Federal agencies look to expand regulatory reach using sweeping UDAAP and UDAP authority
With active regulatory agendas at several federal agencies and what seems like back-to-back hearings considering legislative proposals this spring and summer, a less obvious federal policymaking power grab has been popping up in various agency proposals and guidance seeking to expand regulatory authority. The Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC) and the Federal Housing Finance Agency (FHFA) have all recently discussed the use of broad authority related to unfair or deceptive acts or practices (UDAP) and unfair, deceptive or abusive acts and practices authority (UDAAP).
These policies, typically technical in nature and often buried within the Federal Register, frequently do not garner significant attention. However, when examined closely, there is a trend of concerning mission creep that tests the bounds of certain agency jurisdictions and attempts to circumvent congressional directives. Within various discussions about UDAP and UDAAP, are also direct attacks on certain industry practices and brand-new regulatory authorities that stakeholders should be aware of.
Let’s break a few of these proposals down:
The CFPB Policy Statement Defining “Abusive”
On April 3, 2023, the CFPB issued a Statement of Policy Regarding Prohibition on Abusive Acts or Practices (Policy Statement) under its UDAAP authority. This followed the issuance of several other statements in this area, including a 2020 attempt by CFPB Director Kathy Kraninger to clarify how the CFPB would use this prong of UDAAP. The 2020 statement was subsequently withdrawn in March 2021 when Acting Director Dave Uejio took over following President Biden’s election victory.
The CFPB is clear in its most recent Policy Statement that it reads its authority in this area broadly, and furthermore, it also plans to engage in enforcement activity outside of the limits of its Policy Statement. Industry has argued this is problematic because the CFPB in its most recent Policy Statement appears to reserve the right to use UDAAP for virtually any business practice it does not like.
Several industry commenters highlighted concerns with various sections of the Policy Statement. For example, the Policy Statement describes an unreasonable advantage, including that regulators do not need to show substantial injury to establish liability. Industry commenters pointed out that the CFPB is essentially saying any perceived minor injury could be “abusive” under this line of reasoning. Further, many commentors pointed out that having a minimal time, profit or other advantage over a customer in a capitalistic society would not be uncommon. The Policy Statement also makes the broad and puzzling assertion that a typical, small advantage gathered by an entity may still be illegal if it is unreasonable.
Significantly, the Policy Statement argues that entities could be liable for taking advantage of an unreasonable lack of understanding on the part of the consumer that the entity itself had no role in causing. Industry’s comments posited that read broadly and in practical terms, this interpretation would seem to mean that entities are responsible for educating all consumers on the risks, costs and conditions of products, and would still be responsible for even an unreasonable lack of understanding after that education.
As another example, the Policy Statement also calls out several industries and widely used practices in the financial services marketplace. It puts focus on financial relationships, which it argues are not entered into with real choice, competition or negotiation, like “credit reporting companies, debt collectors, and third-party loan servicers.”
The framework appears to create something of a heightened standard for entities engaged with consumers “without consumer choice or market competition.” Again, here commenters expressed concern that the CFPB would use UDAAP to broadly heighten the standard for entire industries and practices that are already highly regulated at the state and federal levels. It also includes financial markets that are already subject to various specific consumer finance laws and regulations under the CFPB’s jurisdiction.
FHFA Considers Expanding Authority Using UDAP
A recent FHFA proposed rule related to Fair Lending, Fair Housing, and Equitable Housing Finance Plans would require its regulated entities to comply with 15 U.S.C. 45 (Section 5 of the FTC Act), which prohibits UDAP. FHFA cites the Safety and Soundness Act as the basis for its authority to require the regulated entities’ compliance with Section 5 of the FTC Act. Under the Safety and Soundness Act, FHFA is empowered to oversee regulated entities’ compliance with “other applicable law” and engage in enforcement for noncompliance.
Beyond restating FHFA’s existing fair lending oversight functions, FHFA is notably proposing to expand on previous authority in this area. It states regarding this expanded authority that, “the proposed oversight would be substantially the same as FHFA’s current fair lending oversight functions but would establish FHFA’s oversight of potential unfair or deceptive acts or practices by the regulated entities and would require the regulated entities to file certifications of compliance with fair lending and fair housing laws with regular and special reports.”
Industry commenters expressed concern with the FHFA’s use of UDAP authority, set forth under a seemingly innocuous catch-all provision in the FTC Act, to materially expand its regulatory and enforcement authorities over its regulated entities.
Commenters also pointed out that this is likely in contravention of congressional intent. Commenters argued that under the plain text of the FTC Act, there is no indication that Congress intended for a federal agency, such as the FHFA, to invoke this catch-all provision designed only for germane purposes related to antitrust and other matters under the FTC’s jurisdiction to be applied as the basis for another agency to regulate matters in a completely different industry and/or area of jurisdiction.
It was also noted that the Government-Sponsored Enterprises and the Federal Home Loan Banks have clear directives from Congress with no legislative history supporting the concept of UDAP-related enforcement authority using the FTC Act.
FTC’s Motor Vehicle Dealers Trade Regulation Proposed Rule
Last July, the FTC proposed sweeping rules that would: (1) prohibit motor vehicle dealers from making certain misrepresentations in the course of selling, leasing or arranging financing for motor vehicles, (2) require accurate pricing disclosures in dealers’ advertising and sales discussions, (3) require dealers to obtain consumers’ express, informed consent for charges, (4) prohibit the sale of any add-on product or service that confers no benefit to the consumer, and (5) require dealers to keep records of advertisements and customer transactions.
Notably, the proposed rule, among many other sweeping proposals, would make it a UDAP in violation of the FTC Act Section 5 for a dealer of any motor vehicle to charge consumers for:
(i) add-on products that provide no benefit,
(ii) optional Add-on products without presenting specific disclosures including their optionality and price, or
(iii) any item without obtaining a consumer’s express, informed consent for the charge. The proposed rule also prohibits dealers from having consumers waive of the proposed rules’ protections and will impose specific record-keeping requirements on dealers.
Again, here industry expressed concern regarding whether the FTC has authority under UDAP to engage in such sweeping and subjective actions that could effectively halt the offering of add-on products such as GAP protection. Industry pointed out that the FTC’s proposal is duplicative of several laws and regulations already in place that provide the necessary transparency in this market for consumers. For example, the Truth in Lending Act and Regulation Z already have extensive requirements for consumer credit transactions. Moreover, state requirements, as well as the McCarran-Ferguson Act of 1945 for the business of insurance, already outline the regulation of most, if not all, voluntary protection products.
Looking Ahead
A number of industries, under the jurisdiction of various federal regulators, now must wait to see how several of these proposals look in their final form or play out in the enforcement space. These trends across agencies have raised alarm bells about overreach that could not only create confusion for compliance and supervision programs, but also target certain practices and entire product offerings outside of any directive or action from Congress. Various regulatory agencies have shown that they are not afraid to flex their muscles using UDAP and UDAAP authority, and industries should be taking note of this concerning trend that muddies the waters and inhibits clear rules and requirements.
Brownstein’s team is well-positioned to help industries advocate for clarity on these topics and understand new compliance risks associated with them.
This document is intended to provide you with general information regarding UDAP- and UDAAP-related federal policy proposals. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.