UDAAP and Complaint Management Amy Avitable Director of Regulatory Compliance, TCS BaNCS Copyright 2012 Tata Consultancy Services Limited No Legal Advice, Opinions, or Services Provided This presentation does not constitute legal advice 1
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
Agenda UDAP/UDAAP Program Complaint Management Program UDAP/UDAAP Risks Sensitive Customers High Risk Products and Practices 3
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 UDAAP Unfair, Deceptive or Abusive Acts or Practices Principles established by Dodd-Frank Only the CFPB has UDAAP enforcement authority CFPB may write regulations as well as enforce without regulations 4
Key Definitions Unfairness 1. It causes or is likely to cause substantial injury to consumers, 2. The injury is not reasonably avoidable by consumers, and 3. The injury is not outweighed by countervailing benefits to consumers or to competition Examples from CFPB Examination Guidelines Repeatedly refusing to release liens after consumers make final payments on mortgages After issuing credit card convenience checks with stated credit limits and expiration dates, reducing credit lines after the checks are presented and then dishonoring them without notice With telemarketing customer, accepting and processing large number of remotely created checks that turned out to be unauthorized without having appropriate policies and procedures to prevent, detect, or remedy the activities 5
Key Definitions Deception 1. The representation, omission, act, or practice misleads or is likely to mislead the consumer, 2. The consumer s interpretation of the representation, omission, act, or practice is reasonable under the circumstances, and 3. The misleading representation, omission, act, or practice is material Applying the criteria May be an express or implied Fine print, contracts and disclosures may be insufficient to correct misleading info, especially if consumer directed away from it A significant minority of consumers is enough to be misled Most Likely to be Violated 6
What is Material? Info that is important to consumers or likely to affect a consumer s choice of, or conduct regarding, the product or service Omitted info necessary to avoid misleading consumer Presumed to be Material Info about the central characteristics of a product or service Costs, benefits, or restrictions on the use or availability Express claims Implied claims if evidence shows the institution intended to make the claim Intent to deceive not required Claims made with knowledge that they are false Omissions if the institution knew or should have known that the consumer needed the omitted info to evaluate the product or service 7
Deceptive Acts or Practices Apply the 4 P Test Is the statement prominent enough for the consumer to notice? Is the information presented in an easy-to-understand format that does not contradict other information in the package and at a time when the consumer s attention is not distracted elsewhere? Is the placement of the information in a location where consumers can be expected to look or hear? Is the information in close proximity to the claim it qualifies? Common Deceptive Acts or Practices Misleading cost or price claims Offering to provide a product or service that is not available Bait-and-switch Omitting material limitations or conditions from an offer Failing to provide promised services 8
Examples of Deceptive Acts or Practices Inadequate disclosure of material lease terms in television advertising Leasing arrangement advertised $0 down and no down payment but blur of unreadable fine print disclosed $1,000 in costs due at signing If such terms used, must give equally prominent (readable and audible) disclosure of total amount of fees due at lease signing Disclosures in ads were inadequate because they were not clear, prominent, or audible and disclosure of fees at lease signing did not cure violation Misrepresentation about loan terms Mortgage refinancing advertised as 3.5% fixed payment 30-year loan or 3.5% fixed payment for 30 years, implying fixed interest rate when the loans were payment option ARMs Compared payments on a fully amortizing mortgage to payments on a nonamortizing loan that had payments that increased after the first year TILAs were inaccurate 9
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 10
UDAP/UDAAP Program Components Risk Assessment Policy Procedures 1. Advertising and solicitations Social media risk management 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 11
UDAP and UDAAP Always Apply Product Design Marketing Account Opening / Origination Servicing Collections 12
Risk Assessment - 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 13
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 14
