QUESTION
Recently, you provided some helpful tips about how to do a document review in preparing for a UDAAP examination.
We are a small mortgage lender in the southwest. There is only one person who handles compliance: me!
In my area, a lender about our size just went through a state banking exam, and UDAAP was very much a part of the audit.
My question is more rudimentary than how to get our documents ready for a UDAAP audit. In studying UDAAP, I am more confused than ever about how to avoid UDAAP violations. I need a kind of handy rule of thumb to guide me.
Can UDAAP be boiled down to just a few basic rules?
ANSWER
UDAAP is complicated, without a doubt! It is easy to be lost in regulations, rules, laws,
and Best Practices because UDAAP is a sort of generic rubric for many, many regulatory
requirements. Several federal and state regulatory agencies are involved in
monitoring UDAAP implementation.
You refer to our recent article, entitled UDAAP Exam: Document Review. Preparation of documents is just one of many actions you must take to be ready for a UDAAP examination.
That is why we developed the UDAAP Tune-up®, which specifically reviews for UDAAP compliance. It is not expensive and provides a report and risk rating in sixty days. You then take the report’s suggestions and implement them.
You should always be ready for a UDAAP examination, especially now that the CFPB monitors it in its examination and enforcement protocols. Contact us for information about the UDAAP Tune-up®. We’ll help you.
If I had to whittle UDAAP down to some basic rules, I would recommend a three-part test based on a representation you make to a consumer:
1. The representation, omission, or practice must mislead or be likely to mislead the consumer.
2. The consumer’s interpretation of the representation, omission, or practice must be reasonable.
3. The misleading representation,
omission, or practice must be material.
So what does it mean to mislead the consumer?
Essentially, an act or practice is deceptive if it is likely to mislead consumers. I know that seems like circular reasoning, so let me be more specific. Such a representation might take the form of an express or implied claim or promise and could be either written or oral. Omission of information could also be deceptive if the omitted information is necessary to prevent consumers from being misled.
Misleading cost or price claims, bait-and-switch sales techniques, offering services that are not available, omitting material limitations or conditions from an offer, selling products unfit for a particular purpose, and failing to provide promised services are all examples of deceptive practices.
The FTC uses a “Four Ps” test in the evaluation of whether a representation, omission, act, or practice is likely to mislead:
· Is the statement prominent enough for the consumer to notice?
· Is the information presented in an easy-to-understand format that does not contradict other information in the package and at a time when the consumer’s attention is not distracted elsewhere?
· Is the placement of the information in a location where consumers can be expected to look or hear?
· Is the information in close proximity to the claim it qualifies?
The consumer’s interpretation of or reaction to the representation, omission, or practice must be reasonable!
For instance, if a representation conveys two or more meanings to reasonable consumers and one meaning is misleading, the representation may be deceptive. In determining whether a representation, omission, or practice is deceptive, regulatory agencies look at an entire advertisement, transaction, or course of dealing to determine its impact on a reasonable consumer. Written disclosures alone may be insufficient to correct a misleading statement or representation.
A representation may be deceptive if the majority of consumers in the target class do not share the consumer’s interpretation, so long as a significant minority of such consumers is misled. So, you can see it is relatively easy to trigger a UDAAP violation.
When a seller’s representation conveys more than one meaning to reasonable consumers, one of which is false, the seller is liable for the misleading interpretation. Exaggerated claims – what lawyers like to call “puffery” – are not deceptive if a reasonable consumer would not take the claims seriously.
But, Dodd-Frank itself set forth a standard for UDAAP that assists regulators (and lawyers!) in determining when an act or practice is unfair, to wit, it causes or is likely to cause substantial injury to consumers, the injury is not reasonably avoidable by consumers, and countervailing benefits to consumers or competition do not outweigh the injury.
A final word about the representation, omission, or practice being material: a representation, omission, or practice is material if it is likely to affect a consumer’s decision regarding a product or service. In general, information about costs, benefits, or restrictions on the use or availability of a product or service is material.
We can break this down into express and implied claims, as follows:
· Express claims made with respect to a financial product or service are presumed material.
· Implied claims are presumed to be material when evidence shows that the institution intended to make the claim (even though intent to deceive is not necessary for deception to exist).
Claims made with the knowledge that they are false are presumed to be material. Omissions are presumed to be material when the financial institution knew or should have known that the consumer needed the omitted information to evaluate the product or service.