First CFPB Supervisory Highlights Issued Under Director Chopra Cites “Wide-Ranging Violations Of Law” – Finance and Banking

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First CFPB Supervisory Highlights Issued Under Director Chopra Cites “Wide-Ranging Violations Of Law”

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Earlier this week, the Consumer Financial Protection Bureau
released the Fall 2021 edition of its Supervisory
Highlights
 (“Supervisory
Highlights
” or “Report”). This marks the first
edition issued under Director Rohit Chopra, President Biden’s
pick to head the agency. The press release accompanying this
edition of Supervisory Highlights cites
“wide-ranging violations of law” and asserts that
“irresponsible or mismanaged firms harmed Americans during the
COVID-19 pandemic,” statements that signal that the Chopra-led
Bureau is taking an aggressive approach to supervision and is
scrutinizing supervised entities closely.

Supervisory Observations

This edition of Supervisory Highlights covers
examinations completed between January 2021 and June 2021 and
identifies violations in eight areas: credit card account
management, debt collection, deposits, fair lending, mortgage
servicing, payday lending, prepaid accounts, and remittance
transfers. As is the Bureau’s common practice, the Report
refers to institutions in the plural even if the related findings
pertain to only a single institution.

  • Credit Card Account Management. The
    Report details several findings related to credit cards, including
    violations of Regulation Z and the prohibition against unfair,
    deceptive, and abusive acts and practices (“UDAAPs”).
    With respect to Regulation Z, Bureau examiners determined that
    creditors failed to comply with requirements related to billing
    errors. Specifically, the Bureau details alleged failures
    concerning the timing of resolving notices of billing errors
    (within two complete billing cycles), reimbursing late fees when
    payment had not been credited to an account, and conducting
    reasonable investigations based on consumer allegations of missing
    payments and unauthorized transactions. The Report indicates that
    creditors are working to identify and remediate affected customers
    and develop training on Regulation Z’s billing error resolution
    requirements for employees.

    The Bureau also alleged deceptive practices relating to the
    marketing of credit card bonus offers in two separate instances.
    First, examiners determined that credit card issuers engaged in
    deceptive acts by failing to provide advertised bonuses to existing
    customers who satisfied the bonus program requirements of opening a
    new account and meeting the spending requirements. Moreover, the
    Bureau noted that issuers failed to ensure employees followed
    procedures to enroll existing consumers correctly. Second, the
    examiners determined that issuers also engaged in deceptive acts
    when their advertising to consumers failed to disclose or
    adequately disclose material information about qualifying for the
    bonus. In this situation, the bonus was tied to applying for the
    card online, so consumers who otherwise satisfied advertised
    requirements, but applied through a different channel, did not
    receive the bonus. In response to these findings, issuers are
    modifying applicable advertisements and undertaking remedial and
    corrective actions.

  • Debt Collection. According to the
    Report, examiners found that larger participant debt collectors
    were at risk of violating the Fair Debt Collection Practices Act
    (“FDCPA”) as it relates to using false representations or
    deceptive means to collect a debt. The Report explained that debt
    collectors, in the context of discussing the consumer restarting a
    payment plan, represented that making the final payment of the plan
    would improve the consumer’s creditworthiness. The Bureau,
    however, indicated that this could lead the least sophisticated
    consumer to assume that deleting derogatory information would
    result in improved creditworthiness, when in fact numerous factors
    influence a consumer’s creditworthiness and making a final
    payment may not necessarily improve a person’s credit score. As
    a result of the findings, the debt collectors revised their FDCPA
    policies and procedures and enhanced their training and monitoring
    systems.
  • Deposits. Examiners determined that
    supervised entities had violated Regulation E’s requirements
    concerning error resolution for misdirected payments. Bureau
    examiners determined that consumers’ electronic funds transfers
    (“EFTs”) were misdirected to unintended recipients, even
    though the consumer had provided correct token information (the
    recipient’s phone number or email address), constituting a
    “token error” under Regulation E. Examiners determined
    that institutions violated Regulation E by not determining that
    token errors constituted incorrect EFTs under Regulation E.

