• UDAP/UDAAP: Goodbye Regulation, Hello Guidance
  • September 16, 2014 | Author: Craig N. Landrum
  • Law Firm: Jones Walker LLP - Jackson Office
  • In recognition that its authority to issue credit practices rules for insured institutions was repealed as a consequence of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), the Board of Governors of the Federal Reserve System (the "Board") is repealing Regulation AA, which applied the credit practices rule of the Federal Trade Commission ("FTC") to financial institutions. Concurrently, the Board, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency have issued Interagency Guidance Regarding Unfair or Deceptive Credit Practices as a reminder that the credit practices that were described in the former Regulation AA remain subject to Section 5 of the FTC Act.

    Depending on a facts and circumstances analysis, if a bank is found to engage in the unfair or deceptive practices described in Regulation AA, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of Dodd-Frank. Section 5 of the FTC Act prohibits unfair or deceptive acts or practices ("UDAP") and Sections 1031 and 1036 of Dodd-Frank prohibit unfair, deceptive or abusive acts or practices ("UDAAP"). Thus, there may be statutory violations even in the absence of a specific regulation governing the conduct.

    UDAP and UDAAP are rapidly becoming the violation citation of choice with respect to consumer credit practices. This rule has been expanded beyond consumer practices to commercial extensions of credit as well (see FDIC Order to Cease and Desist, Order for Restitution and Order to Pay, FDIC-08-259b and FDIC-08- 403k, applying restitution order to a customer defined as an "individual, group, unincorporated association, corporation, limited liability corporation, limited or general partnership or other business entity" in order to address damages to small business owners and professionals).

    While most consumer oriented rules and regulations objectively address conduct or disclosures in respect of a product or service, UDAP and UDAAP address a more subjective concept of fairness. There has been a definite trend of consumer credit violations morphing into UDAP/UDAAP violations, with two definite consequences. First, a UDAP/UDAAP violation means that a bank's CRA rating may be downgraded. Second, the look-back period for consumer restitution in response to a UDAP/UDAAP violation can go back six years, far beyond the normal time frame for consumer regulations such as Regulation Z. Because UDAP/UDAAP consideration has become so pervasive, appropriate risk management should include a UDAP/UDAAP risk analysis of each product, service or process and any communication related to the product, service or process at each life stage, from its formulation to its retirement.