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©2010 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500
Avoiding the Bureau’s Crosshairs: Understanding UDAAP and
Strategic Management of the RiskPresented by:
Michael C. LuederMartin J. Bishop
©2010 Foley & Lardner LLP
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Today’s Presenters
Michael C. LuederMilwaukee
Martin J. BishopChicago
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UDAAP = FAIRNESSAre Your Consumer Finance Products and Services Fair?
Equal Outcomes?Equitable Treatment?Comparable Opportunities?Absence of Predictive Bias?
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UDAAPSection 1031 of the Dodd-Frank Act empowers the Bureau “to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or
practice under Federal law in connection with any transaction with a consumer for a consumer financial
product or service, or the offering of a consumer financial product or service.”
UNFAIR
DECEPTIVE
ABUSIVE
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What is UDAAP?
UDAAP
UDAP
FEDERAL(Dodd-Frank, FTC Act, Reg. AA)
STATE(Mini-FTC Acts)
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IF… THEN…
Abusive-Advantage outweighed by disadvantages-Increased risk of financial distress
Deceptive-Confusing-Leads to Misunderstandings-Leads to Mistakes in decision making
Unfair-Offensive to standards of fairness-High Costs
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Roadmap
UDAAP is a Tough Compliance and Risk Management ProblemDeep Dive on UDAAPPractical Solutions
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Why is This Such a Tough Problem?
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Risk Management & Compliance GaugeWhat are the chances that your company will experience a compliance failure?– 48% “high” or “very high”
Does your company understand the value of compliance?– 68% do not attempt to demonstrate ROI
for compliance– 38% do not measure the effectiveness of compliance
program
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Risk Management & Compliance GaugeComplexity is increasing risk exposure at my organization.– 63% agree
I am confident that my organization is measuring and monitoring 100% of our risk exposure accurately.– 21% agree
What do you consider to be the main barrier to effective risk management in your organization?– “Uncertainty over future regulation”
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Is Dodd-Frank Really Such a Big Deal?
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500
1000
1500
2000
2500
FRA(1913)
Glass-Steagall(1933)
IBEA(1994)
SOX(2002)
GLB(1999)
Dodd-Frank(2010)
Pages
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The New BossThe most powerful agency in the history of the United States?Tech SavvyMedia SavvyConstituent BuilderModern, Consumer-Friendly Feel
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Staying Power?The Next Election Will Lead to a Repeal of Dodd-Frank– Likely voters favor the 2010 Dodd-Frank Act by a 5 to 1
margin (71% vs. 14%).Congress Will Weaken the Leadership and Funding of the Bureau– Presented with information about
challenges in Congress to the law, 63% believe that policymakers should allow the law to be fully implemented.
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Staying Power?Other More Experienced and Less Focused Regulators Will Have a More Prominent Role In Consumer Protection– Three-quarters (74%) of voters support the
existence of a single entity with the mission of protecting consumers from deceptive practices.
Source: Center For Responsible Lending, July 2011
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Staying Power?More Bank Regulation is Disfavored?
Increased government regulation of banks and major financial institutions
DisapproveApprove
61% 37%
Source: USA Today/Gallup, Aug. 27-30, 2010
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Deep Dive
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Is UDAAP Really Such A Big Deal?The Bureau’s Vision:A consumer finance marketplace:
…where customers can see prices and risks up front and where they can easily make product comparisons;…in which no one can build a business model around unfair, deceptive, or abusive practices;…that works for American consumers, responsible providers, and the economy as a whole.
Source: Building the CFPB: A Progress Report, July 28, 2011
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The Risk Triangle
REGULATORYCIVIL
LITIGATION
LOSS OF CONSUMERS
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Regulatory RisksInvestigation and DiscoveryAdministrative Hearings and Court LitigationRelief:– Rescission; Reformation; Refunds;
Restitution; Disgorgement; Damages; – Payment of Government Incurred Costs
Monetary Penalties– Violation (up to $5,000/day)– Reckless Violation (up to $25,000/day)– Knowing Violation (up to $1,000,000/day)
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UnfairThe act or practice causes, or is likely to cause, substantial injury to consumers which is not reasonably avoidable by consumers; andSuch substantial injury is not outweighed by countervailing benefits to consumers or to competition.
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UnfairTaking Advantage“There is no limit to human inventiveness in this field.”“Substantial Inquiry:”– Small Harm to Many Consumers– Significant Risk of Concrete Harm
“Reasonably Avoidable”– Lack of Free and Informed Choice
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Unfair
Case Study:Federal Trade Commission v. Neovi, Inc., et al. (“Qchex”)
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UnfairWhat does the Bureau consider to be unfair?– Refusing to release a lien after a consumer makes
the final payment on a mortgage.– Dishonoring credit card convenience checks
without notice.– Processing payments for companies engaged in
fraudulent activities.
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DeceptiveFTC: Material representation, omission or practice that, from the perspective of a consumer acting reasonably under the circumstances, is likely to mislead the consumer.
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DeceptiveFraud, but less stringent.Actual deception not required.Misleading a consumer by words, silence, or action.Good faith is not a defense.
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Case Study:Richard Cordray v. Mortgage Servicers
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DeceptiveWhat Does the Bureau Consider to be Deceptive?– Failing the FTC’s 4 “P”s Test (Prominence,
Presentation, Placement, Proximity).– Inadequate disclosure of adequate lease terms in
television advertising.– Misrepresentation about loan terms.
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AbusiveMaterial interference with the ability of a consumer to understand a term or condition of a consumer financial product or service; orTaking unreasonable advantage of --– A lack of understanding on the part of the consumer of the
material risks, costs, or conditions of the product or service;– The inability of the consumer to protect the interests of the
consumer in selecting or using a consumer financial product or service; or
– The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
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AbusiveThe most-feared word in all of Dodd-Frank:– Unconscionability?– Suitability?– Age-Specific Products?– Financial Illiteracy?
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AbusiveWhat does the Bureau Consider to be Abusive?– “Although abusive acts also may be unfair or
deceptive, examiners should be aware that the legal standards for abusive, unfair, and deceptive each are separate.”
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Focus on Compliance RisksNature and Structure of ProductsConsumers to whom products are marketedIncentives and CompensationMarketing and AdvertisingCustomer RelationsCompliance ManagementBoard of Directors/ManagementAuthority and AccountabilityProduct Development and ModificationTrainingComplaint Management
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Solutions!
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Solutions to Manage the RiskBring Compliance and Legal into the RoomIncentivize Compliance and Ethical ConductFacilitate Informed Choice SuitabilityBe ProactiveFocus on Consumer Complaints
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Solutions to Manage the RiskUDAAP Audit TrainingMonitoringPartner With Vendors Who Will Put “Skin in the Game”Analyze Revenue From Consumer Finance TransactionsStatement on Prohibition of Unfair, Deceptive, and Abusive Practices
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Thank YouMartin J. BishopPartner, Vice Chair, Consumer Financial Services Practice, Foley & Lardner LLP321 North Clark Street, Suite 2800Chicago, IL 60654-5313Phone: 312-832-4500(312) [email protected]
Michael C. LuederPartner, Chair, Consumer Financial Services Practice, Foley & Lardner LLP777 E Wisconsin AvenueMilwaukee, WI 53202-5306(414) 297-5643 [email protected]