Assessing and managing UDAAP risk in the new regulatory environment

Abstract

The Consumer Financial Protection Bureau (CFPB), created in the wake of the Great Recession to protect consumers in the financial services space, has recently proclaimed that it will give increased attention to financial institutions’ compliance with Unfair, Deceptive or Abusive Acts or Practices (UDAAP). For banks, meeting this requirement has not been easy, as the terms are subjective and the CFPB ultimately holds the power to define what those terms — potential violations — mean, oftentimes on a case-by-case basis. This renewed focus on UDAAP comes on the heels of a global pandemic and a national reckoning on social justice, which have introduced new layers of discriminatory risk into the environment. This paper explores issues of equity and fairness for consumers under UDAAP, as well as presents several best practices that banks should adopt to better manage UDAAP risk, especially as other regulatory agencies are expected to up the ante on unfair banking practices. Failing to prepare for intensified scrutiny could result in significant financial penalties across the industry, which paid US$14.4bn in consumer relief and US$1.7bn in civil penalties in CFPB’s first decade of oversight.