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New Regulations Prohibiting Abusive Acts or Practices

The Dodd-Frank Act introduced a new concept to the regulatory scheme, hoping to prohibit abusive acts or practices by providers of consumer financial products or services. While DFI statutes uniformly prohibit unfair or deceptive acts or practices, known as UDAPs, the new Consumer Financial Protection Bureau (CFPB), which oversees non-depository financial institutions, may write rules prohibiting unfair, deceptive, or abusive acts or practices, known as UDAAPs.

So what is an abusive act or practice? Essentially, the issue is one of fairness: was the provider of the consumer financial product or service fair in its treatment of the consumer? Under the Dodd-Frank Act, an abusive act or practice is one which:

• Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or
• Takes unreasonable advantage of
  • A consumer’s lack of understanding of the material risks, costs, or conditions of the consumer financial product or service;
  • A consumer’s inability to protect its interests in selecting or using a consumer financial product or service; or
  • A consumer’s reasonable reliance on the licensee to act in the interests of the consumer.

Licensees should consider taking the following steps to ensure compliance:

• Review your business practices to ensure they are not abusive;
• Make any necessary changes to your policies, procedures, and supervisory manuals to prohibit abusive practices; and
• Make certain your employees and independent contractors are familiar with the concept of unfair, deceptive, or abusive acts or practices.

For more information, see the CFPB’s UDAAP Examination Procedures Manual at www.consumerfinance.gov/guidance/supervision/manual/udaap-narrative/