Avoiding the Bureau s Crosshairs: Understanding UDAAP and Strategic Management of the Risk Presented by: Michael C. Lueder Martin J. Bishop 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 2 Today s Presenters Michael C. Lueder Milwaukee mlueder@foley.com Martin J. Bishop Chicago mbishop@foley.com 1
3 UDAAP = FAIRNESS Are Your Consumer Finance Products and Services Fair? Equal Outcomes? Equitable Treatment? Comparable Opportunities? Absence of Predictive Bias? 4 UDAAP Section 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. ABUSIVE DECEPTIVE UNFAIR 2
5 What is UDAAP? FEDERAL (Dodd-Frank, FTC Act, Reg. AA) UDAAP UDAP STATE (Mini-FTC Acts) 6 IF -Offensive to standards of fairness -High Costs -Confusing -Leads to Misunderstandings -Leads to Mistakes in decision making -Advantage outweighed by disadvantages -Increased risk of financial distress THEN Unfair Deceptive Abusive 3
7 Roadmap UDAAP is a Tough Compliance and Risk Management Problem Deep Dive on UDAAP Practical Solutions 8 Why is This Such a Tough Problem? 4
9 Risk Management & Compliance Gauge What 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 10 Risk Management & Compliance Gauge Complexity 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 5
11 Is Dodd-Frank Really Such a Big Deal? 2500 2000 1500 1000 500 Pages 0 FRA (1913) Glass- Steagall (1933) IBEA (1994) SOX (2002) GLB (1999) Dodd- Frank (2010) 12 The New Boss The most powerful agency in the history of the United States? Tech Savvy Media Savvy Constituent Builder Modern, Consumer-Friendly Feel 6
13 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. 14 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 7
15 Staying Power? More Bank Regulation is Disfavored? Increased government regulation of banks and major financial institutions Approve Disapprove 61% 37% Source: USA Today/Gallup, Aug. 27-30, 2010 16 Deep Dive 8
17 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 18 The Risk Triangle LOSS OF CONSUMERS REGULATORY CIVIL LITIGATION 9
19 Regulatory Risks Investigation and Discovery Administrative Hearings and Court Litigation Relief: 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) 20 Unfair 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 to competition. 10
21 Unfair Taking 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 22 Unfair Case Study: Federal Trade Commission v. Neovi, Inc., et al. ( Qchex ) 11
23 Unfair What 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. 24 Deceptive FTC: Material representation, omission or practice that, from the perspective of a consumer acting reasonably under the circumstances, is likely to mislead the consumer. 12
25 Deceptive Fraud, but less stringent. Actual deception not required. Misleading a consumer by words, silence, or action. Good faith is not a defense. 26 Case Study: Richard Cordray v. Mortgage Servicers 13
27 Deceptive What 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. 28 Abusive Material interference with the ability of a consumer to understand a term or condition of a consumer financial product or service; or Taking 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. 14
29 Abusive The most-feared word in all of Dodd-Frank: Unconscionability? Suitability? Age-Specific Products? Financial Illiteracy? 30 Abusive What 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. 15
31 Focus on Compliance Risks Nature and Structure of Products Consumers to whom products are marketed Incentives and Compensation Marketing and Advertising Customer Relations Compliance Management Board of Directors/Management Authority and Accountability Product Development and Modification Training Complaint Management 32 Solutions! 16
33 Solutions to Manage the Risk Bring Compliance and Legal into the Room Incentivize Compliance and Ethical Conduct Facilitate Informed Choice Suitability Be Proactive Focus on Consumer Complaints 34 Solutions to Manage the Risk UDAAP Audit Training Monitoring Partner With Vendors Who Will Put Skin in the Game Analyze Revenue From Consumer Finance Transactions Statement on Prohibition of Unfair, Deceptive, and Abusive Practices 17
35 Thank You Martin J. Bishop Partner, Vice Chair, Consumer Financial Services Practice, Foley & Lardner LLP 321 North Clark Street, Suite 2800 Chicago, IL 60654-5313 Phone: 312-832-4500 (312) 832-5154 mbishop@foley.com Michael C. Lueder Partner, Chair, Consumer Financial Services Practice, Foley & Lardner LLP 777 E Wisconsin Avenue Milwaukee, WI 53202-5306 (414) 297-5643 mlueder@foley.com 18