High Risk Factors That Trigger Transaction Testing Not underwriting a given credit product on the basis of ability to repay Profitability depends significantly on penalty fees or back-end rather than upfront fees Product has high rates of repricing or other changes in terms Product combines features and terms in a manner that can increase the difficulty of consumer understanding of the overall costs or risks of the product and the potential harm Penalties imposed on a customer when relationship with institution is terminated Fees or other costs imposed on a consumer to obtain information about his account Product targeted to particular populations without appropriate tailoring of marketing, disclosures, and other materials designed to ensure understanding by the consumers 15
Transaction Testing for Marketing All representations are factually based All materials describe clearly, prominently, and accurately: Costs, benefits, availability, and other material terms in language understandable to the target audience Related products or services offered or required to receive terms Material limitations or conditions on the terms (time limits, expiration dates, prerequisites, conditions, etc.) Fees, penalties, and other charges and the reason imposed Materials do not misrepresent info affirmatively or by omission Attention is drawn to terms important to enable an informed decision (limitations, conditions, etc.) Contracts clearly inform customers of contract provisions that permit changes in terms and conditions of the product or service The entity avoids advertising terms that are generally not available to the typical targeted consumer 16
Transaction Testing for Products Whether products and services provided are consistent with disclosures and policies Consumers are reasonably able to obtain the products and services (including interest rates or rewards) as represented Consumers receive the specific product or service that they request Counter-offers clearly, prominently, and accurately explain the difference between the original product or services requested and the one offered Actual practices are consistent with stated policies, procedures, or account disclosures Whether the institution represents the amount of useable credit that the consumer will receive in a truthful way Available credit is sufficient to allow the consumer to use the product as advertised and disclosed Typical fees and charges for average customer remain in a range that does not prevent the availability of credit Institution honors convenience checks when used in a manner consistent with introductory or promotional materials and disclosures 17
Transaction Testing Interactions with Customers Ensure that employees and third parties who market or promote products or services are adequately trained to avoid unfair, deceptive or abusive acts Conduct periodic evaluations or audits to check whether employees or third parties follow the training and procedures Have a disciplinary policy and ensure third party has one to deal with deficiencies Review compensation arrangements for employees, third-party contractors, and service providers to ensure that they do not create unintended incentives to engage in unfair, deceptive or abusive acts Performance evaluation criteria do not create unintended incentives to engage in unfair, deceptive, or abusive acts Criteria for sales personnel based on sales volume, size, terms of sale, or account performance Implement and maintain effective risk and supervisory controls to select and manage third-party contractors and service providers 18
Transaction Testing for Servicing and Collections Have policies detailing servicing and collections practices and ensuring compliance with Fair Debt Collections Practices Act Have monitoring systems to prevent unfair, deceptive or abusive acts Ensures that employees and third party contractors: Effectively respond to consumers calls (call centers) Clearly and accurately represent fees or charges on periodic statements Post and credit consumer payments in a timely manner Apply payments in a manner that does not unnecessarily increase customer payments, without clear justification Only charge customers for products and services that are specifically agreed to Mail periodic statements in time to provide the consumer ample opportunity to avoid late payments Don t represent that consumer may pay less than the minimum amount without clearly and prominently disclosing any fees for reduced payment Clearly indicate that they are calling about the collection of a debt Do not disclose the existence of a consumer s debt to the public without the consent of the consumer, except as permitted by law 19
Sensitive 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 20
Sensitive 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 21
Sensitive 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 22
Sensitive Customers: Students Scorecard issued by CFPB in February 2015 to assist schools in evaluating financial institutions http://files.consumerfinance.gov/f/201501_cfpb_safe-student-accountscorecard.pdf 23
Sensitive Customers: Members of the Military Veterans Benefits Act of 2010 Provides private cause of action for servicemembers to enforce their rights Expands civil penalties to cover all provisions of SCRA Consequential and punitive damages Civil penalties of $55,000 for the first violation and $110,000 for subsequent violations March 2015 Santander paid $9 million for SCRA violations Foreclosure Protections Honoring America s Veterans and Caring for Camp Lejuene Families Act of 2012 extends period of relief from foreclosure, sale or seizure of property on loans secured by real or personal property owned by the servicemember Extended for one year after period of military service Relief was scheduled to expire on December 31, 2014 but extended to December 31, 2015 24
