When two parties in a transaction have different expectations based on the terms of an agreement, one is likely to be injured.
By: Joel Haitz
The potential to inadvertently deceive your customers is risky. When two parties in a transaction have different expectations based on the terms of an agreement, one is likely to be injured when those expectations are not met. They might even feel deceived. And when they do, the consequence may be felt by your bottom line.
In order to mitigate this risk (the risk of engaging in what the Consumer Financial Protection Bureau (CFPB) may see as unfair, deceptive, or abusive acts or practices (UDAAP), we need to understand what a deceptive practice looks like.
The Seinfeld episode “The Non-Fat Yogurt” provides a case study. Kramer invests in a nonfat yogurt shop. The yogurt is delicious. “How could this not have any fat? It’s too good!” George proclaims. But Jerry and Elaine start gaining weight. The yogurt is tested and turns out to be fattening. Mayoral candidate Rudy Giuliani blames his poor physical exam on the non-fat yogurt and vows to eliminate false advertising in the city. Business plummets.
There’s no questioning the deceptive practice in “The Non-Fat Yogurt.” Back when it aired in 1993, it may have even been a satisfactory, albeit obvious, example of the type of acts your business must avoid to mitigate risks of deceptive claims. Today, however, it is much harder to define deceptive practices.
The industry’s understanding of what qualifies as deception became less clear when the CFPB started deciding what it considers unfair and deceptive in the consumer financial market. The Dodd-Frank Act empowered the CFPB with the authority to prevent UDAAP. This may be the CFPB’s most powerful tool, and they’ve been busy using it, which offers more recent case studies.
“22,500 bonus points-earn a bonus $300.” The institution is offering 22,500 bonus points, equal to a $300 bonus. The consumer accepts the offer, expecting 22,500 bonus points AND a $300 bonus. The customer only gets the 22,500 points. The CFPB deems the advertisement deceptive. The institution must pay the $300 as part of a $112.5 million Consent Order (which included other acts violating consumer financial law).
This case, like many other CFPB UDAAP actions, doesn’t necessarily include clear, intentional deceptive activity. Similar to CFPB orders related to add-on financial products (debt protection, indentify theft protection, credit score tracking) that focus on marketing and suitability of services, the potential for a UDAAP claim involves a subjective analysis. Even if many customers understand the terms or want the product, a potential UDAAP claim may arise if others don’t get what they expect or if a regulatory authority thinks that product isn’t worth the price (for example, deposit advance and overdraft products).
Read the full article here: Recovery Tips – UDAAP Risks