What Is Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)?

Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.

What Is UDAAP?

UDAAP is an acronym that refers to unfair, deceptive, or abusive acts or practices by those who offer financial products or services to consumers. UDAAPs are illegal, according to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The rules about UDAAPs were created by the Consumer Financial Protection Bureau (CFPB). Enforcement is shared by the CFPB and the Federal Trade Commission (FTC).

Key Takeaways

• The acronym UDAAP refers to unfair, deceptive, or abusive acts or practices by those who offer financial products or services to consumers.
• Regulators created new laws in the wake of the financial crisis to protect consumers, which included defining and outlawing UDAAPs.
• Financial product and service providers cannot coerce or deceive consumers into making unwanted purchases and are prohibited from making misleading statements about products and services to consumers.
• The Consumer Financial Protection Bureau has the authority to regulate UDAAPs while the agency shares enforcement responsibilities with the Federal Trade Commission.
• Regulators evaluate financial products and services for consume harm on a regular basis.

Understanding UDAAP

Defining and outlawing UDAAPs were among the many steps that financial regulators took following the financial crisis. It was during this time that financial regulators created new laws and regulations to protect consumers and boost consumer confidence in financial transactions. The most notable piece of legislation was the Dodd-Frank Wall Street Reform and Consumer Protection Act.

An unfair practice is one that harms consumers financially and that consumers cannot reasonably avoid. The harm does not have to involve a large amount of money. Under the law, unfair practices do not benefit consumers or market competition which would make the potential for harm a valid trade-off. Financial product and service providers are not allowed to:

• Coerce or deceive consumers into making unwanted purchases
• Mislead consumers through specific statements or through a lack of clear and full disclosure

The government does not determine which financial products and services are best for consumers, but it does require that consumers have access to information that lets them choose the best options for their situations. Consumers should only have to take reasonable measures—not impractical or expensive ones—to determine whether purchasing certain financial products or services is in their best interests.

The law generally does not cover emotional harm, except possibly in cases of excessive harassment.

The Role of the CFPB

The Consumer Financial Protection Bureau has a key role when it comes to UDAAPs. Dodd-Frank gives the agency the authority to make rules about these practices. The act also includes the authority to enforce any actions that prevent the "unfair, deceptive, or abusive acts or practices" related to consumer offerings and transactions for financial products and services as long as the entity falls within the CFPB's jurisdiction.

The Role of the FTC

The CFPB also grants enforcement authority to the Federal Trade Commission. Just like the other agency, the FTC ensures that financial products and service providers adhere to consumer protection laws by being truthful and ethical in their offerings and practices. As such, it is responsible for investigating complaints, enforcing regulations, and taking any action against entities that violate the law. This includes issuing fines and penalties, and even prosecuting offending service providers.

You can review the Consumer Financial Protection Bureau's definition of UDAAPs on its website. If you feel that you've been affected, contact the CFPB or the FTC to file a complaint.

Examples of UDAAP

The following are examples of unfair or deceptive practices:

• A lender keeping a lien on a house that is fully paid for by a consumer
• A credit card company issuing convenience checks to consumers, then refusing to honor them without notifying those consumers
• A bank maintaining a relationship with a customer who has repeatedly committed fraud
• A car dealership advertising $0 down payment car leases without clearly disclosing the associated fees
• A mortgage lender advertising fixed-rate mortgages but only selling adjustable-rate mortgages

Regulators routinely evaluate financial products and services for potential sources of consumer harm.

Real-World Example

The CFPB ordered three American Express subsidiaries to refund about $85 million to around 250,000 customers in October 2012. The agency determined the subsidiaries harmed consumers in interactions ranging from advertising credit cards to accepting payments to collecting debts.

The bureau found that consumers were deceived about credit card rebates and about the benefits of paying off old debt. The CFPB also found that some applicants were illegally treated differently based on their age, among other charges.

What Does UDAAP Stand for?

UDAAP is an acronym that stands for unfair, deceptive, or abusive acts or practices by the providers of financial products and services. They are illegal as per the Dodd-Frank Act. The law gives authority to the Consumer Financial Protection Bureau to come up with rules surrounding these illegal acts. The CFPB and the Federal Trade Commission are both tasked with enforcing these regulations to ensure consumers are protected from unscrupulous lenders and financial institutions.

What Constitutes a UDAAP Violation?

There are many examples of unfair or deceptive violations. These include failing to provide customers with promised services, using bait-and-switch tactics, and misleading consumers about costs and prices for products and services, among others.

Who Has the Rulemaking Authority for UDAAPs?

The Dodd-Frank Wall Street Reform and Consumer Protection Act was established following the 2007-2008 financial crisis. Its goal is to protect consumers and boost confidence in the financial system. The act charged the Consumer Financial Protection Bureau with coming up with the rules surrounding UDAAPs. The CFPB and the Federal Trade Commission both enforce the regulations set forth.

The Bottom Line

The financial crisis of 2007-2008 brought to light many failures of the financial system. One of these was the lack of transparency and accountability of certain financial institutions. The Dodd-Frank Act helped establish rules to protect consumers and ensure that lenders, banks, and other financial service providers deal with consumers fairly and ethically. Both the CFPB and the FTC are responsible for ensuring that these entities live up to the rules. If you feel that you've been deceived or are the victim of unfair practices, contact the CFPB or FTC and file a complaint.