Commercial Loans and UDAP

Issue/Inquiry

If a commercial loan customer had trouble contacting the appropriate personnel at the Bank to make an inquiry, would that be considered a UDAAP issue?

Response Summary

UDAAP does not apply to commercial transactions, but similar criteria under the UDAP rules of section 5(a) of the FTC Act would apply. A determination must be made in this case as to whether the inability of the commercial customer to contact the appropriate personnel of the Bank in order to pose an inquiry was unfair to the customer.

Response Detail

The Unfair, Deceptive or Abusive Acts and Practices (“UDAAP”) rules would not apply to commercial transactions. Section 1031(a) of the Dodd-Frank Act empowers the Consumer Financial Protection Bureau (“CFPB”), and states:

 

The Bureau may take any action authorized under subtitle E [the part granting the CFPB’s enforcement powers] to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.

The Bank should be aware, however, that section 5(a) of the Federal Trade Commission (“FTC”) Act remains in effect. It prohibits unfair or deceptive acts and practices (“UDAP”) affecting commerce. This means that it covers any such acts and practices with regards to both consumers or businesses. The concepts of “unfair” and “deceptive” in UDAAP were derived from those of the FTC for UDAP.

In the FDIC Chicago Region Compliance Conference Call on June 16, 2011, the FDIC noted that the areas with the greatest potential for unfair or deceptive acts and practices under the UDAP rules included servicing and collections.

In this case, if there was a UDAP question concerning a commercial loan customer being unable to reach appropriate personnel of the Bank to pose an inquiry, it would likely concern whether such a practice was unfair. Under UDAP, an act or practice is “unfair” when:

• It causes or is likely to cause substantial injury to customers
• The injury is not reasonably avoidable by customers
• The injury is not outweighed by any benefits

With regards to these criteria, FTC guidance on unfairness (i.e., the FTC Policy Statement on Unfairness, December 19, 1980) offers the following insights:

 

Substantial injury usually involves monetary harm, but it can also include reputational harm.  An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury.

 

An act or practice is not considered unfair if customers may reasonably avoid injury. Customers cannot effectively avoid injury from an act or practice if it interferes with their ability to make decisions or to take action to avoid injury.

 

To be unfair, the act or practice must not be outweighed by any offsetting customer or competitive benefits also produced by the act or practice. Costs that would be incurred for remedies or measures to prevent the injury are also taken into account in determining whether an act or practice is unfair.

Whether the commercial customer in this case has suffered an injury is a question of fact that will depend on the nature of the inquiry the customer wanted to make. If it concerned an issue with some aspect of the loan, and the failure to resolve it resulted in additional fees or charges, a default, or damage to the customer’s reputation or creditworthiness, then an argument could be made that the inability of the customer to reach an appropriate Bank employee was unfair. The customer would not have had a reasonable way of avoiding such an injury, except by contacting the appropriate personnel. If this inability to reach the appropriate personnel was because the Bank had reduced staff, then this might be an offsetting advantage, to the extent it resulted in reduced costs and thus smaller fees or charges associated with the loan. However, this is not a strong argument, as adequate servicing should be a given aspect of a loan.

What the Bank should do is make a determination of the nature of the incident and whether it was unfair to the customer from the standpoint of UDAP. It should document its findings, the facts underlying them, and its analysis, and implement the appropriate changes to its acts and practices, if warranted.

Even if the Bank’s act or practice was not unfair in this particular case, the Bank should also evaluate whether it could be unfair when the subject of the inquiry was of greater importance.

This entry was posted on Monday, September 12th, 2016 at 3:00 pm.