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UDAAP Compliance Trends and Best Practices Pt. 1 · COMPLY: The Marketing Compliance Podcast

• 0:07
  Speaker 1: Hey there , pie Podcast listeners, and welcome to this week's episode. This week's podcast is the first part of a conversation between four industry experts, including James Kin from Troutman Pepper, Ryan Sarafin from Wiener Brodsky Keter , PC Pia Thompson from Lawson gc, and Rhonda McGill from Perform Line . Today they discuss their unique insights into compliance on unfair, deceptive, or abusive acts or practices, or more commonly referred to as udap . Listen as they discuss background on UDAP compliance risks to be aware of as it pertains to Udap and their take on the CFP B'S policy statement on abusive acts and practices. Thanks for listening and enjoy.
• 0:56
  Speaker 2: Hi, good afternoon everyone. My name is Rhonda McGill and I am the Senior Director of the Client Success Team here at Perform Line . Today we wanted to get together with some of our friends to talk about minimizing UDAP compliance risk. And thank you all again for joining us today. I think this is an important topic that really , um, has peaked interest and , um, during this campaign for udap , we've seen , um, quite a few of our folks have expressed a , a lot of interest in the content that we've been putting out. Um, so with that said , um, just to give some of that, that background as we're talking about udap , we know that UDAP has evolved throughout the years, and most notably in the 2007, 2008 ish , um, crisis with the financial , um, sector , um, Congress started issuing that authority to the states and banking agencies and then the creation of C F P B in 2010. Um, the financial services industry has changed so much throughout the years and it's continuously evolving and it's oftentimes it's going at a faster clip than what our regulators are even able to keep up with. And so at that , but it's still incumbent on the businesses to, you know, stay on top of these evolving regulations. What do you recommend companies do so that they can stay up to date with U DAT regulations and the many emerging issues and trends within it? I can turn it over to whomever would like to jump in and start on that one.
• 2:24
  Speaker 3: Well , as in-house , uh, just super quick. Um , I think it's important to have your council kind of selected so that you're not always reacting. And so those are an extension of your in-house legal department, and so they'll notify you. They will know about your business in addition to , um, you know, services and outside vendors that aren't law firms, but are heavily embedded in the space , uh, because it's very hard in-house to be up to date on all of those things. Even with the compliance department, even with regulatory lawyers, you know, we have company things that we're focused on .
• 3:12
  Speaker 2: Mm-hmm. . Brian , were you were gonna say something?
• 3:17
  Speaker 4: Yeah , no , I was just gonna say , um, you know, one of those things actually that I found to be really helpful, the cftb publishes something, it's about two or three times a year. They're called supervisory highlights. Um, basically they're , they're reports of violations that the CFP has been discovering during their examinations. Um , obviously ex exams are confidential, so it's all on a no name basis, but I found it actually, it's a pretty helpful source to identify , um, either a issues that they've suddenly seen a lot of people committing, or b it's kind of a place where they start to sort of put out the first, the the first notions when they have a new legal theory. Those sort of identified in some of these highlights. Um, and I've actually found this be really useful just as a source of , um, is , is a place where you can , where they kind of telegraph some of what's, what some of what they're intending to do going forward. Um, and you know, the cp they , they publish a lot of material late . They , they guidance statements, they have blog posts and articles on their website, which are a little more consumer-oriented. But , um, again, you know , uh, these publications, they tend to be a pretty good way to find out what's what's coming down the hill .
• 4:23
  Speaker 3: And Brian , thank you for pointing that out because one of the things we do is we summarize the quarterly enforcement actions for CF p b that impacts our business. Mm-hmm . and , uh, for example, in California, the D F P I or other states that have an active state bureau so that , um, the board is being updated with respect to our industry . So Brian , that was a great , uh, reminder that somebody in the compliance department that is their gig Absolutely . For the board materials, each board .
• 5:01
  Speaker 2: Absolutely. It's so important. And I think so, so often boards are kind of the last to know. So that's a great call out about the importance and the duty of the board.
• 5:11
  Speaker 5: Yeah. Just , just to add on that , um, and I agree with both Pete and Brian , so I want to just kind of add to what they're saying, build on it. Uh, I agree with Brian a hundred percent that the CFP B'S quarterly supervisory highlights are often a precursor to kind of more aggressive legal theories that they will eventually assert or are asserting non-publicly in an enforcement action. And you don't see the output until a year later in a public consent order. So that's why you gotta review the supervisory highlights in tandem with the enforcement orders , cuz I think that gives you , uh, a better kind of more complete picture. And then to kind of piggyback on one of P's comments , um, you know , uh, UDAP present a lot of challenges , uh, but it's not for lack of information. Cause there are a lot of , uh, bulletins and guidance and consent orders and it's almost overwhelming, right? If you're in-house. So I think one of the ways that outside counsel can help you is not only just staying abreast, cuz a lot of people can kind of stay abreast of these developments cuz they're mostly public, not always. Um, but it's understanding how a consent order supervisory highlight, which , uh, the fact pattern may be kind of vague or not applicable to you, how that will translate to your business model or your product. So , um, having that knowledge either in-house or outside counsel of what you do of your particular issues and product offerings and kind of, you know, I think transferring the , um, kind of the data sources that can be overwhelming and , and kind of sifting through it to say this is is what's relevant and specifically how is it relevant to you or to us.
