary relief; (6) public notification regarding the violation, including the costs of notification; (7) limits on activities or functions of the person; and (8) civil money penalties.⁷

An act or practice is unfair if (1) it causes or is likely to cause substantial injury to consumers; (2) the injury is not reasonably avoidable by consumers; and (3) the injury is not outweighed by countervailing benefits to consumers or to competition.⁸ In determining whether an act or practice is unfair, the FTC and the CFPB may consider established public policies as evidence to be considered with all other evidence, but such public policy considerations may not serve as a primary basis for such determination.⁹

A representation, omission, or practice is deceptive if (1) it is likely to mislead the consumer; (2) the consumer's interpretation of the representation is reasonable under the circumstances; and (3) the misleading representation is material.¹⁰

An act or practice is abusive if it (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of: (a) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (b) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (c) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.¹¹ While the CFPB has abusiveness authority, the FTC does not.

Top Developments

Since the last edition of the UDAAP Round-Up, we have seen several significant developments in the UDAP/UDAAP landscape, including a court decision that stuck down a CFPB interpretation of unfairness, a new CFPB policy statement on abusiveness, and a focus by the CFPB and the OCC on deposit accounts.

Federal Court Strikes Down CFPB's Interpretation of Unfairness as Encompassing Discrimination

In September 2023, the US District Court for the Eastern District of Texas ruled that the CFPB acted outside its authority when it updated its interpretation of "unfairness" in the Bureau's Supervision and Examination Manual.¹² If upheld on appeal, the ruling would be a significant blow to the CFPB's efforts to enforce antidiscrimination principles using the unfairness prohibition.

As we discussed in our Spring 2022 edition of the UDAAP Round-Up, ¹³ the CFPB revised the UDAAP section of its Supervision and Examination manual in May 2022 to include a review for discriminatory conduct in its UDAAP examinations. The Supervision and Examination Manual sets forth the guidelines CFPB examiners utilize when assessing compliance with federal consumer financial laws. In its update to the manual, the CFPB alleged that discriminatory conduct could constitute an unfair practice in violation of the Dodd-Frank Act. This interpretation of unfairness is novel. Previously, the CFPB's review of discriminatory conduct was limited to illegal conduct under the Equal Credit Opportunity Act ("ECOA"), which prohibits a creditor from discriminating against an applicant for credit based on certain identified protected classes. The CFPB's new interpretation of unfairness to prohibit discrimination, by contrast, applied to all aspects of offering or providing consumer financial products or services, not just offering credit.

In response to the CFPB's update, several trade associations sued the CFPB, alleging the update exceeded the CFPB's statutory authority. In its ruling, the court held that the "major questions" doctrine applies because the question of whether unfairness encompasses discrimination "is a question of major economic and political significance" given the impact it would have on the financial services industry. The court went on: "Given that context, the CFPB faces a high burden in arguing that Congress conferred a sweeping antidiscrimination authority without defining protected classes or defenses, without using the words 'discrimination' or 'disparate impact,' and while separately giving the agency authority to police 'discrimination' only in specific areas." Although noting that the CFPB's interpretation "has a certain appeal given the facial breadth of [the statutory] language" defining unfairness, the court ultimately determined that that the "text and structure of the Act ... make its definition of 'unfairness' at least vague as to the topic of discrimination" and thus "is not the sort of 'exceedingly clear language' that the majorquestions doctrine demands."

The District Court vacated the CFPB's update to its Supervision and Examination Manual and also enjoined the CFPB from enforcing the updated interpretation against any member of the plaintiff trade associations. To date, the CFPB has not appealed the decision and it is not clear if it intends to do so.

For more information on the decision, see our Blog Post.

CFPB Issues Policy Statement on Abusive Acts or Practices

In another major update, in April 2023, the CFPB issued a Policy Statement on Abusive Acts or Practices (the "Policy Statement").¹⁴ The Policy Statement "explain[s] how the CFPB analyzes the elements of abusiveness" under the Dodd-Frank Act "with the goal of providing an analytic framework" for identifying abusive conduct.

