UDAP

Question 1

What risks are associated with UDAPs?

Answer 1

UDAPs are illegal; can cause significant financial injury to consumers; erode consumer confidence; and present significant credit and asset quality risks, undermining the financial soundness of banking organizations.

Question 2

What act declares that UDAPs are illegal?

Answer 2

Section 5 of the Federal trade commission act (FTC act)

Question 3

What types of transactions does UDAP apply to?

Answer 3

Transactions with consumers, non consumers, and businesses.

The FTC has construed the term ‘consumer’ to include businesses as well as individuals.

Question 4

What three prohibited credit practices are still enforced under UDAP despite the repeal of the guidance on consumer credit practices?

Answer 4

• Use of certain provisions in consumer credit contracts
• misrepresentation of the nature or extent of cosigner liability
• Pyramiding of late fees

Question 5

True or false:

The legal standard for unfairness is independent of the legal
standard for deception. Depending on the facts, an act or
practice may be unfair, deceptive, both, or neither.

Answer 5

True

Question 6

What types of deceptive trade practices does the FDICC focus on?

Answer 6

The FDIC will focus on material misrepresentations or
omissions, that is, those that affect choices made by consumers because such misrepresentations are most likely to cause consumers financial harm.

Question 7

What three elements are required to establish a practice as unfair?

Answer 7

Under the FTC Policy Statement on Unfairness, an
act or practice is unfair when it
(1) causes or is likely to cause substantial injury (usually monetary) to consumers,

(2) cannot be reasonably avoided by consumers, and
(3) is not outweighed by countervailing benefits to consumers or to competition.

Question 8

Under the FTC Policy Statement on Unfairness, an act or practice is unfair when it (1) causes or is likely to cause substantial injury (usually monetary) to consumers, (2) cannot be reasonably avoided by consumers, and (3) is not outweighed by countervailing benefits to consumers or to competition.

What does the first element mean?

Answer 8

Substantial injury usually involves monetary harm, but can also include reputational harm. An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury. An injury may be substantial if it raises significant risk of
concrete harm. Trivial or merely speculative harms are typically insufficient for a finding of substantial injury. Emotional impact and other more subjective types of harm will not ordinarily make a practice unfair.

Question 9

Under the FTC Policy Statement on Unfairness, an
act or practice is unfair when it (1) causes or is likely to cause
substantial injury (usually monetary) to consumers, (2) cannot
be reasonably avoided by consumers, and (3) is not
outweighed by countervailing benefits to consumers or to
competition.

What does the second element mean?

Answer 9

An act or practice is not considered unfair if consumers may reasonably avoid injury. Consumers cannot reasonably avoid injury from an act or practice if it interferes with their ability to effectively make decisions or to take action to avoid injury. This may occur if material information about a product, such as pricing, is modified or withheld until after the consumer has committed to purchasing the product, so that the consumer cannot reasonably avoid the injury. It also may occur
where testing reveals that disclosures do not effectively explain an act or practice to consumers. A practice may also be unfair where consumers are subject to undue
influence or are coerced into purchasing unwanted products or services.

Because consumers should be able to survey the available alternatives, choose those that are most desirable, and avoid those that are inadequate or unsatisfactory, the question is whether an act or practice unreasonably impairs the consumer’s ability to make an informed decision, not whether the consumer could have made a wiser decision. The FDIC will not second-guess the wisdom of particular consumer decisions. Instead, the FDIC will consider whether an institution’s behavior
unreasonably creates an obstacle that impairs the free exercise of consumer decision-making.

The actions that a consumer is expected to take to avoid injury must be reasonable. While a consumer may avoid harm by hiring independent experts to test products in
advance or bring legal claims for damages, these actions generally would be too expensive to be practical for individual consumers and, therefore, are not reasonable.

Question 10

Under the FTC Policy Statement on Unfairness, an
act or practice is unfair when it (1) causes or is likely to cause
substantial injury (usually monetary) to consumers, (2) cannot
be reasonably avoided by consumers, and (3) is not
outweighed by countervailing benefits to consumers or to
competition.

What does the third element mean?

