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Regulation and compliance is something we all have to contend with in the financial institutions arena. It's not always pleasant, nor is it easy, and it's usually far from fun. However, knowing your role and responsibilities within compliance can keep your institution out of hot water. And, breaking compliance regulations generally means being asked to pony up some serious fine monies. The greater damage is the one done to your financial institution's reputation, something members and potential members won't soon forget.
The best way to stay out of trouble is to be well informed. Let's take a look at the unfair, deceptive, or abusive acts or practices (UDAAP) and why you should take prohibited acts outlined under Dodd-Frank seriously.
What is UDAAP?
The Consumer Financial Protection Bureau (CFPB) is a government agency established post-recession to help protect and offer rights to financial institution consumers. As a result of the CFPB, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was created in 2010 to protect consumers from devious practices by financial institutions–regardless if they were knowingly or unknowingly committing the acts.
Though the policy's language leaves room for interpretation, there are three common themes among the UDAAPs standards. Will your financial institution's actions:
Erode consumer confidence?
Cause significant financial injury?
Undermine fair competition in the financial marketplace?
Back in June, House lawmakers advanced legislation to reform Dodd-Frank regulations. The bill still has to pass in the Senate, so it's final fate is unclear. Until then, Dodd-Frank is still in effect and UDAAPs still need to be considered as your financial institution operates and conducts business.
As you read through the CFPB's UDAAPs, consider your financial institution. Do any of your processes, especially surrounding collections, violate these policies?
It's important to note that in the first bullet under unfairness, you see the phrase "substantial injury." According to the CFPB, substantial injury typically means monetary damages. However, the guidelines are written with a little wiggle room, so that emotional damages could be taken into account as a violation. Also, a financial institution's actions don't have to result in an actual injury. Significant risk is all it takes to get your institution in violation of UDAAPs, if the risk can be linked to future harm.
Unfairness: An act or practice is unfair when:
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.
Deceptive Acts of Practices: An act or practice is deceptive when:
it misleads or is likely to mislead the consumer;
the consumer’s interpretation of the behavior reasonable; and
behavior is material.
Abusive Acts of Practices: An act or practice is abusive when:
it materially interferes with the ability of a consumer to understand a term or condition product or service; or
takes unreasonable advantage of
a lack of understanding about the cost, risks, or conditions of the product or service
the inability of the consumer to protect themselves when selecting or using a consumer financial product or service
or takes advantage of consumer’s trust that entity is acting in their best interest.
How UDAAP could affect you
You should care about the CFPB's policies as they begin to pursue cases and issue judgments against financial institutions. For the CFPB, violating the U and DA in UDAAP is a biggie. Case-in-point, in 2016, the CFPB took action against a credit union which restricted access to members' accounts and falsely threatened members about debt collections. The CFPB fined the credit union $28.5 million for the violation.
Your financial institution should review the UDAAP policy, understand it, and create your own policy based upon the CFPBs bulletins. Once your team has an understanding of the potential pitfalls, audit your marketing content to make sure your language is clear and the majority of your audience understands the material.
A key component to lowering your risk of violating the UDAAP policy is to take member complaints seriously. The CFPB has said that consumer complaints are a heavy determining factor if they decide to pursue a case. So having a member-complaint policy and process at your financial institution will help to spot member concerns before it becomes a major issue. Additionally, having a policy and tracking measures in place will go a long way with the CFPB–showing that your institution values complaints as opportunities to address member misgivings.
Looking for more information about collections compliance to ensure your institution is on the 'straight and narrow?' Download our ebook, Compliance in the Collections Industry. You'll learn how to prevent UDAAPs, avoid conduct prohibited by the Fair Dept Collection Practices Act (FDCPA), remain complaint with the Telephone Collection Consumer Protection Act (TCPA), and more.
Chris Cote has been with SWBC since 2011 and has more than 12 years of experience in the financial services industry. As the Compliance Officer for the SWBC Financial Institution Group, he works closely with unit management to ensure operations remain compliant with state and federal regulations and guidelines. He is also responsible for the quality assurance team that monitors calls for multiple SWBC divisions.