March 2022 OBA Legal Briefs

  • The Beneficial Ownership Rule hasn’t gone away
  • UDA(A)P is becoming all the rage!

The Beneficial Ownership Rule hasn’t gone away

By John S. Burnett

The Corporate Transparency Act of 2021 (CTA) was enacted by Congress on January 1, 2021, as Title XIV of the William M. Thornberry National Defense Authorization Act for 2021, Public Law 116-283. It added a new section 31 U.S.C. 5336 to the Bank Secrecy Act.

The CTA requires that most private domestic U.S. entities formed on or after January 1, 2021, must self-report to FinCEN certain basic information about themselves, their beneficial owners and those individuals authorized to act on their behalf. The stated purpose of the CTA is to “discourage the use of shell corporations as a tool to disguise and move illicit funds” as part of the broader federal attempts to prevent and combat money laundering, tax fraud and terrorist financing.

The CTA requires FinCEN to promulgate regulations implementing the Act. No entity reporting to FinCEN can start until the final implementing regulations are issued and effective, and the structure for that reporting (presumably an online portal and a huge database) is completed.

What’s been completed so far?

FinCEN has begun the process of promulgating the regulations. In fact, FinCEN appears to be moving on the CTA requirements fairly quickly.

On April 1, 2021, FinCEN issued an Advance Notice of Proposed Rulemaking— a form of “heads up” that it was working on the rules and an invitation for stakeholders to offer suggestions and comments on the process.

On December 8, 2021, FinCEN published its proposed rules in the Federal Register [86 FR 69920], with a comment period ending February 7, 2022. There were 250 public comments submitted through We don’t know how many comments were sent directly to FinCEN itself.

As of this writing (early March 2022) no final regulation has been issued.

The CTA and financial institutions

Financial institutions have been required since May 11, 2018, to comply with 31 CFR 1010.230 (Beneficial ownership requirements for legal entity customers). The CTA has not changed that fact, and the regulations are still in effect.

It is true that the CTA was enacted with the intent to shift some of the burdens of gathering beneficial ownership information away from financial institutions and make it a government responsibility. It is also true that at some future time — FinCEN has unofficially suggested it will be a year or more after implementation of its final CTA beneficial ownership regulations — there will be a change for financial institutions, which will probably begin verifying entity ownership information against the CTA database, rather than gathering certifications of ownership information repeatedly during the existence of entity customer relationships.

To get to that time, FinCEN will first need to set up a secure and confidential portal through which financial institutions can make those verifications. How that will be done, or what information they will be required to verify, and what will happen if they are not able to successfully verify the information, has yet to be determined.

And yet, we have heard that bank examiners have identified financial institutions that totally misinterpreted — was this wishful thinking? — what FinCEN has so far done as a license to discontinue obtaining beneficial ownership certifications and stopped obtaining them around the time FinCEN announced the December 2021 proposed rule. If it is true that examiners have found financial institutions that made such an error, I can only imagine the sinking feeling the management, BSA officer or compliance officer at those institutions must have had when confronted with their error.

What to do about it

I sincerely hope your institution was not one of those making that mistake. But if it is, it is fortunate that only about three months have passed since the FinCEN proposed rule was published (in December 2021). If that’s when your institution stopped complying with § 1010.230, you can limit the damage by doing a look-back to identify each of the occasions on which you should have obtained beneficial ownership certification (or certification that information you were provided earlier was still correct) and start communicating with the entity customers involved to get those missing certifications.

If, instead, your institution made the wrong decision back in April 2021 when the advance notice of proposed rulemaking was published, you have a bit more digging to do — almost a year’s worth of account openings, renewals, etc.

Don’t assume that, once FinCEN finally eliminates § 1010.230 (remember there will be a different rule replacing it that you will have to follow), it will not matter that your institution jumped too soon to stop complying with § 1010.230. It will matter, so don’t postpone your remedial action to collect those missing certifications.


UDA(A)P is becoming all the rage!

