ABA Bank Compliance - May/June 2011

While the scope of this new standard has not yet been tested or interpreted by any court or banking agency, it clearly widens the UDAP risks banks face. The new abusiveness standard codifies and further expands the expectation that banks must do more than provide disclosures and be clear in their marketing and advertising. Instead, it clearly creates the expectation that banks must be ready to proactively protect consumers from their own bad choices—and affirmatively engage in what appears to be a greater duty of care.

Under the Dodd-Frank Act, the CFPB has, and will most certainly exercise, rulemaking authority. In some respects, formal rulemaking may be useful from a compliance perspective. Because of UDAP’s subjective nature, a clearer list of do’s and don’ts could provide greater clarity to the industry. Plus, with formal rulemaking, banks will have a chance to better understand this new UDAP (or more accurately, UDAAP) paradigm—which puts them in an active role in monitoring consumer behavior and preventing consumers from engaging in conduct that may not be in their best interests.

Practical implications for Bankers

We don’t have a crystal ball to predict where UDAP might be heading next. However, with UDAP-related issues clearly on the rise, consider the following recommendations and action steps to beef up your UDAP awareness in this new UDAAP world:

1. renew your focus on consumer complaints. UDAP-related risks may be lurking in areas where you have a greater number of consumer complaints or inquiries. In the spirit of customer service, many bankers tend to focus on complaint resolution as the primary goal. While timely resolution of consumer complaints is essential, your UDAP analysis should not end there. You should also delve into the root causes of consumer dissatisfaction. Look for trends in complaints, and re-evaluate the product from a UDAP perspective.

■ ■ Are the terms and conditions clear? Do customers understand the product features? Is the product properly positioned from a marketing perspective? Remember that you could be in full compliance with consumer disclosure rules and still have a serious UDAP problem. (For example, Reg. DD permits the use of the term “free” in relation to accounts where overdraft fees may apply, while the OTS’s guidance finds the use of that term inappropriate from a UDAP perspective.) To the extent that consumer complaints focus on fees, the timing of services, or other technical terms, be sure that all product messaging accurately describes the product or service—both benefits and drawbacks.

■ ■ Is the product (and the way it is offered) useful and beneficial to consumers—or is the product itself the problem? In today’s environment, regulators are beginning to determine that bank products (or a bank’s operational practices) must