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

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.