• 6:59
  Speaker 2: Makes a lot of sense. So recently the CF p b issued a policy statement on Abusiveness , um, to address the changing market. And in a recent speech , um, I cannot remember where it was at, but I'm gonna kind of paraphrase what Director Chopra had said because I, it really was really a explanatory background where he said the abuse of prohibition is focused on a company's conduct that obstruct people's ability to digest information, whereas deceptions are more concerned with words and abusive actions. So can each of you share some of your thoughts about po the policy statement and what do you believe are some of the important takeaways that we should be aware of? Especially, I'm looking at like AI and you know, how that's starting to emerge as these things continue to emerge. What are some of the things that you can think of that people should be aware of as applies to that abusiveness , um, policy statement? I'll start with, let's start with Brian .
• 8:04
  Speaker 4: Sure. No , um, I , I think the abusive standard, it's , it's interesting because, you know , um, obviously the , the , the , the statute covers unfair, deceptive or abusive acts or practices, and the unfair or deceptive components are fairly well known . I think , um, they , those two parts, unfair deceptive came from the Federal Trade Commission Act, so like 1938. So those have been around a long time, a long time. They've been deeply interpreted by courts. Uh, whereas this abusive prong that kind of came into the CFPD statute is somewhat newer. And so there has been a lot of effort to try and figure out what is abusive that would not otherwise also be unfair or fair . What , what does abusive bring to the game that wasn't already there? Um, so that , that was why the , uh, the new policy statement that they issued was pretty interesting. Again , uh, it seems like their focused, they sort of put it under, under two components basically. They , they didn't want, I guess a , they really don't want people to be taking ad advantage or unreasonable advantage of consumers. Yes. Just based on sort of circumstances that might arise around the transaction. It might , it might, it might not even be something that , uh, the lender, the financial service provider set up, but just something that'll prevent the consumer from either understanding the product that's before them or else , uh, also
• 9:29
  Speaker 3: Can you give some kind of concrete example of that ? Because one of the frustrations mm-hmm . , I think that I find is, you know, it's also nebulous and it's a way for them to back in, you know, anything mm-hmm . to udap . And so if , if , so I wasn't so convinced that this policy statement helped really. So if you could give any, you know, examples of how you think it would help a company dealing with consumers, that would be great.
• 10:03
  Speaker 4: Sure. So, again, you know , one of the big things it looks like, you know, they're , they're , they're very skeptical disclosures and find print mm-hmm . . Um , and , and one of the things I've noticed, they've actually, they've taken a big interest in websites. Um, so you might have, you know , you know , someone signing up for a service on a website for example , uh, you know, the disclosure might be presented , but if you have to click through a couple extra buttons to get there, or if it's, you know, somewhere on the page where it's just a little harder to see than the, the , the buttons you put to go through the signup process. So that's one of those kinds of things that they seem to be focused on.
• 10:36
  Speaker 3: Okay . And , and on that , I I wanna say something very specific on that. So this is something that I've have to explain to my companies on a regular basis is , and I have had a state attorney gen , uh, I've had more than one say , attorneys general say two my things . We understand that there isn't a consumer on the , who will read any of your stuff . We are the ones who will read it and we will judge it. And so I get a lot from my business books who are like, we're not putting in three extra click buttons and nobody reads it. Right? Like, I know when my iPhone is updated, like whatever I'm agreeing to could be the entire text ofcom, right? agree , agree. I've never read any of them mm-hmm . . And so I think that is something we have to highlight is let's stop with the charade that we are putting this together for consumers. We are putting it together for regulators because it's what they want to see . Because we actually don't want people buying our products who don't understand what they're getting. Like that's actually nothing for business , um, to have people confused. But what's actually in the words, you have to go over and over it for how the regulators are going to read it. Yeah . Um, is, is what I find, and especially when they'll say that to your face that we don't actually care if any consumer was ever confused. Like they , they actually, you know, they don't need that .
