Avoid a bad UDAAP exam

Protect your bank from adverse UDAAP exams with these 4 steps.

The regulatory, reputational and financial risks posed by an adverse result from an Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) examination are significant – no, make that VERY significant. Take these four initial steps to minimize that risk:

  1. Understand the UDAAP regulation is all about how the customer is treated. Technical compliance with the letter of the pertaining regulation doesn’t matter. For example, the feds have ruled that “Bounce-Proof” checking NSF programs are exempt from Regulation Z; however, the feds also determined that they were anti-consumer and found a way to cut it back in Fair Credit, Fair Lending, Truth-in-Savings and in a new, never-seen-before Unfair, Deceptive or Abusive Acts or Practices (UDAAP) regulations. Therefore, successful UDAAP programs recognize that every feature of the bank’s relationship with customers must be examined through the ‘consumer benefit’ lens.
  2. Conduct a bank-wide UDAAP review. Involve all departments. Do not make the mistake of assuming UDAAP is solely the responsibility of the Compliance and Audit Department. The Marketing Department is a significant player. So are Loan and Deposit Ops divisions. Ditto Credit Admin. Every department, and every significant player in each department who has specialized responsibilities, should be involved in the review.
  3. Review the bank’s complaint file. If you don’t have a formal complaint process, especially if it is not available to consumers on your website, get that done right away. Complaint files are the best source of consumer dissatisfaction review. (Examiners often ask early in the process to see your complaint file.) If your bankers, your processes or your policies have drawn even one complaint, you should investigate and determine if the complaint is systemic – that is, did the complaint arise because of a bank policy? If the answer is yes, then a fix is required, pronto. (By the way, it is a critical UDAAP weakness if your bank does not have a robust complaint program. Such programs ensure there is a sustainable procedure in the bank to collect complaints, assign an investigation, track performance and circulate a management report.)
  4. Supervision of the UDAAP exam review is critical. This is critical. Ideally, the exam would be supervised by marketing professionals who think in terms of customer experience rather than in terms of operational parameters. The ability of outside marketing people to understanding how consumers think and react, without prejudice of k0nown operations routines, will serve the bank well during a UDAAP review. This is not to suggest compliance and risk managers take a back seat. But it is vital to proactive UDAAP risk management that people who are consumer-oriented take the lead in the UDAAP review.

A good source for every banker who wants to learn more about UDAAP is the Examination Manual of the Consumer Financial Protection Bureau (CFPB). The manual can be found on the CFPB website.

You may also download this article – Protect your bank from adverse UDAAP exams with these 4 steps.

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