What your marketing team needs to know about UDAAPSteven J Ramirez, CEO, Beyond the Arc

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Popular industry analyst, writer, and speaker in financial services

Speaks and writes frequently about the technology and trends affecting customer experience

Insights have appeared in American Banker, ABA Banking Journal, ABA Bank Marketing, Financial Brand, Bank Innovation, BAI Banking Strategies, Banking Exchange, Mortgage Banking, and other industry publications.

Steven Ramirez

Our industry faces a challenging future

• Regulation shapes how your bank interacts with the customer

• Not only is there a bank on every corner, there’s one on every smartphone

• “Non-bank” options are sprouting everywhere

Survival = agile + customer-centric

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Being compliant is no longer just about following the alphabet soup (Reg B, Z, E, etc…)Success will require a new mindset• Our perspective is changing and we must continue to evolve to be successful in

this new environment• Traditionally: No appetite for compliance failures, but allowance for a certain

error rate

• Evolving: No appetite for compliance failures, and dramatically lower tolerance for operational errors in general, especially those with customer impact…. It feels like we need to be perfect!

• Operational Excellence will evolve to focus on value and delivery of products and services. It will be about the customer experience

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Complaint analysis can help you uncover UDAAP riskIn undertaking a Risk Assessment, examiners should consider both the volume and the nature of consumer complaints received by the entity or by regulatory bodies including the CFPB.

In addition to shedding important light on the extent and types of concerns of consumers utilizing the entity’s consumer financial products or services, complaints may provide indications of potential regulatory violations, including unfair, deceptive, or abusive acts or practices (UDAAPs). How the entity handles complaints is also a key element in evaluating its compliance management system.

CFPB Supervision and Examination Manual, Version 2 - October 2012, pg. 21

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CFPB complaints as of September 2016Over 1 million consumer complaints have been received to date

CFPB fines and penalties are getting larger (and don’t factor in the real damage done to reputation)

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Average amount of CFPB enforcement(in $ millions)

2015 Scorecard

• 70 cases (59 settled with 11 lawsuits)

• $ 7 billion in fines and restitution

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Some banks are making progress…Capital One continues to reduce complaints

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Capital OneLinear (Capital One)

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Amex Linear (Amex)

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UDAAP, the CFPB, and complaintsWhat can you learn by tracking and analyzing complaints?• It’s all about the customer• Heavy focus on UDAAP• The CFPB starts with complaints and then work their way backwards• Compliance management is kind of the last stop – versus with the Fed/OCC it’s the

first stop• When putting together your materials for them, focus on the customer experience• Good idea to involve your Customer Experience partners• Therefore, it is important to emphasize programs, processes, and policies that focus

on customer advocacy, complaint management, call monitoring, Voice of the Customer, etc.

The value of improving customer experience

• Incremental purchases from existing customers in the same year • Revenue saved by lower churn• New sales driven by word of mouth

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$250-$300 million annually

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All’s fair in love and marketing?

The standard for unfairness in the Dodd-Frank Act is that an act or practice is unfair when: 1. It causes or is likely to cause

substantial injury to consumers;2. The injury is not reasonably avoidable

by consumers; and3. The injury is not outweighed by

countervailing benefits to consumers or to competition.

There are standards for identifying what is unfair We can translate the CFPB’s direction

into plain English. Pay attention to:1. Costs or fees paid by consumers

2. Providing material information about a product, such as pricing, upfront

3. Just because your offer provides some consumer benefit, you’re not automatically off the hook.

Hotspots for marketing

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UDAAP risk isn’t just about getting advertising right

• Accepting monthly payments while failing to provide the service– The bank was unable to provide credit monitoring services (because the customer had not yet signed

the authorization), even though the consumer was being charged• Refusing to release lien after consumer makes final payment on a mortgage

– The FTC brought an enforcement action against a mortgage company based on allegations, described below, that repeatedly failed to release liens after consumers fully paid the amount due on their mortgages.

• Not honoring credit card convenience checks, with no advance notice– A credit card issuer sent convenience checks with stated credit limits and expiration dates to customers.

For a significant percentage of consumers, the issuer reduced credit lines after people tried to use the checks, and then also bounced those consumers’ checks.

• Persistent or harassing calls while at work– Calling people at work after the person requested that they not be called at work, or when the creditor

had reason to know that the consumer was not permitted to receive calls at work.

Case studies based on recent enforcement actions

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Written disclosures may be insufficient to correct a misleading statement

It is deceptive when: 1. It is likely to mislead the consumer2. The consumer’s interpretation is

reasonable under the circumstances3. The misleading representation,

omission, act, or practice is material

Being deceptive is more than just the “4 Ps”Pay attention to:1. Vague or unclear language2. How would a “typical person” react?

(…particularly vulnerable segments)3. If something influences the

consumer’s decision to purchase, then it is likely to be material

Hotspots for marketing

Pro Tip: A deceptive act or practice may not be rectified by subsequent truthful disclosures

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The standard for abusive actions was introduced by the Dodd-Frank Act• …Interferes with the ability of a consumer to understand a term or condition of a financial

product • …Takes unreasonable advantage of:

• A lack of understanding on the part of the consumer of the risks, costs, or conditions

• The inability of the consumer to protect its interests

• The reasonable reliance by the consumer on a bank employee

• Mortgage Servicing.The CFPB alleged an “abusive” claim based on a mortgage servicer’s guarantee that consumers would save money if they enroll in a biweekly payment program even though servicer knew they were unlikely to benefit.

• Credit Product. Deferred interest promotions were deemed “abusive” by the CFPB because the lender allegedly provided little information regarding how it would allocate payments among standard and deferred-interest balances

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Take action to assess UDAAP risk – a 5-point plan1. Communications mapping

2. Comprehensive UDAAP checklist

3. Pilot assessment

4. Training program

5. Controls

Who is creating, reviewing, and approving communications?

Have you thought about monitoring and testing for UDAAP-related controls

Is there a business group that would immediately benefit from assessment?

What kind of UDAAP training does your marketing team receive?

Are you considering not only regulatory risk, but what is right for the brand?

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Top 5 tips for marketing

1. Best way to avoid fines is through transparency, clear communications, and customer focus.

2. Marketing should not guarantee a result that can’t be documented.

3. All promotions and offers, particularly cost considerations, should be explained thoroughly, with the information provided prior to purchase.

4. Communications must reflect the way you do business today.5. Cannot pressure the customer to make a decision quickly.

These opportunity areas should be part of your standard approach to the business

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Next steps to take advantage of the opportunities• UDAAP: Your bank likely has hidden UDAAP risk if you haven’t performed a systematic

assessment of your customer-facing materials to identify communications “hot spots”.

• Complaints: The CFPB complaint database is a rich source of data on customer experience, and the data can help to identify root causes and benchmark your experience against other banks.

• Culture: Changing your organization’s culture is an intentional act. You have to set a course for where you want to be, and take action to consciously reshape it.

Thank YouSteven J. Ramirez, CEO

Beyond the Arc, Inc.

Office 1.877.676.3743Email sramirez@beyondthearc.comDigital beyondthearc.com

@beyondthearc

Facebook.com/beyondthearcSlideshare.net/beyondthearc

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This document provides our commentary and analysis. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. No warranty expressed or implied.

The information provided in this presentation is not intended nor should be used as a substitute for legal or compliance advice, or other expert opinions and services in specific situations.

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