The Brave New World of Consumer Compliance


Compliance has changed from a checklist-based, technical science to a principles-based, qualitative art. Gone are the days when an institution that is compliant with all substantive consumer protection laws can breathe easy; practices and products long viewed as acceptable now are susceptible to claims that they constitute Unfair, Deceptive, or Abusive Acts or Practices (UDAAP). Unlike other consumer protection laws, a UDAAP violation hinges on the specific facts and circumstances surrounding each act or practice rather than well-defined legal standards and regulations setting forth clear lines between lawful and unlawful conduct. UDAAP standards are so vague and regulators – particularly the CFPB – are so aggressive in interpreting those standards, that it is virtually impossible to predict with any level of certainty the practices and products that may be subject to challenge. UDAAP is also unique in the sense that its provisions touch nearly every part of a consumer financial institution’s policies and practices, including product development, disclosures, sales, advertising,account servicing, and collections. An additional challenge presented by UDAAP is that regulators now take the view that financial services companies are responsible for the conduct of the third party service providers they partner with in offering products and services to their customers.

So, how can the challenges of this new UDAAP- centric consumer compliance environment be addressed? First, it is important to understand the regulatory enforcement standard. It is best described as akin to the pornography standard set forth by United States Supreme Court Justice Potter Stewart who famously wrote: “I know it when I see it.” Legal and compliance professionals must accept that, when it comes to UDAAP, there are no objective legal standards or regulatory guidance from which to advise the business. They must communicate to their business colleagues that it is no longer possible to tell them what the rules are so they can design, sell, service, and collect on products without risk simply by adhering to those rules. Instead, businesses need their products and services to be consumer friendly and consumer focused. Will the consumer understand? Is the product or service one that has demonstrable benefit to the consumer? Are practices and approaches fair in context of the greater power and sophistication of the provider? Building a compliance culture that is consumer-centric is far from easy. It is particularly difficult because regulators increasingly approach these questions in an enormously paternalistic manner. The seemingly strong defense to challenge – demonstrable evidence that customers like and want the product on the terms it has been offered – often is rejected by regulators where they,as a consumer, would not reach that same conclusion. Regulators often take the view that if they would not want this product a consumer who does must, by definition, have been deceived into thinking a “bad” product is “good".

Originally Published in Mortgage Compliance Magazine - September 2014.

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