UDAP and UDAAP What Do You Need to Know?

Transcription

1 UDAP and UDAAP What Do You Need to Know? Amy Avitable Director of Regulatory Compliance, TCS BaNCS No Legal Advice, Opinions, or Services Provided This presentation does not constitute legal advice 1

2 Amy Avitable, JD, CPA Amy Avitable is a nationally known compliance expert through both her frequent speaking engagements for state bankers associations, state mortgage associations, the American Bankers Association, and the Mortgage Bankers Association, as well as articles in banking and compliance publications. Amy is the Director of Regulatory Compliance for the TCS BaNCS system at Tata Consultancy Services. She began her career at Deloitte & Touche, LLP and has served financial institutions and other organizations as legal counsel at Lowndes, Drosdick, Doster, Kantor & Reed, PA. Most recently, she has supported software products for financial institutions and engaged in lobbying efforts in Congress as well as with the FDIC, CFPB, and NCUA. She was previously the National Director of Compliance Services at Sheshunoff Consulting + Solutions, where she managed a team of compliance professionals who performed compliance audits and consulting for financial institutions of all sizes. Before joining Sheshunoff, she was the Director of FIS Regulatory Advisory Services (formerly Kirchman/Metavante Regulatory Service), where she was the Editor-In- Chief for the renowned Big Orange Book compliance manual and served hundreds of financial institutions throughout the country as well as the FDIC, Federal Reserve and OCC. 2

3 Compliance as a Concept of Fairness Merriam-Webster - Fair adjective \ˈfer\ : agreeing with what is thought to be right or acceptable : treating people in a way that does not favor some over others Business Goals Duties to Consumers 3

4 Areas Affecting Fairness Products Why is the product available? What benefit does it provide to consumers? Do consumers understand how it works? Do consumers understand the costs and benefits? Customers Is the product targeting a particular group of consumers? How are sensitive consumers protected? Are consumers being discriminated against unfairly? 4

5 Why Do We Care? Risks in Today s World Fines Penalties Restitution Litigation Fair lending Servicemembers Civil Relief Act Ability to Repay / Qualified Mortgage Mortgage servicing Contractual Perspective of the CFPB We want consumers to avoid the marketplace s silent pickpocket discrimination. Today we are sending a strong signal that no mortgage lending institution whether bank or nonbank should be able to mislead the public with erroneous data. 5

6 UDAP vs. UDAAP UDAP - Unfair or Deceptive Acts or Practices Principles established by the FTC Act All federal regulators have asserted their authority to enforce UDAP concepts Other than Regulation AA, there are no UDAP regulations Enforcement occurs through examinations 2014 Interagency Guidance on UDAP - Regulation AA will be repealed but requirements still apply under UDAP standards UDAAP Unfair, Deceptive or Abusive Acts or Practices Principles established by Dodd-Frank Only the CFPB has UDAAP authority CFPB may write regulations as well as enforce without regulations 6

7 Key Definitions Unfairness It causes or is likely to cause substantial injury to consumers, The injury is not reasonably avoidable by consumers, and The injury is not outweighed by countervailing benefits to consumers or to competition Deception The representation, omission, act, or practice misleads or is likely to mislead the consumer, The consumer s interpretation of the representation, omission, act, or practice is reasonable under the circumstances, and The misleading representation, omission, act, or practice is material CFPB will also look at implied representations or implications! 7

8 Key Definitions Abusive Interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service Takes unreasonable advantage of: A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or The reasonable reliance by the consumer on a covered person to act in the interests of the consumer 8

9 CUSTOMERS 9

10 Sensitive Customers Students or young adults Elderly Minorities Immigrants Consumers of certain national origins Members of specific religious groups or denominations Military service members or former service members Consumers with limited education Consumers with limited English proficiency Low-income consumers or consumers on limited fixed incomes Consumers receiving any type of public assistance Consumers with limited experience with financial products or services Consumers in or who have recently experienced financial distress Consumers with low credit scores (e.g., FICO below 620) Consumers of a certain gender or marital status 10

11 Customers: Seniors Products designed for seniors Senior deposit accounts Must have same overdraft fee and policies for these accounts as for other, non-senior accounts Other non-lending preferential benefits may be offered Reverse mortgages Customer understanding is critical! Carefully review all marketing, disclosures and communications Consider education options 11