By Andy Zavoina

I was recently reviewing enforcement actions published over approximately the last 18 months and saw what I believe is a trend not too many bankers are talking about. As an example, on a mortgage servicing topic the Consumer Finance Protection Bureau (CFPB) used the phrase, “…identified various Regulation Z and Regulation X violations, as well as unfair and deceptive acts or practices.” As past due fees were charged it was noted, “Examiners found that mortgage servicers engaged in unfair acts or practices…” and “Examiners found that lenders engaged in unfair acts or practices when they debited or attempted one or more additional, identical, unauthorized debits from consumers’ bank accounts after consumers called to authorize a loan payment by debit card and lenders’ systems erroneously indicated the transactions did not process.” In this article we will examine in more detail some of these violations that were made public. Like an iceberg, we know there is much more to it that we can not see, and we are not certain how much is there. But we do know we don’t want to run into it ourselves.

First, let’s cover some of the rules involving Unfair, Deceptive, or Abusive Acts or Practices so we can understand how broadly they can be applied in different scenarios.

UDAAP penalties can go up to $5,000 per day and if they are deemed “reckless” violations they could be $25,000 per day. Yes, it gets worse. Knowingly violating UDAAP can run a penalty of $1 million a day. Do we expect to see these maximum penalties? That would be a “no.” But the penalties can be severe. Consider that there are civil money penalties for the violations, and we have seen these go back for years and years.

Say a bank creates an add-on product to a deposit account. This product requires the customer to enroll with the bank and provide some affirmation such as that they are in good health, and they need to sign and return this form. But they fail to do this for one reason or another. The bank was diligent however, in charging the customer each month for a service that was never provided and technically could not be. That is a UDAAP violation. It may violate another law or regulation as well, and that law or regulation may also be referenced, but UDAAP has big teeth as we already mentioned the fines available. Because there seems to be no statute of limitations, UDAAP penalties at only hundreds of dollars a month add up quickly when a problem goes back 5 or 10 years.

“Seems outlandish, never going to happen,” you might say. Consider the penalty assessed against First Tennessee Bank by the Office of the Comptroller of the Currency (OCC). The bank sold an add-on product which required two things from the customer. They needed to enroll, and they needed to provide personal verification information. With this service, they would have credit monitoring services. Customers who failed to provide the verification information for whatever reason were charged a monthly fee for a service that was not performed for them. This penalty was in 2016, and the product was launched in 2000. The bank needed to look at 16 years of records. The bank paid a $1 million civil money penalty.

But UDAAP does not stop there. The CFPB can require that agreements be amended or terminated, that customers are refunded for charges that were improper, that restitution be ordered so that the bank understands the severity of the penalty, that profits from the act in question are surrendered and that the government be repaid for the time and effort put into the case. This is all on top of the work spent trying to review 16 years of files and responding to every customer and former customer who claims to have had that product and wants a refund.

There are some basic things that are considered a UDAP issue (one “A,” which omits “Abusive” which was added by the Dodd-Frank Act and is an addition the CFPB enforces) while prudential regulators still look at the Federal Trade Commission Act Section 5 rules for Unfair or Deceptive Acts or Practices. Some basic issues blatantly considered UDAP include prohibited provisions in agreements:

  1.  a confession-of-judgment;
  2.  a waiver of exemption in which the consumer relinquishes rights protecting their home and other necessities from seizure to satisfy a judgment,
  3. a n assignment of wages; and
  4.  the taking of household goods as loan collateral.

Also prohibited is the pyramiding of late fees. If you are not familiar with that concept, assume a borrower is late on a loan payment. They send the exact payment, and the bank applies it by first taking the late fee owed, then interest due and the remainder to principal. But the principal payment is short because of the late fee, so another late fee is accrued. And when the exact scheduled payment is made on time the following month, another late fee is paid and so on. That is pyramiding. I’m sure it doesn’t happen in your bank because automated routines control how payments are applied and interest and principal are always collected first, then fees.

But consider a case discussed more below where the borrower rounded up their payment. The extra principal was simply deposited to escrow. That is an improper application and has a similar impact as late fee pyramiding. The bank has certain remedies it can follow and compliance and/or audit needs to ensure the proper actions are taken.

Lastly, UDAP addresses the Holder in Due Course rule which involves the buying and selling of credit contracts and specifically also prohibits a bank from misrepresenting a co-signer’s liability and requires the bank to give a co-signer, prior to becoming obligated in a consumer credit transaction, a disclosure notice which explains the nature of the co-signer’s obligations and liabilities under the contract.

