Best Practices to Avoid UDAAP Violations

While the winds of regulatory relief are beginning to rustle the leaves in Washington, D.C., discussions between RMA’s Community Bank Council and the regulatory agencies during visits there in July 2017 focused on traditional risk management issues.

Among the things the council discussed was how to better understand and avoid violations involving unfair, deceptive, or abusive acts or practices (UDAAP).

Regulators believe that banks do not intend harm and that they are “good actors.” But intent is not relevant to the regulation. UDAAP looks at impact, not intention. Were customers harmed? What were they told and when?

Self-identification and remediation are always preferred. If the issues are identified and resolved by the bank, an enforcement action could well be avoided. Often, isolated incidents will only warrant a Matters Requiring Attention notice or be cited as a violation, leaving a record of the incident in the exam. But if a similar incident surfaces in the following exam, it may reflect a pattern and lead to an enforcement action.

UDAAP violations commonly result from a systems failure or operational error, such as failure to test or monitor the basics during a system change or policy change. The violation can be as simple as an interest miscalculation.

Key best practices are as follows:

  1. Have a great compliance management system that monitors changes in product and in disclosure.
  2. Conduct regular testing—of interest and fee calculations, for example—but particularly when products or systems change.
  3. Review your disclosures. Overdraft protection was cited as a particular issue. Do customers who opted in five years ago, and who have never had an overdraft at the point of sale, truly understand what they opted into? How does the bank know?
  4. Self-identify. Timely and effective corrective actions must be taken.
  5. Look in the rear-view mirror; don’t just fix it going forward. Consider the impact going back. How were customers affected?

The above is based on an excerpt from The RMA Journal, October 2017 article “RMA’s Community Bank Council Meets with Regulatory Agencies” by Robert Messer, chief financial officer at American National Bank of Texas and RMA chair, and Lisa McBride, RMA’s director of member relations for chapters and community banks. You can read the article in its entirety here.

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