Historically, many aspects of compliance concerned hard facts, and whether a bank had handled this or that correctly. But in the age of UDAAP, even veteran compliance officers may disagree regarding what actions fall under its definitions and which don’t—and how to remedy situations that do fall under the new framework.
During ABA’s recent Regulatory Compliance Conference this wrinkle was amply demonstrated during a breakout session devoted to a series of case studies posed to the audience. Moderating the discussion and providing their own ideas along with those of the audience were Lyn Farrell, managing director at Treliant Risk Advisors, LLC, and Gregory Imm, who at the time was senior vice-president, chief compliance officer, and director, community affairs/fair lending and responsible banking at Fifth Third Bank. He recently retired.
UDAAP—Unfair, Deceptive, Or Abusive Acts Or Practices—can be “squishy.” While definitions of each of the terms exist in the guidance of the Consumer Financial Protection Bureau, little direction has been given in how to test for them when a bank is reviewing proposed or current products, services, or practices.
This session attempted to air UDAAP issues raised by several real-life situations posed by the moderators (The cases presented here should be considered illustrative only, not conclusive guidance.)
Ultimately, according to the moderators, it is the consumer’s perspective that matters the most. Treliant’s Lyn Farrell reminded listeners that a disclosure, product description, or other document may be very clear to bankers, but they can’t help but bring experience and understanding to a matter that consumers lack.
Said Greg Imm about the 10 cases presented: “there are a few in here where even we clearly don’t know the right answer.”
Often the cases suggested issues from other compliance areas, such as fair-lending law and rules, but the moderators held the discussions mainly to the UDAAP theme. (Case descriptions in this article are based on those presented by Farrell and Imm, edited for length and clarity.)
1. Case of the Waived Fees
This case was quickly disposed of, with a fairly obvious issue at its core.
“Friendly Bank wants to initiate a new account with monthly service fees of $15. The $15 would be described in the Regulation DD brochure provided at the time of account opening. However, the line of business wants to waive the fee for every customer with collected average balances of $15,000 each month without notice. Any month where the balances are lower than $15,000, the fee would be charged. No disclosures would be provided about this policy—it would be handled as a waiver of the fee.”
Audience consensus quickly came that there is a UDAAP problem here. Farrell agreed, pointing out that the way consumers think about accounts, she would be concerned. Imm criticized the hypothetical bank’s failure to make it clear how fees could be avoided. Farrell noted that the bank had wanted to avoid the appearance of tiered accounts.
2. Case of the English Disclosures
This case stirred a lively discussion. The moderators asked the audience to put aside fair-lending considerations to concentrate on UDAAP.
“Bank A advertises mortgage rates in the local Spanish-language newspaper and even goes so far as to provide Spanish-language initial disclosures. However, the closing package is in English and all servicing documents, including customer-service, rate change notices, and default notifications are in English.”
A sampling of audience member reaction to these facts:
• Providing those early disclosures in Spanish pushed the case over the UDAAP line for one banker. Clearly, said the banker, the expectation that all documents would be in Spanish would be established by such initial action.
• Another banker said the bank would find it hard to argue that the applicants would know what they were getting into, with the change in language at the back end.
• “It’s a bait and switch,” declared another banker. Spanish advertising implies a comfort zone that the bank fails to live up to.
In the course of discussion, Imm pointed out that the situation has “a lot of ifs.” He said he’d be concerned about the consistency of the Spanish used throughout the documentation and other communication, given the numerous dialects of the language that exist.
The audience’s solution, to attempt to make this case acceptable: Disclose in the Spanish-language newspaper ads that all transactions relating to the ad will be conducted solely in English.
Farrell said that some of her firm’s larger bank clients have decided to stop doing Spanish-language promotions, out of fear of UDAAP risk.
3. Case of the Debit Overdraft
In this case the audience had to pick a “winner.”
“Friendly Bank has a policy of holding the funds on debit card holds for three business days, the maximum allowed by Visa and MasterCard. On the other hand, Service Bank has a policy of holding the funds on debit holds for only one business day. Both banks charge an overdraft fee for debit card transactions where the customer has opted-in to overdraft protection. Does Service Bank have a problem if it only holds the debit card transaction funds for one day? ”
“Which bank is more likely to have a UDAAP problem?” said Farrell. “It’s counterintuitive, but the one-day hold is more of a problem.”
