The UDAAP law is driven by principles. Lenders need to embrace the spirit of the law to ensure compliance, rather than fall foul by dealing with it in a rule-based way.
While technical regulations governing mortgage servicing, has often been a big challenge for mortgage servicers, complying with UDAAP – or unfair, deceptive or abusive acts or practices has always been a bigger challenge, because the law is not defined by a clear set of rules. As a service provider, you may have left no stones unturned to have all the right boxes checked, but still be pulled up by the CFPB for UDAAP violation. The moot question, therefore, is how do you deal with a law which is not governed by rules. The answer lies in embracing the spirit of the law.
The UDAAP law was framed to charge financial institutions with the responsibility of meting out fair and transparent treatment in all forms of interactions with consumers. The law assumes that too much information can detract consumers from their decision-making processes. So, doing everything to remove the cognitive limitations of the consumer is the only available way to be compliant with the law. This may seem impossible, given the diverse degree of consumer “understanding” for an exceedingly diverse population, but certain to-dos can make sure your institution remains forever compliant.
Keep it Simple, Keep it Straight
Presenting information in layman’s language is the ultimate requirement of this law. This is truer in case of critical information. Don’t hide them in heavy text paragraphs. Need be, keep them highlighted, particularly in add-on product enforcement actions, so that it sticks its neck out to remove any doubts about your intentions.
Provide Right Value for Right Price
Make sure the value you deliver is commensurate to the price you charge; else you will be hauled up for unfair practices. To steer clear of this possibility, keep your services reasonably priced, or at least price it in line with industry standards. Further, ensure exclusions to your product do not prevent the purchaser from receiving the value for the product.
Acquaint Consumers with the Consequences
Always keep the customer informed about product operations that may invite fees or penalties. For instance, chances of a customer getting trapped into an overdraft fee cycle, (because of an overdrawn amount) remains high, until you alert them of the consequences. Such situations are common when consumers seek loan modification.
Match it Right
Offer products that meet your customer’s needs and not just your need. Aligning wrong products mostly happens when you give a free hand to target-obsessed employees. To eliminate such possibilities, calibrate your internal incentive policies to make employees more accountable. Ensure vulnerable customers (students, senior citizens, physically challenged etc.) are cared for specially, before offering high-penalty or high fee products to them.
While ensuring these strictly will keep you on the right side of UDAAP rules, having a right control mechanism will ensure your process never gets derailed. Make use of complaints to spot trends that call for additional process reviews. Educate your employees on the consequences of a wrong sell. Review every operational process periodically to identify possible loopholes. Lastly, study latest developments to improve your understanding of what comprises violation and dovetail your processes continuously.
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