UDAAP Trends & Requirements

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2 Today s Panelists Rebecca Frederick Principal Analyst Deluxe Corporation Gaye Connell Moderator Garland Group 2

3 Important Note This presentation is provided for informational purposes only with the understanding that Deluxe Corporation is not rendering legal advice and that this presentation is not to be used as a substitute for legal counsel 3

4 Learning Objective Today s Topics Today s Regulatory Landscape Market Factors & Emerging Issues UDAAP Fundamentals UDAAP Enforcement Actions: Capitol One, Discover and American Express Best Practices for UDAAP Risk Management Operational Readiness for UDAAP Oversight Tools and Resources 4

5 Today s Regulatory Landscape What s the tone? Increased focus from examiners on UDAAP & consumer complaints Aggressive enforcement of consumer protection New requirements Fear, uncertainty and doubt 5

6 Today s Regulatory Landscape CFPB s vested powers include: Write regs identifying unfair, deceptive or abusive acts or practices (UDAAP) Civil Investigative Demands (CIDs) for UDAAP Enforcement actions for UDAAP 6

7 Has your financial institution exited a product line, delivery channel, or geographic market due to compliance risk/cost? 21.9% 78.1% 2009 No Yes Have compliance burdens caused your financial institution to reduce your consumer financial product or service offerings? 5% 21% 19% 55% 2011 No Yes - Loan & Deposit Accounts Yes - Loan Accounts Only Yes - Deposit Accounts Only Source: ABA Surveys Of Bank Compliance Officers 7

8 UDAAP Fundamentals A New Standard for Compliance Deceptive vs. Abusive Viral Nature of Complaints today Consumer Perception & Understanding Unreasonable Advantage Polling question: How significant do you think the CFPB impact will be to your financial institution? a) Significant The Regulatory transition for GLB and Alphabet Soup Regs hits all financial institutions b) Major Examination expectations will increase across the board c) Moderate Consumer advocacy will change customer expectations for all d) Minimal The CFPB will only focus on the largest financial institutions 8

9 UDAAP Fundamentals The Standard for Deceptive Acts: Representation, omission, or practice that misleads or is likely to mislead the consumer Act or practice must be considered from the perspective of the reasonable consumer Representation, omission, or practice must be material 9

10 UDAAP Fundamentals The Standard for Unfairness It causes or is likely to cause substantial injury to consumers The injury is not reasonably avoided by consumers The injury is not outweighed by countervailing benefits to consumers or to competition 10

11 UDAAP Fundamentals The Standard for Abusive Materially interferes with consumer s ability to understand a term or condition Takes unreasonable advantage of: A lack of understanding by the consumer of the material risks, costs, or conditions The consumer s inability to protect its interests in selecting or using a financial product or service; or The consumer s reasonable reliance on a covered person to act in the consumer s interests 11

12 The 4 P s Test 1. Is the statement prominent enough for the consumer to notice? 2. 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? 3. Is the placement of the information in a location where consumers can be expected to look or hear? 4. Finally is the information in close proximity to the claim it qualifies? 12

13 UDAAP Management CFPB Examination Handbook 2011 Policies and Procedures Conducting Risk Assessments Management Oversight Testing Employee Training Complaint Analysis and Resolution Polling question: How does the compliance function adapt to these changes? a) Compliance team will need more training on UDAAP management b) UDAAP management function will need to become more strategic and involved throughout financial institution c) Compliance team will need to rely on 3 rd party resources d) All of the above 13

14 UDAAP Risk Assessment Scope of UDAAP Risk Assessment Nature and Structure of Product/Service Targeted Consumers Incentives and Compensation Marketing and Advertising Practices Ongoing customer relationship management Regulatory or Enforcement Actions Board of Directors & Senior Management Incentives & Compensation Compliance Management Product & System development/modification Training of employees and vendors Complaint Management Data Privacy & Operations Disclosures 14

15 Formalize UDAAP Oversight UDAAP Risk Assessment Inventory of existing products and services Product features/attributes Marketing & Advertising practices Fees/Terms/Conditions Complaint Management Governance & Oversight 15

16 UDAAP Enforcement Actions UDAAP Enforcement Actions: What is the cost? Capital One Refund $140 million to 2 million consumers Pay $25 million penalty to CFPB and $35 million penalty to OCC Discover Refund $200 million to 3.5 million consumers Pay $7 million penalty to CFPB and $7 million penalty to FDIC American Express Refund $85 million to 250,000 consumers Pay $27.5 million penalty, including $14.1 million to CFPB, $3.9 million to FDIC, $9 million to Federal Reserve, and $500,000 to OCC 16