As already noted, it was the Dodd-Frank Act which empowered the CFPB to prevent unfair, deceptive, or abusive acts or practices. The other agencies enforce the FTC Act, Section 5. Rest assured for all intents and purposes they are similar as it pertains to the ability to right a perceived wrong.

The CFPB has definitions bankers must be familiar with to navigate compliance with UDAP and UDAAP. These are definitions that must be applied broadly when the bank is designing a new product, service, or policy.

Unfair: a practice that is “unfair” is one that:

a)  Causes or is likely to cause substantial injury to consumers;

(Substantial injury usually involves monetary harm. Monetary harm includes, for example, costs or fees paid by consumers as a result of an unfair practice. An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury.

Actual injury is not required in every case. A significant risk of concrete harm is also sufficient. However, trivial or merely speculative harms are typically insufficient for a finding of substantial injury. Emotional impact and other more subjective types of harm also will not ordinarily amount to substantial injury. Nevertheless, in certain circumstances, such as unreasonable debt collection harassment, emotional impacts may amount to or contribute to substantial injury.)

b)  The injury is not reasonably avoidable by consumers;

An act or practice is not considered unfair if consumers may reasonably avoid injury. Consumers cannot reasonably avoid injury if the act or practice interferes with their ability to effectively make decisions or to take action to avoid injury. Normally the marketplace is self-correcting; it is governed by consumer choice and the ability of individual consumers to make their own private decisions without regulatory intervention. If material information about a product, such as pricing, is modified after, or withheld until after, the consumer has committed to purchasing the product, however, the consumer cannot reasonably avoid the injury. Moreover, consumers cannot avoid injury if they are coerced into purchasing unwanted products or services or if a transaction occurs without their knowledge or consent.

A key question is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer’s decision-making. For example, not having access to important information could prevent consumers from comparing available alternatives, choosing those that are most desirable to them, and avoiding those that are inadequate or unsatisfactory. In addition, if almost all market participants engage in a practice, a consumer’s incentive to search elsewhere for better terms is reduced, and the practice may not be reasonably avoidable.

The actions that a consumer is expected to take to avoid injury must be reasonable. While a consumer might avoid harm by hiring independent experts to test products in advance or by bringing legal claims for damages in every case of harm, these actions generally would be too expensive to be practical for individual consumers and, therefore, are not reasonable.


c) The injury is not outweighed by countervailing benefits to consumers or to competition.

To be unfair, the act or practice must be injurious in its net effects — that is, the injury must not be outweighed by any offsetting consumer or competitive benefits that also are produced by the act or practice. Offsetting consumer or competitive benefits of an act or practice may include lower prices to the consumer or a wider availability of products and services resulting from competition.

Costs that would be incurred for measures to prevent the injury also are taken into account in determining whether an act or practice is unfair. These costs may include the costs to the institution in taking preventive measures and the costs to society as a whole of any increased burden and similar matters.

In determining whether an act or practice is unfair, the CFPB may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

UDAP’s unfairness prong applies not only to overt acts and practices, but also to those that unreasonably impair a consumer’s ability to make an informed decision, such as withholding material information until after a consumer has purchased a product.  But a bevy of UDAP case law creates nuances. For instance, “substantial injury” can be monetary or reputation harm, but there must be a significant risk of concrete harm rather than a speculation that harm might occur. An act is not  considered unfair if its benefits outweigh any injuries caused. Some  examples of benefits include lower prices or the availability of products  and services to a wider range of consumers.

A representation, omission, act or practice is deceptive when—

  • The representation, omission, act, or practice misleads or is likely to mislead the consumer;
  • The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
  • The misleading representation, omission, act, or practice is material. This applies when it misleads or is likely to mislead the consumer.

Written disclosures may be insufficient to correct a misleading statement or representation, particularly where the consumer is directed away from qualifying limitations in the text or is counseled that reading the disclosures is unnecessary. Likewise, oral or fine print disclosures or contract disclosures may be insufficient to cure a misleading headline or a prominent written representation. Similarly, a deceptive act or practice may not be cured by subsequent truthful disclosures.