12 Customers: Students Even if you partner with someone else, you are still responsible! Cole Taylor Bank Enforcement Action Higher One offered student loan disbursement services for schools Higher One partnered with Cole Taylor Bank to allow students to open internet accounts under Higher One s disbursement program Higher One s website Omitted info about fees, features, limitations and online nature of the account Omitted cheaper alternatives Omitted information about ATM locations and hours Registration process disclosed fees, terms and conditions after customer entered personal info Featured school logo more prominently than Higher One or Cole Taylor, which may have erroneously implied endorsement by the school 12

13 Customers: Students Cole Taylor Bank Enforcement Action Benefits for Higher One Various account fees Interchange fees Benefits for Cole Taylor Although Cole Taylor did not receive any OneAccount fees paid by students, Cole Taylor did receive benefits from holding and deploying the funds held in non-interest bearing accounts. Consequences for Cole Taylor $4.11 million civil money penalties Responsibility for paying restitution not paid by Higher One, up to $30 million Relationship with Cole Taylor lasted less than 18 months 13

14 Customers: Minorities FDIC Side by Side: A Guide to Fair Lending Watch out for: Consider: Lending strategy that fails to include contact with minority realtors and other realtors serving predominately minority areas Failure to advertise in media directed to minority areas or in media known to appeal to minorities Affirmative marketing and call programs designed to assure minority consumers, realtors, and business owners that credit is available on an equitable basis Sustained advertising programs covering publications and electronic media that are targeted to minority audiences 14

15 Customers: Pregnancy and Parental Leave $6.5 million in settlements with HUD to date! Claims generally deal with pregnant women or women on maternity leave, though men are also protected Suntrust Settlement - May 8, 2013 Prior to closing, bank tries to verify income with employer and learns that applicant is on unpaid maternity leave Employer refused to verify continued employment or return date Due to inability to verify info and in accordance with investor guidelines, bank did not fund the loan Bank ordered to pay $18,000 and adopt Parental Leave policy A woman s maternity status should not determine whether she receives a mortgage loan. Wells Fargo settled claims for $5 million on October 9 th! 15

16 Customers: Pregnancy and Parental Leave Parental Leave Policy Cannot: Inquire about future maternity leave plans Require the applicant to return to work in order to approve or close the loan If applicant is on maternity leave at closing, document: Borrower s intent to return to work That borrower has right to return to work 16

17 Customers: Pregnancy and Parental Leave Temporary Leave Underwriting Guidelines Must consider reduced income in underwriting Customer s Return to Work Date Before First Mortgage Payment Use pre-leave income if post-leave income will not be less Customer s Return to Work Date NOT Before First Mortgage Payment May use any income received during leave to meet underwriting standard If insufficient, customer may use verified liquid assets not required to close the loan to bridge any period of reduced income 17

18 PRODUCTS 18

19 Sensitive Products High Risk Products Overdraft protection Reward accounts Free products Prepaid cards Add-on products Third party products Mortgages Does the Customer Understand the Product? What are the Characteristics of the Product? 19

20 Key to Understanding: Advertising and Disclosures Areas of concern Information that is incomplete or not understandable Discriminatory practices RESPA Section 8 violations Potentially higher risk Use of cross-sales, telemarketing or third parties Online or mass media advertising 20

21 FDIC s 4 P Rule for Clear and Conspicuous Disclosures PROMINENCE: Is it big enough for consumers to notice and read? PRESENTATION: Is wording and format easy for consumers to understand? PLACEMENT: Is it where consumers will look? PROXIMITY: Is it near the claim that it qualifies? 21

22 FDIC on Marketing and Solicitations Dos Format ads to direct attention to key information Present information clearly and conspicuously Disclose all decision impacting information near most highly promoted features and place any qualifiers near claim it is qualifying Don ts Use small font to hide costs, critical terms or conditions Use pop-up windows or hyperlinks to display key information Bury information at the end of a long webpage Use a fast moving scroll on websites 22

23 Marketing Compliance review before product is made available to consumers New Complicated Innovative Target particular customer groups Training for marketing department Education, not sales Mom test Get feedback from non-bankers Effective review process Reviews prior to publication Frequency of internal reviews or audits Quantity of ads to be reviewed 23

24 Characteristics of the Product What is the benefit to the consumer? Is the product confusing or complicated, making it more difficult for the consumer to understand? Is the product appropriate for the consumer? What is the true cost to the consumer? 24

