inform. educate. connect. Issue #1 - December 2011  

UDAAP and the New Fair Lending Standard

By Dan Huston, Partner, Moss Adams LLP

What is Fair Lending?
The phrase “fair lending” is usually used in reference to a group of laws applying to financial institutions and designed to protect consumers. While the Community Reinvestment Act, Fair Credit Reporting Act and other laws are sometimes considered part of fair lending, the two primary laws are the:

  • Fair Housing Act. Passed on April 11, 1968, this act expands the Civil Rights Act of 1964 by giving minorities and women greater access to housing and prohibiting loan discrimination.

  • Equal Credit Opportunity Act (ECOA). Enacted in 1974 in response to investigations into consumers' disparate access to credit, this act concerns creditor discrimination.

Violating these laws usually involve declining credit to consumers or offering significantly different pricing and terms based on protected classes (race, color, religion, national origin, sex, marital status, age, and other criteria) compared to others with similar financial characteristics.

Unfair, Deceptive and Abusive
Unfair and Deceptive Acts and Practices, also known as UDAP, is a set of principles derived from Section 5 of the Fair Trade Commission Act (the FTC Act) that deals with trade practices resulting in an unfair advantage. The Dodd-Frank Act adds the word “abusive” to the term, expanding it to UDAAP. The concept of UDAAP is defined by:

  • Acts or practices which cause or are likely to cause substantial injury to consumers and cannot be avoided (Unfair)

  • Representations, omissions, or practices that mislead or are likely to mislead the consumer, where the consumer’s interpretation of these elements is considered reasonable under the circumstances and the misleading representation, omission, or practice is material (Deceptive)

  • Representations, omissions, or practices that 1) materially interfere with the ability of the consumer to understand a term or condition of a product or service and 2) take an unreasonable advantage of the following:

    • A lack of understanding by the consumers of material risk, costs, or conditions of a product or service,

    •  The ability of the consumer to protect their interest in selecting or using a product or service or;

    • The reasonable reliance of the consumer on a covered person to act in the consumer’s interest (Abusive)

Violations cited in recent years have typically involved charges incurred by consumers related to overdraft protection products (for example, Wells Fargo’s $200 million reimbursement to consumers for overdraft fees deemed excessive in August of 2010) or other types of fees that consumers either were not properly informed of or did not fully understand the potential impact of aggregating charges.

However, the application of UDAAP can go well beyond the application of fees and charges to consumer deposit products. 

Fair Lending and UDAAP
So how do fair lending laws and UDAAP intersect? The relationship between the two may not be apparent at first, but guidance provided to federal examiners indicates that if a violation of fair lending laws is identified than UDAAP must also be evaluated. Consider the following:

  • Practices that tend to discriminate against applicants based on protected classes take many forms. Lack of clear disclosures regarding the costs of credit, fees charged, or the availability of other less costly products may result in discrimination and result in significant costs, or damages, to the consumer.

  • Charging fees for products (such as overdraft protection) that results in aggregated charges may impact some consumers more than others when considering protected classes, this can become apparent if other less costly products were available or the institution made no attempts to counsel the consumer regarding the cost of the transactional activity.

UDAAP can also be asserted when patterns of activity that violate provisions of the following are detected:

  • Truth in Savings Act

  • Truth in Lending Act

  • Fair Debt Collection Practices Act

How Can Institutions Avoid Violations?
Some practices that can help protect your institution from UDAAP assertions include:

  • Evaluating written disclosures and advertisements carefully. Are they accurate and easily understood? Can the consumer understand the cost of the product or service from the information provided? Be cautious about using terms that may indicate a product or service has no fees or costs associated with its use.

  • Taking consumer complaints seriously. Establish a program to identify, collect, and analyze customer complaints. Employees must be trained to discern the difference between a service issue and a consumer complaint that may indicate the presence of fair lending or UDAAP violations.

  • Training employees thoroughly with frequent follow-ups. Conduct training with all employees who may have customer contact and complete periodic follow-up communications to ensure they're aware of best practices.

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Dan Huston is a partner with Moss Adams LLP ( He can be reached at 503-471-1291 or