A year ago, consultant Jo Ann Barefoot did the industry a service in her cover story on the emergence of “UDAP”—unfair and deceptive acts and practices—as a broadly applied standard by which banks would be measured. Since then, UDAP has been incorporated into the bank regulatory regime in a big way. The Dodd-Frank Act expanded it by adding the word “abusive” (making it UDAAP) and created a new agency to enforce it: the Consumer Financial Protection Bureau.
“Agencies and Congress cannot produce ‘fairness.’ What they can produce—and do in abundance—are laws, regulations, and ‘guidance’ ”
CFPB will be UDAAP Central.
In this month’s cover story (p. 32), Barefoot and her coauthor, attorney Lyn Farrell, return to the subject and offer seven steps to help banks transition from a traditional compliance mindset and framework to the far more subjective “fairness” regime.
Senior management in particular should read the article because the changes described will demand much more attention—and direction—from the top. It’s not that CEOs are unaware of the importance of Compliance. It’s that the traditional, rules-based compliance model will not withstand the rigors of UDAAP. The old model was designed to satisfy technical rules, as the article says, not to produce “fairness.”
The absurdity of all this is that agencies and Congress cannot produce “fairness.” What they can produce—and do in abundance—are laws, regulations, and “guidance.” Each of which spawns countless interpretations and updates.
A community banker told us recently how one year he began to keep a pile in the corner of his office of the advisories and notifications issued to him by his two primary regulators. It grew to nearly eight feet high in less than 12 months. And that was 20 years ago! Yet this upward spiral of advisories—many of them incredibly technical—has not achieved “fairness,” however one defines that. What it has achieved is compliance with rules, at great cost.
Now we have UDAAP. Here’s what we think will happen.
Because the terms “unfair,” “deceptive,” and “abusive” are subjective and broadly defined, each field examiner will interpret them differently. Then, over time, as the industry pushes back, subjective concepts will become rules, set in regulatory stone. Then the figurative pile of paper in the corner will get higher, costs will grow, and fairness will remain as elusive as ever.
We’ve seen it before.
The shame of it is, the vast majority of the bankers we have met and known over many years are decent people who would not knowingly tolerate practices that treat customers unfairly. And so all of this vast web of regulation stems from the actions of the few bad players that any human endeavor spawns.
We need laws and rules, of course, but fairness comes from people doing the right thing, not from legality. Plenty of laws are already on the books. Let them be used to punish abusers. But with UDAAP, the bad actors will continue to find loopholes, and good, decent, and, yes, fair players will once again end up paying the price. •
In this month’s cover story (p. 32), Barefoot and her coauthor, attorney Lyn Farrell, return to the subject and offer seven steps to help banks transition from a traditional compliance mindset and framework to the far more subjective “fairness” regime.
Senior management in particular should read the article because the changes described will demand much more attention—and direction—from the top. It’s not that CEOs are unaware of the importance of Compliance. It’s that the traditional, rules-based compliance model will not withstand the rigors of UDAAP. The old model was designed to satisfy technical rules, as the article says, not to produce “fairness.”
The absurdity of all this is that agencies and Congress cannot produce “fairness.” What they can produce—and do in abundance—are laws, regulations, and “guidance.” Each of which spawns countless interpretations and updates.
A community banker told us recently how one year he began to keep a pile in the corner of his office of the advisories and notifications issued to him by his two primary regulators. It grew to nearly eight feet high in less than 12 months. And that was 20 years ago! Yet this upward spiral of advisories—many of them incredibly technical—has not achieved “fairness,” however one defines that. What it has achieved is compliance with rules, at great cost.
Now we have UDAAP. Here’s what we think will happen.
Because the terms “unfair,” “deceptive,” and “abusive” are subjective and broadly defined, each field examiner will interpret them differently. Then, over time, as the industry pushes back, subjective concepts will become rules, set in regulatory stone. Then the figurative pile of paper in the corner will get higher, costs will grow, and fairness will remain as elusive as ever.
We’ve seen it before.
The shame of it is, the vast majority of the bankers we have met and known over many years are decent people who would not knowingly tolerate practices that treat customers unfairly. And so all of this vast web of regulation stems from the actions of the few bad players that any human endeavor spawns.
We need laws and rules, of course, but fairness comes from people doing the right thing, not from legality. Plenty of laws are already on the books. Let them be used to punish abusers. But with UDAAP, the bad actors will continue to find loopholes, and good, decent, and, yes, fair players will once again end up paying the price. •
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