    In addition, the Report detailed violations of Regulation E based
    on the institutions’ failure to conduct reasonable
    investigations into alleged consumer complaints regarding
    misdirected payments. Specifically, the institutions did not
    consider whether the transfers went to unintended recipients
    because of a token error, nor did they consider relevant
    information in their own records, or reasonably obtainable
    information, to determine whether the consumer’s error notice
    was an error under Regulation E.

  • Fair Lending. According to
    the Supervisory Highlights, Bureau examiners found
    that mortgage lenders discriminated against African-American and
    female borrowers in the granting of pricing exceptions based on
    competitive offers from other institutions in violation of the
    Equal Credit Opportunity Act (“ECOA”) and Regulation B.
    The Bureau found statistically significant disparities for the
    incidence of pricing exceptions for African Americans and female
    applicants as compared to similarly situated white and male
    borrowers. The lenders permitted pricing exceptions where
    applicants had  competitive offers from other lenders, but
    their policies and procedures did not specifically address the
    circumstances under which a loan officer could grant such
    exceptions, instead relying on an unwritten policy that a consumer
    must initiate or request a competitor price match exception. The
    examiners found instances where pricing exceptions for competitive
    offers were made to non-Hispanic white and male borrowers without
    evidence of customer initiation, and noted that supporting
    documentation was not retained. Importantly, according to the
    Bureau, the lenders failed to take corrective action when business
    line personnel raised concerns about a lack of documentation to
    support the pricing exception decisions. In response to the
    findings, lenders will take remedial and corrective actions to be
    reviewed by the Bureau.

    In addition, Bureau examiners found that some lenders inquired
    about the applicant’s religion for religious institutions
    applying for small business loans and denied credit to an applicant
    to who did not respond to this inquiry. According to the Bureau,
    these actions constituted a violation of ECOA and Regulation B
    which prohibit discrimination on the basis of religion. The Report
    concluded that the violations caused consumers monetary harm,
    resulting in revisions to policies and procedures and remediation
    to injured consumers identified through lookbacks.

  • Mortgage Servicing. Consistent with
    other statements the Bureau has made this year about its
    priorities, the Supervisory Highlights states
    that, due to the increased number of borrowers who are in need of
    loss mitigation assistance, the Bureau is prioritizing its
    supervision of mortgage servicers. Bureau examiners identified
    numerous legal violations committed by servicers, including
    violations of Regulation Z under the Truth in Lending Act,
    Regulation X under the Real Estate Settlement Procedures Act, and
    UDAAPs.

    In addition to other violations, the report states that examiners
    found that some servicers engaged in unfair acts or practices by
    charging default-related fees, including late fees, to borrowers in
    CARES Act forbearances when such fees were prohibited by the CARES
    Act. Among other things, the Bureau asserted that borrowers could
    not reasonably avoid the injury caused by the fees because
    borrowers could not anticipate that their servicer would assess
    unlawful fees.

    Next, Bureau examiners found that some servicers failed to comply
    with the Regulation X requirement to evaluate a borrower’s
    complete loss mitigation application and provide the consumer with
    a written notice stating the servicers’ determination of
    available loss mitigation options within 30 days of receiving a
    complete loss mitigation application. According to the Bureau,
    servicers attributed the delays to the increased number of borrower
    requests for assistance and other issues caused by the COVID-19
    pandemic. Nevertheless, the CFPB determined that the servicers had
    not engaged in good faith efforts to comply with the 30-day
    requirement. This finding may demonstrate that the Bureau is
    willing to offer servicers little flexibility when handling
    disruptions caused by the pandemic and expects servicers to adjust
    their operations as necessary to comply with Regulation X
    requirements.

  • Payday Lending. As part of its
    supervision of institutions offering payday loans, the Report
    identified unfair and deceptive acts or practices and violations of
    Regulation E. Examiners noted unfair acts related to lenders
    debiting or attempting to debit the loan balance on the original
    due date, even though consumers had applied for a loan extension
    and had received a confirmation email that the only fee that would
    be charged was an extension fee. Moreover, the examiners determined
    that lenders also engaged in deceptive acts based on
    misrepresentations in the loan extension confirmation emails. Based
    on these findings, the Report notes that lenders are undertaking
    remedial and corrective actions and that the Bureau is reviewing
    the violations.

