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Thursday, November 17, 2016

UDAAP Violations in Consumer Debt Collection

QUESTION
Our compliance group recently passed around the E-Book on Advertising Compliance, written by Jonathan Foxx. In Part II, there is a section on UDAAP. We are particularly interested in UDAPP because we are updating our policies to include new language for UDAAP conduct in debt collection. Mr. Foxx’s outline was terrific in showing the range of UDAAP issues involving Advertising Compliance, but we wonder if he would provide some examples of how debt collection is impacted by UDAAP guidelines. So, what examples of conduct related to the collection of consumer debt could constitute UDAAP violations?

ANSWER
Thank you for the kind words about the E-Book, entitled Advertising Compliance: Getting Ready for the Banking Examination, which compiled two of my published White Papers. I have written extensively on this subject, but the E-Book has been found useful for individuals seeking a path to understanding this very complicated area of regulatory compliance.

There are many examples of Unfair, Deceptive, or Abusive Acts or Practices (“UDAAP”) violations in the context of debt collection, but any list is not going to be comprehensive. Also, please note that the obligation to avoid UDAAPs is in addition to any obligations that may arise under the Fair Debt Collection Practices Act (“FDCPA”).

First, what is an unfair act or practice? There are generally three components: (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. [Dodd-Frank Act §§ 1031, 1036, 12 U.S.C. §§ 5531, 5536]

Second, what is a deceptive act or practice? This consists of three components: (1) it misleads or is likely to mislead the consumer; (2) the consumer’s interpretation is reasonable under the circumstances; and (3) the misleading act or practice is material. [Section 5 of the FTC Act. See CFPB Exam Manual at UDAAP 5]

Third, what is an abusive act or practice? This is more nuanced than the foregoing elements, but there are two primary factors: (1) the act or practice 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 consumer’s lack of understanding of the material risks, costs, or conditions of the product or service, (b) a consumer’s inability to protect his or her interests in selecting or using a consumer financial product or service, or (c) a consumer’s reasonable reliance on an institution to act in his or her interests. [Dodd-Frank Act § 1031(d), 12 U.S.C. § 5531(d). See also CFPB Exam Manual at UDAAP 9. See Stipulated Final Judgment and Order, Conclusions of Law ¶ 12, 9:13-cv-80548 and Compl. ¶¶ 55-63, CFPB v. Am. Debt Settlement Solutions, Inc., 9:13-cv-80548 (S.D. Fla. May 30, 2013)]

Given the above-outlined features of UDAAP, the following non-exhaustive list of examples of conduct related to the collection of consumer debt could constitute UDAAPs:
  • Collecting or assessing a debt and/or any additional amounts in connection with a debt (including interest, fees, and charges) not expressly authorized by the agreement creating the debt or permitted by law.
  • Failing to post payments timely or properly or to credit a consumer’s account with payments that the consumer submitted on time and then charging late fees to that consumer.
  • Taking possession of property without the legal right to do so.
  • Revealing the consumer’s debt, without the consumer’s consent, to the consumer’s employer and/or co-workers.
  • Falsely representing the character, amount, or legal status of the debt.
  • Misrepresenting that a debt collection communication is from an attorney.
  • Misrepresenting that a communication is from a government source or that the source of the communication is affiliated with the government.
  • Misrepresenting whether information about a payment or non-payment would be furnished to a credit reporting agency.
  • Misrepresenting to consumers that their debts would be waived or forgiven if they accepted a settlement offer, when the company does not, in fact, forgive or waive the debt.
  • Threatening any action that is not intended or the institution or service provider does not have the authorization to pursue, including false threats of lawsuits, arrest, prosecution, or imprisonment for non-payment of a debt. [CFPB Bulletin 2013-07] 

Facts and circumstances will dictate the presence of a UDAAP violation; however, these examples are but a few of the many potential UDAAP acts or practices involving consumer debt collection.

Jonathan Foxx
Managing Director
Lenders Compliance Group