Sensitive Customers: Members of the Military FDIC UDAP Restitution Order for Sallie Mae Bank Acceptable Documentation Practices Accepting military orders or request for a military deferment or forbearance as written notice of eligibility In lieu of written orders, accepting a letter on official letterhead from a borrower s commanding officer that includes contact information for confirmation, borrower s identifying information, and information about period of military service Prohibited Documentation Practices Conditioning the granting of benefits on the use of a specific form or requiring that a written notice explicitly request benefits Engaging in communications that, expressly or by implication, condition receipt of SCRA benefits on an agreement that the borrower will recertify his/her active-duty status periodically 25
Sensitive Customers: Members of the Military May not: Require that any military orders submitted have a specific end date for the period of military service Remove protections unless an end date is indicated or found on Department of Defense Manpower Data Center Require that any military orders submitted specify the date upon which the borrower first entered active duty for this period of service 26
Other CFPB Recommendations CFPB Complaint Report Get updated military address before changing account terms Provide clear instructions on how to access accounts Notify military customers of Power of Attorney policies and required format 27
Sensitive Customers: Members of the Military Current Department of Defense regulations under Military Lending Act affect: Payday loans Closed-end credit with term of 91 days or less and amount financed of $2,000 or less where borrower: Provides a check or other payment instrument to creditor who agrees not to deposit it for more than one day; or Authorizes creditor to initiate one or more debits from borrower's deposit account (by electronic fund transfer or remotely created check) after one or more days Vehicle title loans Closed-end credit with term of 181 days or less secured by title to a motor vehicle (other than purchase money transaction) Tax refund anticipation Closed-end credit that will expressly be repaid in whole or part by borrower s income tax refund 28
Sensitive Customers: Members of the Military DOD Proposed Rule Current requirements include origination disclosures and limit on Military APR (MAPR) > 36% Proposal to extend coverage to other consumer loans Not applicable to consumer real estate loans CFPB Announcement Extend coverage to consumer loans with: Term of 45 days or less or Proposed Rule Alert Any term if all-in APR > 36% and is vehicle title loan or will be repaid through access to deposit account Possible proposed rules include: Debt trap prevention requirements such as underwriting / ability to repay rules Debt trap protection requirements such as limits on rollovers within set timeframes, cooling off periods between loans 29
High Risk Products and Practices 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? 30
High Risk 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 31
High Risk Products: Overdraft Protection Common Expectations 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 32
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. http://www.aba.com/aba/documents/ebulletins/compliance/2012/sa_fdicudapoverdraft2012feb.pdf 33
Overdraft Opt Ins Regions Bank Enforcement Action April 28, 2015 First enforcement action on application of opt in rules Two products Linked deposit accounts Did not provide opt in notice Charged overdraft fee when both accounts were exhausted Did not correct for 10 months Deposit advance product Determined that overdraft and NSF fees should not be charged by flawed system programming only suppressed NSF fees Disclosures were deceptive because indicated that fee would not charged without an opt in but fees were charged on linked accounts without opt in Voluntarily refunded $49 million and fined $7.5 million Would have been higher if bank had not self-reported 34
Account Balances for Overdraft Fees CFPB Supervisory Highlights Winter 2015 Transaction Processing Banks changed from ledger balance to available balance Available balance includes authorized, unsettled transactions so balance was lower and more transactions were overdrafts Overdraft fee also charged when authorized transaction was later settled in overdrawn account Disclosures Create misimpression that institution would not charge overdraft fee if transaction authorization did not cause account to become overdrawn 35
