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FEE INCOME: Beware UDAAP traps

Quest to bolster falling income can land you in compliance trouble

FEE INCOME: Beware UDAAP traps
Has your bank been exploring new activities to try to pick up fee income in the face of falling interest income? Speakers at a recent ABA telephone briefing issued a general warning--with product-by-product specifics that dictates heightened caution in the wake of the “UDAAP.”
   
  More about UDAAP on bankingexchange.com
Podcast: Speaker Lyn Farrell of Treliant and Jo Ann Barefoot, the firm’s co-chairman, presented a podcast on this site about UDAAP last year. Listen to it now.
 
Tools: Farrell and Barefoot also presented an ABA BJ cover story with online tools, concerning UDAAP. You can see all materials here.

Common Sense Compliance: Our regular blog, by Lucy Griffin, and Nancy Derr-Castiglione, frequently touch on UDAAP and the Consumer Financial Protection Bureau. Just recently we posted Lucy’s “From UDAP to UDAAP to ???
   
Overall, “you need a UDAAP compliance program,” said Lyn Farrell, managing director at Treliant Risk Advisors, which presented the ABA’s March 7 telephone briefing, “Planning Your Strategic Response to Dodd-Frank: An Update.” Farrell noted that the Consumer Financial Protection Bureau has made a point of all banks having a program to manage compliance with UDAAP--Unfair, Deceptive and Abusive Acts and Practices, which was put in place by Dodd-Frank and expands on the old UDAP--Unfair and Deceptive Acts and Practices.

A UDAAP compliance program becomes a yardstick against which bankers can check both existing products and, especially in the context of revenue growth, new products for fairness.
 
 
Keeping new products “kosher”
Farrell gave four reminders for new product development:

• Implement governance over new product innovation processes—in other words, no one should be allowed to go off on an inspired wild tear on their own.

• Build in a consumer perspective,
to make sure the bankers aren’t just talking to themselves.

• Empower Compliance—indeed, Farrell suggested that the bank’s compliance function should be able to sign off on products and have a “kill switch” to avoid compliance blow-ups.

• Be careful of vendor products.
An interesting sidelight to this was an earlier speaker’s point that the compliance challenge has grown so that some banking vendors have engaged Treliant to help them keep up with compliance mandates.

(An ABA survey recently looked at the impact of compliance on bank’s product decisions. Read bankingexchange.com coverage of the survey, with experts’ reactions, here.) 


Importance of complaint handling
While UDAAP is a renewed and revised challenge, it also presents an ongoing one. There are aspects of compliance that eventually become “baked in,” once a bank changes a form, rewrites software, or otherwise makes a hard-wired changed. UDAAP, by contrast, goes beyond the black and white into fairness and other concepts that defy precise measurement. UDAAP will also continuously hang over bank policies, practices, and decisions.

As a result, Farrell suggested, the best UDAAP tool that a bank can develop is a robust and well-managed complaints handling program.

“Complaints are the ‘canary in the coal mine’,” said Farrell. “UDAAP problems usually begin with complaints. So your best defense against UDAAP is a formal complaint system.” Frequently, she added, complaints can be related to the level of complexity a product presents. (Remember the point about bankers talking only among themselves.)

Farrell presented bullet points to get banks started on this ongoing challenge:

• Implement a formal program.

• Write a complaint policy.

• Define what a complaint is
—does a customer grousing about a fee qualify, or does something more significant have to happen first?

• Capture all complaints
—however defined--both written and verbal.

• Include all channels where the bank does business.

• Use complaints to find root causes of problems, which may turn out to be common to multiple complaints.

• Use your complaint program in monitoring, testing, and auditing for UDAAP compliance.
 
 
Getting down to specifics
UDAAP will function as an overlay on bank products, which will continue to be subject to both that body of regulation as well as more specific laws and regulations.  One example is overdraft programs.

Overdraft protection. While laws, regulations, and guidelines and guidances govern overdraft--and CFPB is conducting its own investigation into this family of products--Farrell warned listeners that “the biggest UDAAP risk, based on what I’ve seen coming out of examinations, is overdraft protection.”

