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From Banking and Finance Law Daily, June 12, 2014

UDAAP front and center at 2014 ABA regulatory conference

By Katalina M. Bianco, J.D.

The 2014 American Bankers Association’s Regulatory Compliance Conference was a blend of the old and the new, with the presence of the Consumer Financial Protection Bureau felt throughout. Held June 8 – 11 in New Orleans, the conference provided new guidance on regulatory standards while opening up discussions on areas brought to the forefront by the bureau this year and topped off with a heavy dose of the Unfair Deceptive Abusive Acts or Practices Act.

Standards revisited. As in previous years, the ABA conference included sessions on compliance topics that affect standard banking compliance practices such as flood insurance, risk management, and the Bank Secrecy Act. The new CFPB final rule on Truth in Lending Act/Real Estate Settlement Procedures Act integrated mortgage disclosures was discussed in light of the upcoming August 15 effective date, and mortgage servicing made a return appearance as third-party relationships continue to grow in importance. Third-party servicers’ policies and procedures now must be questioned and monitored to the same extent as an institution’s, adding another piece to the compliance puzzle. Vendors need to be ranked for risk, and documentation and reporting, along with independent reviews, are required to manage risks associated with servicing relationships.

One area that has been a subject of previous conferences that resurfaced as a strong theme this year was customer response. The CFPB has indicated that consumer complaints form the basis for bureau supervisory activities, driving the bureau’s rulemaking process. Complaint management now has become an area of concern. This is a relatively new wrinkle in the regulatory scheme for financial institutions as many put into place for the first time complaint management programs as part of their compliance policies and procedures. Sessions on handling consumer complaints were woven throughout the conference offering tips on best practices in responding to customer complaints and complaint management strategies for banks of various sizes.

Debt collection may be a standard, but it is one currently on the hot seat. The CFPB has taken note of the many debt collection complaints, and the bureau has made it clear that the size and volume of complaints are big factors in the initiation of enforcement actions. The bureau has been examining service providers and larger participants as a precursor to rulemaking. On Nov. 12, 2013, the CFPB published in the Federal Register an advance notice of proposed rulemaking (ANPR) seeking input from the public on a number of debt collection issues, including the accuracy of information used by debt collectors, how to ensure consumers know their rights, and the communication tactics collectors employ to recover debts.

With bureau rulemaking imminent, the conference offered advice on debt collection best practices. Some of these include:

  • provide notices of debt transfers to consumers;

  • treat Do Not Call requests on one debt as a request to all debts belonging to that consumer; and

  • conduct thorough and responsible investigations when disputes arise.

The UDAAP twist. A number of compliance classics, like debt collection and fair practices, continued to be represented at the conference, but with a new twist: UDAAP. For every compliance area, UDAAP considerations must be included. The checklists used to determine compliance with any given regulation no longer are sufficient without adding UDAAP concerns into the mix.

UDAAP is an area that has created compliance confusion and uncertainty. Consider that UDAAP is a statute without regulations, a law without rules. UDAAP is principles-based, and it is questionable whether there will be any significant rulemaking. There is no definitive, or even suggestive, regulatory guidance on UDAAP, and no satisfying definition of “abusive.” UDAAP is dependent on the specific circumstances in any given case, making it tricky to apply.

What to do? Expert speakers at the conference suggest closely studying enforcement actions, particularly those taken by the CFPB, as many of them contain UDAAP violations intertwined with standard regulatory violations.

When applying UDAAP principles, financial institutions must keep in mind that the consumer’s perspective rules. If consumers complain that they do not understand a communication or did not receive the product they expected, for example, there may be a UDAAP problem. To avoid such problems, institutions need to take a holistic view. They must know everything about a product to determine if there may be UDAAP violations.

In a session on determining UDAAP violations, case studies were presented to attendees. In one such case, a bank wanted to initiate a new account with service fees of $15. The fee would be disclosed in the brochure provided at the time the account opened. However, the bank wants to waive the fee for each customer with collected average balances of $15,000 each month, without notice to the customers. In months in which the balances were lower than $15,000, a fee would be charged. No disclosure would be provided. UDAAP issue? Most likely. The customers not regularly being charged the fee would question why it applied in certain months. Customers considering the account would need to know that there would be a fee if the balance fell below $15,000.