Answer 10

To be unfair, the act or practice must be injurious in its net effects — that is, the injury must not be outweighed by any offsetting consumer or competitive benefits that are
also produced by the act or practice. Offsetting consumer or competitive benefits may include lower prices or a wider availability of products and services. Nonetheless,
both consumers and competition benefit from preventing
unfair acts or practices because prices are likely to better
reflect actual transaction costs, and merchants who do not
rely on unfair acts or practices are no longer required to
compete with those who do. Unfair acts or practices injure
both consumers and competitors because consumers who
would otherwise have selected a competitor’s product are
wrongly diverted by the unfair act or practice.

Costs that would be incurred for remedies or measures to
prevent the injury are also taken into account in determining whether an act or practice is unfair. 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.

Question 11

In addition to the three prongs that must be met for a practice to be Unfair, public policy may also be taken into consideration, what is meant by that?

Answer 11

Public policy, as established by statute, regulation, judicial
decision, or agency determination may be considered with all other evidence in determining whether an act or practice is unfair. Public policy considerations by themselves, however, will not serve as the primary basis for determining that an act or practice is unfair. For example, the fact that a particular lending practice violates a state law or a banking regulation may be considered as evidence in determining whether the act or practice is unfair. Conversely, the fact that a particular practice is permitted by statute or regulation may be considered as evidence that the practice is not unfair.

However, the fact that a statute or regulation recognizes the existence of a practice does not establish its fairness. The requirements of the Truth in Lending Act (TILA), the Truth in Savings Act (TISA), the Fair Credit Reporting Act (FCRA), or the Fair Debt Collection Practices Act (FDCPA) are examples of public policy considerations. Fiduciary responsibilities under state law may clarify public policy for actions, especially those involving trusts, guardianships,
unsophisticated consumers, the elderly, or minors. State
statutes and regulations that prohibit UDAPs are often aimed at making sure that lenders do not exploit the lack of access to mainstream banking institutions by low-income individuals, the elderly, and minorities.

Question 12

What three elements must be met to determine if a representation, omission or practice is deceptive?

Answer 12

First, the representation, omission, or practice must mislead or be likely to mislead the consumer.

Second, the consumer’s interpretation of the representation, omission, or practice must be reasonable under the circumstances.

Third, the misleading representation, omission, or practice must be material.

Question 13

Why are the standards for establishing deception less burdensome than the standards for establishing unfairness?

Answer 13

As a general matter, the standards for establishing deception are less burdensome than the standards for establishing unfairness because, under deception, there is no requirement that the injury could not be reasonably avoidable or that the injury be weighed against benefits to consumers or to competition.

Question 14

When evaluating the three part test for deception, the four Ps should be considered, what are they?

Answer 14

When evaluating the three-part test for deception, the four “Ps” should be considered: prominence, presentation, placement, and proximity.

First, is the statement prominent enough for the consumer to notice?

Second, 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?

Third, is the placement of the information in a location where consumers can be expected to look or hear?

Finally, is the information in close proximity to the claim it qualifies?

Question 15

Under the three part deception test, what is meant by the representation, omission or practice must mislead or be likely to mislead the consumer?

Answer 15

An act or practice may be found to be deceptive if there is
a representation, omission, or practice that misleads or is
likely to mislead a consumer. Deception is not limited to
situations in which a consumer has already been misled.
Instead, an act or practice may be found to be deceptive if
it is likely to mislead consumers. A representation may be
in the form of express or implied claims or promises and
may be written or oral. Omission of information may be
deceptive if disclosure of the omitted information is
necessary to prevent a consumer from being misled. An
individual statement, representation, or omission is not
evaluated in isolation to determine if it is misleading, but
rather in the context of the entire advertisement,
transaction, or course of dealing. Acts or practices that
have the potential to be deceptive include: making
misleading cost or price claims; using bait-and-switch
techniques; offering to provide a product or service that
is not in fact available; omitting material limitations or
conditions from an offer; selling a product unfit for the
purposes for which it is sold; and failing to provide
promised services.

Question 16

Under the three part deception test, what is meant by the representation, omission or practice must be considered from the perspective of the reasonable consumer?

