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Managing UDAAP Risks in
Payments: What Have We
Learned to Expect from the
Regulators?
BAI Payments Connect
March 12, 2013
Cliff Stanford, Alston & Bird, LLP
Lyn Farrell, Treliant Risk Advisors, LLC
Disclaimer
• Nothing in this presentation is or is intended to be
legal advice.
• Please consult with your own legal counsel for
guidance specific to your organization or
situation.
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Are legal changes driving payments innovation?
• There is a positive correlation between legal/regulatory changes and
payments product innovation across all payments channels
• More often than not, payments regulation is reactive – payments
innovation is driving legal change
• Expect accelerating regulatory reaction to perceived unfair, deceptive
or abusive practices (overdraft fees, prepaid card fees, binding
arbitration, etc.)
• Expect more, not less, unintended consequences
• Be careful (and thoughtful) – it’s a compliance jungle out there
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U.S. Regulatory Drivers of Product
Change
• Numerous government interventions in the payments market
– Durbin/Regulation II
– Surcharge Settlement
– CARD Act
– Regulation E: Overdrafts, Payroll Cards, Remittances, GPR Prepaid
– FinCEN: Prepaid Access Rules
– Money transmitter licensing
– Regulation CC
– FACTA
– UDAAP Enforcement
• “The first class of problems is the deceptive and misleading
marketing of consumer financial products and services . . . .”
– Richard Cordray to CFPB Consumer Advisory Council, 2/20/13
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UDAAP
• “Unfair” – causes or is likely to cause substantial injury to consumers;
– the injury is not reasonably avoidable by consumers; and
– the injury is not outweighed by countervailing benefits to consumers or to competition.
• “Deceptive” – misleads or is likely to mislead the consumer;
– the consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
– the misleading representation, omission, act, or practice is material.
• “Abusive”
– materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
– takes unreasonable advantage of:
• a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
• the inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or
• the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
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CFPB UDAAP Actions
• Capital One:
– CFPB/OCC; $150MM restitution, $60MM penalties
– directed certain customers with low credit scores or low credit limits to
third-party call centers who made misleading and deceptive
statements about credit card “add-on” products (e.g., credit
monitoring and identity-theft protection)
• Discover:
– CFPB/FDIC; $200MM restitution, $15MM penalty
– telemarketing scripts misled regarding charges for add-on products,
enrolled consumers without their consent, and withheld information
about eligibility requirements for certain benefits
• American Express:
– CFPB/FDIC/Fed/OCC; $85MM restitution, $27.5MM penalty
– various consumer laws; deception regarding card benefits
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Civil Enforcement Jurisdiction
• CFPB
– >$10BN banks
– Non-bank firms as service providers or directly in some markets
• Prudential Banking Regulators
– < $10BN banks
– “institution affiliated parties”
– Bank Service Company Act
• FTC
• State Attorneys General
• http://www.youtube.com/watch?v=dxhyUAWPmGw
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CFPB Priorities
• Prepaid Cards
• Electronic Disclosures
• ODP/Payday Loans
• Debt Collection
• Payment Innovation/Mobile Wallets
UDAAP Payment Hot Topics
• Overdraft Protection
• Prepaid Cards
• Credit Cards
• Marketing
• Sales Practices
Example #1
• Non-enforcement action examination finding
• Restitution required
• Approximately $25 million
Debit Card Authorization Hold
Balance
Account Balance on Day 1 $110
Debit card transaction authorized ($100) $10
(for a purchase at Target)
Check #1 ($20) ($10)
Check #2 ($20) ($30)
Account Balance on Day 2 ($30)
Release debit hold $100 $70
OD Fee for Check #1 ($35) $35
OD Fee for Check #2 ($35) $0
Debit transaction settlement ($100) ($100)
OD fee for Target debit transaction ($35) ($135)
Example #2
FDIC Enforcement Action against
Higher One, Inc.
The Bancorp Bank
Multiple NSF fees on prepaid cards marketed to college
students
Four Pillars for Product Fairness
• Value
• Predictability
• Understanding
• Appropriateness
These principles should be applied to the bank’s products,
services and practices. They should also be applied to third
party vendor activities and products.
Value
The consumer receives value that is
reasonably related to the cost of the product
or service.
Predictability
The consumer can predict how the product
or service will perform.
Understanding
The consumer understands the terms and
conditions of the product or service
(particularly any limitations or exclusions).
Appropriateness
The bank provides products that are
appropriate for their customers and their
customers can rely on the bank to show
them the most appropriate product.
Strategies for Creating Fair Products
1. Develop a formal process for new product
design and implementation
2. Make sure risk and compliance is involved from
the very start
3. Determine the characteristics of the product’s
target customer
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Strategies for Creating Fair Products
4. Gain a thorough understanding of the
product’s terms and conditions
5. Understand how each cost or fee will be
assessed and collected
6. Determine if there is burden on the consumer
to activate the product or to get the benefit
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Strategies for Creating Fair Products
7. Test the product in live circumstances to
understand how it works in all possible
transaction types
8. Use an outside party to provide a consumer
perspective on the product
9. Review all proposed marketing and advertising
strategies
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Strategies for Creating Fair Products
10. Review a detailed plan of all sales
practices, including proposed scripts,
guidance documents, sales aids, targeted
market, etc.
11. Conduct periodic reviews of the sales and
marketing efforts and customer
complaints; revise the product as needed
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Factors for Determining Fee Risk
1. Is it a service charge or a penalty?
2. Is the fee reasonably related to the cost of providing the
service?
3. Is the product complex or simple?
4. Are disclosures effective?
5. Can it be easily explained?
6. Is the fee significantly greater than competitors?
7. Is the product aimed at vulnerable populations?
8. Are vendors involved in delivering the product?
Fee Risk Assessment
Recommendations
• Make sure your disclosures and agreements (including
authorizations) comply with current laws
• Consider the current legal landscape and the costs/benefits of
conforming “gray area” products to the most nearly applicable law
• Consider legal developments on the horizon and ensure product and
legal agreement flexibility to accommodate anticipated and
unanticipated changes
• The future may hold more, not less, legal uncertainty, particularly as
the pace of payments product innovation accelerates – make sure
your compliance decisions are informed and consistent with your
organization’s risk tolerances
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Lyn Farrell, CRCM, CAMS
Treliant Risk Advisors, LLC
713-204-9500
Cliff Stanford
Alston & Bird LLP
404-881-7833
