Unfair, Deceptive or Abusive Acts or Practices Act (UDAAP)..It May Not Be What You Think

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1 Unfair, Deceptive or Abusive Acts or Practices Act (UDAAP)..It May Not Be What You Think November 15, 2012 Mary Thorson VP, Chartwell Compliance/ICBA CRM

2 I. UDAAP Overview Background II. UDAAP An emerging compliance force III.UDAAP The CFPB Effect IV.UDAAP What you need to know to protect your bank V. Questions 2

3 Traditional application of the requirements Regulation AA Unfair or Deceptive Acts or Practices Act Notices to Cosigners Prohibitions on Pyramiding of Late Charges Confessions of Judgment 3

4 Dodd Frank Act and the Consumer Financial Protection Bureau effect Misleading or inaccurate information, disclosures, advertising i Renewed initiatives to pursue enforcement 4

5 Legal standard for unfair or deceptive Unfair practices An act or practice is unfair where it: causes or is likely to cause substantial injury to consumers; cannot be reasonably avoided d by consumers and; is not outweighed by countervailing benefits to consumers or to competition. Public policy, as established by statute, regulation, or judicial decisions may be considered with all other evidence in determining whether an act or practice is unfair. 5

6 Legal standard for unfair or deceptive (cont d) Deceptive practices An act or practice is deceptive where: a representation, omission, or practice misleads or is likely to mislead the consumer; a consumer s interpretation of the representation, omission, or practice is considered reasonable under the circumstances and; the misleading representation, omission, or practice is material. 6

7 Emerging i Issues Trending ExaminationCitations oudaap violations paired with other regulatory citations Joint Agency Investigations a new player in the league Recent tformal actions and what htthey could mean for community banks 7

8 o Capital One Bank, N.A. July 2012 UDAAP cited CFPB issued $25M penalty, OCC issued $35M penalty OCC required bank to stop sales and marketing of any debt suspension product, debt cancellation product, credit and identity monitoring products, any similar products ( add on products) OCC required corrective action and $150M reimbursements to 2.5M affected customers Bank s failure to develop and implement a comprehensive and effective enterprise risk management program to detect and prevent unfair and deceptive practices July 18, 2012 CFPB Bulletin re: add on products, footnote 1: Although this bulletin focuses on credit card add on products, institutions should take the guidance that it provides into consideration when they offer similar products in connection with other forms of credit or deposit services. [emphasis added] 8

9 o Higher One, Inc., and The Bancorp Bank August 2012 UDAP cited FDICissued consent orders (details on the following slides) Higher One and The Bancorp Bank agreed to settlement terms FDIC ordered restitution of $11M to ~60,000 students FDIC ordered civil money penalties Higher One $110K, The Bancorp Bank $172K 9

10 FDIC Consent Orders The Consent Order requires Higher One to change the manner in which it imposes NSF fees. It is required: 1) to not charge nonsufficient funds ( NSF ) fees to accounts that have been in a continuous negative balance for more than 60 days; 2) to not charge more than three NSF fees on any single day to a single account; and 3) to not charge more than one NSF fee with respect to a single automated clearing house ( ACH ) transaction that is returned unpaid within any 21-day period. In addition, Higher One is required not to make misleading or deceptive representations or omissions i in its marketing materials or disclosures and to institute t a sound compliance management system. 10

11 FDIC Consent Orders The Consent Order requires The Bancorp Bank to: 1) increase board oversight of all compliance matters; 2) improve its compliance management system; 3) enhance its audit program, correct all violations; 4) significantly increase its management of third-party risk; and, 5) provide to the FDIC details relating to the termination of its relationship with Higher One. The order additionally states that, if Higher One fails to complete restitution, the FDIC may require The Bancorp Bank to establish a restitution account in the amount of restitution unpaid by Higher One. 11

12 o Higher One, Inc., and The Bancorp Bank August 2012 (cont d) For a student debit card account program, FDIC determined Higher One and The Bancorp Bank were: charging student account holders multiple nonsufficient fund ( NSF ) fees from a single merchant transaction; allowing these accounts to remain in overdrawn status over long periods of time, thus allowing NSF fees to continue accruing; and collecting the fees from subsequent deposits to the students' accounts, typically funds for tuition and other college expenses. o FDIC Guidance on Overdrafts a familiar theme returns 12

