KEEPING TRACK OF UDAAP ISSUES (Unfair, Deceptive, or Abusive Acts or Practices) in lending can cause fifty shades of confusion.
Fully addressing UDAAP compliance requires looking
at the entire lifecycle of a lending product or service to
ensure that everything is covered. Some aspects of the
rule are product-specific.
Lending Product Lifecycle
The product or service lifecycle includes:
■ ■ ■ Development
■ ■ ■ Marketing
■ ■ ■ Account Opening
■ ■ ■ Servicing
■ ■ ■ Collections
■ ■ ■ Third Parties, and
■ ■ ■ Complaints.
The first phase of the lifecycle is the product or service
development—or even the pre-development phase. This
is when a new product or service is still a concept, and
when the design or marketing teams are putting their
heads together to brainstorm ideas.
It is important to understand every aspect of the
product or service being developed. And, it is imperative that compliance professionals be invited to the
brainstorming session. In order to evaluate a product,
Compliance must know the ins and outs. For example,
who pays the fees for the product? Compliance should
engage with the bank to ensure that the new product
or service offers value and that any fees charged are for
value provided. While it is fair to earn a profit, the fees
should align with the bank’s costs and risk projections.
For all new products and services, the bank should
perform UDAAP due diligence including a risk assess-
ment. The steps taken during this stage should include
a thorough review of the product or service as well as
diligence on any third party involved. A robust due
diligence assessment should go beyond the vendor’s fi-
nancial statements—consider including a survey of news
reports. This should include pending or prior litigation
matters, industry-wide concerns, regulatory criticisms,
and consent orders. While none of these findings indi-
vidually might be a deal-breaker, they could indicate
higher risk. The bank will need to design controls to
mitigate risks as they occur. If a third party will be used,
verify the controls in place to monitor the third party
and ensure that complaints are identified and monitored.
Compliance professionals will also need to assess
whether the consumer base for the product or service
is considered a vulnerable consumer, or if any vulnerable customers would be more likely to use the product
than the general population. Economically vulnerable
customers, older Americans, students, service members,
and veterans may all be considered vulnerable markets.
Often, new products and services are well intentioned;
however, be aware of the end results and be sure to continually monitor the consumer outcomes.
Make sure the product or service can be delivered as
promised. Be cautious when it comes to dependencies on
information technology and systems. Testing is crucial
to make sure the product or service offered is provided
as promised to the consumer.
Because the compliance department cannot be everywhere, it is key to educate all staff through a corporate-wide
UDAAP awareness or training program. The UDAAP
training should not be a one-size-fits-all approach; compliance should tailor the training for each area. Marketing
and product development teams benefit from UDAAP
training so that when a product or service is in the development phase, fairness pitfalls can be identified and
avoided before the product is marketed to consumers.
All marketing materials for the product and service should
be clear with material terms made conspicuous. Review
marketing materials with a consumer lens. This can be
difficult for bankers themselves, but think about how your
family would understand the marketing materials, without
having any background working in the industry. Would
they fully understand the fees and limitations or would the
materials cause confusion about the product or service? Pay
close attention to any fees and product or service limitations
and/or guarantees. Ask whether actual practices coincide
with the marketing materials. This question highlights the
importance of system testing. Finally, determine whether
all advertised promotions are being honored.