25 Products: Overdraft Protection Is there a benefit? Payments are not returned Customers transactions are paid Does the customer understand how it works? What are the consequences? Overdraft fees (one time, ongoing) Reporting to bad check writer databases How does overdraft work? Impact of funds availability policies Impact of debit card authorizations Delays in updating balances at ATMs Alternatives to discretionary overdraft protection How do debit cards work? Authorization versus settlement Possible authorization for lower amount than settlement amount 25

26 Overdraft Opt Ins by No-Pay Banks [I]nstitutions with a policy and practice of not paying ATM or one-time debit card transactions into overdraft, which the FDIC describes as no-pay banks. There are, however, instances in which a point of sale transaction may be paid into overdraft even by a no-pay bank. These force pay situations can arise if a network: (1) is offline and uses a stand in balance; (2) does not operate in real-time and works from the prior days balance; or (3) the merchant does not seek authorization for the full amount of a transaction i.e., the case in which a merchant seeks only a $1.00 preauthorization to ensure that a card is active and valid, but under network rules, the bank that authorizes the transaction is required to pay the full amount when presented for settlement. 26

27 Products: Overdraft Protection What is fair? Limits on fees Discouraging use or abuse of overdraft protection If you pay, consider: Customer education Customer notifications (texts, online banking) where account is or will become overdrawn Notice where overdraft transactions occur and fees are charged Requiring opt ins for all transactions Alternatively, opt outs for all transactions Neutral payment order Renewed CFPB Focus 27

28 Products: High Yield Checking Accounts Is there a benefit? Higher interest rate than would otherwise receive ATM fee refunds Other potential benefits Does the customer understand how it works? Are there requirements to get the benefits? What are the requirements? How do they work? When do they have to be met? Are there limitations on the benefits? When will they be provided? What are the costs? 28

29 Products: High Yield Checking Accounts FDIC Supervisory Highlights, Winter 2012 Concerns about ads, websites and disclosures that: Highlight highest APY but omit fall-back APY Omit qualifiers or provide some but not all of the qualifiers Fail to explain how to enroll in online banking or omit the requirement to log in and view periodic statements Omit requirement that transactions be PIN or signature-based, or that they post and settle during the statement or qualification cycle Fail to state that ATM transactions do not qualify as debit card transactions Fail to explain the period in which qualifiers must be met Represent unlimited, free, nationwide ATM access but actually require qualification to receive them and impose limits on refunds per statement or qualifier cycle 29

30 Products: High Yield Checking Accounts FDIC Best Practices Involve compliance in all aspects of product Ensure materials contain clear and conspicuous terminology, including qualifiers and limitations Monitor consumer inquiries and complaints for signs that consumers may not understand the product Review training materials and scripts used in promoting the product Ensure staff are properly trained on the product and can communicate it clearly with customers If you will prohibit abuse of the system, clearly state the purpose of the account and examples of inappropriate behavior or account misuse Clearly and conspicuously explain consequences of not qualifying 30

31 Products: Free Products Is there a benefit? It s free! Does the customer understand how it works? What exactly is free? Are there limits on the using the product for free? Are there components or services that are not free? 31

32 Free Account Products: Free Products FDIC s official position is that it will follow Regulation DD Free if there is no maintenance or activity fee on the account An overdraft fee will not prevent an account from being called free Free Services An account can be free even if services are not as long as services are not required on the account Where different components of a service are free and others are not, ensure that ads and disclosures are extremely clear Free online banking but use of online billpay is not free If a fee is likely to arise, the service is not free Non-usage fee for online billpay or only free if used for 6 transactions per month A service can have a fee on an unusual or special service without causing the service to no longer be free 32

33 Products: Free Products M&T Bank Enforcement Action $2.9 million in penalties and restitution - October 2014 Bank offered free account but: Had to maintain minimum activity to hold free account Failure to meet minimum activity level caused account to be converted to checking account with minimum balance fee CFPB s criticism Advertised as free and no strings attached without disclosing condition in ads Condition and terms for both accounts disclosed at account opening Automatically converted accounts into product with fees Did not notify customers of the account conversion 33

34 Products: Prepaid Cards Is there a benefit? Easy, portable way to transport and provide money Does the customer understand it? Where can the card be used? Are there limits on using the card? Are there costs for purchasing the card? Are there costs for using the card? Are there costs for not using the card? What will this cost the consumer? CFPB began accepting complaints in June! 34

