supervisory highlights

The CFPB’s Winter 2019 Supervisory Highlights discusses the Bureau’s examination findings in the areas of automobile loan servicing, deposits, mortgage loan servicing, and remittances.  We discussed the Bureau’s auto loan servicing findings in a separate blog post.  In this blog post, we focus on the Bureau’s additional findings.

Although issued under Director Kraninger’s leadership, the Winter 2019 Supervisory Highlights covers examinations generally completed between June and November 2018 when Mick Mulvaney was Acting Director.  It represents the CFPB’s second Supervisory Highlights covering supervisory activities conducted under Mr. Mulvaney’s leadership.  Like the Summer 2019 Supervisory Highlights, the Winter 2019 issue contains the following language in its introduction:

It is important to keep in mind that institutions are subject only to the requirements of relevant laws and regulations.  The information contained in Supervisory Highlights is disseminated to help institutions and better understand how the Bureau examines institutions for compliance with those requirements.  In addition, the legal violations described in this and previous issues of Supervisory Highlights are based on the particular facts and circumstances reviewed by the Bureau as part of its examinations.  A conclusion that a legal violation exists on the facts and circumstances described here may not lead to such a finding under different circumstances.

Also like the Summer 2019 Supervisory Highlights, the new issue’s introduction and the Bureau’s press release about the report does not include any statements touting the amount of restitution payments that resulted from supervisory resolutions or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities.  (The report does, however, include summaries of the terms of five consent orders entered into by the Bureau, including its settlements with Cash Tyme, a payday retail lender, and Cash Express, a small-dollar lender.)

Key findings include:

Deposits.  CFPB examiners found that one or more institutions engaged in deceptive acts or practices by representing that payments made through their online bill-pay service would be debited no sooner than the date selected by the consumer and failing to disclose (or disclose adequately) that the debit might occur earlier than that date when the payee only accepted a paper check.  Such paper checks were sent by the institution several days before the consumer’s designated payment date, at the institution’s discretion, and would be debited from the consumer’s account when presented and cashed by the payee.  As a result, the debit could have occurred earlier or later than the designated date.  In response to the Bureau’s findings, the institutions “undertook a revision” of their consumer-facing materials and “undertook a plan to remediate consumers” who were charged an overdraft fee due to a paper check being negotiated before the consumer’s designated payment date.

Mortgage Servicing.  CFPB examiners found:

  • Servicers engaged in unfair practices by charging late fees greater than those permitted by the mortgage notes.  In one example, the FHA mortgage note permitted late fees based on a percentage of the overdue principal and interest only.  However, the servicer charged late fees based on a percentage of the full periodic payment of principal, interest, taxes, and insurance.  The overcharges were the result of programming errors in the servicing platform and “lapses in service provider oversight.”  In response to the findings, servicers conducted a review to identify and remediate affected borrowers and changed their policies and procedures “to assist in charging the late fee authorized by the mortgage note.”
  • Servicers engaged in deceptive practices by misrepresenting the conditions for the cancellation of private mortgage insurance (PMI).  One or more servicers were found to have told borrowers requesting PMI cancellation that such requests were declined because the borrowers has not reached the 80% loan to value requirement for cancellation.  While the relevant amortization schedules did not yet reach 80% LTV, the borrowers had in fact reached 80% LTV by making additional principal curtailment payments.  Although the borrowers had not satisfied additional conditions necessary for PMI cancellation, the servicers did not identify those conditions as the reasons for denying the borrowers’ cancellation requests.  In response to the Bureau’s findings, the servicers “changed templates, as well as policies and procedures, to ensure that PMI cancellation notices state accurate denial reasons.”
  • One or more servicers were found not to have satisfied the Regulation X requirement for a servicer to exercise “reasonable diligence” in obtaining documents and information to complete a loss mitigation application.  The servicers offered short-term payment forbearance programs during collection calls to delinquent borrowers who had expressed interest in loss mitigation and submitted financial information that the servicer would consider in evaluating them for loss mitigation.  However, the servicers had not notified the borrowers that their forbearance offers were based on an incomplete application evaluation and did not contact the borrowers, near the end of the forbearance period, to inquire whether they wanted to complete the applications to receive a full loss mitigation evaluation.  In response to the Bureau’s findings, the servicers “used enhanced processes, such as a centralized queue, to track borrowers receiving short-term forbearance programs and subsequently notify them that additional loss mitigation options may be available and that they could apply for such options over the phone or in writing.”
  • In examinations reviewing servicing of Home Equity Conversion Mortgage loans, examiners criticized the notices sent by servicers to successors of deceased borrowers informing them that they could qualify for an extension of time to delay or avoid foreclosure to enable them to purchase or market the property and directing them to return a form indicating their intentions for the property.  While the notices listed several documents that might be needed to evaluate whether the successor qualified for an extension, it did not direct them to submit such documents within a certain timeframe to be eligible for an extension. The Bureau found that the servicers had assessed foreclosure fees, and in some instances had foreclosed on properties, where successors had returned the form indicating that they intended to purchase or market the property but had not returned the documents necessary for an evaluation. While examiners did not find this to be a legal violation, they observed that it could pose a risk of a deceptive practice by creating an impression that the statement of intent was all that was needed to delay foreclosure.  In response to the Bureau’s findings, the servicers “planned to improve communications with successors, including specifying the documents successors needed for an extension and the relevant deadlines.”