13 o Discover Bank September 2012 UDAAP cited FDIC conducted an investigation in which the CFPB joined Subject of the joint investigation was deceptive telemarketing and sales tactics related to promotion of various credit card add on products Payment protection Credit score tracking Identity theft protection Wallet protection 13

14 The agencies jointly determined that Discover engaged in deceptive telemarketing tactics to sell the company s credit card add on products: Payment Protection was marketed as a product that allows consumers to put their payments on hold for up to two years in the event of unemployment, hospitalization, or other qualifying life events; Credit Score Tracker was sold to allow a customer unlimited access to his or her credit reports and credit score; Identity Theft Protection was marketed as providing daily credit monitoring; and, Wallet Protection was sold as a service to help a consumer cancel credit cards in the event that his or her wallet is stolen. 14

15 The FDIC and CFPB determined: Discover s telemarketing scripts contained misleading language likely to deceive consumers about whether they were actually purchasing a product Discover s telemarketers also often downplayed key terms and spoke quickly during the part of the call in which h the prices and terms of the add on products were disclosed Because of the misleading language in the scripts and the actions of Discover s telemarketers, consumerswere: Misled about the fact that there was a charge for the products; Misled about whether they had purchased the products; Enrolled without their consent; and, Not provided certain material information about eligibility requirements for certain benefits. 15

16 Under the order, Discover has agreed to: Stop deceptive marketing; Pay approximately $200 million in restitution to more than 3.5 million consumers who were charged for one or more of the products between December 1, 2007 and August 31, 2011; Provide refunds or credits without any further action by consumers; Submit to an independent audit which will report to the FDIC and the CFPB on Discover s s compliance with the joint FDIC CFPBConsentCFPB Consent Order; and, Pay a $14 million in civil money penalties $7 million of that penalty to the U.S. Treasury and $7 million to the CFPB s Civil Penalty Fund. 16

17 o American Express October 2012 UDAAP cited FDIC initiated an investigation in which the CFPB, FRB, OCC, and Utah Department of Financial Institutions ( UDFI ) UDFI) joined Subject of the joint investigation was alleged deceptive marketing and debt collection practices and associated deficiencies in compliance risk management and internal audit programs 17

18 The Agencies issued orders against entities they supervise in the American Express organization totaling $27.5 million in civil money penalties and $6 million in restitution to consumers: CFPB $14.1 million fine against American Express Centurion Bank, American Express Travel Related Services, and American Express Bank, FSB. FRB $9 million civil money penalty, against American Express Travel Related Services Company, Inc. and American Express Company, the parent company. Both are registered bank holding companies based din New York. FDIC $3.9 million fine against American Express Centurion Bank. The FDIC and UDFI discovered the first evidence of illegal activities during a routine examination of American Express Centurion Bank. OCC $500,000 civil money penalty against American Express Bank, FSB and ordered the bank to provide approximately $6 million in restitution to an estimated 17,000 affected customers. 18

19 The compliance violations and compliance program gaps across the organizations include: Deceptive marketing practices; Age discrimination; Unlawful Fees on existing accounts; Consumer disputes; and, Deceptive debt collection. 19

20 UDAAP What you need to know to protect your bank o Hey, we re not Discover or Capital One What does all this meanfor communitybanks? Trending andemerging issues Examinations of community banks have evidenced UDAAP violations Duplicitous it citations ti add fuel lto the overall fire Could produce unanticipated examination results for management 20

21 UDAAP What you need to know to protect your bank ochecking for UDAAP standards what is there and not there Advertising, Disclosures, Notices Virtually any information that may be viewed by the public Inaccurate policies/procedures Bank s complaint files oscope adjustments Et External engagements with third parties Internal audit Compliance monitoring 21

22 Capital One Bank, N.A. Higher One, Inc., and The Bancorp Bank p p FDIC Guidance on Overdrafts, FAQs, and Joint Agency Guidance Discover American Express

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24 Mary Thorson, Vice President www 24