Thought Leadership

What small business lenders need to know about UDAP in 2021

There's a developing trend with financial regulators to use FTC Act Section 5 authority to apply consumer protections to small business borrowers. We explore the impacts for community and midsize banks.

Leaders at the Federal Trade Commission (FTC) have made it clear that they intend on using their FTC Act Section 5 Authority to protect small business borrowers from unfair and deceptive practices of non-bank lenders (also known as UDAP). FTC Commissioner Rohit Chopra has clearly indicated that FTC Section 5 UDAP is not limited to loans for personal, family, or household purposes. Recent enforcement actions — such as those against the Merchant Cash Advance Industry in the summer of 2020 — are clear indicators that the FTC is using its Section 5 UDAP authority to protect business borrowers from unfair and deceptive practices of non-bank lenders, brokers, servicers, lead generators, and collectors.

It is important to note that the OCC, Fed, and FDIC all have UDAP authority, and are likely to take their cues from the FTC. As such, we expect that these Prudential Regulators will use their Section 5 UDAP Authority in the same manner as the FTC — meaning these trends could impact a larger group of lenders.

Three Focus Areas for Small Business Lenders

From their public statements and actions to date, the FTC seems to be focused on three primary areas:

  • Inconsistent disclosures of costs and fees
  • A lack of clarity about the costs of lending — which has already spurred industry groups to push for Truth in Lending-type disclosure requirements
  • Misleading claims in advertising

UDAP's Focus on Small Business Lending: A Timeline


The Federal Trade Commission determined in a 2008 UDAP case (FTC v. IFC Credit Corp., 543 F. Supp. 2d 925, 943) that the term 'consumer' includes businesses as well as individuals.


In June 2009, the Federal Deposit Insurance Corporation (FDIC) issued a Cease-and-Desist Order against Advanta Bank — citing FTC Section 5 UDAP violations for deceptively advertising cash-back rewards percentages for business account holders.


The Dodd-Frank Act made it unlawful for any provider of consumer financial products or services to engage in any unfair, deceptive, or abusive acts or practices.

2011 to 2017

In the wake of the Financial Crisis of 2008, regulators' UDAP activity was focused more on consumer protections.


The former Assistant Director of the Consumer Financial Protection Bureau (CFPB), Rohit Chopra is sworn in as the Federal Trade Commission Commissioner on May 2, 2018.


In May 2019, the Federal Trade Commission launched an investigation into potentially unfair and deceptive practices in the small business financing industry using its authority under Section 5 of the FTC Act.


In August 2020, the Federal Trade Commission alleged that a Merchant Cash Advance Provider overcharged small businesses. Specifically, it claimed Yellowstone Capital misled potential customers and withdrew payments customers did not actually owe.

UDAP and Small Business Lenders: Prepare Now

There are several actions and considerations that community and midsize banks can take now to comply with these developing requirements. The steps below can help minimize risk and facilitate compliance with evolving UDAP rules.

  • Update your UDAP policy to consider small business lending product lifecycle — from marketing to collections
  • Build small business lending into your UDAP program in terms of risk identification, control monitoring and testing, complaint management, issue management, and reporting
  • Conduct a small business UDAP risk assessment
  • Conduct ongoing UDAP testing and training

How can RMSG help?

Risk Management Solutions Group (RMSG) offers a comprehensive suite of regulatory and compliance services for community and midsize banks, customized to your unique business, delivered by experienced subject matter professionals — all at an accessible price.

We founded RMSG because:

  • Managing and mitigating risk is critical for financial institutions of any size
  • Not every financial institution has the expertise, time, or internal resources to oversee this part of their business
  • We believe you don't have to be a big bank to get great advice

When it comes to UDAP, it's important to lay the groundwork now to achieve compliance and minimize risk. We can help you with:

  • Understanding UDAP trends as they continue to develop and evolve
  • Conducting a UDAP assessment of your current operations
  • Developing a formalized UDAP program within your institution
  • Training your staff and monitoring progress — and flagging future risks
The FTC is the sole federal regulator and enforcer in the non-bank, small business financing marketplace, so we are accountable for making sure the market is working. We will need to determine whether certain contract terms and business practices constitute a violation of the law.
Rohit Chopra, Federal Trade Commissioner
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