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UDAAP – Is Your Bank at Risk?
A recent webinar hosted by the Federal Reserve Bank shared information that was helpful in providing an insight into how examiners identify and investigate for UDAAP violations. The financial institution can be in compliance with all other regulations but still be cited for a violation of UDAAP. UDAAP violations can result in unsatisfactory CRA ratings, downgraded Consumer Compliance ratings, restitution to customers and civil money penalties. All of these violations can be costly in terms of both dollars and reputation. The misconception for community banks is that UDAAP violations will not affect them, however, since 2008, 43% of UDAAP violations have been cited against banks with total assets of $250 million or less.
For UDAAP investigations, examiners may begin with customer complaints. These include the complaints (whether written or verbal) received by the bank or the bank’s regulator, but can also include social media comments (Twitter or Facebook). How the bank deals with the complaint is crucial. The financial institution should take a look at the complaint with its UDAAP glasses on. If the complaint is the result of a fee which was assessed, an investigation into other customers who were assessed the fee should be completed and documented.
The first step to avoid a UDAAP violation begins with a risk assessment of each product and service your institution offers. When you are performing a risk assessment for each product and service consider the elements of UDAAP. To meet the standard for Unfair, the product or service must cause or is likely to cause substantial injury that cannot be reasonably avoided by the customer and the injury is not outweighed by the benefit. When considering if the product or service is deceptive, verify that the disclosures or marketing materials are clear, concise and easy for the customer to understand. Eliminate the fine print! Ensure your product or service does not materially interfere with the customer’s ability to understand the product or service and does not take unreasonable advantage of the customers and their ability to protect themselves. Customers are relying on the bank to act in their best interests. If not, the product or service may be abusive.
When reviewing the product or service be sure to cover all areas such as:
- Advertising and marketing materials
- Account and loan disclosures
- Servicing and collection activities including correspondence to the customer
- Management and monitoring of all third party providers
Financial institutions are strongly encouraged to review and assess the risks associated with every product and service offered. Along with that, consider incorporating a UDAAP risk assessment into all third party provider and vendor management due diligence procedures and programs.