ABA Bank Compliance - May/June 2013

A Trail of U D A A P T R A P S
In JuLY 2012, the CFPB published
guidance on the
marketing of credit
card add-on
products.
That also marked the
beginning of a spate of
uDAAP cases that were
finalized and published:

JULY 2012: CFPB and The Office of the Comptroller of the Currency (OCC) fined Capital One $60 million in penalties and forced it to pay restitution of $150 million. Regulators found that Capital One’s outsourced customer center was misrepresenting credit card add-on products to subprime customers. Its telemarketing scripting contained many inaccuracies.

JULY 2012: OCC told Urban Trust Bank to eliminate its prepaid debit card (which was issued in conjunction with a payday lender) and to shore up its vendor management.

AUGUST 2012: The Federal Deposit
Insurance Corporation (FDIC) fined Ban-
corp Bank $172,000 and ordered a third-
party program partner of the bank to pay
a fine and make restitution of approxi-
mately $11 million. Regulators were not
happy about Bancorp’s lack of monitor-
ing, and the operational practices of the
third party, which resulted in excessive
insufficient funds fees being charged on
accounts targeted to students.

SEPTEMBER 2012: CFPB and FDIC fined Discover $14 million in civil penalties and forced it to pay a restitution of $200 million. Regulators found issues with the telemarketing sales of credit card add-on products, such as credit insurance, credit score tracking, and identity theft protection with claims that customers were enrolled without consent or that agents were suggesting the products were free.

OCTOBER 2012: CFPB fined American Express $27.5 million and forced the company to pay restitution of $85 million. Regulators found that agents were misrepresenting debt to obtain payments in the collection process and there were anomalies with marketing bonus points.

so what can you learn from these cases?

1. Credit card add-on products increase the level of inherent consumer risk and banks must take that into account. Compliance officers will want to review associated procedures and scripting to determine if they have sufficient controls. The function should also be subject to monitoring and auditing.

2. Vendor management was also at issue and can increase inherent UDAAP risk. Compliance officers should determine what functions have been outsourced. If a control is in place for in-house operations, it should be in place for the vendor. If customer service or telesales have been outsourced, compliance officers should ensure there are procedures and scripting in existence for these functions. They should also be reviewed for control sufficiency.

3. Overdrafts remain a high inherent risk as well. Regulators provided guidance indicating there should be limits on the associated fees, especially with regard to vulnerable customers. That means banks should review pricing.

■ ■ Do community groups express concern about any of the products and services that you might or might not offer?

■ ■ Is the bank at the forefront of developing new and non-traditional products and services?

cluding interest rates and amounts of credit or rewards, as represented in the advertisement?

■ ■ Are prescreened or “pre-approved” solicitations used?

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Advertisements and Solicitations

A bank’s enticements, advertisements, and solicitations represent another aspect of its strategic direction. Are those marketing materials informative? And are the materials reflective of what customers tend to receive? For this factor, you should document the following types of activity:

■ ■ Do advertisements provide customers with all the information needed to make an informed decision about the product in a clear, transparent, and accurate manner?

■ ■ Are customers realistically able to obtain the products and services, in-

Pricing & Profitability

Regulators now evaluate whether a bank’s adventures cost too much—whether they make their money from fee-based products or take advantage of consumers through pricing models. Therefore, as a final aspect of strategic direction, you will want to understand how pricing is set and how it compares to peer banks. Among the questions to consider: