Frank byplay from top federal officials at ABA Regulatory Compliance Conference
Discussions on UDAP, CRA, RESPA, overdraft,
and more underscore bank challenges
By Steve Cocheo, executive editor,
Most compliance conferences
tend to dwell on the "how" of lending, when credit comes up, not the "how much."
But when the subject of the evolving Community Reinvestment Act and its
implementing rules and commentaries arose during a keynote session at ABA's
recent Regulatory Compliance Conference, how and how much intersected.
Ann Jaedicke, Deputy
Comptroller for Compliance Policy at the Office of the Comptroller of the
Currency, had been asked about banker expectations for change in CRA. She took
the opportunity to link CRA to the broader issue that has dogged banks and
savings institutions throughout the financial crisis-balancing new lending for
economic recovery with retrenchment or maintenance to help the institutions
themselves to regroup, heal, or simply get by.
Politicians from the Oval
Office down have been battering banks to lend more before, during, and since
steps such as the TARP program were taken, at the same time that some experts
indicated that a de-leveraging was just
what the doctor ordered for a credit-bloated economy.
Community bankers have
often cited a flagging appetite for credit, with some borrowers preferring to
avoid or pay down debt when they can. Others have actually been ordered to
shrink their banks' portfolios, and some, in the wake of writeoffs, have had to
do so on their own judgment in order to maintain capital levels.
CRA compliance focus, she
said, "is a place where we as regulators may be able to assess whether a bank
isn't lending as a result of lack of demand in the community or as a result of
a bank not being willing to take on risk and make a long-term commitment."
Continuing her point,
Jaedicke, involved in OCC exams
and regulation for more than three decades, reflected on the role of compliance
examiners and examiners in general.
"I don't think there is
anybody better situated than we are to make these kinds of determinations," she
said, noting that "every situation is different."
On a related point, Luke
Brown, associate director of compliance policy at FDIC, noted his agency's
advocacy for bringing the unbanked and underbanked into the banking industry's
mainstream. This attitude has grown significantly in the administration of
current FDIC Chairman Sheila Bair. Under Bair's leadership FDIC has pushed
programs, pilots, and protocols dealing with overdraft checking, small-balance
lending, consumer product templating, and more.
This facet of a
wide-ranging discussion demonstrated that while plans for a "Consumer Financial
Protection Bureau," under the pending financial reform legislation, would
likely accelerate institutionalized consumerism at the federal level, it has
not been dormant under the current regulatory structure. Yet while the four
speakers-one from each banking and savings institutions regulatory
agency-frequently spoke in harmony, they demonstrated that even on the
regulators' side of the debate there are differing viewpoints.
Growing importance of UDAP
The senior regulatory
panel, a fixture for years at the longstanding ABA conference, held more than
In a sense, there was an
unspoken "last hurrah" about the gathering, at least in the sense of a last
look at a setup banks and savings institutions have grown used to.
For one thing, one agency
represented on the panel, the Office of Thrift Supervision, will be absorbed
into the Office of the Comptroller of the Currency under pending financial
For another, consumer
compliance and other regulatory compliance issues have long been shared among
the federal banking and savings institutions regulators, as well as other
agencies, such as the Federal Trade Commission and the Department of Housing
and Urban Development. With the all-but-assured creation of the Consumer
Financial Protection Bureau, much of the policymaking in certain of these areas
will move to the new organization. For most banks, most primary enforcement
will remain with the primary federal regulator, with, at least in theory,
enhanced state-level participation as well in financial consumer protection
Just who will be up on
the stage next year-and how groups like ABA will work with them-is an open
question. The rumor mill has been churning already concerning who will head the
new agency and how its staff will be populated.
However, the agencies
represented have wrought most of what banking institutions must cope with in
the compliance context, either directly or through implementation of
congressional decisions. There has been evolution in both spheres.
A strong example that the
panelists devoted a large portion of their conference discussion to is
UDAP-Unfair and Deceptive Acts and Practices law and regulation. UDAP was actually
promulgated, originally, in the Federal Trade Commission Act. However, the banking
regulatory agencies have been issuing supervisory guidance on UDAP and bringing
enforcement cases, and the Federal Reserve, which hung back somewhat among the
regulators on UDAP for a time, has recently times been citing UDAP as
authority for new regulatory initiatives. UDAP came up in numerous contexts
throughout the entire conference.
The rise in UDAP marks a
shift in federal financial regulation, noted panelist Timothy Burniston, senior
associate director in the Division of Consumer and Community Affairs at the
Federal Reserve Board. "It reflects the fundamental shifting between what has
been called ‘consumer compliance'," he said, "and what is now called ‘consumer
protection'." Burniston said regulators have moved beyond "check boxes and
correct disclosures" to the bottom line, whether processes and products result
in fair treatment of customers.
protection laws are very robust," said April Breslaw, director, consumer
regulation, at the Office of Thrift Supervision, "but they don't cover everything. That's when UDAP
analysis can begin."