17 UDAAP Enforcement Actions UDAAP Enforcement Actions: What did they do? Capital One Misled about the benefits of the products Deceived about the nature of the products Misled about eligibility Misinformed about cost of the products Enrolled without their consent 17

18 UDAAP Enforcement Actions UDAAP Enforcement Actions: What did they do? Discover Misled about the fact that there was a charge for the products Misled about whether they had purchased the products Enrolled without their consent Withheld material information about eligibility requirements for certain benefits 18

19 UDAAP Enforcement Actions UDAAP Enforcement Actions: What did they do? American Express Deceived consumers who signed up for the American Express Blue Sky credit card program Charged unlawful late fees Unlawfully discriminated against new account applicants on the basis of age Failed to report consumer disputes to consumer reporting agencies Misled consumers about debt collection 19

20 UDAAP Risk Assessment Financial Products and Services Nature & Structure 1. Consider the ability of consumer to make payments for credit products 2. Terms should not be altered solely at discretion of financial institution need for disclosure 3. Discretion over terms & product features should be based upon policies & procedures 4. Scrutinize termination penalties for consumer protection issues 5. Assess the volume of customers who could be at risk for specific products and services 20

21 UDAAP Risk Assessment Product Terms & Bundling Nature & Structure 1. Measure & monitor fee reversal rates 2. Product profitability should not be dependent on penalty fees 3. Products & Services should be bundled in a way that costs are clear, and not obscured to the consumer 4. Pricing structures need to make total costs & benefits understandable 5. No barriers to information including costs to access customer service 21

22 UDAAP Risk Assessment Marketing & Advertising 1. Review & audit materials for targeted consumer groups 2. Inspect your offers to ensure that targeted consumers should be likely to qualify for advertised products or terms 3. Audit your advertising to avoid advertising only the higher cost products and not the full product suite 4. Review your data analytics model to avoid potential discrimination or compliance issues 5. Teaser rates or low fees need to have sufficient information about important conditions including periodic charges or exit fees 22

23 UDAAP Risk Assessment Profitability & Money Factors 1. Review your incentive plans for high cost products for fairness 2. Assess employee procedures if they have price discretion 3. Analyze returns, refunds & credits to see if there is a selling issue 4. Implement daily dashboards for credit portfolio analysis to monitor risk 5. Integrate customer harm ($) into your issue & complaint management process 23

24 UDAAP Best Practices Embed UDAAP into Standard Practices 1. Embed the UDAAP 4 P s into your web privacy policy statement approval process 2. Measure readability scores for key customer documents Adapt as needed 3. Add UDAAP considerations to your review of credit disputes and chargeback processes 4. Integrate UDAAP into your marketing/advertising checklists 5. Adapt existing training employee training goes from customer service to compliance! 24

25 UDAAP Readiness Checklist 10 steps you can do right now 1. Develop your Risk Assessment approach based on the nature & structure of financial service or products 2. Assess & revise your policies, standards & procedures for targeting consumers to address consumer protection, discrimination, & populations with unique needs 3. Revise your marketing & advertising audit/compliance processes to address UDAAP risk factors 4. Expand your ongoing customer relationship management oversight for vendors with customer interaction 5. Leverage & monitor regulatory or enforcement action to prioritize issue identification & consumer protection issues 25

26 UDAAP Readiness Checklist 10 steps you can do right now 6. Establish periodic review & independent oversight of incentives & compensation policies & practices 7. Integrate UDAAP into your existing compliance management processes with expanded management & BOD reporting 8. Implement UDAAP compliance checkpoints into your product system development & modification processes 9. Provide or expand training & awareness for employees with mechanisms to self report potential 26

27 Tools and Resources Regulators Web Resources CFPB Supervision & Examination Manual: and PartIIICFPBsupervisionmanual.pdf CFPB Capitol One Enforcement Action: CFPB Discover Enforcement Action: CFPB American Express Enforcement Action: Industry Web Resources ABA Survey of Bank Compliance Officers: 27

28 Q and A 28

29 We Thank You for joining the web seminar and look forward to working with you on this and other initiatives. Contact info: 29