"UDAP is Becoming a Pain in the Rear"
Contributed by Blair Rugh, Trinovus
In the almost 40 years that I have been involved in banking and compliance with banking regulations, until recently, one topic I was never concerned with was unfair and deceptive acts and practices. I have taught four and five day schools on banking regulations during which the only time this topic arose was relative to Regulation AA and the few practices that it defines as unfair and deceptive in the making of a loan, such as an assignment of wages or a confession of judgment. In the last year, however, UDAP has become the buzz word of the regulators, particularly the FDIC, and consequently the hot topic among banks that it regulates. Section 1013 of Dodd Frank gives the Consumer Financial Protection Bureau the rule making authority to define acts that are unfair, deceptive or abusive. So far, it has not exercised this authority and declared any act unfair, deceptive or abusive; however, that has not been an impediment to the examiners from the FDIC.
Historically, when the regulators have exercised their UDAP authority, they have advised the banking industry in advance that they were doing so. The Fedʼs expansion of Regulation Z relative to higher priced mortgages was done under its UDAP authority, but a proposed rule was published far in advance of the rule becoming mandatory. Most of the new rules regarding overdraft protection programs were issued under UDAP authority; again, the rules were published far in advance of the mandatory compliance date. Now, we find that even if you follow the agencies’ rules to the letter, you may have an unfair or deceptive act or practice.
Consider this situation. Your financial institution does not have a courtesy overdraft protection program, but you pay items into overdraft on an ad hoc basis. Under the VISA and MasterCard rules, under certain situations you are required to honor a debit card transaction even though you did not pre-authorize the transaction or the amount. For example, if a customer swipes his or her debit card at gas station and is preapproved for one dollar, the final charge may be $50. If the customer does not have that amount in his or her account at the time of settlement, under the network rules you are required to force pay the transaction into an overdraft in the customer’s account. Your policy has long been to charge a fee for the overdraft, and you typically have done so.
Everything was fine until the Fed amended Regulation E to require that a consumer opt-in to the assessment of overdraft fees for ATM and POS transactions if they wanted you to overdraw an account. The Fed was explicit that a notice was required for institutions that did not have a courtesy overdraft program as well as those that did. In Appendix A-9 to the regulation, the Fed published the safe harbor, model form for the opt-in notice to be sent to consumers. In Section 205.17(d) of the regulation, it cautions institutions not to change any of the wording of the notice, except under certain closely defined situations.
Your institution wanted to protect its revenue stream; you sent the required opt-in notice to your customers, and many did opt-in. When those customers have a forced pay ATM or POS transaction, you pay it as required and charge an overdraft fee just as you did prior to the amendment to Regulation E to those who have opted in. Per the FDIC, that is now an unfair and deceptive act or practice.
We don’t exactly know the FDICʼs reasoning, but apparently, the notice that you sent to the customer, if you used the model form provided in the regulation, may have led the customer to believe that you did have a courtesy overdraft program. And, because you do not, the customer could have had the same overdraft service without incurring a fee. The FDIC is citing for UDAP despite the Fed’s analysis that such a clarification for distinguishing force pays was unnecessary. Even the FDIC has issued subsequent guidance and FAQs without mention of an unfair or deceptive act or practice when a consumer, who has opted in, is charged a fee for the payment of overdraft in force pay situations. We are told that, in several instances, the FDIC has required the offending bank to rebate to its customers the overdraft fees that were charged where the only overdraft service provided (and opted-in) was for forced payments.
Because the Consumer Financial Protection Bureau is now the arbiter of all things unfair and deceptive, we called it to see if a ruling or clarification has been made. The person we spoke with said that the CFPB was aware of the issue. We asked if it had made a determination; all they would say was that “it was under discussion.” We asked what that meant, and the person would not comment further.
We wish that we could give bankers advice about what to do. If you are an FDIC examined bank in this situation, you should be concerned. As a matter of fact, if you are an FDIC examined bank, you should be concerned that other things that you have done for years without challenge may now be considered unfair, deceptive or abusive, despite the FDIC’s own examination manual in which it states “the fact that a practice is affirmatively allowed by statute may be considered evidence that the practice is not unfair.”
We beg the CFPB and the other regulatory agencies to please let the industry know when you find something to be unfair, deceptive or abusive. Equally important, don’t criticize financial institutions for actions that they take consistent with regulatory requirements or that have never been challenged before until there is a public declaration that the act is unfair, deceptive or abusive.