Answer 16

In determining whether an act or practice is misleading,
the consumer’s interpretation of or reaction to the
representation, omission, or practice must be reasonable
under the circumstances. In other words, whether an act or
practice is deceptive depends on how a reasonable
member of the target audience would interpret the
marketing material. When representations or marketing
practices are targeted to a specific audience, such as the
elderly or the financially unsophisticated, the
communication is reviewed from the point of view of a
reasonable member of that group.

If a representation conveys two or more meanings to
reasonable consumers and one meaning is misleading, the
representation may be deceptive. Moreover, a consumer’s
interpretation or reaction may indicate that an act or
practice is deceptive under the circumstances, even if the
consumer’s interpretation is not shared by a majority of
the consumers in the relevant class, so long as a significant
minority of such consumers is misled.

Written disclosures may be insufficient to correct a
misleading statement or representation, particularly where
the consumer is directed away from qualifying limitations
in the text or is counseled that reading the disclosures is
unnecessary. Likewise, oral disclosures or fine print are
generally insufficient to cure a misleading headline or
prominent written representation. Finally, a deceptive act
or practice cannot be cured by subsequent truthful
disclosures.

Question 17

Under the three part deception test, what is meant by the representation, omission or practice must be material?

Answer 17

A representation, omission, or practice is material if it is
likely to affect a consumer’s decision to purchase or use a
product or service. In general, information about costs,
benefits, or restrictions on the use or availability of a
product or service is material. When express claims are
made with respect to a financial product or service, the
claims will be presumed to be material. While intent to
deceive is not a required element of proving that an act or
practice is deceptive, the materiality of an implied claim
will be presumed if it can be shown that the institution
intended that the consumer draw certain conclusions based
upon the claim.

Claims made with knowledge that they are false will also
be presumed to be material. Omissions will be presumed
to be material when the financial institution knew or
should have known that the consumer needed the omitted
information to make an informed choice about the product
or service.

Question 18

Why are complaints important to UDAP?

Answer 18

Consumer complaints play a key role in the detection of a
UDAP. Consumer complaints have often been an essential
source of information for possible UDAPs and can also be an indicator of weaknesses in elements of the institution’s
compliance management system, such as training, internal
controls, or monitoring.

While the absence of complaints does not ensure that UDAPs are not occurring, the presence of complaints may be a red flag indicating that a more detailed review is warranted. This is especially the case when similar complaints are received from several consumers regarding the same product or service. One of the three tests in evaluating an apparent deceptive practice is: “The act or practice must be considered from the perspective of the reasonable consumer.” Consumer complaints provide a window into the perspective of the reasonable consumer.

Question 19

What should examiners do when reviewing a bank’s Complaint resolution Procedures for UDAP risk?

Answer 19

Examiners should interview institution staff about consumer
complaints and the institution’s procedures for resolving and
monitoring consumer complaints.

Examiners should determine whether management has responded promptly and
appropriately to consumer complaints.

Question 20

What are the FDIC’s expectations regarding consumer complaint response? (4)

Answer 20

The FDIC expects
institutions to be proactive in resolving consumer complaints,
as well as monitoring complaints for trends that indicate potential UDAP concerns.

Institutions should centralize consumer complaint handling and ensure that all complaints are captured, whether they are made via telephone, mail, email, the institution’s regulator, or other methods.

In addition to resolving individual complaints, an institution should take action to improve its business practices and compliance
management system, when appropriate.

The institution’s audit
function should also include a review of consumer complaints.

Question 21

What are some sources for identifying complaints?

Answer 21

Consumer complaints can originate from many different sources. The primary sources for complaints are those received directly by the institution and those received by the FDIC Consumer Response Center.

Secondary sources for complaints
would include State Attorneys General, the Better Business
Bureau, the FTC’s Consumer Sentinel database, consumer
complaint boards, and web blogs. In many cases, complaints have been identified through simple Internet searches with the institution’s name or particular product or service that it offers. At times, former employees may post complaints. These can
be an important information source.

For institutions that have
significant third-party relationships, complaints may have been
directed to the third-party, rather than to the institution.
Examiners should determine if the institution is provided with
copies of complaints received by third-parties. If they are not,
this would be a red flag and should be examined further.

Question 22

How should examiners analyze complaints for UDAP?