• 12:35
  Speaker 2: Right. And , and I think when you think about like, even like the most recent thing around the legion, you know, and you know, who's paying the most to get their name in the top 10 or whatever the list is. I think that's another perfect example of where they are going with this type of a thing. Brian , or , um, James, would you wanna
• 12:56
  Speaker 5: Yeah, just, just to weigh in a little bit , um, you know , these are some great observations. Um, I , I agree with Pia that you're doing this for the benefit of the regulator, not the consumer. Um, and , and I'd say, what else would I add to that about the abuse of this policy? It's, it used to be that if you disclose things well and you had proper kind of process mm-hmm. , right? Uh, you know, clear flow, clear disclosures, you know, people get to click and see things that was adequate. Um, I think , um, the abusiveness and the policy statement and also kind of their whole application of unfairness really is about outcomes, right? So the process that flows, the disclosures can be great, but if they just don't like the outcomes , um, either at an individual transaction level or at an aggregate level, they're gonna just assert unfair and abusive. So , um, so the CF p b sadly is , uh, a result oriented agency. You know, people talk about process, they're not a process driven , right? Processes. You have public, you know, notice and comment. You have a fair transparent process. People know, companies know the rules of the road , um, the C A P B kind of, you know, they have their idea of what their outcome is, and then they play a little bit of gotcha with you, right? So a and then, so what does that mean for companies? So , uh, one of the ways I try to give practical advice is , um, really what the CFPB and others want is almost a fiduciary duty. Um , and my colleagues joke with me and they say, James , strike almost, they want a fiduciary duty, a fiduciary
• 14:37
  Speaker 2: Duty. Yes.
• 14:38
  Speaker 5: And, and , and so that's , uh, the reason why I like using that concept, you'll never see that word anywhere in cf p b literature, but I like to use it as a good practical kind of way of explaining to companies, cause people understand fiduciary duty and product suitability in other fields like security so they can transfer it. Right? Yeah.
• 15:01
  Speaker 3: I just wanted to say, like for the audience, if you could kind of really break that down, like what the , do you mean when you say fiduciary duty, like in our world, what would that look like?
• 15:14
  Speaker 5: I mean, that means you have to not just be honest and transparent the consumer, you have to look out and protect their interests. Yeah . Right? I mean, you're taking it to another, they are your fiduciary. You owe them a fiduciary duty, right? That's the outcome. Like, you have to give the consumer a good, fair outcome. It's not enough to just say, caveat, I disclose, and if you do whatever you do, that's on you, not on me. That's not good enough. That's fiduciary duty. And the one other thing I'd say about the policy statement, I'd love to get people's reaction to it, is it's, again, not in the policy statement, but , uh, director Chopra's kind of testimony, I think it was testimony, or it might have been his press conference announcing the policy. I think he let the cat outta the bag a little bit. Uh, to Brian's point, there's a lot of precedent and guidance around unfair and deceptive. And when Chopra was at the ftc, he was often critical of the FTC and what they did and didn't do. And so what Director Chopra said in his, I think it was testimony, but it was public remarks, is he likes abusive. I'm paraphrasing because it's not bound by the precedent that he doesn't like about unfair and deceptive . So he has a clean slate to , to do whatever he wants, and all the adverse guidance and precedent and cases on udap with one a , like, it , like irrelevant to him, like no barrier.
• 16:41
  Speaker 2: Yeah. And
• 16:43
  Speaker 4: I think particularly again , in the financial service industry, this can kind of become an issue. Us , for example, if , uh, a consumer is working with a mortgage officer or a bank consultant about which mortgage should you get or which account should you open, you know, the, the mortgage officer, the bank consultant, they kind have an interest in making the sale,
• 17:00
  Speaker 2: Which
• 17:01
  Speaker 4: Oftentimes will be the product that's best suited for the customer, but maybe sometimes some differences of opinion of what's the best product . Absolutely. And um , again , ICP really doesn't want customers to get the impression you're solely focused on doing , you know , picking the product . That's the exact perfect one for them
• 17:21
  Speaker 2: For sure. Now that's,
• 17:23
  Speaker 4: They don't , they don't want , they don't want the customer to think that.
• 17:26
  Speaker 3: Great . And, and Donna , I wanna go to one of the things you said in the intro about, you know, so much of this obviously came out of 2000 , 2008 and the mortgage crisis and the financial crisis, and Brian, you just mentioned mortgage officers. Well , one of the things that I have found over the last 15 years is the agencies and the regulators don't seem to understand the difference between a secured and unsecured product. And so I think a bunch of these concepts mm-hmm . , um, I'm not saying they're completely irrelevant, but ability to repay when it is not tied to your home, when it is not tied to all these other things. Is that so relevant, or is that perhaps in infantilizing of the consumer who needs the loan to make their own decisions, they need this lump sum, they can make their own decisions about what they're going to pay back and what their choices they're gonna make from their monthly budget. Right. Um, and so they're being kept from getting this lump sum mm-hmm . because of a tool that wasn't really meant for that product. And so James and Brian , I'd love to kind of get your feedback on that because I've had some difficult times with the Department of Justice with all sorts of agencies where no matter how many times I explain it's an unsecured product, they just, they don't get it mm-hmm . and they don't care.
