Question: We have been told that our advertising is unfair, deceptive, and abusive. Now we’re facing administrative action. The Consumer Financial Protection Bureau seems to be really looking for these violations. But we had no intention of being “deceptive” at all! What criteria is used to determine if there is a violation of this kind with regards to mortgage companies?
Answer: In the current iteration of the rules relating to unfair, deceptive, and abusive practices, Dodd-Frank transferred to the Bureau the FTC’s authorities to adopt rules with respect to mortgage loans. The FTC’s authorities resided in the Omnibus Appropriations Act of 2009. Prior to the transfer and thereafter, several developments took place, such as rules that address mortgage assistance relief services, mortgage advertising, marketing, appraisals, origination, and servicing.
Dodd-Frank authorized the Bureau to meet two goals:
(1) Take any actions to enforce the prevention of a mortgage company or service provider from committing or engaging in unfair, deceptive or abusive acts or practices, commonly known by its acronym “UDAAP,” under federal law in connection with any transaction with a consumer involving a financial product or service or offering a consumer financial product or service.
(2) Promulgate rules to address unlawful, unfair, deceptive or abusive acts or practices under federal law by a mortgage company or service provider in connection with any transaction with a consumer involving a financial product or service or offering a consumer financial product or service. [PL 111-203, § 1031(a), (b)]
To determine what constitutes an unfair act or practice, the Bureau must have a reasonable basis to conclude that (1) the act or practice causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers, and (2) such substantial injury is not outweighed by the countervailing benefits to consumers or to competition. [PL 111-203, § 1031(c)]
This position is entirely in keeping with the FTC’s position. [15 USC § 45(n); also FTC Policy Statement on Unfairness (December 17, 2980)]
The Bureau will determine if an act or practice is a UDAAP violation by forming a reasonable basis for showing that the act or practice:
(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
(2) Takes unreasonable advantage of:
►A lack of understanding on the part of the consumer of the material risk, costs or conditions of the product or service;
►The inability of the consumer to protect his or her interests in selecting or using a consumer financial product or service; or
►The reasonable reliance by the consumer on a covered person (i.e., mortgage company, service provider) to act in the interests of the consumer. [PL 111-203, § 1031(d)]
While Dodd-Frank did not specifically denote what is considered a “deceptive” act or practice in its directive to the Bureau, the FTC’s definition is still the most precise. According to the FTC, an act or practice is deceptive if there is a representation, an omission of information or practice that is likely to mislead consumers who are acting reasonably under the circumstances, and the representation, omission or practice is material. [FTC Policy Statement on Deception (October 1983)]
Jonathan Foxx is president and managing director of Lenders Compliance Group, Brokers Compliance Group, Servicers Compliance Group and Vendors Compliance Group, national companies devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted by phone at (516) 442-3456, by e-mail at [email protected] or visit www.LendersComplianceGroup.com.
