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Thursday, October 3, 2019

The Meaning of “Unfair” in UDAAP

QUESTION
I am General Counsel for our bank. In the last few years, I have attended several conferences and breakout sessions about UDAAP. It seems to me that Unfair, Deceptive, or Abusive Acts or Practices is so broad that it doesn’t take much to trigger a nasty allegation. 

The word “unfair” is particularly onerous. I’ve gone through a lot of material, such as case law and many regulations, and I still can’t offer a standard to give our employees in their training. 

I heard Jonathan Foxx speak a few years ago on UDAAP, and I’m writing to find out if he ever came up with a simple formula for understanding “unfair” in relation to UDAAP. So I ask, is there a simple way to define the word “unfair” in UDAAP?

ANSWER
Thank you for this question. Many people struggle with UDAAP readiness. Yes, I have spoken on UDAAP. Recently, I have been particularly interested in UDAAP in connection with Elder Financial Abuse. In any event, UDAAP is exceedingly broad.

Many professionals are caught up in the minutiae of UDAAP, which is one of the reasons why my firm offers a mini-audit for determining if a financial institution’s UDAAP compliance is weak or strong. 

It is called the UDAAP Tune-up!™ (See sidebar or contact me.)

Maybe you were in the audience when I spoke about UDAAP to a group of bankers, asking them to tell me what comes to their mind when they think of the word “unfair.” Here’s a list of their responses: biased, discriminatory, dishonest, illegal, false, misleading, prejudiced, immoral, partisan, shameful, unjust, unreasonable, bigoted, cheating, crooked, fraudulent, lying, sneaky, swindling, unscrupulous, disreputable, culpable, injurious, petty, vicious, cruel, vile, and wicked.

Quite a list! And we were just getting started that day!

But in banking we need a more dispassionate definition to use when the purpose is to train employees. A serviceable definition of what “unfair” means might be a good way to sensitize the affected personnel. They need to remember three criteria! You can get the “unfair” concept onto a one-page handout for training. Take my outline and format it for your use!

Briefly, 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 the competition.

If you want descriptions to go with these criteria, I am providing here a modestly reconfigured outline of useful descriptions provided by Dodd-Frank. [Dodd-Frank Act, Title X, Subtitle C, Sec. 1036; PL 111-203 (July 21, 2010)]

Substantial Injury
·       A substantial injury usually involves monetary harm.
o   Monetary harm includes, for example, costs or fees paid by consumers as a result of an unfair practice.
·       An act or practice that causes a small amount of harm to a large number of people may amount to substantial injury.
·       Actual injury is not required in every case. A significant risk of concrete harm is also sufficient.
o   An injury must involve a significant risk of concrete harm.
o   Trivial or speculative injuries usually are insufficient, and emotional damages ordinarily will not amount to an unfair practice.
·       In certain circumstances, such as unreasonable debt collection harassment, emotional impacts may amount to or contribute to substantial injury.

Reasonable Avoidance
·       Consumers must not be reasonably able to avoid the injury.
·       If the consumer’s ability to effectively make decisions is impaired, the consumer cannot reasonably avoid the injury.
o   For instance, withholding material price information about a product or service would prevent the consumer from making an informed decision.
o   Instances of undue influence or coercion in purchasing unwanted products or services would be further examples of unfair practices.
o   Consumers cannot avoid injury if they are coerced into purchasing unwanted products or services or if a transaction occurs without their knowledge or consent.
·       A key question is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer’s decision making.
o   For example, not having access to important information could prevent a consumer from comparing available alternatives, choosing those that are most desirable to them, and avoiding those that are inadequate or unsatisfactory.
o   Also, if almost all market participants engage in a practice, a consumer’s incentive to search elsewhere for better terms is reduced, and the practice may not be reasonably avoidable.

·       The actions that a consumer is expected to take to avoid injury must be reasonable.
o   While a consumer might avoid harm by hiring independent experts to test products in advance or by bringing legal claims for damages in every case of harm, these actions generally would be too expensive to be practical for individual consumers and, therefore, are not reasonable. 
Countervailing Benefits
·       The injury must not be outweighed by countervailing benefits to consumers or to competition.
o   The act or practice must be injurious in its net affects.
o   Offsetting consumer or competitive benefits of an act or practice may include lower prices to consumers or a wider availability of products and services resulting from competition.
·       Costs that would be incurred for measures to prevent the injury also are taken into account in determining whether an act or practice is unfair.
o  These costs may include the costs to the institution in taking preventive measures and the costs to society as a whole of any increased burden and similar matters.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group