Part Two: Management’s role in avoiding UDAAP violations
In the first part of this series we talked about the three prongs of the Unfair Deceptive Abusive Acts or Practices Act (“UDAAP”). We detailed the three concepts that lead to violations and potential enforcement actions. A brief description of the types of violations includes practices that are either:
- Unfair: Fees or costs that a consumer has to pay that are unfair
- Deceptive: Fees or costs that are not obvious in product disclosures
- Abusive: Not helping the customer understand what it is they are getting into.
The Wells Fargo case is the most recent and one of the most newsworthy cases of a financial institution being cited for violations of UDAAP. The actions of the bank in this case are obviously egregious and for the most part it is fairly clear that customers were mistreated. However, there are several places where potential violations of UDAAP lurk that are not nearly so obvious. The warning signs for potential UDAAP problems are not always obvious. Senior management must play a significant role to when it comes to avoiding UDAAP.
UDAAP – A Different Approach
One of the vexing aspects of UDAAP violations is the manner in which they occur. In the UDAAP world, technical compliance with a regulation is not nearly enough. Violations are most often found in the outcome experienced by a customer of a financial institution. While a disclosure may meet all of the requirements of the Truth in Savings Act, if fees are not explained in a manner that details the “worst case scenario” for the consumer, the disclosure might be misleading. When considering your overall compliance program for UDAAP, it is important to consider your institutions overall level of transparency. Marketing, disclosures and information packages must allow a consumer to understand everything that they are getting into and how much it will cost. Financial institutions have greater resources than the customers they serve and the idea behind UDAAP is with those additional resources, your institution should do all that it can to make sure the customer understands things like overdraft fees are very expensive.
One of the many lessons from the Wells Fargo case is that management must play a significant role in addressing potential UDAAP issues. An excellent source of information to determine potential problems is the customer complaints log. By keeping track of the complaints from customers and following up on those complaints, management can get an early warning that customers experience does not match what they thought they were getting. Compliant logs should be reviewed and considered as part of ongoing compliance committee meetings.
Another area for management to consider is large increases in non-interest income that far exceeds projections. Put another way, when overdraft fees become a significant part of your income, there is strong potential for a UDAAP concern. Management must keep a close watch for unintended consequences.
Here is a list of practices that have come under scrutiny for UDAAP consideration
- Overdraft programs
- Excess Flood Insurance
- Debt collection Practices
- Loan payment processing
- ATM fees
- Loans with balloon payments
- Credit life and disability insurance sales
- Rewards programs
- Gift card sales
- Credit Card programs
This is not to say that any of these programs are forbidden or even a bad idea. Instead, what is necessary is to make sure that as you offer these programs or products, the disclosures about them are both clear and consistent.
Taking the followings steps when assessing overall UDAAP potential problems at your bank may reduce risk:
- Review all of the product features of consumer products at your bank. For all products that have the potential to add fees or costs (such as early withdrawal penalties), review for potential UDAAP concerns;
- Have several members of staff review product features to determine whether the potential for misunderstanding exists;
- Review the revenue streams for consumer products and look for increases of more than 1% per quarter. In the event that revenue has increased, determine the reason for the increase;
- Review the written and oral disclosures given to customers to ensure they are consistent and correct;
- Review current agreements with third party servicers to make sure there is a clear understanding of the services being provided:
- Conduct thorough and regular due diligence on third party servicers;
- Complete a regular check to ensure the language on all mediums of communication with the public is consistent (a maintenance fee is a maintenance fee);
- Evaluate customer complaints for signs of more serious systemic problems