Consumer Finance Insights
September 19, 2014

Interagency Guidance: Regulators Will Enforce UDAAP Laws Notwithstanding Repeal of Regulation AA

The Federal Reserve Board recently made headlines when it repealed its Regulation AA to comply with the Dodd-Frank Act, leading some to wonder how, and to what extent, regulation of financial institutions might change going forward. But the federal agencies charged with regulating banking and credit activities have made it clear that they will continue to enforce prohibitions against unfair, deceptive, and abusive practices. On August 22, 2014, the Fed, CFPB, FDIC, NCUA, and OCC issued an Interagency Guidance Regarding Unfair or Deceptive Credit Practices stating that these agencies retain, and will continue to exercise, enforcement authority concerning these practices.

The Fed implemented Regulation AA, which governed certain unfair or deceptive acts or practices, in 1985 pursuant to its authority under Section 18(f)(1) of the FTC Act, which authorized the federal banking agencies to implement rules governing unfair or deceptive practices.  Regulation AA prohibited banks from “pyramiding” late fees, misrepresenting the nature or extent of co-signer liability, and using certain contract provisions and remedies in consumer credit contracts.  The FHLBB and NCUA issued similar regulations pursuant to the rulemaking authority of the FTC Act as well.

Section 1092(2) of the Dodd-Frank Act repealed this FTC Act rulemaking authority, requiring that these agencies repeal Regulation AA and rules like it. But the agencies’ August 22, 2014 Guidance warns that “the repeal of credit practices rules applicable to banks, savings associations, and Federal credit unions should not be construed as a determination by the Agencies that the credit practices described in these former regulations are permissible.”

The Guidance highlights several ways in which these agencies will continue to enforce prohibitions on unfair or deceptive practices.  First, the Guidance asserts that many of the practices that were formerly regulated by the agencies’ regulations may still violate Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act.  Dodd-Frank did not strip the agencies of their supervisory and enforcement authority concerning unfair or deceptive practices, and in their Guidance, the agencies indicated that they intend to continue exercising that authority. Additionally, the CFPB retains its authority to enforce the FTC Act as to creditors under its jurisdiction.

And while the Dodd-Frank Act constricted certain banking agencies’ rulemaking authority, it may have the ultimate effect of broadening the scope of prohibitions on unfair credit practices.  The Act added “abusive” conduct to the list of acts or practices prohibited under the law (causing the acronym describing these acts to be amended to “UDAAPs”), and it gave the CFPB new rulemaking authority concerning such practices. The Act also deputized state agencies and attorneys general to investigate and enforce federal UDAAP laws and regulations, marking an expansion in states’ roles in enforcing federal laws and regulations.

The practical impact, if any, of these changes on the banking industry remains largely to be seen.  In the meantime, financial institutions should ensure that their policies and practices comply with current UDAAP laws and regulations, and they should look for additional guidance from the CFPB on whether, and how, it will change UDAAP regulations and enforcement.