A hot topic among bankers and bank regulators lately has been UDAAP – Unfair, Deceptive or Abusive Acts or Practices. To gain insight into what more stringent UDAAP requirements might mean in the future for community banks, CFPB Journal interviewed Jo Ann Barefoot, co-chair of Treliant Risk Advisors. Following is Part 3 of the interview. Please also see Part 1 and Part 2.
CFPB Journal: You’ve talked about the need for banks to be careful in the ways that they target products toward customer segments. For the benefit of our readers, can you please explain that?
Barefoot: A good place to start with UDAAP preparation is to focus on products that are specifically targeted toward customer segments that might be perceived as vulnerable – that would include older customers, young customers and students, servicemembers, people who are in financial distress (of whom there are enormous numbers at the moment), and people who are financially unsophisticated – due to lack of education, lack of English skills and so on.
You can have UDAAP problems in any product. But if you have products that are particularly aimed at those groups, then you really need extra care in trying to make sure that the customer understands the product and is making a good choice. It’s almost becoming an expectation that the bank would use sort of a suitability standard like they use in the investment realm and give thought to whether the customer is choosing a product that’s going to be good for them.
Examples would be areas like secured credit cards, debt cancellation products, ready advance cash products that are competing with payday lending, and reverse mortgages – things like that that are aimed at people who may be perceived as being vulnerable. The bank needs to think about: How are we targeting these people? Are they going to understand the product? How should we disclose it? Who is selling it to them? What are the incentives of the people who are selling it to them? Are those incentives well designed so that no one would be rewarded for taking advantage of a customer not understanding a product’s real pricing? That kind of conversation is a very good place to start for UDAAP preparation.
CFPB Journal: Can you give an example of a recent regulatory enforcement action that illustrates what kind of practices may be considered unfair, abusive or deceptive?
Barefoot: I never like to be quoted naming the names of banks that are facing regulatory actions. But certainly a very high profile one was that the Fed took action on immediately before handing off to CFPB in July … It was against Wells Fargo and it was an $85 million civil action against Wells Fargo, and it was the largest consumer compliance civil matter that the Fed had ever done, addressing subprime lending practices.
There are also a variety of cases – and most are still confidential in agency pipeline – but probably the biggest single area is on overdraft protection products. The one that is the best known there is the Woodforest Bank one, which is what 18 months old. … It’s a good example of the kinds of practices that the regulators are now challenging. We have a number of clients that have similar kinds of matters under review by their regulators but are still confidential. Overdraft products that are producing high fees, repeat fees that are high, all these issues on order of presentment triggering more fees – those kinds of areas are very big.
CFPB Journal: It seems overdraft protection would be problematic, because banks are always going to have customers that use it as a short-term loan product.
Barefoot: Right, and do they understand it and are they really choosing it? It’s very complex. A lot of the banks are finding that changing the way they do these things is expensive and complicated, so it’s a very big area.
CFPB Journal: Is there anything else you’d like to add?
Barefoot: It’s really important for community bankers to know that the other agencies are actively going after UDAAP. People sometimes think that these things are just going to affect somebody else.
I think another extremely practical step for banks to take is to update their complaint handling system to look for patterns of UDAAP complaints.
Most banks have a complaint system where typically they’ve empowered employees to try to resolve customer complaints on the spot when the customer raises an issue. They don’t typically track and report complaints unless they get escalated to the regulator or to the, say, CEO or the Better Business Bureau or something like that. If the complaint has been resolved to say the bank complied with all the technical rules, then that’s all they do with it. They put it in a resolved stack and they don’t even track it. The agencies are finding their UDAAP cases in complaints. Usually the bank did comply with the technical rules but has done something that customers thought was unfair anyway. Banks are being blindsided by this because they don’t even look for complaints like that.
So, maybe the single most important action step, other than to get CEOs engaged, is to redesign the complaint system, begin to track those and to look for patterns where what the bank did was technically compliant, but you’ve got a number of customers saying “this is unfair” or “I didn’t understand this” or “this isn’t what they told me” or “they never told me that.” Those are UDAAP risks that banks need to pay attention to, and most of them aren’t yet doing that.
For more from Barefoot, see:
Nine Dangerous Words: “Show Me Where It Says We Can’t Do That” in American Banker (9/13/11)
Don’t Get Lost in UDAAP in the ABA Banking Journal (June 2011)