UDAAP – A New Emphasis on Old Standards

10/13/2011

By Fran Sponsler, CRCM, CAMS, CCBCO

On July 21, 2011, the Dodd-Frank Act became effective, bringing with it a new guideline for measuring unfair and deceptive acts and practices. The new guideline will add the term “abusive” to the standards and will be known as UDAAP – Unfair, Deceptive, and Abusive Acts or Practices.

How this Impacts Financial Institutions

Although these standards have been around for quite some time, the implementation of the Dodd-Frank Act and the Consumer Financial Protection Bureau will lead to added focus and enforcement during regulatory examinations that up to now, has not been as prevalent.

The previous standards for testing unfair and deceptive acts or practices have been established and outlined by the regulatory agencies.

While the new guidelines for measuring “abusive” acts or practices have not yet been finalized, they will incorporate the following factors:

• Materially interferes with the ability of a consumer to understand a term or condition of the product or service, or
• Takes unreasonable advantage of:
  • A consumer’s lack of understanding of material risks, costs, or conditions of a product or service; and
  • Consumer’s inability to protect their interests in selecting or using a product or service; and
  • The reasonable reliance on the financial institution to act in the best interest of consumer.

Areas of Regulatory Focus

• TILA/RESPA Disclosures
• Mortgage Loan Products and Pricing
• Gift Cards and Travel Cards
• Overdraft Protection Programs
• Fee Schedules
• Advertising
• Third Party Vendors

Action Steps to Mitigate Potential UDAAP Violations

Financial institutions can and should take measures now to reduce any potential violations by reviewing all products and services offered. Banks must ensure that customer agreements are in plain language, that all disclosures are understandable, and that all fees and charges are clearly defined and explained before a product or service is originated or sold to the consumer.

Practices and procedures should also be reviewed to ensure that when multiple choices are made available, that the consumer clearly understands the differences and is offered only the ones that are in the best interest of the consumer.