supervisory highlights

Earlier this week the CFPB released its Summer 2017 Supervisory Highlights, which covers supervisory activities generally completed between January through June of 2017. The report touts the $14 million total restitution payments consumers received due to nonpublic supervisory activities during this period-plus the approximately $1.15 million in consumer remediation and $1.75 million in civil monetary penalties resulting from public enforcement actions that grew out of or were bolstered by CFPB examinations.

The report includes discussions of the following topics:

Auto Loan Servicing: The publication addresses repossession practices by auto loan servicers, stating that in the course of examinations the Bureau found that “one or more entities were repossessing vehicles after the repossession was supposed to be cancelled,” and concluding that the servicer(s) had committed an unfair practice by repossessing vehicles where “borrowers had brought the account current, entered an agreement with the servicer to avoid repossession, or made payments sufficient to stop the repossession, where reasonably practicable given the timing of the borrower’s action.”

Credit Card Account Management: The report focuses on four alleged credit-card related practices: (1) failure to provide tabular account-opening disclosures as required by Regulation Z (the table set forth in Appendix G-17); (2) deceptive misrepresentations to consumers regarding costs and availability of pay-by-phone options; (3) deceptive misrepresentations to consumers about the benefits of debt cancellation products; and (4) noncompliance with requirements related to billing error resolution and liability for unauthorized transactions.

Debt Collection: According to the report, the CFPB uncovered various FDCPA violations in the course of examinations of larger participants in the debt collection market. These alleged violations include unauthorized communications with third parties, false representations made to authorized credit card users regarding their liability for debts, false representations regarding credit reports, and communications with consumers at inconvenient times.

Deposit Accounts: The CFPB also claims to have found a number of Regulation E and UDAAP violations in connection with deposit accounts offered by banks. The alleged violations relate to (1) the freezing of customer deposit accounts relating to suspicious activity observed by banks; (2) misrepresentations about fee waivers for deposit products subject to a monthly service fee; (3) violations of error resolution requirements under Regulation E; and (4) deceptive statements about overdraft protection products.

Mortgage Origination and Servicing: The report details the results of supervision following the CFPB’s first round of mortgage examinations for compliance with the Bureau’s “Know Before You Owe” mortgage disclosure rule. The publication states that “for the most part, supervised entities, both banks and nonbanks, were able to effectively implement and comply with the Know Before You Owe mortgage disclosure rule changes,” but notes that examiners did find some violations relating to the content and timing of Loan Estimates and Closing Disclosure. Other origination practices addressed in the report include the failure to reimburse unused portions of service deposits and the inclusion of an arbitration notice on certain residential mortgage loan notes that was held to violate Regulation Z even though the note apparently lacked an arbitration provision. On the servicing side, the report focuses on violations of Regulation X in connection with assisting borrowers complete loss mitigation applications, and the inclusion of broad waiver of rights clauses in short sale and cash-for-keys agreements as a UDAAP. The report also cites fair lending concerns identified during examinations of mortgage servicers relating to data quality issues and “a lack of readily-accessible information” concerning borrower characteristics.

Short-Term Small Dollar Lending: The CFPB cites a number of alleged UDAAP violations, such as workplace collection calls, repeated collection calls to third parties, misrepresentations in marketing about small dollar loan products, misrepresentations about the use of references provided by borrowers in connection with loan applications, and the handling of unauthorized debits and overpayments.

Statistics Regarding CFPB’s Action Review Committee Process: Another notable aspect of the report is the inclusion of new statistics about the Bureau’s Action Review Committee (ARC) process, which senior executives in the CFPB’s Division of Supervision, Enforcement, and Fair Lending use to decide whether issues that come up in examinations will be handled using a confidential supervisory action or will be investigated for possibly bringing a public enforcement action. The report includes a table detailing the total number of ARC decisions made—and the outcomes of such decisions—for fiscal years 2012 through 2016. Importantly, only a subset of CFPB matters go through the ARC process, and of these matters, 24.59% were deemed “appropriate for further investigation for possible public enforcement action.” A further 11.48% of these matters were determined to be appropriate in part for further investigation for public enforcement, and in part for resolution through confidential supervisory action. Finally, the CFPB commits in the report to publishing ARC data at the end of each fiscal year (starting with 2017 data to be published in its upcoming Fall 2017 Supervisory Highlights).

