So what’s the difference between Unfair or Deceptive Acts or Practices (UDAP) and Unfair, Deceptive or Abusive Acts or Practices (UDAAP)? We’ve been asked this question by our customers quite a bit lately, and it’s an important one to answer, since it may affect the outcome of your next compliance examination.
Let’s take it from the top. UDAP with one ‘A’ stems from Regulation AA, also known as the Credit Practices Rule. The rule, as we know it today, was established in 1986 and consists of two subparts. Subpart A outlines the process for submitting consumer complaints to the Board of Governors of the Federal Reserve System’s Division of Consumer and Community Affairs. Subpart B puts forth the credit practice rules pertaining to the lending activities of financial institutions. It defines certain unfair or deceptive acts or practices that are unlawful in connection with extensions of credit to consumers, specifically prohibiting a financial institution and its subsidiaries from using:
- certain provisions in their consumer credit contracts, including confessions of judgment, waivers of exemptions, assignments of wages and security interests in household goods
- unfair or deceptive practices involving co-signers
- pyramiding late charges, in which a delinquency charge is assessed on a full payment even though the only delinquency stems from a late fee that was assessed on an earlier installment
On the other hand, UDAAP with two ‘A’s goes beyond extensions of credit and introduces an enterprise-wide focus on all the products and services offered by your institution. And another key difference is that UDAAP coverage makes it unlawful for any provider of consumer financial products or services to engage in unfair, deceptive or abusive act or practices; therefore, this regulation may be applicable far beyond financial institutions.
In addition, be aware that UDAAP has been used to cite a single regulatory violation twice during an examination. For example, an advertisement that violates the Truth in Savings Act can also violate UDAAP, especially if a distinct pattern or practice is noted. This could result in even steeper penalties.
You should expect that bank examiners will require you to comply with the intent of both UDAP and UDAAP on your next exam, so it is imperative that your institution have policies in place that adequately discuss both regulations. I recommend that Regulation AA (UDAP) requirements be discussed in both your formal complaint policy and your loan policy. Accordingly, you should cover UDAAP requirements in a separate UDAAP policy.