Farrell said much is going on with overdraft in forums off the radar. She said that much remediation is going on under nonpublic memoranda of understanding or simply as formalized followup to examination findings.

“Make sure they are promoted well, that everything is done fairly, that fees are fair, and that consumers can understand the basis for their assessment,” said Farrell. She said that Treliant recommends that clients test their overdraft offerings annually against both UDAAP and Regulation DD requirements.

“Fine print won’t work anymore,” said Farrell. She said banks should improve the transparency of their disclosures. Key points to check are mentions of product cost; customer risk; program limitations; the order in which transactions are processed; and the maximum total fee that can be applied daily.

She added that banks should look at heavy users and determine what’s going on.  A review of eligibility criteria for the bank’s program may be warranted, she said. In addition, a review of complaints about overdraft programs may bring out causes that suggest modifications to the program.

Know this, Farrell advised: “The examiners are looking at this through consumer’s eyes.”

Reward programs. How rewarding are they? That is, asked Farrell, are consumers participating in your program actually receiving the points or other rewards that you’ve promised them.  Bankers should periodically see how actively customers are using the programs and “cashing in” their earnings.

Reward programs represent a potential UDAAP target, said Farrell.  A concern to be aware of is the level of complexity involved in the program and whether customers understand what they have to do to receive rewards. This requires a look at collateral materials, disclosures, and advertising.

A sticking point that banks should fix occurs in programs where a consumer must do X or Y so many times in a month to qualify for a bonus, or a preferential deposit interest rate, or some other traffic-based incentive. Sometimes activity the consumer conducted within required time frames doesn’t arrive in the bank that way, because merchants may delay sending transactions to their processor, for instance.

Farrell suggested that banks find ways to avoid consumers losing out for such reasons.

Identity theft protection. With the risk of ID theft so often in the news, there is demand for protection. Farrell said bankers whose institutions offer such programs should know that these are prime UDAAP targets, and they should determine:

1. Do consumers have to take action to activate product? “If you have a low activation rate, then something is wrong,” said Farrell.

2. Does the product work as advertised?

Again, complaints represent a good guide to what isn’t working.

Remittance transfer programs. Farrell noted that the Federal Reserve’s authority over the Electronic Funds Transfer Act has been absorbed by CFPB, and that a rule on remittance transfers is scheduled to take effect in 2013. This will bring many consumer protections in the EFT area to remittance transfers, made from the US to foreign recipients, per Dodd-Frank. The rule applies to banks, thrifts, and credit unions, as well as to money transmitters.

The rule addresses compliance before, during, and after the transfer. Disclosures include applicable fees and exchange rates. A special provision permits the sender 30 minutes--sometimes more--to cancel their transfer, and the ability to receive their funds back should they do so. Proof of payment or a receipt disclosing when funds will arrive must be provided. Certain language requirements also apply.

Farrell said that this regulation will require training for all customer-facing employees who handle remittance transfers.

Payday lending programs. In an earlier part of the program, Susanna Tisa, also a Treliant managing director, reviewed CFPB’s examination procedures for short-term, small-dollar lending programs. These were published in January 2012.

Tisa suggested that banks review their small-dollar, short-term lending to see if it falls into the category of “payday lending.” Some banks are offering deposit advance programs—short-term loans made in anticipation of coming direct deposits—that are open only to depositors, and those are not considered payday lending. 
Steve Cocheo

Steve Cocheo’s career in business journalism has taken him to all 50 states and nearly every corner of banking in institutions of all sizes. He is executive editor of ABA Banking Journal, digital content manager of ababj.com, and editor of ABA Bank Directors Briefing. He coordinates the popular Pass the Aspirin and First Person features and wrote the booklet series Focus On The Bank Director. He is the only journalist to have sat in on three federal banking exams, was a finalist for the Jesse H. Neal national business journalism awards, and a winner of multiple awards from the American Society of Business Publication Editors.

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