Community Banking Advisor: Watch out for UDAAP

There’s a common misconception that community banks are exempt from the Dodd-Frank Act’s unfair, deceptive or abusive acts or practices (UDAAP) provisions. In fact, UDAAP applies to banks of all sizes. According to the Consumer Financial Protection Bureau, examples of potential UDAAPs include:

  • Collecting a debt or assessing added amounts in connection with a debt (including interest, fees and charges) not expressly authorized by the agreement creating the debt or permitted by law,
  • Taking possession of property without the legal right to do so,
  • Revealing the consumer’s debt, without consent, to the consumer’s employer or co-workers,
  • Misrepresenting that a debt collection communication is from an attorney or government-affiliated source, and
  • Misrepresenting whether information about a payment or nonpayment would be furnished to a credit reporting agency.

All community banks should have policies and procedures in place to avoid UDAAPs.

Deposit advances: Know the risks

The FDIC and OCC have issued guidance on deposit advances. They define a deposit advance as a “small-dollar, short-term loan or line of credit that a bank makes available to a customer whose deposit account reflects recurring direct deposits.” Although the agencies encourage banks to meet their customers’ small-dollar credit needs, they also admonish banks to be aware of the credit, reputational, operational, compliance and other risks involved with these products.

To minimize the risks, the guidance urges banks to consider certain factors in underwriting deposit advances, including the length of a customer’s deposit relationship, the existence of certain adversely classified credits, the client’s financial capacity (including income level) and others. The guidance also recommends implementing a “cooling off period” — that is, requiring each advance to be repaid in full and waiting at least one monthly statement cycle before making additional advances.

Banks should reevaluate a customer’s eligibility and capacity at least every six months and shouldn’t increase a client’s deposit advance credit limit without a full underwriting reassessment.

Heightened demand for mobile banking

Mobile banking services are becoming increasingly important to both small businesses and consumers. For example, a recent survey by research and consulting firm ath Power indicates that 66% of small business owners would switch banks to obtain better mobile services.

In another survey, from credit analysis firm FICO, consumers expressed an interest in mobile services beyond what they’re currently receiving. For example, 59% of respondents would like to receive notifications of potential fraudulent activity on their mobile devices. And 53% would like the ability to make payments from their accounts using mobile devices.