Answer 22

Complaints that allege misleading or false statements, missing disclosure information, excessive fees, inability to reach customer service, or previously undisclosed charges may indicate a possible UDAP.

When reviewing complaints, examiners should look for trends.
While a large volume of complaints may indicate an area of concern, the number of complaints alone is not dispositive of whether a potential UDAP exists. Conversely, a small number of complaints does not undermine the seriousness of the
allegations that are raised. If even a single complaint raises valid concerns relative to a UDAP, a more thorough review may be warranted. It is important to focus on the issues raised in the complaints and the institution’s responses, and not just
on the number of complaints.

Note also that high rates of chargebacks or refunds regarding a
product or service can be indicative of potential UDAP violations. This information may not appear in the consumer complaint process.

When reviewing complaints, also look for any complaints lodged against subsidiaries, affiliates, third-parties, and affinity groups regarding activities that involve the institution,
a product offered through the institution, or a product offered
using the institution’s name. While the institution may not be actively involved in the activity, if it is a branded product or third-party relationship product, the institution can be held responsible and face the same risks as if the activity was
housed within the institution.

Question 23

A UDAP that violates FTC Act may violate what other laws? (6)

Answer 23

• TILA
• TISA
• ECOA
• FHA
• FDCPA
• FCRA

Question 24

True or false:

If a practice violates UDAP, it also violates any related laws.

Answer 24

False:
I may violate UDAP and any associated law, but it also may not.

Certain practices may violate the FTC Act while complying with the
technical requirements of other consumer protection laws

Question 25

How does UDAP relate to TILA?

Answer 25

Pursuant to TILA, creditors must “clearly and conspicuously” disclose the costs and terms of credit. An act or practice that does not comply with these provisions of TILA may also
violate the FTC Act. Conversely, a transaction that is in technical compliance with TILA may nevertheless violate the FTC Act. For example, an institution’s credit card
advertisement may contain all the required TILA disclosures, but limitations or restrictions that are obscured or inadequately disclosed may be considered a UDAP.

Question 26

How does UDAP relate to TISA?

Answer 26

TISA requires depository institutions to provide interest and fee disclosures for deposit accounts so that consumers may compare deposit products. TISA also provides that advertisements cannot be misleading or inaccurate or
misrepresent an institution’s deposit contract. As with TILA, an act or practice that does not comply with these provisions may also violate the FTC Act, but transactions that are in technical compliance with TISA may still be considered as
unfair or deceptive. For example, consumers could be misled by advertisements of “guaranteed” or “lifetime” interest rates when the creditor or depository institution intends to change the rates, even if the disclosures satisfy the technical
requirements of TISA.

Question 27

How does UDAP relate to ECOA and FHA?

Answer 27

ECOA prohibits discrimination in any aspect of a credit transaction against persons on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant
has the capacity to contract), the fact that an applicant’s income derives from any public assistance program, and the fact that the applicant has in good faith exercised any right
under the Consumer Credit Protection Act. The FHA prohibits
creditors involved in residential real estate transactions from discriminating against any person on the basis of race, color, religion, sex, handicap, familial status, or national origin. UDAPs that target or have a disparate impact on consumers in
one of these prohibited basis groups may violate the ECOA or the FHA, as well as the FTC Act. Moreover, some state and local laws address discrimination against additional protected classes, e.g., handicap in non-housing transactions, or sexual
orientation. Such conduct may also violate the FTC Act.

Question 28

How does UDAP relate to the FDCPA?

Answer 28

The FDCPA prohibits unfair, deceptive, and abusive practices
related to the collection of consumer debts. Although this statute does not apply to institutions that collect their own debts in their own name, failure to adhere to the standards set
by this Act may support a claim of a UDAP in violation of the FTC Act. Moreover, institutions that either affirmatively or through lack of oversight permit a third-party debt collector acting on their behalf to engage in deception, harassment, or
threats in the collection of monies due may be exposed to liability for participating in or permitting a UDAP.

Question 29

How does UDAP relate to the FCRA?

