Some community banks believe that they are not subject to the unfair, deceptive or abusive acts or practices (collectively referred to as UDAAP) provisions of Dodd-Frank. These provisions prohibit all such acts or practices affecting commerce, including banks.

Who does it apply to?
In reality, UDAAP provisions apply to all banks, regardless of their size. A large percentage (43%) of UDAAP violations cited by the FDIC was for banks with total assets of $250 million or less. UDAAP violations have resulted in unsatisfactory CRA ratings, downgraded consumer compliance ratings, restitution to customers and the pursuit of civil financial penalties, which can be significant.

What is considered a violation?
An act or practice is considered to be unfair if it is likely to cause substantial consumer injury that cannot be reasonably avoided and is not outweighed by consumer or competitive benefits. One is considered to be deceptive if it misleads, or is likely to mislead, the consumer. And an act or practice is considered to be abusive if it materially interferes with the ability of a consumer to understand a term or condition of a financial product or service or takes un-reasonable advantage of the consumer.

A similar provision community banks should be aware of is the “disparate impact” standard, which is part of the Fair Housing Act (FHA). According to this provision, a member of a protected class can challenge a policy he or she believes is discriminatory based on a prohibited ground, rather than on a blatant intent to discriminate.

What is the impact?
Earlier this year, HUD published a new rule formalizing the use of disparate impact under the FHA. Since the rule took effect in March, the Consumer Financial Protection Bureau (CFPB) has been using a disparate impact test in fair lending examinations and investigations under the FHA, Equal Credit Opportunity Act (ECOA) and Regulation B.

Lawsuits are currently pending that challenge the legality of disparate impact, including one that the Supreme Court has agreed to hear.