Fair banking on the rise

Visit LinkedIn, and enter the term “fair banking.” You will find something you wouldn’t have found five years ago: pages of bank officers with titles like director, fair banking; fair banking compliance manager; and other variations.

While many of the bankers bearing some version of the title work for very large banks, not all do.

And even where the banker’s title doesn’t include fair banking, chances are the phrase will appear in the job description. And, by the way, the term is making its way into the titles, job descriptions, and organizational names for activists who are targeting banks.

Indeed, the only place you won’t find fair banking is the Consumer Financial Protection Bureau’s org chart—though it still includes the narrower “fair lending.”

Roots of “fair”

The term fair banking has been ushered in, in part, by the expansion under the Dodd-Frank Act of UDAP to UDAAP—prohibition of unfair, deceptive, or abusive acts or practices.

CFPB has done little to flesh out the industry’s understanding of the term “abusive,” leaving banks to attempt to read the tea leaves to divine what is and isn’t appropriate. While some bankers have been known to use their own “smell test” for new products and services or new policies, “fair” can be subjective.

Last fall, during a panel discussion on fair banking at the CRA & Fair Lending Colloquium, presented by Wolters Kluwer Financial Services [2016 event], moderator Lynn Woosley asked panelists how they assessed “fairness risk.” (She is senior vice-president and fair and responsible banking officer at SunTrust Banks.)

Mark Schultz, senior director for fair lending compliance at Capital One, said that the company formerly provided a nonnumerical tool to staff for making such judgments, but found that it didn’t work well.

“I don’t think there is any one person who can make the right call regarding what’s fair,” said Schultz.

According to Schultz, today the two main parts of the bank overseeing fairness overall are Legal and Compliance. The bank looks to Legal, he said, for identification of what’s fair or not, and looks to Compliance to be the bank’s “eyes and ears.” The idea is that Compliance escalates risk issues that it identifies.

Jeff Jaffee, senior vice-president and senior corporate compliance manager at Bank of the West, said that the bank reviews fairness risk on a product-by-product basis. Each one receives a risk assessment, and the staff works to mitigate those posing the greatest threats. This review must go beyond product features, as a problem could result, for example, from marketing that targets a vulnerable population, such as students or seniors.

Complaints can be a good place to find potential issues, said Jaffee. “They are a good source for things that customers feel are unfair.”

Woosley said that anytime a change is made in a product or service, SunTrust Banks reassesses that specific item in case the change turns a fair relationship into an unfair one.

“Fair” and lines of defense

Each of the banks represented on the panel have adopted the “three lines of defense” approach to compliance and risk management. Typically in this approach, the business unit is considered the first bastion against risk, and this applies to fair banking risk as well.

“We expect business units to own both their risks as well as the management and mitigation of those risks,” said SunTrust’s Woosley. However, her own unit handles regression analysis—used to analyze the potential or existence of differential treatment or impact. This, in part, is so that the function can be centralized, she explained.

It’s similar at Capital One. “We expect the business units to be educated regarding what their risks are, and we expect them to consider those risks,” explained Schultz. Each business line has a governance committee with which Schultz works closely. At Capital One, he pointed out, the classical compliance responsibilities have been pushed out to the first line, the business unit. The only exception, as at SunTrust, is monitoring and statistical analysis.

With CFPB making complaints a bigger part of regulatory activity than ever, bankers increasingly have been regarding complaints brought straight to them as a resource to be mined for problems and direction toward solutions.

Jaffee said that common problems and root causes can be identified when complaints handling is centralized, and this enables action.

“Over the last year or so, we have changed both policies and procedures with our line-of-business partners,” noted Jaffee. “They are the first line of defense, so they own it.”

“Fair” and banking spread

The panelists agreed that the challenge of determining what is fair is growing, in part, because of the rapid pace of change in banking.

Pointing to the industry’s practices on deposit funds availability, Jaffee talked about his college days. There were no ATMs, no debit cards, no apps. His school actually recommended a local liquor store, which would cash a check for free—if you used part of it to buy beer. Jaffee said he’d let his father know he needed money and write a check, which the liquor store would cash. His father would then go to the hometown bank to cover the check. Together, they were relying on float.

“If you told my story to a 20-something today, they’d look at you as if you were crazy,” said Jaffee. “The world has changed.” His point is, have banks’ policies and practices changed? Even if regulations haven’t shifted, disclosures and policies need to be considered in light of current conditions and technologies.

To underscore the importance of continually reexamining policies and practices in this light, Jaffee pointed to the Citizens settlement of August 2015. Citizens Financial Group, Inc., and affiliates agreed to pay $31.5 million—$11 million in refunds and $20.5 million in civil money penalties assessed by three agencies—for failing to credit full deposit amounts. 

The joint CPFB, OCC, and FDIC settlement accused the company of unfair and deceptive practices—specifically, keeping money from deposit discrepancies when receipts didn’t match actual money transferred. The agencies’ statement indicates the discrepancies were not addressed if they fell below a particular threshold (first $50; later $25). Over a period of almost five years, this alleged behavior amounted to millions in shorted deposits, the agencies said.

Overdrafts: We’re all struggling

With overdraft protection—which CFPB has had in its sights from its beginnings—banks must be certain that their programs do what they say they do.

“You really need to be on top of it,” said Bank of the West’s Jaffee. He indicated that CFPB expects to see such correlation.

