UDAAP- What is in a name? 

Among the many new regulations that have been passed in the banking world in the last two-three years, one of the most feared and miss-understood is the Unfair, Abusive or Deception Acts or Practices regulation of UDAAP for short.  The truth is that these laws allow the regulatory fairly broad authority to criticize, halt, prevent or even punish a ban for practices that are deemed unfair or abusive.  The ugly truth about this area of regulation is that the definitions included in it are vague.  Regulators are left to interpret what is and is not an unfair practice.  To paraphrase the words of Supreme Court Justice Potter Stewart-the regulators may not be able to define it, but they know abusive and deceptive practices when they see them!

Although the question about what is and is not a deceptive or abusive act or practice comes up quite a bit from our clients, there is rarely a clear answer.   Instead we currently base our advice on the enforcement actions that have been published under the Act, “stories from the road” and well established best practices. 

Abusive?  Our Bank?  Never!  

For many of our clients the mere names included in the act are too much to bear!  Abusive and deceptive sound incredibly sinister and dark hearted.  AS a result, many believe that this law and the implementing regulations do not apply.  Surely these rules were designed for some cartoonish character who preys on poor unsuspecting customers and cheats them out of their houses, cars or other valuable possession!

But even though the words sound awful, it is possible to engage in a deceptive or abusive act, simply by failing to disclose fees completely or properly.   For example, suppose your bank offers a “free” checking account on its website.  In fact the product has no month to month charges, but there is a cost to the Bank for setting up the account.  If your bank passes that cost on to the customer, then the account is not free and your advertising is deceptive.  You enticed customers in with the promise of free checking when in fact, it was not free.  RELATIVELY free is not the same thing as free!  

5 Steps to a UDAAP Free-Zone

In our opinion there is nothing that you do to absolutely guaranty that there will be UDAAP violations at your bank.  However, there are some steps that you can take to significantly reduce UDAAP risk.  The motto for avoiding problems in this area is that consistency is key!   

Step 1. - Get Compliance Involved; Recognize that that advertising and marketing must get the blessing of the compliance department before going to the public.  The largest area of enforcement action under UDAAP has been in the areas of false of deceptive advertising.   It is often the case that advertising is classified as deceptive when the information on account disclosures does not exactly match the advertising on the website or on print media.  By getting the compliance department to review advertising ahead of time, a great deal of pain and suffering can be avoided.  As a best practice, it is a great idea to have the compliance department be involved with the development of products so that fair lending and UDAAP concerns can be addressed at the time a product is being developed not after all of the marketing materials have been delivered!  

Step 2. –Formalize the customer compliant system; it is obvious that the regulators have been directed to pay close attention to the manner in which banks handle customer complaints.  In the past this simply meant making sure that all complaints were answered within a reasonable time.  However, in the future examiners will explain that the bank will track the complaints to make a determination of the nature and quality of complaints.  If, for example several complaints are received about a fee or billing from customers, the examiners will expect that the Board will discuss the complaints and make the necessary charges to the product.  Failure to address complaints puts the Bank in the position of willfully violating UDAAP  

Step 3. - Incorporate UDAAP into the Compliance Management program;    When the compliance department is preparing its annual risk assessment and determining what areas of the bank require review for compliance, make sure that UDAAP is part of the considerations.  An ongoing review to ensure that not only are complaints tracked and answered, that all disclosures match, but also to ensure that products being offered are yielding their intended results.  In some cases, what can seem like a fee that is meant to discourage activity (overdraft fee); can have the result of a UDAAP violation.   Compliance must ensure that all staff is trained about UDAAP and the potential for trouble.

Step 4. – Internal Audit for UDAAP; Make sure that you internal auditor or audit provider includes UDAAP compliance in its scope.  Although there is not an established UDAAP template, the scope should reflect that overall size and complexity of the bank and the potential for UDAAP violation  

STEP 5. - Vendor management; when your bank uses vendors for the delivery of products, it is critically important to work with the vendors to ensure that the information disseminated to the customer matches the desires of the Board and senior management of your bank.  It is important to perform at least an annual due diligence for vendors of products to determine whether there has been any quality control issues.  Remember the Bank is ultimately responsible for compliance.

 

Remember, deception, abuse and general bad acts are in the eyes of the regulator that beholds the bank!   By incorporating these steps in the overall compliance effort, the bank can keep what is seen clean!