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3 Simple Tips to Manage UDAAP Compliance Risk

2 min read
Aug 21, 2014

UDAAP has garnered attention as a regulatory focal point. Regulators are watching very closely for Fair Lending and UDAAP violations, and the cost of noncompliance is high. Recent high-profile UDAAP settlements underscore the importance of compliance. Do you know your risk?

UDAAP stands for “unfair, deceptive, or abusive acts or practices,” and these are prohibited by Dodd-Frank. Any actions that are hurtful, likely to be hurtful, or may be perceived as hurtful to a consumer or consumers could be considered a UDAAP violation. We'll come back to that perception later.

We can anticipate that the importance of UDAAP compliance will increase in the months and years ahead. Now is the time to proactively address your UDAAP and Fair Lending compliance risk. In the article, Griffin outlines the following 7 things to consider:

  1. Some compliance issues are only evident in hindsight.
  2. Every party evaluates potential violations differently.
  3. Subjectivity in compliance must be acknowledged.
  4. The cost of non-compliance is high.
  5. It's not always clear how an issue may be perceived by different parties.
  6. Compliance programs must be responsive to Fair Lending and UDAAP changes.
  7. Effectively managing risk is key to survival.

This issue of perception in UDAAP compliance is a tricky one. It can be difficult to ensure that a practice will not be perceived as a UDAAP violation. Additionally, determining whether an action constitutes a UDAAP violation could be subjective. That's why it's so important to understand your institution's risk, so that you can do your best to minimize the potential for UDAAP violations.

Remember that Fair Lending and UDAAP compliance go hand-in-hand, and can be approached similarly. Perception is tricky, but we have been dealing with it in Fair Lending compliance for years. We can expect that regulators will try to minimize the influence of perception by standardizing the process and relying on data and metrics for proof of UDAAP violations.

Related: Survive the Compliance Tsunami - Examiner Insights on Risk Assessments

To help manage UDAAP compliance, we recommend three simple steps:

  1. First, assess your compliance risk. Identifying and understanding your UDAAP risk must occur before anything--you can't mitigate a risk that you can't see.

  2. Second, identify existing risk areas and take action to minimize risk exposure. It's important that you take steps to minimize existing risk. Some risk assessments will provide guidance.

  3. Third, establish processes to mitigate risk in the future. After you've identified risk, establish policies and procedures that limit that risk exposure in the future.

This requires team involvement, open communication, and a real commitment to compliance. But it's worth it, to ensure your financial institution is prepared to manage UDAAP risk.


Related: Creating Reliable Risk Assessments

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