As a general matter, we should note that many of the issues discussed in the report appear to stem from system errors and failures to monitor third party vendors and service providers. Given that the CFPB now regularly conducts examinations of service providers, both banks and non-banks should pay careful attention and seek advice from outside counsel in managing their relationships with outside service providers—especially since the CFPB has taken the position that a company can be vicariously liable for violations committed by its service providers.

The CFPB recently released a “Special Edition” of its Supervisory Highlights that focuses exclusively on data accuracy issues in consumer credit reporting and the handling and resolution of consumer disputes. The report describes the observations of CFPB examiners during examinations of both consumer reporting agencies and the creditors and other companies that furnish information to consumer reporting agencies.

The CFPB acknowledges that consumer reporting agencies have made significant advances in promoting the accuracy of data reported to them by overseeing data furnishers and enhancing the dispute resolution process, but the CFPB believes that continued improvements are still necessary in these areas. In their examinations of furnishers, the CFPB examiners found “CMS weaknesses and numerous violations of the FCRA and Regulation V that required corrective action by furnisher(s).”

The CFPB’s “supervisory observations” include the following:

  • Data governance. CFPB examiners found that one or more consumer reporting agencies had decentralized data governance functions and undefined data governance responsibilities, a lack of quality control policies and procedures, and inconsistent practices for vetting furnishers and providing data quality feedback to them. CFPB examiners also found that one or more furnishers had weaknesses in its compliance management system, including weak oversight by management over data furnishing practices and no formal data governance program.
  • Reinvestigation of disputes. CFPB examiners found that one or more consumer reporting agencies did not comply with its obligation to conduct a reasonable reinvestigation when consumers dispute the completeness or accuracy of items in their consumer files. CFPB examiners also found that one or more consumer reporting agencies did not review and consider certain categories of documentary evidence in support of a dispute submitted by consumers. Furthermore, CFPB examiners found that one or more furnishers’ policies and procedures failed to promote reasonable investigations of disputes.
  • Required dispute notices. One or more consumer reporting agencies examined by the CFPB failed to provide notification of a consumer dispute within five business days to the furnisher who provided the information because the furnishers’ contact information was no longer valid at the time of the consumer’s dispute. CFPB examiners also found that one or more consumer reporting agencies sent dispute notices to consumers that failed to clearly articulate the results of the dispute investigation as required by the FCRA. In cases where furnishers decided to not investigate disputed information, the CFPB found that one or more furnishers failed to provide consumers with proper notice of a reasonable determination that a dispute was frivolous or irrelevant.
  • Quality control. One or more furnishers examined by the CFPB failed to perform quality checks on the data furnished to consumer reporting agencies, failed to conduct ongoing periodic evaluations or audits of furnishing practices, and failed to conduct audits of disputed information to identify and correct root causes of any inaccurate furnishing.
  • Data accuracy requirements. CFPB examiners found that one or more furnishers provided consumer information to consumer reporting agencies while knowing or having reasonable cause to believe that the information was inaccurate, including information that consumers were delinquent, had no payment history, or had an unpaid charged-off balance when they had settled the account in full.

The report indicates that the consumer reporting market is a “high priority” for the CFPB. Notably, the report states that the CFPB has “targeted substantial resources” to improving the accuracy of consumer information and will continue to do so.

The CFPB recently released a “Special Edition” of its Supervisory Highlights that focuses exclusively on data accuracy issues in consumer credit reporting and the handling and resolution of consumer disputes. The report describes the observations of CFPB examiners during examinations of both consumer reporting agencies and the creditors and other companies that furnish information to consumer reporting agencies.

The CFPB acknowledges that consumer reporting agencies have made significant advances in promoting the accuracy of data reported to them by overseeing data furnishers and enhancing the dispute resolution process, but the CFPB believes that continued improvements are still necessary in these areas. In their examinations of furnishers, the CFPB examiners found “CMS weaknesses and numerous violations of the FCRA and Regulation V that required corrective action by furnisher(s).”

