1. Presented by: Hudson Cook LLP
WHAT IS UDAAP?
Presented by: Hudson Cook LLP
Allen Denson, DC Office
Justin Hosie, TN Office
Blake Sims, TN Office
October 21-23, 2016

2. DFA PROHIBITION OF UDAAPs
Sections 1031 and 1036 of Consumer Financial Protection Act (Title X of Dodd-Frank Act):
Prohibit any covered person or service provider from engaging in “any unfair, deceptive, or abusive act or practice” (UDAAP);
Authorize the CFPB to define by rule what constitutes UDAAP; and
Empower the CFPB to prevent UDAAPs and enforce law.

3. CFPB EXAM MANUAL: WHAT’S “UNFAIR”?
Under DFA § 1031(c), before declaring an act/practice to be “unfair,” CFPB must have “reasonable basis” for deciding that:
The act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and
Such substantial injury is not outweighed by countervailing benefits to consumers or competition.

4. CFPB EXAM MANUAL: WHAT’S “UNFAIR”? (cont’d)
The Exam Manual provides the following examples of what is considered an “unfair” act:
Refusing to release a lien after a consumer makes a final payment on a mortgage;
Dishonoring credit card convenience checks without notice; and
Processing payments for companies that are engaged in fraudulent transactions.

5. CFPB EXAM MANUAL: WHAT’S “DECEPTIVE”?
DFA does not define “deceptive.”
CFPB Examination Manual references FTC guidance:
Representation, omission or practice that is likely to mislead the consumer;
Viewed from the perspective of a consumer acting reasonably in the circumstances; and
Must be a “material” – i.e., likely to affect the consumer's conduct or decision with regard to a product or service.

6. CFPB EXAM MANUAL: WHAT’S “DECEPTIVE”? (cont’d)
The Exam Manual provides the following examples of what is considered a “deceptive” act:
Inadequate disclosure of material lease terms in television advertisements.
Misrepresenting loan terms.

7. CFPB EXAM MANUAL: WHAT’S “ABUSIVE”?
To declare act/practice “abusive,” CFPB must find that the act/practice:
Materially interferes with ability of consumer to understand a term or condition of a consumer financial product or service (CFPS); or

8. CFPB EXAM MANUAL: WHAT’S “ABUSIVE”? (cont’d)
Takes unreasonable advantage of:
lack of understanding of material risks, costs or conditions of CFPS;
inability of consumer to protect his/her own interests selecting or using a CFPS; or
reasonable reliance by consumer on a covered person to act in interests of consumer.

9. What methods do the CPFB use to interpret UDAAP?

10. CFPB RULEMAKING
Prior to adopting rules identifying act/practice as unfair, deceptive or abusive, CFPB must consult with federal banking and other agencies.
Here’s the thing, though CFPB has not adopted UDAAP rules. Instead, it has “defined” UDAAP by supervisory edict and enforcement action.
“Small Dollar” proposed rule would be first

11. REPRESENTATIVE CFPB BULLETINS
Bulletin Number
Title
In-Person Collection of Consumer Debts
Marketing of Credit Card Promotional APR Offers
Compliance Bulletin and Policy Guidance: Mortgage Servicing Transfers
Fair Debt Collection Practices Act and the Dodd-Frank Act
Prohibition of Unfair, Deceptive, or Abusive Acts or Practices in the Collection of Consumer Debts
Marketing of Credit Card Add-On Products

12. REPRESENTATIVE CFPB ENFORCEMENT ACTIONS
Entity
Total Amount in Settlements
TMX, LLC (TitleMax)
$ 9 Million
EZ Corp, Inc.
$ 10.5 Million
Westlake Services, LLC and Wilshire Consumer Credit, LLC
$ Million
ACE Cash Express
$ 10 Million
Southwest Tax Loans
$ 438,000
Springstone Financial, LLC
$ 700,000
Morgan Drexan, Inc.
$170 million
Herbies Auto Sales
$ 800,000
Collecto, Inc.
$ 2.5 million
Paymap, Inc.
$ 33.4 million

13. Other Avenues for UDAAP Application
Examinations
Problems could lead to Consent Orders
Could lead to informal follow-up through Matters Requiring Attention and Examination findings
Sources to Learn about Examinations
Supervisory highlights
Example: Selling accounts in bankruptcy, accounts deemed fraudulent, or accounts settled in full
Example: Payment allocation among multiple accounts
Example: Multiple ACH Attempts
Informal guidance through compliance professionals
Complaint Portal
Can be assumed true
New “Yelp” function

14. STATE UDAAP CLAIMS AUTHORITY
Under Dodd-Frank § 1042, a state Attorney General or regulator is authorized to bring a civil action to enforce provisions of Dodd-Frank Title 10 or CFPB regulations issued under Title 10, including the Dodd-Frank UDAAP prohibition.
Several states have initiated UDAAP enforcement actions, including: Connecticut, Florida, Illinois, Mississippi, New Mexico, and New York.

