Absolutely no question about it: UDAAP and fair lending are the highest compliance risks for banks right now.
It is no coincidence that both are such hot issues. They have a great deal in common. In fact, there is so much similarity that the two issues could have been twins separated at birth.
Consider the following.
1. Hindsight is perfect—or at least much clearer than foresight.
The best intentions up front may be seen later as violations.
Just think how many fair-lending issues have come up after people thought they were in compliance. A marketing campaign designed to reach a certain audience is later challenged because another minority audience felt excluded. A loan program designed to increase lending in low- and moderate-income areas backfires because the underwriting was too relaxed and loans went into foreclosure.
The same is true for UDAAP. There is a constant stress between designing marketing that works and marketing that deceives. Sales targets motivate branch staff to push a product that may not be best for the customer.
Famous last words: “It was a great idea at the time, but it backfired.”
2. Violations are in the eye of the beholder.
It all depends on who is affected and who is looking at it. What seems fair or logical to a banker may seem very different to a consumer—or CFPB.
When a regulator or investigator starts reading complaints about a product or service, they will see it through the eyes of the consumer.
CFPB will be considering consumer harm, but may not give weight to the business issues that drove the activity or the information that was available to the bank at the time.
The focus is on the reasonable consumer—not the reasonable banker.
3. Subjectivity rules.
Whether treatment was fair and non-deceptive depends on the capabilities and expectations of a reasonable consumer.
What is “reasonable”? This term is wondrously undefined.
As CFPB is currently applying “reasonable,” it seems to slide around from describing the reasonableness of the consumer to the reasonableness of the consumer’s behavior or choices.
When looked at this way—especially with the 20-20 clarity of hindsight—the term can mean many different things.
4. The stakes are high.
Violations of these two issues are the worst sort of headlines for the bank’s reputation. Too many people think banks are mean-spirited and do not have customers’ interests at heart. To them, a UDAAP or fair-lending headline simply proves it.
5. Through a mirror darkly.
When questions of UDAAP or fair lending are raised, what things look like can depend on what is being looked at.
Looking through different parts of a darkened mirror or seeing light through different sides of a prism can produce different pictures. The problem with these two issues is that when the plans are made and the product or service is introduced, we don’t know what it will look like from a different perspective—afterwards.
6. Managing both issues is like herding cats—or squirrels.
Things keep slipping away. Neither fair lending nor UDAAP can be managed through a system. A series of approved procedures won’t by itself save you.
Both UDAAP and fair lending are dynamic issues and can occur any time, any way, anywhere.
Both issues come down to human behavior—behavior of both bank staff and customers. There is no way to control it. So herding cats it is.
With these two issues at the top of the enforcement list, how are bankers to survive?
There is no safety zone, but there are ways to manage risk.
Because the two issues are so similar, it makes sense to look to the fair-lending program—assuming that you have a good one. The issues are similar and the program structure should be similar. Just don’t limit the UDAAP program to lending because deposit transactions are equally vulnerable.
Fair-lending programs must contain the basic elements of policies, procedures, training, monitoring, and auditing. All elements are important and apply equally to UDAAP. But as with fair lending, the monitoring and auditing steps can be the difference between success or an enforcement order.
Both auditing and monitoring should be approached with creativity.
Those conducting these steps must consider and evaluate much more than whether regulations and procedures are complied with. They must be creative and anticipate the hindsight view that a regulator might see. The findings from both monitoring and auditing should be studied for any UDAAP or fair-lending issues and appropriate responses should be developed.
Finally, watch the agencies closely—especially the CFPB. Take your cues from what happens to others—including non-banks.
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