ABA Bank Compliance - July/August 2014

Make testing consumer-focused

Traditional compliance and audit testing evaluates whether a particular requirement is met. Often this is a binary determination: it either meets it or it doesn’t. Developing these types of questions is pretty easy since you are looking for a simple yes/no answer. It’s objective. UDAAP of course is entirely subjective, although the answer sought is whether something is unfair, deceptive, or abusive. So although the answer is ‘yes’ or ‘no’, how you get there is the trick. Subjective standards are used to come to an objective answer.

UDAAP testing must be designed to evaluate the impact to the consumer. There are particular concepts that can be tested to indicate whether acts or practices contain risk.

What to test?

This is by no means an exclusive listing of factors to examine when testing for UDAAP, but it is a good starting point.

Questions should focus on the following:

Value. Simply put, is the consumer offered tangible economic value? Less value equals more UDAAP risk. For example, if consumers are paying $100 per year for identity theft protection, but the product has significant gaps in coverage and payout percentages are low, they are not getting much for their money.

Typical questions to evaluate the value proposition would include:

■ ■ ■ Does the bank price the product similarly to others in the marketplace (or is it an outlier)?

■ ■ ■ Can the value of the product or service be clearly communicated to the consumer in a way that is easy to understand?

■ ■ ■ Does the product or service have excessive penalty costs or fees relative to the benefits it provides?

■ ■ ■ Is the profit margin for the product or service excessive related to similar products at the bank or its competitors?

■ ■ ■ Is the product unreasonably expensive to cancel from the consumer’s perspective?

Understanding. This is another way of asking if consumers know what they’re getting themselves into. This reflects not only on transparency of communication and disclosure from the bank, but on the complexity of products and services. Evaluations must be measured on a sliding scale, where the more complex and difficult a product is to understand, the more time and care must be taken to ensure the consumer fully understands the pros and cons of it. The definitions of ‘unfair’ and ‘deceptive’ both refer to a consumer’s ability to make an informed decision, and this is the ultimate quality being measured.

Some questions here could include:

■ ■ ■ Are advertisements and sales scripts written in simple language, and not bogged down by “bank-speak”?

■ ■ ■ Is enough information presented to enable an average consumer to understand the costs and benefits of the product?

■ ■ ■ Are important terms and conditions (especially related to costs and restrictions) conspicuous or buried in the small print (or even left out entirely)?

■ ■ ■ Are verbal communications structured in a way to clearly answer consumers’ questions, or are they designed to de-emphasize important information that could cause a consumer to decide it isn’t the best option?

Another aspect to take into account is the audience for these communications. You’ve likely heard about the concept of “ vulnerable populations,” meaning those, for various reasons, who may have a more difficult time understanding the intricacies of a financial product or service. When language barriers (non-English speakers), attention to other matters (service members), inability to grasp complex financial concepts (elderly or very young, financially distressed, non- or underbanked, etc.), or other barriers to understanding exist, testing should take into account the audience targeted or typically attracted to a product or service.

Testing should not be one-size-fits-all, but be focused on the consumer and his/her ability to understand, along with evaluations of the time and effort taken by the bank to achieve that goal.

Predictability. This is closely related to understanding and transparency, but in essence the question is as follows: from the information provided, will the consumer be able to predict, with a reasonable degree of certainty, how the product or service will perform?

Representative questions here include:

■ ■ ■ Are all fees, along with their amounts and conditions for being assessed, clearly disclosed in a way that allows the consumer to consider how their behavior will impact cost?

■ ■ ■ Are fees and charges avoidable in ways that are evident to the consumer?

■ ■ ■ Do most (if not all) consumers actually receive the advertised or communicated benefit of the product, or do costs typically exceed consumers’ expectations?

■ ■ ■ Are there excessive cancellations of the product due to it performing in unexpected or disappointing ways?

Appropriateness. This is a difficult concept to quantify, but it’s similar to steering in the fair lending context. It revolves around the question of how and why did the consumer end up with this particular product? In other words, was it purely the consumer’s choice as to what he or she wanted, or was it more a case of being pushed into a different (and more costly/less beneficial) product?

For example:

■ ■ ■ Are there incentives that would entice employees to promote one product over an alternative that may be more appropriate to the consumer’s needs?