Answer 29

The FCRA contains significant responsibilities for institutions
that obtain and use information about consumers to determine
the consumer’s eligibility for products, services, or employment; share such information among affiliates; and furnish information to consumer reporting agencies. The
FCRA was substantially amended with the passage of the Fair and Accurate Credit Transactions Act (FACT Act) in 2003, which contained many new consumer disclosure requirements as well as provisions to address identity theft. Violations of the FCRA may also be considered as a UDAP. For example, obtaining and using unsolicited medical information (outside of the exceptions provided by the rule) to make credit decisions may also be considered as unfair.

Question 30

How does UDAP relate to Privacy?

Exceptions (3)

Answer 30

Regulation P (12 CFR Part 1016.12) prohibits an institution or its affiliates from disclosing a customer’s account number or similar access code for a credit card, deposit, or transaction account to a nonaffiliated third party for use in telemarketing, direct mail marketing, or other marketing through electronic mail. There are only three exceptions to this prohibition.

A financial institution may disclose its customers’ account numbers to:

(1) a consumer reporting agency;
(2) its agent to market the institution’s own products or services, provided that the agent is not authorized to directly initiate charges to the account; or
(3) another participant in a private label credit card or an affinity or similar program involving the institution.

Depending upon the totality of the circumstances, an institution that does not comply with these requirements may be also engaging in UDAPs.

Question 31

What categories can be transaction tested for UDAP? (5)

Answer 31

• marketing and disclosures,
• availability of credit,
• availability of advertised terms,
• repricing and other changes,
• servicing, and collections.

Question 32

Who should examiners collaborate with when potential UDAP risk arises? (4)

Answer 32

Examiners should consult:

• Regional exam specialists (FLEX, SME, etc)
• Legal
• Risk management (if there are S&S risks)
• Policy and research (when large amounts of consumer data)

Question 33

What procedures should examiners follow for documenting UDAP concerns? (10)

Answer 33

1. Create an inventory of documentary evidence gathered
   and interviews conducted.
2. Create chronologies or charts to explain complex fact patterns.
3. For printed materials (marketing, solicitations, disclosures), an original, unmarked copy should be
   maintained.
4. For websites, print copies or save the webpages electronically as soon as possible.
5. If consumer complaints are voluminous, create spreadsheets or summaries.
6. Indicate the type of institution reports that are available. For those documents received, notate why it was obtained, how it was received, when, and from whom.
7. Maintain a final, typed version of the interview notes. All examiners that participated in the interview should review the notes and attest to their accuracy.
8. During the onsite review, the examiner should consider
   the types of corrective actions that may be pursued. For cases where restitution to consumers may be necessary, the examiner should obtain information needed to identify and estimate restitution.
9. If the potential violation involves an affiliate or third party, obtain the information and documentation needed to determine whether an affiliate is an institution affiliated
   party (IAP).
10. The following includes a list of other documents that are
    generally needed:

• Income reports
• Third-party contracts
• Relevant board minutes
• Relevant audit reports
• Due diligence records
• Training materials
• Telemarketing and customer service scripts
• Software parameters
• Account agreements
• Collection scripts and notices
• Consumer communications
• Billing Statements

Question 34

If a webpage is included supporting documentation for a UDAP case, what information should be documented?

Answer 34

Websites are easily altered, so versions of the website that support the case must be preserved by the examiner. When possible, print in color. If they cannot be printed in color, notate the colors used on the website.

In cases where the website includes links for additional information, notate the page succession. In addition to printing the website, the examiner should attempt to save
the webpages electronically. The electronic and print versions can be used in combination to replicate the live website as closely as possible.

A printed copy of the webpage should be formatted such that the following information is included: window title, URL, date, time, page number, total number of pages.

Question 35

What should examiners consider when determining corrective action for UDAP? (5)

Answer 35

• The nature of the violation;
• Whether it is a repeat violation or a variation of a previously cited violation;
• The harm, or potential harm, suffered by consumers;
• The number of parties affected; and
• The institution’s overall compliance posture and history, both in general and with respect to UDAP.

Level 3 or Level 2 violations may result in a downgrade of the
institution’s compliance and CRA ratings and potentially, the institution’s risk management rating. In determining the overall CRA rating for an institution, examiners consider evidence of discrimination or other illegal acts, including
violations of Section 5 of the FTC Act.

