Since the financial meltdown of 2008, consumer protection has been a major topic in the financial regulatory landscape. In response to these concerns, the Consumer Financial Protection Bureau (CFPB) was formed in order to better protect consumers by enforcing regulations and penalizing firms that are non-compliant. Consequently, the CFPB was endowed with: 1) rule making authority and implementation powers; 2) supervisory responsibility; and 3) enforcement powers to ensure its ability to fulfill its mission.
A key area of focus for the CFPB is the Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) section of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). First written as Section 5 of the Federal Trade Commission Act as UDAP (Unfair or Deceptive Acts and Practice), the "Abusive" element (from UDAP to UDAAP) was added by the CFPB to further enhance consumer protection. The CFPB has established guidelines for what constitutes Unfair, Deceptive, or Abusive Acts and Practices. Below is a quick recap of UDAAP from the CFPB Supervisory and Examination Manual (version 2) published in October 2012:
- Unfair- An act or practice is deemed unfair if: 1) it causes or is likely to cause injury to consumers; 2) the injury is not avoidable by consumers; AND 3) the benefits do not outweigh the injury caused.
- Deceptive- An act or practice is deemed deceptive if: 1) a representation or omission misleads or is likely to mislead consumers; 2) consumer interpretation or representation of omission is reasonable; AND 3) the representation or omission is material in nature.
- Abusive- An act or practice is abusive if: 1) a term or condition materially interferes with the consumer's ability to understand the terms and conditions of the financial product or service; OR 2) it takes unreasonable advantage of the consumer in the following ways: I) The consumer does not understand the material risks, costs, or conditions; II) The consumer is unable to protect their interest in selecting or using a product or service; OR III) The consumer makes reasonable reliance on a covered person to act in the consumer's interest.
While the "Unfair" and "Deceptive" sections are relatively straight forward, and directly in the control of providers, the "Abusive" portion of UDAAP takes a different view by adopting the perspective of the consumer, not that of the firm. The "Abusive" section focuses on the consumer's ability to understand terms and conditions, the consumer's interests, and the consumer's ability to protect those interests. As a result, product and service providers must now apply another lens to their products. This new change demands that firms consider several questions. Will the consumer fully understand what they are purchasing, and its risks? Are we explicitly telling consumers the risks, even if they should be inherently understood? How can the consumer protect themselves? These are all questions that providers must answer prior to taking a product to market if they wish to stay in the good graces of the CFPB. Additionally, providers must apply this lens to products and services already available to consumers.
A direct example of how UDAAP has been instrumental in protecting consumes involves the simplification of the language in product and service disclosures to reduce "legalese" so that consumers are better able to understand the terms and conditions. The language changes are a direct outcome of the CFPB and UDAAP enforcement, many of them stemming from consumer complaints.
The mission of the CFPB is to create a more level playing field by enforcing the laws designed to protect consumers in the marketing and sales of financial products and services. If consumers better understand the products/services options, costs, and risks, the consumer is better equipped to purchase products that most suit his/her needs. Firms will facilitate this transparency by adapting their product and service offerings to entice a larger audience, including the way terms and conditions are written. Consumers receive products at more competitive rates with a better level of service and decreased level of risk. Thus, UDAAP provides greater consumer protection through increased transparency, and the increased transparency results from better laws and tighter enforcement.
Under its established guidelines for determining UDAAPs, the CFPB has already taken significant actions to enforce the law. In 2012 alone, the CFPB fined or required repayment of more than $450M from financial services providers. The CPFB is protecting consumers by directly impacting the bottom line of firms with UDAAP violations. As is the case with many regulatory violations and fines, firms typically do not admit guilt, but agree to a fine and determine steps to "strengthen" their operational, marketing, compliance, and audit programs. However, the end result remains the same. By preventing UDAAPs, the CFPB is protecting consumers and creating a better experience for consumers of financial products and services.