Remittances.  CFPB examiners found that one or more supervised entities violated the remittance rule’s error resolution requirements by failing to refund fees and, as allowed by law, taxes to consumers whose remitted funds were made available to designated recipients later than the date of availability stated in the entity’s remittance disclosures and the delay was not due to any of the rule’s excepted events. The CFPB cited the violations, even though the delays at issue were due to a mistake by a non-agent foreign payer institution.  The CFPB reminded companies that “neither the relationship between a remittance transfer provider and the institution disbursing the funds to the designated recipient, nor the particular entity that is at fault for the delayed receipt of funds, is relevant to whether the remittance transfer provider must refund fees and taxes to the consumer.”  In response to the Bureau’s findings, the entities are making the mandated refunds.

Yesterday, the CFPB released the Winter 2019 edition of its Supervisory Highlights.  The report discusses the Bureau’s examination findings in the areas of automobile loan servicing, deposits, mortgage loan servicing, and remittances.  In this blog post, we focus on the Bureau’s findings relating to auto loan servicing.  (We will discuss the Bureau’s other findings in a separate blog post.)

The auto loan servicing findings include a discussion of interest to auto finance companies, based on the now-familiar topic of ancillary products.   Notably, however, the ancillary product issues identified concern refunds on such products when a consumer’s vehicle is repossessed or is declared a total loss.  These observations underline not only the Bureau’s continued interest in ancillary product issues, but also its high degree of attention to repossession- and collection-related issues in auto finance, which have been present in numerous examinations over the past couple of years.  The Bureau’s emphasis on ancillary product cancellation and refund issues also mirrors similar efforts by state regulators that we have observed.

The discussion in Supervisory Highlights mentions two practices that the Bureau found to be unfair or deceptive.  First, the Bureau stated that “one or more servicers” had made errors in requesting refunds on extended service contracts purchased with used cars.  In essence, the servicers allegedly had used the total mileage on the cars in calculating the refund amount, when the correct calculation should have been based on the miles driven by the consumer after purchase.  The Bureau noted that this error reduced the amount of the refunds provided to consumers, which in turn increased their deficiency balances.  According to the Bureau, the attempts made to collect these inflated balances were “unfair” under Dodd-Frank.  The servicer(s) involved remediated the issues (although the type of remediation is unspecified), and began to “verify mileage calculations” on service contract refunds.

Our take on this issue is that it reflects a pattern we continue to see in CFPB examinations – that errors in operations – be they human or system errors – are still a fertile ground for UDAAP findings by the CFPB.  And, as noted below, when those errors affect deficiency balances or collections, they Bureau will likely identify them as UDAAP violations.

The second issue discussed in Supervisory Highlights seems to be potentially more generally applicable.  The Bureau noted that “one or more servicers” failed altogether to request refunds on ancillary products after repossession or total loss events.  According to the CFPB, the servicers then sent deficiency balance notices to consumers, including a line item for “total credits/rebates.”  The Bureau concluded that this deceived consumers, who interpreted the statements as including any available refunds from ancillary products, when in fact no refunds had been requested by the servicer.  The Bureau went on to note that the servicer(s) involved “remediate[d] affected borrowers,” and “changed deficiency notices to clarify the status of eligible ancillary product rebates.”

