A SURVEY OF UNFAIR, DECEPTIVE, AND ABUSIVE PRACTICES

ADAM D. MAAREC SEPTEMBER 10, 2014

OVERVIEW

COMPLIANCE &

UDAAP ENFORCEMENT

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OVERVIEW

1. BACKGROUND

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OVERVIEW

2. IDENTIFYING UDAAP:

ENFORCEMENT

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OVERVIEW

3. IDENTIFYING UDAAP:

BULLETINS

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OVERVIEW

4. WHAT’S NEXT?

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BACKGROUND

Section 5 of the FTC prohibits UDAP – Wheeler-Lea Act of 1938 expanded FTC powers from

preventing unfair competition to UDAP • FTC enforces against many non-banks • Banking regulators enforce against banks

State authorities enforce state UDAP statutes

Dodd-Frank changes regulatory focus

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THE CATALYST

Democracy Journal, Summer 2007

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CFPB’S MISSION: PROTECT AMERICANS

EDUCATE ENFORCE STUDY

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CFPB’S ENFORCEMENT POWERS

Transferred laws: - TILA, ECOA, FDCPA, Privacy in GLBA, RESPA,

and others 12 U.S.C. 5481(12) “enumerated consumer laws”

New authority: - Power to prohibit unfair, deceptive, and

abusive acts and practices Dodd-Frank Act § 1031 (codified at 12 U.S.C. §§ 5531(a); 5536(a)(1))

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WHO IS SETTING UDAAP PRECEDENT?

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COP ON THE BEAT

Warren’s charge to stop “tricks and traps” CFPB’s enforcement action count (complaints

and settlements): – 2012 – 6 – 2013 – 20 – 2014 (first 6 months) - 7

UDAAP-based actions – 16 in 2012 & 2013

• 9 were settlements – 3 in first half of 2014

• 2 were settlements

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WHAT’S THE BIG DEAL?

Malleable concepts that depend on facts and circumstances – UDAAP-based rulemakings

have been limited • Remedies to enforce credit

obligations • Telemarketing

– Know it when you see it

UDAAP = Enforcement – Cases set precedent

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WHAT’S THE BIG DEAL?

Body of CFPB settlements –

looks and feels like common law BUT: – Lacks checks and balances – No judge – Subjective interpretations with

little rationale – No admissions by parties – New policy but no notice &

comment

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States are using federal UDAAP powers

STATES STEP IN

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IDENTIFYING UDAAP

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“UNFAIR” PRACTICES

- Defined by Dodd-Frank Act - An act or practice that: “[1]causes or is likely to cause substantial injury to consumers [2] which is not reasonably avoidable

by consumers [and [3] the] injury is not outweighed by countervailing benefits to

consumers or to competition.” 12 USC § 5531(c)(1)

See also FTC Policy Statement on Unfairness (December 17, 1980)

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EXAMPLE: UNFAIRNESS IN PRODUCT EXECUTION

CREDIT MONITORING PRODUCT Consumer purchases monitoring of credit report

information at three credit bureaus from card issuer

Card issuer does not track activity at one or more credit bureaus – Customers never notified – Customers pay full price for the product without

receiving full benefits

Injury, unavoidable, no countervailing benefits

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“DECEPTIVE” PRACTICES

- Defined in the CFPB’s Exam Manual

a material representation, omission, act or practice that misleads or is likely to mislead a

consumer, provided the consumer’s interpretation is reasonable under the

circumstances CFPB Examination Manual V.2, UDAAP 5 (October 2012)

See also FTC Policy Statement on Deception (October 14, 1983)

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EXAMPLE: DECEPTIVE TELEMARKETING SALES

INSERT VIDEO CLIP

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EXAMPLE: DECEPTIVE TELEMARKETING SALES

DEBT PROTECTION PRODUCTS

Misrepresentations of materials terms that influence purchase decision – Mischaracterization of benefits

• Death benefit – $25,000 vs. amounts outstanding up to $25,000

• Duration – 12 or 24 months of benefits vs. three

– Inadequate consent: enrollment before key terms disclosed; mischaracterized free look periods

– Claims process mischaracterized

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OTHER EXAMPLES OF UNFAIR OR DECEPTIVE PRACTICES

Misleading cost or price claims Omitting material limitations Failing to provide promised services Bait and switch ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Offering a service that is not actually available Selling a product unfit for its purpose

Unfair or Deceptive Acts or Practices by State-Chartered Banks, FDIC FIL 2004

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“ABUSIVE” PRACTICES

Defined by Dodd-Frank Act An act or practice that:

“[1] materially interferes with the ability of a consumer to understand a term or condition of a

consumer financial product or service;”

OR

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“ABUSIVE” PRACTICES

An act or practice that: “[2] takes unreasonable advantage of [either]:

– “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 the interests of the

consumer in selecting or using a consumer financial product or service; or

– “the reasonable reliance by the consumer on a covered

person [such as a bank or other financial institution] to act in the interests of the consumer.”

12 USC § 5531(d)

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EXAMPLE: ABUSIVE ACTS IN DEBT-RELIEF

DEBT-RELIEF SERVICES Consumer pays fee for debt-relief services after

being told debt could be settled in 3-6 months

Abusive practice: to knowingly enroll consumers whose financial conditions made it highly unlikely that they could complete the program – Inadequate income to support repayment

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EXAMPLE: ABUSIVE ACTS IN DEBT COLLECTION

DEBT-COLLECTION On-line payday loan agreements that were:

– “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation…”

CFPB said loans were void in some states due to licensing or usury violations

Abusive practice: collecting on loans when taking “unreasonable advantage of consumers’ lack of understanding about the impact of applicable state laws on the parties’ rights and obligations”

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UNIVERSAL PROBLEMS

INADEQUATE COMPLIANCE MANAGEMENT SYSTEMS

Failure to prevent, identify,

and correct problems

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CFPB BULLETINS ADDRESSING UDAAP

Prohibition of UDAAP in the Collection of Consumer Debts – Collecting unauthorized debts, i.e. late fees – Untimely posting payments and charging late fees – Illegally taking possession of property – Revealing consumer debt to employers or co-workers – Falsely representing debt amount or status – Misrepresentations regarding:

• Source of communications – attorney or a government agency

• Reporting to credit agencies • Waiver or forgiveness offers

CFPB Bulletin 2013-07

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ADDITIONAL UDAAP GUIDANCE

Marketing of Credit Card Promotional APR Offers – 0% balance transfer offers

• If a promotional balance transfer is not paid in full, consumer will lose grace period on future purchases and pay interest even if new purchase balance is paid in full

– Deception: Misrepresenting the true cost of promotional interest rate offers

• Transaction fee in Reg Z disclosure is the only fee • Promotional rate is the only rate charged

– Failure to disclose contingent costs – Abusive: Taking unreasonable advantage of consumers by

failing to adequate disclose conditions & exploiting this lack of understanding

– Above & Beyond Reg Z – Requires additional discloses re: effect of promotional APR offers on grace period for new purchases

CFPB Bulletin 2014-02

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NO SAFE HARBORS

No clear rules of the road Banks pull back, exit amid uncertainty Safety needed to return

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PREVENTING UDAAP VIOLATIONS

TO ENSURE COMPLIANCE:

1) TRACK UDAAP 2) ROBUST CMS

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SURVEY OF UDAAP ACTIONS

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Disclaimer

This presentation is a publication of Davis Wright Tremaine LLP. Our purpose in making this presentation is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations. Attorney advertising. Davis Wright Tremaine and the D logo are registered trademarks of Davis Wright Tremaine LLP. © 2014 Davis Wright Tremaine LLP.

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