Acts or practices that may be deceptive include making misleading cost or price claims; offering to provide a product or service that is not in fact available; using bait-and-switch techniques; omitting material limitations or conditions from an offer; or failing to provide the promised services.

The FTC’s “four Ps” test can assist in the evaluation of whether a representation, omission, act, or practice is likely to mislead:

  • Is the statement prominent enough for the consumer to notice?
  • Is the information presented in an easy-to-understand format that does not contradict other information in the package and at a time when the consumer’s attention is not distracted elsewhere?
  • Is the placement of the information in a location where consumers can be expected to look or hear?
  • Finally, is the information in close proximity to the claim it qualifies?

A representation may be deceptive if the majority of consumers in the target class do not share the consumer’s interpretation, so long as a significant minority of such consumers is misled.

Exaggerated claims or “puffery” are not deceptive if a reasonable consumer would not take the claims seriously.

A representation, omission, act, or practice is material if it is likely to affect a consumer’s choice of, or conduct regarding, the product or service. Information that is important to consumers is material.

Certain categories of information are presumed to be material such as costs, benefits, or restrictions on the use or availability.

Express claims made with respect to a financial product or service are presumed material. Implied claims are presumed to be material when evidence shows that the institution intended to make the claim (even though intent to deceive is not necessary for deception to exist).

Claims made with knowledge that they are false are presumed to be material. Omissions will be presumed to be material when the financial institution knew or should have known that the consumer needed the omitted information to evaluate the product or service.

If a representation or claim is not presumed to be material, it still would be considered material if there is evidence that it is likely to be considered important by consumers.

The Dodd-Frank Act makes it unlawful for any covered person or service provider to engage in an “abusive act or practice.”  This is an act or practice which—

  1. materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
  2. takes unreasonable advantage of—

a) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

b) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or

c) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

Combined, this definition of “abusive” indicates terms, disclosures and advertisements for products need to be clear and easily understood without reliance on micro-font footnotes or other disclosures that may be “legalese” or have “hidden” terms. It also tells us that the more complex a product or service is, the more it may need to be explained and this will also depend on the market it is provided for. Lastly it says the bank has to act in the best interest of the consumer. It will not be enough to say, “we made the full disclosure, so we are covered for liability.”

Consumer complaints play a key role in the detection of unfair, deceptive, or abusive practices. As a general matter, consumer complaints can indicate weaknesses in elements of the institution’s compliance management system, such as training, internal controls, or monitoring. Complaints against subsidiaries, affiliates and third parties which pertain to your institution and its products and services are included in this analysis. While the absence of complaints does not ensure that unfair, deceptive, or abusive practices are not occurring, complaints may be one indication.

Now let’s examine some recent penalties and while I will use one specific example, as you read this and contemplate the issues, think broadly. As an example, this first penalty involves a credit card product. Do not discount it because it is a credit card, and your bank may not offer them but pay attention to it because it is about the advertising of the product, the training of staff, and the failure to deliver what was advertised.

The advertisement was targeted to sell new credit card accounts. Both existing customers and new ones were the target market. The intent was to have them qualify for the new card and then to meet prescribed spending requirements to qualify for a bonus. The plain terms on the face of the advertisement stated what was required as to the spending threshold. The bonus was central to the advertisement.  Remembering the criteria for UDAAP compliance, in this case a consumer could reasonably conclude that if they qualified for the new card and met the spending limit, they would receive the bonus.

The issuers of the product failed to state that the bonus would be offered only to consumers who applied online. This made the advertisements misleading as they were incomplete. Staff were not correctly trained on how to program these accounts, which further lead to bonuses not being paid. And because not all consumers would qualify for the bonus because of how they applied, the ads were deceptive. This is like many of the UDAAP enforcement actions taken on add-on products. That is poor marketing, poor training and charging fees without ensuring that all the qualifications were disclosed, programmed, and understood by both staff and the consumer.

A second case examines debt collection and the Fair Debt Collections Practices Act (FDCPA). Do not skip this section because you do not believe that the FDCPA does not apply to your bank because you collect your own debts. I believe the CFPB could connect the FDCPA to UDAAP dots in this manner. The FDCPA states in many places that certain acts or practices can be unfair or deceptive. As an unfair or deceptive act, UDAAP can then apply and using this proxy, UDAAP is violated while collection one’s own debt because of how it was done. I have not yet seen this in practice, but is it worth testing the action? I would not.

