ABA Bank Compliance - May/June 2013

■ ■ The following loan features are fully explained to customers: Negative amortization.

Balloon payments. All loan costs.

• Credit Card Add-On Products

■ ■ If there is an upfront fee, then the benefits and downsides of this product are clearly explained before the fee is charged.

■ ■ It is clear whether this product is included with the card or required to obtain one.

■ ■ If customers must pay in advance for this product, any unearned amounts are returned to the customer.

■ ■ Deposits

• Account Maintenance

■ ■ All fees and penalties are clearly labeled in periodic statements.

• Overdrafts

■ ■ More than one overdraft product is available.

■ ■ The bank is clear when it will charge fees and when it will pay overdrafts.

■ ■ The bank clearly and neutrally explains the consequences of opting in to overdraft protection, including what transactions will be covered.

■ ■ The bank does not advertise an account as “free” if there could be overdraft charges.

After you have observed all of the uDAAP traps, it is time to document each control factor and its effectiveness along with any observations, findings, and individual factor conclusions. Remember to weight factor (traps are not of equal concern) and how well these traps worked in catching uDAAP issues because strengths are also not equal. After showing your findings, you will want to document additional compensating factors and the ultimate strength of your control program. Once summarized, you are ready to rate your residual risk.

the laSt StePS

Now that you’ve explored inherent risk indicators and risk mitigation and controls, you are almost done. But first, it’s time to identify the UDAAP gaps you detected.

identify risk gaps

Your risk mitigation and controls probably do not address every inherent risk factor you identified. This is typical and not necessarily a problem. But these issues represent gaps in the mitigation and control process and you need to decide what, if anything, needs to be done to address them. Consider your board’s risk appetite when completing this exercise.

On your summary table, identify those inherent risk factors that are not addressed or adequately addressed by risk mitigation and controls. These issues represent risk gaps. Your table should also include a chart that lists each gap, how great a risk concern each represents, what needs to be done, any observations you have, and a column for follow-up.

Based upon your risk tolerance objectives, ask yourself these questions:

1) How risky are the deficiencies?

2) What needs to be done and by whom?

3) How will changes be evaluated and monitored?

changes. Focus on those risks of greatest significance to your program; and for all risks gaps, document your decisions and actions on your summary table.

udaaP risk direction

As you prepare to conclude your UDAAP adventure, you will want to determine your level of residual risk (inherent risk + controls = residual risk). But don’t stop now. Ask yourself whether this same journey will be more or less risky in 12 to 18 months and what changes might affect your residual risk. Consider such issues as national or local economic events, proposed changes to products, policies or procedures, new regulatory requirements, staff turnover, or the bank’s strategic direction. Again, document your observations and conclusion on your summary table.

Find your own Path

We have presented one way in which you can perform a UDAAP risk assessment. You can utilize many of the factors presented in this article and document them in any way that allows you to get a picture of your UDAAP compliance adventure. Whatever path you choose, be sure to make it your own. Ultimately, that’s the best way to tame the UDAAP beast. And please join us next time when we boldly monitor areas of the bank where few compliance souls have dared to tread. ■

ABOUT THE AUTHORS:

MEG sCz YRBA, CRCM, is an industry principal at Infosys Technologies Limited, working on how to implement regulatory requirements in its integrated banking platform core processing system Finacle. Sczyrba previously worked for PayPal, Washington Mutual, Union Bank of California, U.S. Bank, and as a compliance consultant. She sits on several ABA Boards including the ABA Compliance School board and the ABA Bank Compliance magazine board. She is a former member of the CRCM Advisory Board and the Compliance Executive Committee. Sczyrba has published several articles on topics ranging from Regulation AA/UDAP to Regulation O and wrote the recurring Training Room column in the ABA Bank Compliance magazine. She is also a frequent speaker at industry compliance conferences and schools. Sczyrba was honored as ABA’s 2011 Distinguished Service Award recipient. She graduated from the University of Missouri at Columbia with degrees in psychology and law. Reach her at Meg_sczyrba@infosys.com.

PhILLIP R. “RICk” FREER, JR., CRCM, is senior director of Exam and Compliance Programs at the American Bankers Association (ABA). He retired from the Office of the Comptroller of the Currency (OCC) in February 2011, after 41 years at the agency. He served most recently as a national bank examiner in the Compliance Policy Division. Freer joined the OCC in 1969 as an assistant national bank examiner. He was commissioned as a national bank examiner in 1976. From 1976 through 1978, he served as a regional training officer and regional director for the Human Resources Division. From 1978 through 1990, he held various positions in the OCC’s Washington office. From 1990 through 1997, he was director for compliance management and handled CRA and fair lending examination programs, consumer complaints, and compliance training and administrative programs. In 1997, Freer joined the OCC’s Resource Cadre. He was a senior internal consultant and participated in such tasks as CRA and compliance appeals with the OCC’s Ombudsman’s Office, large bank CRA exams, and the development of examiner recruitment training, the OCC’s contract examiner hires program, and examination handbooks and policy positions for the Community and Consumer Policy Unit. He served as a member of the ABA Bank Compliance magazine and the ABA Compliance Schools Advisory Board and frequently instructs and presents at the schools and ABA conferences. Reach him by telephone at (202) 663-5056 or via email at rfreer@aba.com.