In another case study, a bank changed its policy from permitting all checking account customers to have five free foreign ATM uses per year, but decided to reduce the free transactions to three per year. This rule change would apply to all customers except account holders over the age of 62. The rule would have a negative impact on all customers but those that fall within a vulnerable age group and as such would most likely not present a UDAAP problem. The CFPB has encouraged preferential treatment for certain consumers, according to the speakers. These consumers include seniors, servicemembers, and students. Therefore, there is disparate treatment but most likely no UDAAP issue.

Because UDAAP is not black and white, it can be a challenge to develop and implement a satisfactory UDAAP program. Speakers at the conference suggest beginning with a risk assessment that includes reviews both horizontal—across the business—and vertical—by product. Risk assessment should be applied to new and existing products. The key is to apply risk assessment practices to the entire life cycle of a product, from initial product development, including marketing, through customer complaint management. Separate and distinct training of employees, especially those on the front line, is a must, as is reporting and proactive remediation. Document, document, document!

New topics to the table. The 2014 conference included new topics stemming from current events affecting the banking arena and those derived from the CFPB’s stated interest. One new topic was self-reporting. The bureau has indicated that it will take self-reporting into consideration when deliberating whether to initiate enforcement action against an institution. The CFPB’s stance on self-reporting was outlined in a June 2013 bulletin (CFPB 2013-06 ) and was a factor in a consent order entered by the bureau against First Alliance, a company that provides loss-mitigation financing to distressed mortgage borrowers, in February 2014. The CFPB has stressed that prompt self-reporting represents evidence of an institution’s commitment to responsibly address the conduct at issue.

Financial exploitation. Financial abuse and exploitation, an area of strong concern for the bureau, made an appearance at this conference. Statistics indicate that $2.9 billion per year is stolen from those 60 years of age and above, to the tune of more than $120,000 per person, and thieves are using banks as vehicles of exploitation, making it a problem for the banking industry and not just the elderly. Speakers explained the Elder Justice Act and discussed various ideas for preventing fraud before it happens.

Disparate impact. Disparate impact was discussed this year, with the emphasis on indirect auto lending. One of the speakers represented Ally Financial. Ally Financial Inc. and Ally Bank agreed in December 2013 to pay $98 million to settle charges by the CFPB that they did not try hard enough to ensure that their auto loan pricing structure did not allow illegal discrimination on the basis of race or national origin. In addition to the payments, Ally agreed to create a compliance program that is intended to prevent discrimination in the future. The program will include not only purchase monitoring but also dealer education and corrective action against dealers where discrimination may be present.

The bottom line, according to Ally, is that once the terms of the consent order are completed, the company will remain unclear as to how to avoid future actions. The nature of indirect auto lending, as it currently exists, makes it difficult to monitor dealers for discriminatory practices because lenders see only a portion of a dealer’s contracts.

The marijuana business. Finally, banking and the marijuana industry was added to this year’s conference, presented by Rastafarian-cap wearing speakers who discussed the current status of the marijuana business and the pros and cons for banks considering accepting marijuana businesses as customers. The biggest issue is the fact that while a number of states have legalized marijuana use for medical purposes, and two—Colorado and Washington—now permit recreational use of marijuana, the stance of the Department of Justice is that the Controlled Substances Act prohibits the distribution and sale of marijuana. On the one hand, the DOJ has issued memos stating that “no State can authorize violations of federal law.” On the other hand, the memos indicate that it is not a priority to use federal resources to prosecute individuals “whose actions are in clear and unambiguous compliance with existing state laws.”

The session speakers discussed the benefits and drawbacks of banks entering the marijuana business. The business brings with it much ready cash in the form of deposits and fee and interest income, but the benefits must be balanced against the very real reputational, lending, and operational risks.

Companies: Ally Financial; American Bankers Association.

MainStory: TopStory CFPB DebtCollection FairCreditReporting Loans Mortgages RESPA TruthInLending UDAAP

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