Panelists warned that the bureau looks askance at an institution that has what it perceives as too many opt-ins to overdraft service. Jaffee said it is essential for frontline staff to be sure consumers are clear what they are signing up for. He added that it would be instructive for compliance officers to review how much of the bank’s income came from overdraft charges and other service fees—the implication being that leaning too hard on this could be a red flag to examiners.

A similar challenge is serving people who don’t speak English. “There’s a balancing between fair lending risk and UDAAP risk,” said Woosley. Moving the dial either way can expose a bank.

Legally, Schultz said, the easiest option is doing business solely in English, but that will not help the bank offer broad service. However, once a bank ventures to offer service in other languages, that forms an expectation that documents—at least significant disclosures and other key ones—be produced in translated form. And to avoid issues, those documents must be accurately translated.

“This is probably one of the biggest fair lending/UDAAP concerns of the moment,” said Jaffee. “We’re all struggling with what the right thing is to do.”

Digital advances, a challenge

While banks run risks if they don’t keep up with technology, panelists agreed that keeping up comes loaded with its own exposures. It’s possible for exciting technology to get ahead of compliance and fairness thinking.

“If you are only offering certain features of products through your bank’s app, you have to be sure you aren’t creating an impact based on that,” said Capital One’s Schultz. “You have to be looking at these things through a fair-lending perspective.” For example, discount coupons that are only available to app users could wind up triggering a compliance problem if certain groups tend to obtain benefits that others don’t.

There’s also the issue of disclosures. “If you are making loans over a mobile phone, will you be able to make required disclosures in a clear way,” questioned Schultz, “so people know what they are getting into?”

Woosley pointed out that consumers notoriously don’t like to have to “click” a lot to get anywhere. As a result, she suggested bankers place disclosures as close as possible to borrowing points, to minimize necessary navigation.

Schultz noted that any bank either partnering with, or adopting the methods of, an online marketplace lender must be sure that all compliance requirements are observed by all parties.

Avoiding “add-on” problems

One of the regulators’ targets in UDAP and UDAAP cases has been products and services added onto other ones, such as protective services added to credit cards.

Schultz said there is room for disagreement about the utility of such products. As a parallel, he noted that he and his father differed on the need for extended warranties; his parents generally opting for them, and he typically avoiding them.

That said, Schultz said it was important for add-on products have some true value to customers, and that costs, coverage, and more be disclosed clearly and accurately. Product is important as well, so that the add-on services provide what is promised.

Additionally, sales efforts must be scrutinized. Schultz said that Capital One’s compliance function tests sales letters and monitors phone calls to be sure that any add-on products are sold in an appropriate fashion. “And then you have to make sure that they don’t go off-script,” warned Schultz.

Where are auto dealers heading?

When banks buy indirect paper from auto dealers, they inherit any and all compliance issues. There is no safe harbor, because the dealers act in the bank lender’s stead.

Thus, all three banker speakers said their institutions have grown more hard-nosed in the wake of recent enforcement settlements, insisting on delving into records to be sure that UDAAP and other violations are not occurring.

“When I started asking, ‘What’s in the black box?,’ they looked at me like I’d lost my mind,” said Woosley, referring to dealer credit evaluation processes. Not all dealers will share everything, but will often share more than they first offer.

“They are getting more people asking for more information,” Woosley said, “but it is still a negotiation. Some will say, ‘We won’t give you the secret sauce recipe, but we will give you the results of our disparate impact testing.’” She said she’d grown comfortable with that.

Jaffee stressed that bankers should not be put off by auto dealer resistance: “Don’t be shy if they say anything you ask is an outrageous request.”

“Different banks will be in different positions of leverage with their dealers,” Schultz acknowledged.

Third-party partners of any stripe pose compliance and fair-banking risks for banks, whether the relationship involves credit, fee income, or otherwise. An audience member asked Woosley if more banks were stiffening contract language with partners in response to UDAAP and other fair banking risks.

Woosley cautioned listeners against regarding contracts as complete protection, but said they were valuable in that they could ensure that banks maintain oversight and monitoring access to their partners’ activities. Schultz noted that a number of Capital One’s contracts grant the bank auditing rights. In typical practice, this isn’t always done on site, but the ability to do so is frequently arranged. Should the bank need maximum access, the opportunity is there.

Tips from the podium: Read what auto dealers read and you won’t be blindsided

Why would a compliance officer subscribe to Auto Finance News?

Consider for a moment two stories on the publication website’s front page recently: a description of how one non-bank finance firm tries to cross sell credit cards to subprime auto borrowers and tips on collecting from millennials (make it fun; use gamification to keep payments on time).

Bank of the West’s Jeff Jaffee subscribes and recommended doing so to the recent CRA & Fair Lending Colloquium audience, because Auto Finance News’ print newsletter and website are where auto dealers go to share what they are doing to make more money.

“Whatever they are thinking of has got to get you worried,” said Jaffee. The banker spoke of the various complicating factors that go into an auto financing transaction, and noted that an Auto Finance News article he’d seen suggested how to crank up a purchaser’s loan-to-value ratio to 137%.

“That doesn’t sound like a good number to me,” said Jaffee.

Auto loan terms have Jaffee concerned as well, with some going as long as 84 months—seven years.

“I know cars last a long time,” said Jaffee, “But that’s something to be really careful about.”