OCC's Ann Jaedicke had a
"It's not a shift in
focus, but our examiners are much more sensitized," Jaedicke explained. OCC has
been a leader among the banking agencies in using UDAP as the basis of
enforcement actions. Over ten years, the national bank regulator has made a
string of high-profile cases on UDAP grounds. Panelists noted that UDAP
enforcement is driven very much by the facts in individual cases, versus
traditional compliance and enforcement that relies more heavily on finding
outliers to established, regulated norms and requirements. OCC began with credit card cases and
moved into mortgages and other banking areas from there. OTS's recent
enforcement action taken against Woodforest Bank, a Texas savings institution, concerning
overdraft protection program practices, hinged on UDAP.
"This isn't a welcome
comment to this audience," said Jaedicke, "but I think we are getting better at
it. We have ten years of experience at it now and that is what it takes."
said UDAP isn't an easy mandate for examiners, because of the fact-specific
nature of the cases. In recognition of this, they are limited or backstopped,
depending on the viewpoint. "Our examiners can't take enforcement action on
their own, without going through Washington, on UDAP issues," said Jaedicke.
"They don't have that authority."
Tim Burniston of the Fed
reacted to a tone running through some fellow panelists' comments that postured
UDAP as a means of tackling issues that make regulators feel uncomfortable but
which don't clearly violate any rule or statute. He said there was a sense that
the FTC Act's UDAP provisions were a "catchall for all things we don't like."
"There's a lot of fearmongering
that we will turn what we don't like into UDAP violations," said Burniston. "I
don't think that is the case at all." Burniston said UDAP often comes up
indirectly, when a regulator is looking at an issue on some other
grounds-possibly even something as far removed as fraud concerns-and UDAP
issues then surface.
"We really do have a lot
of other things to do," said Burniston.
However, April Breslaw of
OTS clearly felt that such issues were a priority. "There is an element of
using Section 5 (of the FTC Act, containing UDAP) as a tool," she said. She
said when examiners see fees that are "way out of bounds, way out of whack,"
they can see that UDAP can be applied.
"The value of Section 5
is that it is broad," Breslaw continued, "and can be applied to new situations
that we haven't seen before."
[The June 2010 ABA Banking Journal featured a special cover story concerning UDAP, by expert Jo Ann Barefoot. Read the digital edition now]
More overdraft protection compliance coming?
The OTS enforcement
action against Woodforest and the related proposed supplemental guidance released
simultaneously with the regulatory enforcement order in April have already been
broached among all the agencies as a rallying point for further united action
on overdraft issues in a UDAP context. This comes even as institutions push to
comply with new Fed rules. The panel discussed this concept and its possibilities,
although one regulatory analyst painted the OTS order as highly unfair, and the
proposed supplemental guidance as a "last gasp" effort by a condemned agency to
justify its existence. (For more about overdraft issues from the conference,
see our companion article.)
Interagency adoption of
something like the OTS proposal "is not something that is going to happen
quickly," admitted Breslaw. But, in an apparent nod to the pending Consumer
Financial Protection Bureau, she noted that agencies, while not always having
policymaking authority, will continue to have enforcement authority.
"It is in our best
interests to come up with a single policy," acknowledged Burniston.
A curious point made by
Jaedicke was that the 2005 interagency guidance that OTS would supplement with
its proposed document fell out of touch with reality.
"The world changed on
us," said Jaedicke, who said she'd spent more time on overdraft issues in the
last six months that she'd dreamt was possible.
regulator said that the 2005 document, which included many best practices, as
opposed to being wholly made up of rules, fell behind the times.
"One thing we didn't
anticipate was the increased use of debit cards and some of the IT issues and
payment processing issues, as well as young people's use of debit cards for
small-dollar purchases," said Jaedicke. She added that many consumers have
difficulty understanding the timing of how items clear through their
transaction accounts and "keeping those accounts in balance."
"Some banks are making
that work to their advantage," said Jaedicke, aiming for a wry tone, perhaps.
"I could describe it more harshly than that, but that's how I'll choose to
stressed the regulators' insistence that banks monitor overdrafts in order to
filter overuse. They are expected to counsel customers who use overdraft protection too much.
"It appears that in some
cases that hasn't happened," Jaedicke said. She then threw down a warning as
banks race to comply with the Fed's new overdraft debit-card rules.
"Don't be frightening
people into opting in," said Jaedicke. "If you do, I'm going to call you. I
don't have time to write you a nice letter, so I'm going to call you. Or I'll
call your CEO."
The Fed's Burniston
allowed that his agency hadn't seen too many strange efforts going on in the
opt-in campaigns underway, "but sometimes people bring us strange flyers." Some
he characterized as "frightening," and examples of the risks run when Marketing
gets too far ahead of Compliance.
FDIC's Luke Brown
confirmed that proposed product templates that his agency had put out for
comment earlier this year include the potential for not permitting overdraft
services to be attached to those transaction accounts. The templates could be
used as a basis for low-cost
transactional and basic savings accounts.
For more compliance topics at aba.com, see the following links:
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Center provides direct access to regulatory expertise, up-to-date
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keeping pace with the demands of supervisory oversight. http://www.aba.com/Compliance/default.htm
[This report was posted on June 18, 2010 on the website of ABA Banking
Journal, www.ababj.com, and is copyright 2010 by the American Bankers