    The Bureau also noted that lenders engaged in unfair acts when they
    made or attempted to make unauthorized or duplicate debits of
    consumer accounts, either because lender systems erroneously
    indicated the transactions did not process or due to coding errors.
    Additionally, the Report alleges that lenders failed to retain
    records of compliance with the Electronic Fund Transfer Act
    (“EFTA”) in violation of Regulation E. As with the above
    violations, the lenders are undertaking remedial and corrective
    actions, and the Bureau is reviewing the violations.

  • Prepaid Accounts. The Report notes
    violations of Regulation E and the EFTA with respect to prepaid
    accounts. As an initial matter, the Bureau noted violations of the
    EFTA concerning stop-payment waivers. Specifically, examiners noted
    that financial institutions included language in their Terms of Use
    agreements that was inconsistent with a consumer’s right under
    the EFTA and Regulation E, which allow a consumer to stop a
    preauthorized electronic fund transfer by notifying the financial
    institution orally or in writing at least three business days
    before the scheduled transfer. The Report notes that this language
    was inconsistent with both the EFTA and Regulation E and a
    violation of the EFTA.

    Relatedly, the Bureau determined that financial institutions
    enforced their Terms of Use provisions and did not honor
    stop-payment requests that were made orally or in writing at least
    three business days before the scheduled transfer. Rather, the
    financial institutions’ service providers required consumers to
    contact the merchant before processing stop-payment requests. The
    service providers, in some instances, also failed to process
    stop-payment requests because of system limitations. The Bureau
    concluded these were violations of Regulation E. Based on the
    findings, the financial institutions are developing and
    implementing comprehensive compliance management systems (CMS) and
    ceasing and desisting from violating EFTA and Regulation E.

    The CFPB also noted that financial institutions failed to provide
    the necessary explanation of their Regulation E error investigation
    determinations when informing consumers of those determinations, in
    violation of  Regulation E. Accordingly, the supervised
    entities are developing and implementing CMS programs that are able
    to ensure compliance with requirements under the EFTA and
    Regulation E. The Bureau also noted that financial institutions
    violated Regulation E by failing to promptly begin investigations
    after receiving oral error notices, failing to complete
    investigations within applicable timeframes, and failing to report
    investigation results in determination letters to consumers. In
    response to the findings, financial institutions are enhancing
    their CMS to ensure compliance with the EFTA and Regulation E’s
    requirements related to prepaid accounts.

  • Remittance Transfers. The Report also
    detailed alleged violations of the Remittance Rule, concerning the
    failure to investigate notices of error. Examiners noted that
    remittance transfer providers had received notices of error
    alleging that remitted funds were not made available to recipients
    by the disclosed date of availability. However, the providers
    failed to investigate whether a deduction imposed by a foreign
    recipient bank was a fee that was required to be refunded to the
    consumer. Based on the findings, providers are revising policies
    and procedures related to fee-refund provisions and will remediate
    consumers who did not receive fee refunds.

Supervision Program Developments

The Report also mentions several supervision program
developments. As we discuss in greater detail here, the Report details the joint statement
by the Bureau and other federal and state regulators from November
noting that the agencies would resume their supervision and
enforcement of mortgage servicers after having announced a flexible
approach to supervision and enforcement at the onset of the
COVID-19 pandemic. Next, the Report indicates that the Bureau has
published CMS-IT examination procedures, which are designed to
assess a supervised entity’s use of IT and IT controls that
support consumer financial products and services. Lastly, the
Report discusses the Bureau finalizing amendments to mortgage
servicing regulations based on the end of the federal foreclosure
moratoria. The rules provide temporary safeguards for borrowers to
evaluate their options before foreclosure.

Remedial Actions

The Report closes with a description of the public enforcement
actions stemming from supervisory activity, noting the Bureau’s
lawsuit in which it sued a supervised entity for violating a prior
consent order, alleging the entity continued to use the same
illegal and deceptive marketing. This lawsuit is a continuation of
the Bureau’s stated focus on ensuring compliance with prior
consent orders, and the Bureau’s willingness to litigate when
it perceives an entity is not in compliance with the provisions of
a consent order.

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