High Risk Products: Overdraft Protection How You Use Deposit-Side Credit Reports May disproportionately affect low income customers Causes customers to have to turn to alternative banking services that are more expensive and more likely to be predatory Customers should not be rejected for isolated or minor errors Capital One (2014) and Citibank (2015) required by New York Attorney General to modify policies regarding use of Chexsystems Capital One will only reject applicant who appears in Chexsystems database as a result of fraud Citibank will only reject applicant who has at least 2 incidents of account abuse in recent years 36
High Risk Products: Overdraft Protection RBS Citizens, N.A. and Citizens Bank of Pennsylvania (2013) - $10 million in penalties and restitution Overdraft Bank allowed customers to opt out but had system limitations that prevented the opt out from being effectively applied for all transactions Provided an opt in notice that stated that a fee would be imposed for items that were paid or returned for a customer who had opted in, when fees were not charged for certain items Did not disclose that sweeps from savings accounts to pay overdrawn items would not occur if there were insufficient funds in the savings account to cover the entire overdrawn balance for the day Preauthorized EFTs - Due to technical limitations, bank could not stop preauthorized recurring EFTs as it disclosed Reward accounts - Did not disclose posting requirements for customers to get the rewards 37
High Risk 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? 38
High Risk 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 39
High Risk 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 40
High Risk 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? 41
Free Account High Risk 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 42
High Risk Products: Free Products 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 43
High Risk 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 2014! 44
High Risk Products: Prepaid Cards 2014 Proposed Rule Prepaid protections Periodic statements or online information for easy access Error resolution Limited consumer liability for loss or theft Know Before You Owe disclosures Short and long form disclosures Both would be available before card provided Publicly available card agreements Posted on websites Submitted to CFPB for posting on CFPB website Proposed Rule Alert If related credit product provided, additional requirements apply 45
High Risk 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 46
High Risk 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 47
High Risk 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 48
High Risk Products: Mortgages Integrated disclosures become mandatory in August 2015 to better inform customers of key features of loans Mortgage process has 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 Use other waivers only as intended 49
High Risk Products: Mortgages Example of UDAP/UDAAP risk with waiting period waivers Copy of appraisal must be received at least 3 business days before closing for certain kinds of loans under Regulation B and Regulation Z If provided under Regulation B, 3 day wait period can be waived if: Waived at least 3 business days before closing or Waived within 3 business days before closing if customer received a copy and additional copy only reflects minor clerical changes and Borrower receives copy before closing UDAP/UDAAP Issues No waiver allowed under Regulation Z Routine waiver has been viewed as UDAP violation 50
High Risk Practices: Debt Collection CFPB Prohibition of Unfair, Deceptive, or Abusive Acts or Practices in the Collection of Consumer Debts Collecting a debt or assessing interest, fees or charges that are not expressly authorized by the contract or permitted by law Failing to post payments timely or properly and then charging late fees Taking possession of property without the legal right to do so Revealing the consumer s debt without the consumer s consent to the consumer s employer or co-workers Misrepresenting that debts would be waived or forgiven if the customer accepts a settlement offer when it will not actually occur Threatening any action that is not intended or the person does not have the authorization to pursue False threats of lawsuits, arrest, prosecution, or imprisonment 51
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 52
Complaint File CFPB Final Rule on Complaint Narratives Effective June 24, 2015 Complaint narratives will be published in CFPB Consumer Complaint Database Consumer must consent Data will be scrubbed for personal information 53
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What Can You Do? Adopt a UDAP/UDAAP Program Update annually and as customers, products and examiner expectations change Adopt internal testing/monitoring for UDAP risks Carefully review complaint file and processes Work With Your Examiners May provide insight as UDAP/UDAAP risks evolve Educate and Inform Staff training Review training and monitoring by third parties Board must understand risks and consequences! 55
Questions? Amy Avitable amy.avitable@tcs.com No Legal Advice, Opinions, or Services Provided This presentation does not constitute legal advice Copyright 2012 Tata Consultancy Services Limited 56