The consultant explained “that’s because you put a hold on that debit transaction to make sure the funds are there when the settlement item comes in. If you release the hold too soon, then the money is released back into the general fund of the account, and it is more than likely that the consumer’s transactions are going to eat that money up before the settlement item comes in. The consumer has an understanding that you put a hold on those funds and that those funds will be there when the item comes in to settle.”
So if the funds are not in the account, continued Farrell, “the agencies have said that there is a problem. There was an expectation that the funds would be there, but the funds are gone. So putting the maximum hold on is the safest thing to do from a UDAAP perspective.”
4. Case of the Free ATM Uses
This one had elements of a trick question …
“Last year the bank allowed all checking account customers to have five free foreign ATM uses per year. Starting this year, after appropriate disclosures are given, the bank is reducing the free transactions to three per year, and will begin charging at the appropriate time after disclosures are made. However, the bank will allow accountholders over age 62 to continue with five free foreign ATM uses.”
Discussions drew the conclusion that this would not be a UDAAP issue, so long as the policy shift was disclosed in a timely manner. The change does make the account a bit less attractive to folks under 62, but that is a marketing matter.
At first glance, the difference in policy because of customer age tends to trigger bankers’ fair-lending radar, noted Greg Imm. But therein lies the answer—this is a deposit account, not a credit product, and therefore, she said, fair-lending laws do not apply.
“Age was a red herring,” confessed Imm.
5. Case of the Debit Card Rewards
This is a case where absolute full disclosure rules.
“Friendly Bank charges a fee for all PIN-based debit card use ($1 per transaction). The bank also has a debit card reward program whereby the consumer can get cash back for all signature-based transactions over $50. The bank advertises its debit reward program on its ATM screens and receipts and on the statements of its checking accounts as follows:
“ ‘Get 50 cents back on debit card transactions above $50. Call for details’.”
Asked Farrell: “Do you have a problem with this?”
An audience member suggested that insufficient detail was being disclosed.
“I think you are right. You have to tell them enough—everything is material here,” says Farrell. “I don’t think that consumers really understand the difference between PIN-based and signature-based. So if you are really going to tout that rewards system, you need to be sure, in the same place, to say that you charge $1 for PIN-based. There’s no law behind that view, but Reg DD says you need to say something like, ‘Fees may reduce earnings on the account’.”
Advised Farrell: “Put everything in one place,” so there can be no misunderstandings.
6. Case of the Free Credit Score
“Credit scores are one of the more confusing things out there,” said Farrell. She pointed out that many consumers don’t realize there is more than one FICO credit score. The bank in this case study is offering the general FICO, not the mortgage FICO nor the auto-credit FICO.
“Friendly Bank is offering a free credit score as a promotion for its new unsecured line of consumer credit products. The bank will provide the general consumer FICO credit score on a one-time basis 15 days after the loan funds. The FICO score is NOT the one generally used by lenders for car loans or for mortgages. The promotional flyer and insert read:
“‘Be savvy. Know your credit score. Get our Summer Time Fun line of credit and we will send your FICO score to you for free!’”
Initially, some members of the audience grew confused, thinking that the case-study bank is promising free credit reports, something dangled in many TV and internet promotions, and something that is legally required once a year of the credit bureaus already. Then it was clarified that credit scores are what is being discussed.
The audience decided that much more disclosure is necessary in the bank’s offer for the promotion to be clear. Certainly the type of score to be provided must be clarified.
“The only reason someone usually wants a FICO score is to know if they are going to be able to get some kind of loan,” Farrell pointed out. So they would definitely want to know what kind of score they would be obtaining as part of the bank’s offer.
7. Case of the Typo
Though this case study involved only a local newspaper’s error, in these days of electronic editions and online-only publications, one can seen the issues wrestled with expanding.
“A local newspaper collects the local mortgage rates of banks to publish in a weekly roundup of rates for consumers. The paper makes a typo in its chart and as a result shows ABC Bank’s rate as 1% lower than it actually is.”
In this situation, the paper is calling mortgage lenders for data, and this is an editorial service, not a form of advertising.
Would consumers be likely to rely on the erroneous information, in spite of the questionable likelihood that a lender would be undercutting the market so severely? With tongue firmly in cheek, Greg Imm said, “there are unreasonable people out there … shocking!”
