Worried about UDAAP? Recent Enforcement Actions Suggest Ways to Ease Missteps

[ILLUSTRATION OMITTED] Unffair, deceptive, and are probably three of the scariest words compliance these days. They are scary because of the subjective nature of the UDAAP standard and the significant amount of enforcement authority handed to the regulatory agencies for those institutions unfortunate enough to run afoul of UDAAP's requirements. Under the Consumer Financial Protection Bureau's Supervision and Examination Manual, UDAAP analysis consists of three elements: Unfair Acts or Practices, Deceptive Acts or Practices, and Abusive Acts or Practices. The manual defines these detail. The challenge for compliance professionals is applying these definitions to real facts and Reviewing recent enforcement actions gives some interesting insight into how regulators are applying the UDAAP elements particular industries and how to potentially avoid civil money penalties. Lesson #1: targeted industries Regulatory enforcement actions over the past couple of years have targeted certain industries within the financial services marketplace. While CFPB and other regulators have been very active a number of enforcement areas, it appears that the debt settlement services industry as well as the credit card industry have received particular attention and could prove instructive the quest to avoid UDAAP violations. Debt settlement industry There are several debt settlement enforcement actions that are worthy of review and analysis. Consumer Financial Protection v. American Debt Settlement Solutions, et al (May 30, 2013) is notable because it is the only enforcement action that has applied the abusive standard to date. In this case, a debt servicer was making promises and charging fees to people who were deeply debt and, as a result, were in dire circumstances. All the while, the servicer allegedly knew that these consumers would not be able to complete the debt relief program because of their financial situation. In reading this case, it would probably not surprise anyone that the bureau used it to illustrate the abusive standard. In an Oct. 3, 2013, press release, the bureau cited several other cases that were part of its comprehensive effort to prevent consumer harm the debt settlement industry. Actions the debt settlement services industry that were found to be a violation included: collecting illegal up-front fees from consumers; making false or misleading promises; and not providing promised services. The clear message from these enforcement actions is to be cautious when doing business the debt settlement industry, whether as a direct provider of debt relief services (CFPB v. American Debt Settlement Solutions, et al, May 30, 2013); a vendor providing services to the debt settlement services industry (CFPB v. Meracord, LLC, et al, Oct. 3, 2013); or a financial institution hiring a vendor to provide these debt settlement services (subject of an Oct. 2, 2012, consent order between American Express and CFPB and FDIC). [ILLUSTRATION OMITTED] Credit card industry The Discover Bank, Greenwood, Del., case was a Sept. 24, 2012, joint action between FDIC and CFPB against Discover Bank for deceptive acts and practices violation of Section 5 of the Federal Trade Commission Act and Sections 1031 and 1036 of the Consumer Financial Protection Act. The regulators determined that Discover Bank had engaged deceptive telemarketing practices to sell its credit card add-on products. The regulators found that Discover's third-party telemarketing company--through the use of scripts--had deceived consumers by: 1. Misleading consumers about the fact that there was a charge for the add-on products. 2. Misleading consumers about whether they had purchased the add-on products. 3. …