In addition to determining a violation’s impact on the
institution’s compliance and CRA ratings, examiners must consider corrective actions that should be taken. These may include requiring the discontinuance of the act or practice, restitution to consumers, informal or formal enforcement
actions, and assessment of a civil money penalty.

Question 36

What may be considered appropriate corrective action to a UDAP violation?

Answer 36

• Discontinuing the underlying practice and making appropriate restitution to impacted consumers.
• in some cases another consumer law may satisfactorily address and mitigate consumer harm.
• To ensure resources and violations are consistent, examiners should determine if a UDAP violation should be considered if the the conduct in question violations another consumer law.

Question 37

What factors should examiners consider when determining whether to pursue a UDAP violation? (3)

Answer 37

• Impact on consumers and other harmed entities
• Nature, severity, duration, and pervasiveness of the misconduct and the bank’s CMS.
• Resources required to make a UDAP violation.

Question 38

When pursuing a UDAP violation, how should examiners determine the impact on consumers and other harmed entities? (3)

Answer 38

Examiners should answer the following questions:

• Will a determination of UDAP result in more effective relief for those harmed by the institution’s misconduct than is available under the other consumer law?
  a. Are all consumers affected by the misconduct covered by another consumer law or are some not covered (e.g. are there business customers affected)? If business customers are among those harmed by the misconduct, what portion of impacted customers are covered by the other consumer law?
  b. Is restitution required under the other consumer law? Will consumers be made whole for quantifiable losses under the other consumer law?

Question 39

When pursuing a UDAP violation, how should examiners determine the Nature, severity, duration, and pervasiveness of the misconduct and the institution’s compliance management system? (8)

Answer 39

Examiners should answer the following questions?

Is the character of misconduct such that a determination of UDAP may better communicate to the Board and Management of the institution the significance of the consumer harm or the supervisory concern with the institution’s conduct?

a. Does the act or practice detrimentally affect a large number of consumers or have a large monetary impact on consumers?
b. Does it appear that the misconduct was designed to deceive or to be unfair to the institution’s customers, as opposed to a technical error or oversight? What was the root cause of the misconduct?
c. What is management’s response to the violation(s), including amount of resources dedicated to resolving the issues, and willingness to take corrective action, including restitution, for all parties harmed by the practice?
d. If the bank self-identified a violation, did it take complete corrective action for all impacted consumers, or was the bank’s action limited?
e. Did the misconduct continue after the bank became aware, or was made aware, of it?
f. Is the act or practice widespread or present in multiple products or services?
g. What is the institution’s history of compliance and response to recommendations?

Question 40

When pursuing a UDAP violation, how should examiners determine the resources required to make a UDAP determination? (4)

Answer 40

Examiners should answer the following questions:

What is the length of time and level of effort needed for examination-related staff to evaluate the potential UDAP violation?

a. What additional time or staff will be required to gather information or data necessary to make a UDAP determination (violation of Section 5)?
b. Is the additional information or data reasonably available to the institution to make a UDAP determination (violation of Section 5)?
c. How much time would likely be necessary to gather the relevant information and data and complete the process of evaluating the potential UDAP violation, inclusive of any expected consultations with the Regional or Washington Office?

Question 41

After considering all relevant factors, how should examiners determine if a UDAP violation is the appropriate course of action?

What should examiners do next to pursue the UDAP violation or other potential violations? (2)

Answer 41

In situations where a violation of a consumer law or regulation may also be a Section 5 violation, examiners should evaluate these factors and make a determination of whether the facts and circumstances merit the pursuit of a potential Section 5 violation or not.

After considering and weighing the factors above:
• if the examiner determines that pursuit of a potential Section 5 violation is appropriate, the examiner should follow regional procedures and the WO Consultation Process, if warranted, to gain concurrence to pursue and, if appropriate, cite the violation.

• if the examiner determines that citing a violation of the other consumer law is appropriate, without consideration of a potential Section 5 violation, the violation shall be cited according the regional procedures and the WO Consultation Process. Note that if the other consumer protection law or regulation does not provide coverage for business customers, the ROE should not include discussion of business customers in the impact of the violation or examples of affected customers. Moreover, examiners should not request restitution for business customers if the law cited does not cover them.