The CFPB’s “supervisory observations” include the following:

  • Data governance. CFPB examiners found that one or more consumer reporting agencies had decentralized data governance functions and undefined data governance responsibilities, a lack of quality control policies and procedures, and inconsistent practices for vetting furnishers and providing data quality feedback to them. CFPB examiners also found that one or more furnishers had weaknesses in its compliance management system, including weak oversight by management over data furnishing practices and no formal data governance program.
  • Reinvestigation of disputes. CFPB examiners found that one or more consumer reporting agencies did not comply with its obligation to conduct a reasonable reinvestigation when consumers dispute the completeness or accuracy of items in their consumer files. CFPB examiners also found that one or more consumer reporting agencies did not review and consider certain categories of documentary evidence in support of a dispute submitted by consumers. Furthermore, CFPB examiners found that one or more furnishers’ policies and procedures failed to promote reasonable investigations of disputes.
  • Required dispute notices. One or more consumer reporting agencies examined by the CFPB failed to provide notification of a consumer dispute within five business days to the furnisher who provided the information because the furnishers’ contact information was no longer valid at the time of the consumer’s dispute. CFPB examiners also found that one or more consumer reporting agencies sent dispute notices to consumers that failed to clearly articulate the results of the dispute investigation as required by the FCRA. In cases where furnishers decided to not investigate disputed information, the CFPB found that one or more furnishers failed to provide consumers with proper notice of a reasonable determination that a dispute was frivolous or irrelevant.
  • Quality control. One or more furnishers examined by the CFPB failed to perform quality checks on the data furnished to consumer reporting agencies, failed to conduct ongoing periodic evaluations or audits of furnishing practices, and failed to conduct audits of disputed information to identify and correct root causes of any inaccurate furnishing.
  • Data accuracy requirements. CFPB examiners found that one or more furnishers provided consumer information to consumer reporting agencies while knowing or having reasonable cause to believe that the information was inaccurate, including information that consumers were delinquent, had no payment history, or had an unpaid charged-off balance when they had settled the account in full.

The report indicates that the consumer reporting market is a “high priority” for the CFPB. Notably, the report states that the CFPB has “targeted substantial resources” to improving the accuracy of consumer information and will continue to do so.

In an unmistakable warning shot to mortgage servicers, the CFPB recently issued a “Mortgage Servicing Special Edition” of its Supervisory Highlights. The CFPB also updated portions of its Mortgage Servicing Examination Procedures.

In the Bureau’s accompanying press release, and throughout the Supervisory Highlights, there is a particular focus on perceived technological failures. In the words of Director Cordray: “Mortgage servicers can’t hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules.” The clear takeaway is that the CFPB will not be persuaded by arguments that system limitations impair a servicer’s ability to comply with CFPB regulatory interpretations.

The Supervisory Highlights focus primarily on issues involving loss mitigation procedures and servicing transfers. Scrutiny in these areas should not be a surprise to the industry, due to the CFPB’s continued emphasis in the areas, the logistical difficulties involved, and the inherent potential impact on consumers.

On the topic of loss mitigation, the CFPB first addresses issues with loss mitigation acknowledgment notices under Regulation X. Findings include obvious issues, such as failing to send an acknowledgment notice due to system glitches, and failing to send the notice within the 5-day time frame. The report also highlights issues with requests for additional information in connection with incomplete loss mitigation applications. Notably, the findings cite failures to request necessary documents, requesting documentation that is not applicable to a particular borrower, and requesting documents that a borrower already submitted. As we have noted in response to past Supervisory Highlights, the CFPB expects that 5-day acknowledgement notices be tailored to the particular borrower and reflective of information already on file.

The CFPB also cites issues regarding loss mitigation offer letters. Noted issues include deceptive statements of the time at which fees, charges, and advances would be assessed. The document notes examples of servicers taking “unreasonable advantage of borrowers’ lack of understanding of the material risks of the loan modification” in terms of when certain charges would be assessed. These findings reinforce the importance of considering potential payment shock for borrowers through the life of a modified loan, and the clarity with which payment schedules are disclosed in modification agreements and accompanying materials.

The Supervisory Highlights provide several other examples of issues for loss mitigation offers. Such issues include the failure to disclose conditions of a permanent loan modification with the trial modification plan, and failure to timely convert completed trial modifications into permanent modifications. In the category of easily preventable issues, the report notes repeated findings of broad waivers of consumer rights in loss mitigation agreements. In our experience, such waiver-of-rights provisions are common in legacy loss mitigation agreement templates. If not done already, servicers should review all loss mitigation agreement templates to remove these types of broad waiver clauses.