However, Imm did not see a UDAAP issue here.
“The bank had no control over this,” said Imm. He suggested that the bank might give consumers drawn by the error a break on their application fee, as a way of smoothing things over.
That said, Imm warned that the bank’s regulators would expect to see a record of the bank taking steps to quickly correct the paper’s error. And he pointed out that, though the bank bears no blame for the error, there can be a bit of reputation risk, especially in no attempt is made to rectify the error.
8. Case of the Reminder Call
This convoluted case drew a common-sense solution from the audience.
“The bank has a process for calling mortgage loan customers on the 14th, reminding them that their payment is due on the 15th, and that they will be charged a late fee, in accordance with the terms of the note at midnight EST, if the payment is not received on the 15th.
“The customer called would have multiple options, which are not reviewed during the call. The bank can process payments immediately by credit card, or by debiting the customer’s account at another bank. The bank charges $30 for this process. Direct debits from the customer’s deposit account at this bank are free. Alternatively, the customer can go to his online account with the bank and make the payment with a credit card or debit a different bank account to make the payment, both for no charge—but it takes two days to process such transactions.
“This information was provided to customers at the time the account was established, but, again, the bank caller does not tell them about these options, specifically, during the reminder call.”
“Well, why doesn’t the bank just call these people a day earlier?” said an audience member whose hand shot right up.
That would cover the two-day cycle described for the no-charge option. The moderators smiled and said the audience was supposed to discuss things in depth before solving the problem, and said that, yes, that was a way of avoiding the problem.
“What are the options a customer has to avoid a late fee?” Imm asked.
“They could have paid on time,” quipped a member of the audience, as the room exploded in laughter.
“Yes, that is correct,” Imm admitted.
The truth is that “99% of people called will say, ‘I sent the payment in, the check is in the mail’,” said Imm. “And the other 1% will tell the caller to go to hell.” A few might plead having been away and forgetting all about the payment, he acknowledged.
Farrell raised an important point: “Are we under an obligation to make a reminder call at all? No.”
“That’s right, this is a courtesy call,” said Imm. “I wouldn’t say there is UDAAP risk in this particular transaction. I might change my answer depending on the size of the late payment charge. But I think the suggestion is right, to make the calls on the 13th and solve the problem altogether.”
9. Case of the Lifetime Account
With those contests they used to have—where the prize was a lifetime supply of this or that—we always used to wonder, “the winner’s lifetime or the company’s?” As the banking industry begins a new round of consolidation, this is no longer an academic pursuit.
“Bank A acquires Bank B and maintains all of its products for two years. At the end of the two years, Bank A wants to convert all Bank B products to similar ones at Bank A. However …
“Bank B had a product initiated many years before that was directed at graduating high school seniors. The account was called ‘Free for Life.’ If the student opened the account and kept it active—making a deposit or withdrawal once a year—the account would be free for the life of the accountholder.
“Bank A, the acquirer, does not offer this types of account and therefor converted these accounts to its lowest-cost checking account, which has a $5 monthly service charge.”
Can an acquiring organization just treat such arrangements as null and void? Or is the acquirer stuck for life, with the alternative being to court UDAAP trouble?
Members of the audience argued both sides of the question.
“I don’t really know,” said Farrell, “but I tend to agree that it is going to be very difficult to take away an essential feature of the account. My suggestion is to stick these people in a separate account type.” This will enable the acquirer to honor the commitment without adding more such accounts.
However, Farrell added, some buyers would likely prefer to pull the plug on the freebies. If that’s the case, she said, it makes the most sense to do so immediately, after the acquisition is complete, rather than leaving the waivers in place for a couple of years.
Imm warned that not honoring the deal could be risky.
First, he said, regulators’ radar goes up on the word “free.”
“Free is free is free,” said Imm. “The regulators have said that time and time again.”
That is compounded by the common interest of the recipients, the fact that they have all been local high school students.
10. Case of the Right of Rescission
As they say, timing is everything…
“Bank C made a home improvement loan to John Doe. The loan documents were signed on Monday and the loan was funded into an escrow account. John was given access to the funds on Thursday after the right to cancel expired.
“Bank C started charging interest on the loan on Monday when the escrow account was funded.”
“No, this is not a problem,” said Farrell. “Reg Z allows you to do that.”