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From Banking and Finance Law Daily, August 22, 2014

Fed to repeal unfair lending rules; change might make no difference

By Richard A. Roth, J.D.

The Federal Reserve Board is proposing to rescind Reg. AA—Unfair or Deceptive Acts or Practices (12 CFR Part 227) because the Dodd-Frank Act eliminated the Fed’s authority to write rules that implement the Federal Trade Commission Act. However, the Fed and the other federal bank, thrift, and credit union regulatory agencies are warning that they retain supervisory and enforcement authority over unfair or deceptive acts and practices. The practices prohibited by Reg. AA still may be illegal under the FTC Act and the Dodd-Frank Act (CA 14-5).

According to the Fed, the Office of the Comptroller of the Currency effectively repealed the UDAAP rule that applied to federal savings associations in 2011, and the National Credit Union Administration intends to rescind its rule as well. However, those agencies, as well as the Consumer Financial Protection Bureau and Federal Deposit Insurance Corporation, are joining in the new interagency guidance, making it applicable to any lender that is federally supervised and examined.

Interagency guidance. The interagency guidance says that the banking regulatory agencies’ UDAAP rules were substantially similar to the Federal Trade Commission’s Credit Practices Rule, which remains in effect but does not apply to banks, thrifts, or credit unions. The guidance is intended to make clear that acts which were unfair or deceptive under the banking agency UDAAP rules may well remain unfair or deceptive.

“[T]he 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 says. The conduct still may be found to violate Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act (12 U.S.C. §5531 and §5536, respectively).

Other guidance. The Fed also emphasizes that its 2004 UDAAP guidance remains in effect. CA 04-2:

  • outlines the standards for what is considered an unfair act and what is considered a deceptive act;

  • describes how the Fed assesses whether a particular act violates either of those standards;

  • describes the relationship between the UDAAP prohibition and other consumer financial protection laws; and

  • sets out risk management expectations for Fed-supervised banks.

Reg. AA rescission. In its proposal, the Fed observes that the Dodd-Frank Act did not transfer FTC Act rule-writing authority to the CFPB, which means that neither the Fed nor the bureau can write rules implementing FTC Act Section 5. However, the bureau does have the authority to write rules addressing acts or practices that are unfair, deceptive, or abusive—“abusive” being a concept added by Dodd-Frank.

The proposal also repeats that the bank, thrift, and credit union regulators still have UDAAP supervisory and enforcement authority.

Reg. AA currently applies specifically to six practices, the proposal says. Banks may not:


use confession of judgment clauses;


require waivers of state law exemptions protecting homes or personal necessities from attachment unless they were pledged as collateral;


use wage assignments;


take security interests in household goods unless the goods were pledged as collateral or are in the bank’s possession;


pursue a co-signer for payment unless the co-signer was given proper written notice of his legal obligations; or


pyramiding late fees.

The guidance makes clear that these practices likely remain prohibited.

MainStory: TopStory ConsumerCredit CFPB DoddFrankAct FederalReserveSystem Loans UDAAP

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