35 Products: Prepaid Cards Concern that consumers do not understand the fees associated with prepaid cards FDIC s Recommended Procedure: 1. Customer requests a prepaid card DO NOT TAKE THE CUSTOMER S MONEY YET! 2. Provide customer with the disclosures that go along with the card AND highlight the typical card fees Preferably, provide a separate document that shows and explains common fees for the card No need to highlight unusual fees that are unlikely to arise Train staff to explain the fees to the customer to ensure that customers understand them 3. ONLY THEN can you take the customer s payment for the card 35

36 Products: Add-On Products Is there a benefit? Does the customer understand it? Regulator concerns that consumers do not understand how add-on products work or their cost Check for: Understandable disclosures Staff training so that they can clearly, accurately explain the product and costs to the consumer Explicit disclosure and explanation of any costs to the consumer and how/when they will be imposed Advertising that clearly explains the product and its costs 36

37 Products: Add-On Products First United Security Bank Enforcement Action $500 million assets 19 branches all in the same state $40,000 civil money penalty for UDAP violation Bank offered identity theft insurance add-on product Disclosed to existing customers who purchased the add-on product that benefits were automatically provided when registration was required to receive all of the benefits Failed to adequately disclose to new and existing customers that they would receive the identity theft insurance benefit for free even if they opted-out of purchasing the product for $1.95 per month 37

38 Products: Mortgages Does the customer understand it? Can the customer afford it? Mortgage reform rules have built-in protections Mandatory time periods to receive and review disclosures before closing Limits on revising early disclosures and fee changes Requirements to correct closing disclosures, even after closing Take these protections seriously Significant liability for violations Many waivers of waiting periods are limited to bona fide financial emergencies where stringent requirements must be met Upfront waiver of 3-day period for appraisals has been viewed as UDAP violation! 38

39 UDAP/UDAAP PROGRAM 39

40 UDAP/UDAAP Program Components Risk Assessment Policy Procedures 1. Advertising and solicitations 2. Account and loan disclosures 3. Servicing and collections 4. Managing and monitoring of third-party service providers 5. Consumer complaints Processes for Reviewing New Products Training FDIC s Top Five Areas of Greatest UDAP Risk 40

41 UDAP and UDAAP Always Apply Product Design Marketing Account Opening / Origination Servicing Collections 41

42 UDAP/UDAAP Program Components Risk Assessment Sensitive customers High risk products Other key risks Incentives and Compensation Sales staff compensated or evaluated on number of sales, price, etc. without consideration of outcome or performance Customer service staff not evaluated on quality of service or customer satisfaction Effect on compensation where customer service staff or vendors have discretion to adjust prices or modify terms Compliance should be involved in structuring incentives Third Party Providers Regular evaluations of third party performance Training and monitoring policies for third parties 42

43 UDAP/UDAAP Program Components Complaint File Do you: Allow the consumer to submit complaints in any manner they wish Have a complaint process that you carefully monitor Track complaints and time to resolve them Track and monitor: Types of complaints Product at issue Staff member at issue Branch Complaints lodged against subsidiaries, affiliates, and third parties regarding your products and services 43

44 Warning Signs in Complaint File Numerous complaints relative to the size of the customer base or similar institutions offering similar products Multiple complaints about the same product, employee, branch or third party Complaints that allege or involve: Misleading or false statements Lack of disclosure of information about material terms of a product or service Unauthorized fees, fees for services not provided, or duplicative fees Previously undisclosed charges Customer service Loan servicing and collections Compliance violations Discrimination 44

45 What Can You Do? Take a Step Back Look at Your Bank From an Examiner and Consumer s Perspective What products are available? Who do they target? What is your customer base? What communities do you serve? Evaluate Your Compliance Efforts and Focus Strategically Have you performed a UDAP/UDAAP risk assessment? If so, is it up to date? Where does your complaint file suggest vulnerability? Are your changes, reviews/audits, and remediation prioritized on a risk basis? 45

46 What Can You Do? Educate the Board and Management Regularly Higher financial and reputational risks than ever before Take Action! Implement a UDAP/UDAAP program Use CFPB UDAAP examination guidelines for risk assessment Implement new procedures, testing and oversight where required Take corrective action quickly and effectively 46

47 No Legal Advice, Opinions, or Services Provided This presentation does not constitute legal advice 47