The Policy Statement explains that the first prong of the definition of abusiveness, "materially interfere[ing] with the ability of a consumer to understand a term or condition," can be shown when an act or omission (1) intends to impede consumer understanding, (2) has the natural consequence of impeding consumer understanding, or (3) actually impedes consumer understanding. This interpretation is arguably broader than the statutory language which only speaks to conduct that "materially interferes." The CFPB identifies several acts or practices that may constitute material interference: buried disclosures; interference that impairs a consumer's ability to see, hear, or understand terms or conditions; and overshadowing – defined as the "prominent placement of certain content that interferes with the comprehension of other content". Importantly, the CFPB also implied that certain products and services may be inherently abusive, stating a product or service may be abusive if it is so complicated that material information about it cannot be sufficiently explained.

The Policy Statement also expands on the CFPB's interpretation of the remaining prongs of the definition of abusiveness, which all involve taking unreasonable advantage of a consumer. The Policy Statement sets forth an analytic framework for what constitutes "taking unreasonable advantage" in the Bureau's view. For one, according to the CFPB, typicality in the industry cannot be used to defend conduct that takes unreasonable advantage. In other words, "everyone does this" is no defense to a claim of taking unreasonable advantage. In addition, the CFPB states that taking even a relatively small advantage may be abusive if it is unreasonable. Next, the Policy Statement notes that loans "set up to fail" (i.e., loans made with an "indifferen[ce] to negative consumer outcomes") may constitute abusive conduct. Finally, conduct may take unreasonable advantage of a consumer if entities "get a windfall" because of a gap in a consumer's understanding, unequal bargaining power, or consumer reliance—the three statutory factors of which entities cannot take unreasonable advantage. The Policy Statement then discusses each of these statutory factors in turn.

With respect to a lack of understanding, the Policy Statement notes that untruthful statements or omissions are not required to find that an entity took advantage of a consumer's lack of understanding. Further, the lack of understanding does not need to be reasonable or widespread to constitute an abusive act or practice. The Policy Statement also makes clear that entering into a transaction that involves material risks or costs, but from which the consumer can derive only minimal or no benefit, can demonstrate the consumer lacks sufficient understanding of the transaction.

With respect to unequal bargaining power and a consumer's inability to protect their interests, the Policy Statement states that a consumer's inability to protect their own interests does not need to be an impossibility, but rather an impracticality. For those of limited means, the CFPB notes that the payment of money may be impractical, for example. The Policy Statement also explains that if consumers lack market choice, they may be unable to protect their interests by choosing an alternative provider. While the Policy Statement makes clear such relationships are not per se abusive, such relationships may present a higher risk that certain conduct may be abusive. The Policy Statement also identifies other circumstances where consumers lack bargaining power, and which may be ripe for abusiveness claims: using form contracts, having a high market share, and imposing high transaction costs to exit the relationship.

With respect to a consumer's reasonable reliance, the Policy Statement notes two examples of circumstances in which it may be reasonable for a consumer to rely on a company to act in the consumer's interest: (1) if an entity represents that it will act in the consumer's best interest, it is usually reasonable for a consumer to rely on such representations; and (2) if an entity acts as a person's agent or representative, or acts as an intermediary in navigating marketplaces for consumer financial products or services, it may be reasonable for consumers to rely on the entity to act in the consumer's best interest.

For a more detailed discussion on the Policy Statement, as well as its implications and how it compares with CFPB precedent, please see our Legal Update.

