reduce UDAAP risk in communications UDAAP scrutiny and a new director at the CFPB are putting more pressure on how banks engage with customers

Does your financial institution’s messaging have hidden UDAAP risks? If you haven’t performed a systematic review of your customer communications, the answer is probably yes.

Compliance today goes beyond following prescriptive regulations to avoid hefty fines and penalties. With UDAAP, the focus has shifted to protecting customers from any practices considered to be unfair, deceptive, or abusive. The slippery slope is that UDAAP guidelines are non-specific – and leaving room for interpretation can leave banks vulnerable to potential unintended violations.

Practices and communications that may have gone unchallenged in the past now face sharp scrutiny by the Consumer Financial Protection Bureau (CFPB). And the heat is being turned up. Fall 2021 brought a new Director to the CFPB who “has a reputation for cracking down hard on financial services companies accused of consumer protection law violations.”1 Lending practices during the pandemic are expected to be one of the key targets for investigations.

Regulatory compliance is critical to an FI’s survival, especially with increasing competition from neobanks and tech giants. How can you reduce UDAAP risk? Take action centered on these five customer-focused strategies…

5 customer-centric strategies to reduce UDAAP risk

1 – Communicate with clear, plain language

A common pitfall that can introduce UDAAP risk is delivering customer service communications infused with banking jargon and legalese. While certain phrasing or concepts may be required for regulatory reasons, it’s often possible to translate that into simple language that anyone could understand. Ensuring communications and calls to action are clear and easy to follow is an important part of avoiding risk.

For example, explicitly describe any risks, costs and conditions associated with your products and services, but do it a friendly, conversational way. Read your communications out loud, and consider if a friend or family member could easily understand them.

– Be transparent, upfront

Your communications should support customers in making decisions that are in their best interest. That means providing material information (e.g., critical details and disclosures) before they purchase a product or service. Disclosing this information after they’ve purchased is considered a deceptive practice.

Transparency also includes making any critical information easy to access, to improve the likelihood that customers will read it. That might include providing easy-to-read online or mobile versions, or an email that highlights key information with links or instructions on where to learn more.

3 – Optimize across a chain of communications

When creating a marketing campaign, imagine a customer’s first impressions. Could they easily determine if the product or service would be of value to them? Is it clear how the offering might help them meet specific financial needs or achieve their goals? Does the customer have all the information they need to make an informed decision?

To help protect against UDAAP risk, ask other stakeholders in your organization to review the end-to-end “net impression” of all your campaign communications. Make sure they look at the full chain of touch points, from promotional emails to online purchase landing pages, to how customer service will handle inbound calls.

4 – Back up any guarantees and time limits

Can you back up your marketing claims? Don’t guarantee a result unless you’re certain you can deliver it. In the past, marketers used to promote interest rates while knowing that some customers would not qualify for them. Now banks must clarify upfront about the qualifying requirements, before the point of purchase. If you’re unclear about the way you’re presenting an offer, be sure to have your regulatory team review it.

Equally important is to be honest about deadlines. Stating there’s a due date to enroll in a product or service when the time limit is not valid, pressures customers into making a decision – and that’s a clear violation of UDAAP. Taking advantage of people by urging them to make a quick decision when they haven’t had time to make an educated choice is considered “abusive.” Avoiding risk is simple here – never include a time limitation unless it actually exists.

5 – Monitor and test your compliance

As part of minimizing risk, track your progress in UDAAP-related compliance. The CFPB complaint database can provide a wealth of information to help you monitor your performance. Another valuable resource is the CFPB Supervision and Examination Manual, which includes standards and definitions of Unfair, Deceptive, and Abusive, insights on how to interpret the standards, and case studies. The manual also has extensive checklists and risk assessment tools.

To make it easier to monitor UDAAP compliance, consider bringing a data scientist on board to create a dashboard for your financial institution. The dashboard can help keep management updated and highlight any emerging risks so you can resolve them quickly.

Reducing UDAAP risk requires an integrated approach, and a close partnership between Marketing and Compliance. But even more critical is having the foundation of a customer-centric company culture. Everyone responsible for creating (and reviewing) communications or interacting with customers should bring a customer-first perspective to their work. That approach makes a huge difference in your ability to effectively apply these strategies to minimize risk.

In financial institutions, customer-focused writing can be harder than it sounds. At Beyond the Arc, we’ve been helping leading banks create UDAAP-compliant communications for nearly 15 years.

Interested to explore how we can help you?  Let’s start a conversation >


1 CFPB’s New Director is No Fan of Banks, Financial Brand, Oct 2021