15. FTC “UDAP” AUTHORITY
Federal Trade Commission is still very active in small dollar space through enforcement actions.
Notice that “abusiveness” is omitted.
Ex—AMG Services Case

16. Lessons learned from CFPB UDAAP enforcement actions

17. LESSONS LEARNED Sales Tactics
Saying that your product is less expensive than competitors when it is not;
Encouraging consumers to repay over a longer period of time than specified in the contract;
Using disclosures that differ from contractual documents; and
Enrolling consumers in products that auto-renew.

18. LESSONS LEARNED (cont’d)
Sales Tactics
Advertising a monthly rate rather than an APR;
Use of Triggering terms without appropriate disclosures;
Advertising credit reporting features;
Obscuring costs of product or service;
Making misleading statements to induce consumers with poor credit quality to apply; or
Failing to clearly explain effects of interest deferral or extended payment.

19. LESSONS LEARNED (cont’d)
Debt Collection Issues
Creating and leveraging a “false sense of urgency.”
Making false statements regarding (among other things):
Whether a law suit would be filed
The character, amount, or status of a debt owed
That a communication is from a lawyer or government agency, when it is not
That debts would be waived or forgiven if they would not be
Collecting amounts that are not expressly authorized by the underlying agreement or applicable law.

20. LESSONS LEARNED (cont’d)
Debt Collection Issues
Failing to process payments in a timely fashion;
Taking possession of property without the legal right to do so; and
Using collection tactics (for example: door knocks, certain collection activities at places of employment, contacting references) that would increase the risk of a third party becoming aware of the debt.

21. LESSONS LEARNED (cont’d)
Debt Collection Issues
Using technology that alters Caller ID messages so that it appears the call is coming from a party other than the collector (e.g. certain skip-tracing services).
Contract terms that permit use of remotely created check if consumer revokes ACH authorization.
Finally, while not specified in any of the enforcement actions, I will add an additional one to the mix: “Facebaiting.”

22. LESSONS LEARNED (cont’d)
Debt Collection Issues
Meet Jenny Anderson…

23. How will the CFPB prove a UDAAP case?

24. How will the CFPB prove a UDAAP case?
Hypothetical Scenario: Sneaky Sims Cash Advance offers 30-day loans to its customers at $20 finance charge per $100 borrowed. When Sneaky Sims’ customers sign a contract, however, they are offered “SafePay” option—where customers can convert the loan to a 3-month installment loan with equal payments. Sneaky Sims emphasizes that the SafePay option allows for lower monthly payments but does not explicitly disclose that following the SafePay option will result in the customer paying $60 per $100 borrowed.

25. How will the CFPB prove this UDAAP case? (cont’d)
Step 1: Establishing that an act or practice occurred
Former employees
Consumer testimony
Step 2: Establishing consumer impressions
Expert testimony

26. How will the CFPB prove this UDAAP case? (cont’d)
Step 3: Establishing Consumer Injury
Gross receipts method
Difference in expectation vs. received method
What is NOT required:
Intent
Presumption of consumer reliance

27. How will the CFPB prove this UDAAP case? (cont’d)
Challenges for defending a UDAAP case:
Double/triple-pleading UDAAP claims
CFPB has control over choice of forum
Statute of limitations unclear
Resource disparity

28. How can I best protect against UDAAP liability?

29. How can I best protect against UDAAP liability?
Strong policies
Clear scripts
Strong oversight, auditing, and monitoring
Strong training

30. Hudson Cook’s Attorneys’ Contact Information
Allen Denson
Partner
Hudson Cook, LLP
Direct: (202)
Mobile: (919)
Justin Hosie
Partner
Hudson Cook, LLP
Direct: (423)
Blake Sims
Partner
Hudson Cook, LLP
Direct: (423)