On the one hand, this seems like a fairly obvious issue – auto finance companies should make an effort to request ancillary product refunds in the event of a total loss or repossession.  But there are two very strange things about the CFPB’s discussion of this issue that will tend to confuse, rather than assist, auto finance companies.  First, the Bureau notes this as purely a disclosure issue, arguing that the wording of the deficiency notices was misleading.  Second, the going-forward solution was for the deficiency balance disclosure to be changed to “clarify the status” of refunds on ancillary products.

That’s easy for auto finance companies to do, but industry players will undoubtedly be asking the question, “what is the extent of my duty to request ancillary product refunds in these situations?”  This is a significant operational question for auto finance companies, especially because many ancillary products are offered by dealers and administered by companies with which the finance company or bank has no relationship.  The CFPB’s discussion of this issue seems to suggest that there is no duty to request a refund, and indeed there is no indication that the entity involved was required to actually request refunds.  But we think that conclusion is probably a risky one to adopt, since we know that the Bureau (on other occasions) and state regulators have insisted that the finance company or bank does have such a duty.   But, since the Bureau’s discussion is confined solely to disclosure issues, we don’t know what the scope of that duty is.

We also note that although the discussion of this issue in Supervisory Highlights concerned repossessions and total loss situations, it can also arise in the context of early payoffs, when a consumer has purchased a GAP waiver product.  In our view, banks and auto finance companies should be equally sensitive to requesting refunds, calculating those refunds properly, and disclosing their status to consumers when an early payoff makes a GAP product no longer necessary for a consumer.

 

In what seems to be a response to the Government Accountability Office’s (“GAO”) determination that the Consumer Financial Protection Bureau’s indirect auto finance bulletin (the “Bulletin”) was a rule subject to the Congressional Review Act (“CRA”) and a rebuke to the Bureau’s prior approach of “rulemaking by enforcement,” the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency and the Bureau (collectively, the “agencies”) this week issued an Interagency Statement Clarifying the Role of Supervisory Guidance (the “Interagency Statement”). The Interagency Statement’s stated purpose is to “explain the role of supervisory guidance and to describe the agencies’ approach to supervisory guidance.”

The Interagency Statement begins by clarifying the agencies’ position as to the difference between supervisory guidance and laws or regulations and provides: “Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance.” As set forth in its 2017 letter to Senator Patrick Toomey, a significant factor in the GAO’s determination that the Bulletin was a “rule” subject to the CRA was the Bureau’s use of the Bulletin to advise the public prospectively of the manner in which the Bureau proposed to exercise its discretionary enforcement power. The Interagency Statement clarifies that supervisory guidance is meant to outline supervisory expectations or priorities and articulate a general view regarding appropriate practices but should not serve as the basis for enforcement actions. And, while the agencies indicate that they may continue to seek public comment on supervisory guidance in order to improve their understanding of a given issue, any such guidance is not intended to be a regulation or have the force and effect of law.

The agencies state that they will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will seek to limit the use of numerical thresholds or other “bright-line” tests (numerical thresholds will generally be used as exemplars only). Finally, the Interagency Statement also provides that the agencies will limit examination and supervisory citations to violations of law, regulation or compliance with enforcement orders or other enforceable conditions and that their examiners will not criticize supervised financial institutions for a “violation” of supervisory guidance. Supervisory guidance may, however, be referenced as an example of safe and sound conduct in an examination finding.

What does this mean going forward? The Interagency Statement suggests that instead of issuing supervisory guidance to set forth expectations to be used as a “sword” if not followed by supervised entities, the agencies intend to use supervisory guidance to identify compliant practices. As a result, supervised entities may be better able to rely on supervisory guidance as a potential “safe-harbor” or “shield” from agency criticism when structuring their compliance programs. Additionally, existing supervisory guidance issued by the agencies such as supervision manuals and supervisory highlights and including the Bureau’s newly-released Summer 2018 edition of Supervisory Highlights should be viewed as helpful guidance, without precedential effect, in light of the Interagency Statement. Finally, Congress’ override of the Bulletin following the GAO’s determination that the Bulletin was a “rule” subject to the CRA may serve as a deterrent to any attempt by an agency to use its supervisory guidance in a way that is inconsistent with the Interagency Statement.

Webinar. On October 10, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Key Takeaways from the CFPB’s Summer 2018 Supervisory Highlights” where the Interagency Statement will also be addressed. The webinar registration form is available here.

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.