Focus on Deposit Accounts

Deposit accounts have been a focus of the CFPB and the OCC since the last edition of the UDAAP Round-Up. In May 2023, the CFPB released Circular 2023-02 on the topic of reopening previously closed deposit accounts.¹⁵ In the circular, the CFPB states that unilaterally reopening a deposit account previously closed by a consumer in order to process a debit or deposit can constitute an unfair practice. The Bureau notes that doing so may cause the account to become overdrawn and, accordingly, the consumer may incur overdraft and non-sufficient funds (NSF) fees. The consumer may also be charged account maintenance fees when their account is reopened. The CFPB concludes that when a financial institution reopens an account without the consumer's prior authorization and without providing notice, it can result in substantial injury to consumers that is not reasonably avoidable or outweighed by a countervailing benefit to the consumer or to competition.

Next, in April 2023, the OCC issued a bulletin addressing the risks associated with overdraft protection programs.¹⁶ Among other things, the bulletin warned that it may be a UDAP to assess overdraft fees on debit card transactions that are authorized when a consumer's available account balance is positive but later post to the account when the available balance is negative, commonly referred to as "authorize positive, settle negative" transactions. The bulletin also states that failing to have a limit or having a high limit on the number of representment fees an entity charges may constitute a UDAP.

Finally, the CFPB and the OCC settled actions against a large financial institution for, among other things, charging NSF fees on represented transactions. According to the agencies, charging the fees provided little to no benefit to consumers and did not serve any deterrent purposes because consumers could not reasonably anticipate or avoid the fees. The institution was required to pay a $60 million penalty to each agency and provide consumers with $80.4 million in redress. The OCC also settled an action against another financial institution for deceptively representing that it would waive deposit account fees under certain conditions but charging the fees even if the consumer met the requirements for a waiver.

Footnotes

1. This review generally covers those actions first filed during this period. Actions that were initiated prior to April 1, 2023 and resolved during this period are counted in the enforcement trend statistics (e.g., total civil money penalties), but they are not discussed in the narrative.

2. 15 U.S.C. § 45(a)(1). Many states have adopted similar laws.

3. Id. § 53(b). Historically, injunctive relief under Section 13(b) of the FTC Act included potential orders for restitution or disgorgement. However, a recent U.S. Supreme Court decision eliminated the FTC's ability to seek equitable monetary relief under Section 13(b). AMG Capital Mgmt v. FTC, 141 S. Ct. 1341 (2021).

4. 12 U.S.C. §§ 5531(a), 5536(a)(1)(B).

5. Id. § 5536(a)(3).

6. Id. § 5481(6). The Dodd-Frank Act also includes a "related person" concept that is intended to reach certain persons related to covered persons, if they manage, control or materially participate in the conduct of the covered person's affairs. Id. § 5481(25).

7. 15 U.S.C. § 5565(a)(2).

8. 15 U.S.C. § 45(n); 12 U.S.C. § 5531(c)(1). The statutory language is modeled on the FTC's December 17, 1980, Policy Statement on Unfairness, appended to Int'l Harvester Co., 104 F.T.C. 949, 1070 (1984).

9. 15 U.S.C. § 45(n); 12 U.S.C. § 5531(c)(1).

10. FTC Policy Statement on Deception (Oct. 14, 1983), appended to Cliffdale Assocs., Inc., 103 F.T.C. 110, 174 (1984); CFPB, Examination Manual v.3, UDAAP-5 (March 2022) (citing FTC Policy Statement on Deception). The CFPB has indicated that it will look to authorities under the FTC Act for guidance in defining the scope of deception under Title X of the Dodd-Frank Act. See id. at 5 n.10.

11. 12 U.S.C. § 5531(d). The CFPB recently released a Policy Statement setting forth its approach to enforcing the abusiveness prohibition. CFPB, Policy Statement on Abusive Acts or Practices (Apr. 3, 2023).

12. Chamber of Commerce v. CFPB, No. 6:22-cv-00381, 2023 WL 5835951 (E.D. Tex. Sept. 8, 2023).

13. Also see our March 17, 2022 Legal Update.

14. CFPB, Policy Statement on Abusive Acts or Practices (Apr. 3, 2023).

15. CFPB, Consumer Financial Protection Circular 2023-02 (May 10, 2023).

16. OCC Bulletin 2023-12 (Apr. 26, 2023).

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