Finally on the topic of loss mitigation, the Supervisory Highlights note issues pertaining to denial notices. Cited issues include incorrect statements of the reason for denial, and failing to correctly state the borrower’s right to appeal the denial.

Regarding servicing transfers, the CFPB notes that incompatibilities between servicer platforms have, in part, caused issues related to in-process loss mitigation. Examples of issues include a transferee servicer failing to honor the terms of loss mitigation agreements already in place at the time of transfer, and delays converting trial loan modifications to permanent loan modifications.

Notably, this section of the Supervisory Highlights includes some limited positive feedback. The CFPB states that one or more transferee servicers began to use certain tools available to the industry, such as Fannie’s HomeSaver Solutions Network and the HAMP Reporting Tool, to reconcile loan data during transfer and better identify in-flight modifications.

As noted above, the CFPB also revised its Mortgage Servicing Examination Procedures. On the topic of complaint handling, the revised module focuses on a servicer’s procedures for expedited evaluation of complaints and information requests for borrowers in foreclosure. The CFPB also notes that it will be conducting targeted reviews of fair lending issues for mortgage servicers.

The Mortgage Servicing Special Edition of the CFPB’s Supervisory Highlights can be found here, and the updated Mortgage Servicing Examination Procedures can be found here.

The CFPB’s release this week of its first “Supervisory Highlights” report reinforces concerns I previously voiced that, instead of establishing industry-wide standards through the rulemaking process, the CFPB plans to use its supervisory and enforcement authority to impose such standards.  

The report discusses “the most critical” issues and problems detected by CFPB examiners during examinations conducted between July 2011 and September 30, 2012.  According to the CFPB, the document is intended to “signal to all institutions the kinds of activities that should be carefully scrutinized for compliance with the law” and “will help providers of financial products and services better understand the CFPB’s supervisory expectations so that they can take action to comply with Federal consumer financial laws.”  The CFPB states that it expects to periodically publish additional “Supervisory Highlights” and “[t]hrough these supervisory reports, CFPB will provide financial institutions with clear guidance about the standards of conduct expected of them.” 

In discussing problems and issues it found at “financial institutions,”  the CFPB did not distinguish between banks and nonbanks over which it has supervisory authority such as payday and private student loan lenders. The issues and problems described in the report include the following: 

  • Comprehensive deficiencies in compliance management systems, such as failures to adopt and/or follow compliance policies and procedures. The CFPB notes that, in compliance exams, it “evaluates both the understanding and application of the financial institutions’ compliance management programs by its managers and employees.”
  • Failures to establish a comprehensive service provider management program or to effectively manage service providers to ensure compliance with Federal consumer financial laws.
  • A lack of any formal fair lending compliance system or the implementation of systems that do not provide compliance oversight for all major lending products.  The CFPB notes that in some cases where fair lending violations have been found, “financial institutions have been directed to expand their internal fair lending regression analysis, monitor compliance through special reports and certifications, or take other steps to address the potential existence of discrimination against applicants on a prohibited basis and to verify full compliance with ECOA.”
  • In addition to the violations by the three card issuers that were the subject of the CFPB’s public enforcement action, CARD Act violations by other issuers have resulted in non-public supervisory action by the CFPB.  Those violations consisted of increases in credit limits on accounts issued to consumers under the age of 21 based on the ability to pay of a co-applicant age 21 or older without the co-applicant’s written authorization and failures to perform a rate review of an acquired portfolio within 6 months or to establish written policies for rate reevaluations.
  • FCRA violations consisting of failures to (1) communicate appropriate and accurate information to consumer reporting agencies, (2) indicate when a consumer had disputed account information, and  (3) delete information upon completion of dispute investigations.
  • Significant TILA and RESPA violations by residential mortgage lenders, such as inadequate or improper completion of the Good Faith Estimate and HUD-1 Settlement Statement, inaccurate TILA disclosures.  The CFPB also identifies HMDA compliance as an area of concern, noting that its examiners found several financial institutions had significant error rates in their HMDA data.   

The report is yet another example of the CFPB’s continued focus on fair lending.  As Chris Willis commented about the CFPB’s appeals procedure bulletin that was released concurrently with the “Supervisory Highlights” report, fair lending was the only substantive area mentioned in the bulletin. Similarly, in the report, fair lending compliance programs were the only specific compliance programs mentioned by the CFPB in its discussion of the deficiencies it found in compliance management systems.