The FDCPA prohibits the use of any false representation or deceptive means to collect or attempt to collect any debt.   What examiners found was debt collectors proposing an alternate payment plan with past due borrowers. It was noted the new payment plan, when repaid, would improve the borrower’s credit because they paid the revised plan and extinguished the debt. That has to be better and lead to an improved credit rating, right? But there are many factors affecting creditworthiness and a person’s credit score, including repayment of the debt.  Saying that paying just this loan would improve their credit score and lead to increased borrowing power could be misleading.  Examiners found that the least sophisticated consumer could conclude from this discussion was that deleting derogatory information by paying this loan would result in improved creditworthiness, and this created the risk of a false representation and was a deceptive means to collect the debt. This is then defined as a UDAAP issue. You may not be subject to the FDCPA, but you are to UDAP and UDAAP.

Mortgage servicing is a hot issue as many borrowers are exiting pandemic protection forbearance plans on their home loans and may be ill equipped to resume payments. Mortgage servicing exams have identified various Reg Z and X violations, as well as UDAP problems. Remember UDAAP is brought up when a product or service: (1)  causes or is likely to cause substantial injury; (2) the injury is not reasonably avoidable by consumers; and (3) the substantial injury is not outweighed by countervailing benefits to consumers or to competition.

Examiners found that mortgage servicers engaged in the following unfair acts or practices by:

  • charging delinquency-related fees to borrowers in CARES Act forbearance plans. (Refer to the Coronavirus Aid, Relief, and Economic Security Act, Section 4022(b)(3) prohibits a mortgage servicer from imposing fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract);
  • failing to stop electronic fund transfers after receiving notice that the consumer’s bank account was closed, and an NSF fee had been assessed; and
  • assessing fees for services that exceeded the actual cost of the services performed.

Read this and look for those UDAAP buzzwords. The CFPB report said that consumers experienced substantial injury in the form of illegal fees, which were considered significant because these are the consumers experiencing hardships from the pandemic.  The mortgage servicers failed to refund some of the fees until almost a year after they were assessed.  These consumers  likely suffered further harm when because of these fees, they could not pay other expenses they had.  The injury was to a large number of consumers.  The consumers could not reasonably avoid the injury because they could not anticipate that the mortgage servicers would assess unlawful fees and they had no reasonable means to avoid the fees from being charged.  Charging the illegal fees did not provide any countervailing benefit to consumers.

Expanding on the second bullet above, what examiners found were mortgage servicers that engaged in unfair acts or practices by failing to terminate preauthorized EFTs that the servicer should have realized were from closed or inactive accounts. Examiners found that servicers received notices of account closures but continued to initiate EFTs from the closed accounts each month until the consumer affirmatively canceled the preauthorized EFT.  Borrowers experienced substantial injury because the mortgage servicers’ practices resulted in repeated NSF charges.  Borrowers could not reasonably avoid the injury because they could not anticipate that the mortgage servicers would continue to attempt the EFTs, even where the EFT agreement disclosed that the EFTs would terminate when the “from” account was closed.  The continued attempts to withdraw payment from closed accounts and fees associated with the subsequent NSF transactions did not provide any countervailing benefit to consumers.

Another issue examiners found was that mortgage servicers engaged in deceptive acts by incorrectly disclosing transaction and payment information in borrowers’ online mortgage loan accounts. They found violations of Reg X (RESPA) requirements to evaluate a borrower’s complete loss mitigation applications within 30 days of receipt. Reg Z requirements relating to overpayments to borrowers’ escrow accounts and Homeowners Protection Act (HPA) requirements to automatically terminate PMI as required were subtopics found with the online statement errors.

Still on the topic of mortgage servicing, some practices were deemed deceptive because  inaccurate descriptions of payment and transaction information was provided in online mortgage statements.  The inaccurate descriptions and information were likely to mislead borrowers because the information was false.  It would be reasonable for borrowers to rely on their mortgage servicers to report accurate mortgage payments and account transaction histories wherever the information was offered.  The inaccurate descriptions and information were material because they were likely to affect borrowers’ conduct regarding their mortgage payments.