A developing area of bank examination

One of the many unknowns for banks from the Dodd Frank Act is the role of the Consumer Financial Protection Bureau (CFPB). Part of CFPB’s mission statement is promoting transparency and consumer choice and preventing abusive and deceptive financial practices. To achieve this, CFPB has the authority to examine banks for unfair, deceptive and abusive acts and practices (UDAAP).

UDAAP examinations were formerly conducted by the Federal Trade Commission, and most community and regional banks were safe in their normal business. However, with the rise of automated overdraft protection programs, foreclosures and debt collection, UDAAP violations are occurring in banks of all sizes. According to the FDIC, in the last three years more than 40% of UDAAP violations were found in banks with less than $250 million in assets.

With the CFPB’s lead, all regulators are paying closer attention to areas susceptible to UDAAP violations. Areas of focus in UDAAP examinations are 1) TILA and RESPA disclosures; 2) mortgage loan products and pricing; 3) mortgage loan origination compensation; 4) overdraft protection programs; 5) credit card and debit card practices and pricing; 6) high fee income producing products; and 7) information reporting.

The stated objectives of a UDAAP examination are to:

1. assess the quality of the institution’s compliance risk management systems and internal controls and policies and procedures for avoiding unfair, deceptive or abusive acts or practices;
2. identify acts or practices that materially increase the risk of consumers being treated in an unfair, deceptive or abusive manner;
3. gather facts to help determine whether the institution engages in acts or practices when offering or providing consumer financial products or services that are likely to be unfair, deceptive or abusive; and
4. determine whether unfair, deceptive or abusive acts or practices have occurred and whether further supervisory action or enforcement action is appropriate.

If you believe one of your products or services could be interpreted as unfair, deceptive or abusive, it is best to act now to correct it. The CFPB’s enforcement authority includes civil money penalties of up to $1 million per day. The newly announced mortgage settlement between the five largest loan servicers, the state attorneys general and the federal government is just a glimpse into the possible penalties. In 2010, Woodforest Bank was ordered to pay $12 million in restitution to customers and $400 thousand in civil money penalties for failure to impose a reasonable limit on overdraft fees and failure to provide overdrawn customers with the opportunity to avoid additional fees under its overdraft protection program. Advanta Bank was ordered to pay $14 million in restitution and a civil money penalty of $150 thousand in 2009 for its credit card program that offered a cash back reward and advertised a cash back percentage that was impossible to earn.

At your next examination, whether federal or state, you should be prepared to explain your products and services, fee schedules, notices, policies and procedures, and even your marketing materials to show that your bank is open and honest with your customers and not charging back-end heavy fees, offering products with frequent changes in terms and not engaging in bait-and-switch advertising. To help in this preparation, the CFPB has included its Supervision and Examination Manual on its website at http://www.consumerfinance.gov/guidance/supervision/manual. The Manual includes the CFPB’s UDAAP Examination Procedures which will likely be used by all regulators.