• 19:24
  Speaker 4: So one of the things that , uh, that's sort of interesting, again, this is with the CFPB and with some of this consumer projection generally, you know, in a lot of areas, the lot the lock and asked what would the reasonable person be the reasonable person's number . But when you get into consumer protection, particularly, for example, in dealing with the cfp, they're more focused on what would be least sophisticated consumer value .
• 19:46
  Speaker 3: Mm-hmm.
• 19:47
  Speaker 4: Mm-hmm. . Um , so the , they're , they're , so, again, they're kind of sort of bending over backwards to kind of make all inferences in favor of the consumer might be one way to look at it. So again, you know , part of it is , um, you know , what , what are , what are consumers gonna understand basically in some ways that almost has to be spoon fed to them? Or, you know, how do you highlight what are the most important parts? Yep . So, so you're not, you know, overloading them with a pose full of words that, you know, not all of them are gonna get through. I think that's important. And again, as , as far as your point of , um, you know, the unsecured loans, again, I think that goes to making them understand what are the consequences if you, for example, don't pay back what you owe . Yeah , yeah . Making sure they understand that.
• 20:29
  Speaker 5: Yeah. I , I , yeah, I agree. Just taking my shot at P'S question. I agree. It's very paternalistic. Um, you know, I , I think sometimes the government folks cross the line and in the name of consumer protection, they're really picking winners and losers in the marketplace. Um, and , uh, it , it just some kind of contextual data points. Like when Elizabeth Warren over the years , um, talks about the post office offering loans , um, and , you know, banks make too much money. I mean, all of that indicates like in , in , in her mind, in people who think like her, that , um, it , it really, banking should be just a utility that's a kind of a low profit, widely accessible kind of a vanilla product for everybody. And the problem with that is, you , you lose innovation, you lose competition. So as a FinTech focused practitioner, one of my common challenges is explaining, educating, defending like a , a kind of a novel product to a regulator cuz they're so robotic and rigid in their thinking. If it doesn't fit neatly in a regulated box, they're immediately very skeptical of it and they think it's, you know, harmful and they don't realize that it's often , um, a market driven positive alternative to existing products or , um, an existing problem or gap in the marketplace.
• 21:59
  Speaker 3: Absolutely. Well , and, and on that topic to, to take it out to some concrete examples, so I have two things on this. You know, having loans available at libraries or post office. Um, so the , I was speaking with someone from the cfpb and I had a high interest loan product, and this guy at the CFPB said, well, I don't understand why these people aren't going to banks. And so I said, I agree with you, and I don't know why they don't have private bankers too, because it's so nice. Like, I've never had to call a toll free number. Like, I don't understand, why don't they do ? Yeah. Right. And it was just so obnoxious on his part, right? It we're talking about people who don't have every option. And then here's the second thing, and it goes really directly to this post office idea . So I've been in the subprime space a lot and in the prime space, but in the subprime space, what are the states doing? They are putting in interest rate counts, right? Of 36%. Well, that doesn't mean subprime people get 36% loans. It means they don't get any loans. And so if the government has an issue with very high percentage rates that have to exist for two reasons, right? They exist because of defaults and they exist because of cost of capital, right? And who has the least cost of capital? National banks, right? Back in the day, their 10 years ago, their cost of capital was zero, right? And they still won't make these loans . So then you go to the fintechs who sometimes have 12%, 14% cost of capital , then they have big default rates. And so to be able to offer the product, the math , is the math . And you end up with these higher rates . And so because subprime lenders are demonized, they decide we're putting in account , that'll be the end of this. Well, you know what, if you wanna put subprime lenders out of business and not have 50, 60 , 90% interest loans, go ahead, give loans at the post office for 30%. And maybe it is a public good that as taxpayers, we subsidize the defaults, right? That's a whole philosophical discussion as to what we should do as a society. Yeah . But let's have that discussion. Discussion , but instead they just ban it . And so James, I think that really goes also to your point where stop talking about it. If you're gonna do it, do it. But instead what you're doing is you're taking this huge group of the American population and saying you don't get credit .
• 25:21
  Speaker 2: Thank you for that. That was a great , um, great discussion.
• 25:26
  Speaker 1: Thanks for listening to this episode of the Comply podcast. Many of the key topics of discussion today are highlighted in our top UDAP compliance issues report, which I will drop for you and today's show notes. And if while listening to our podcast today, you realize you may need to prioritize incorporating udap into your marketing compliance program, I'm also going to include a link to our udap resource library. It has a number of helpful pieces to help you better understand and prioritize UDAP compliance. As always, for the latest content on all things marketing compliance, you can head to content dot perform line.com . Thanks for listening and we'll see you next time.