Lessons Learned from the CFPB’s Fall 2016 Supervisory Highlights
Author: Jennifer-L Friesz
On October 31, 2016, the Consumer Financial Protection Bureau (CFPB) released its fall 2016 Supervisory Highlights report. The report focuses on supervision-related work generally completed between May and August 2016 related to automobile origination and loan servicing, debt collection, mortgage origination and servicing, student loan servicing and fair lending.
The CFPB has supervisory authority on auto origination practices at the largest banks and other large financial companies, which includes an assessment of the compliance management system (CMS) and financing practices. The CFPB highlighted observed strengths of entities’ CMSs. However, the CFPB also found a number of entities had deficiencies related to compliance-related policy and procedures, compliance training, consumer complaint management, service provider oversight and adequate oversight by the board of directors and management.
Automobile Loan Servicing
The CFPB has had supervisory authority on large auto loan servicing companies since August 2015. The report reviews primarily assessed if entities had engaged in any unfair, deceptive or abusive acts or practices and reviewed practices as they relate to the Fair Credit Reporting Act (FCRA) and Regulation V. The examiners identified unfair practices relating to repossession fees. Some companies were holding personal belongings inside repossessed vehicles until the borrower had paid a fee for the cost of retaining the property. In at least one case, if unpaid, the fee was added to the borrower’s balance, and the borrower’s personal property was disposed of after the company was no longer obligated to keep the property within state law. In addition, some companies were charging fees for personal property storage in the repossessed vehicle, but consumer agreements never disclosed the borrower would be required to pay for the property storage. CFPB examiners identified multiple instances where a company’s repossession fee practices were deemed unfair.
The CFPB examines certain bank creditors that originate and collect their own debt and nonbanks that are large participants in the debt collection marketplace. Recent examinations identified several violations of the Fair Debt Collection Practices Act (FDCPA) and FCRA. The weaknesses CFPB identified at one or more debt collection companies include, but aren’t limited to:
- Unlawful fees – Convenience fees were assessed to process online and phone payments, but it was observed contracts didn’t expressly permit the assessment of such fees, and applicable state law was silent on the permissibility of such fees. In addition, collectors stated fees were “nonnegotiable.” Collectors didn’t disclose information on optional payment methods after consumers inquired about other payment methods that wouldn’t incur a fee.
- False representations – Collection employees claimed to assess the creditworthiness, credit scores or credit reports of consumers, but collectors couldn’t assess overall borrower creditworthiness. In addition, collectors impersonated consumers by using relevant creditors’ automated telephone systems to obtain information about the consumer’s debt. It also was observed that collectors told consumers the ability to settle the collection account was revoked or would expire when this wasn’t the case.
- Communication with third parties – Collectors disclosed the consumer’s debt and identified the debt collection company to third parties without the third party expressly requesting this information.
- Furnishing policies and procedures – Entities failed to provide adequate guidance and training to staff regarding differentiating FCRA disputes from general customer inquiries, complaints or FDCPA debt validation requests.
- FCRA dispute handling – Debt collectors failed to investigate certain direct disputes. In addition, disputes deemed frivolous didn’t detail to the consumer what was needed for the collector to investigate.
- Regulation E authorization for preauthorized electronic fund transfers – One or more debt collectors failed to provide consumers with a copy of the terms of the authorization for preauthorized electronic fund transfers.
The CFPB examines entities’ compliance with the Truth in Lending Act and Real Estate Settlement Procedures Act disclosure provisions and other applicable federal consumer laws. In addition, CFPB conducts a CMS evaluation. Weaknesses CFPB supervision identified at one or more mortgage origination companies include, but aren’t limited to:
- CMS deficiencies – Examiners determined the origination CMS was weak because it allowed violations of Regulations G, N, X and Z to occur.
- Failure to verify total monthly income in determining ability to repay (ATR) – One or more mortgage originators violated ATR requirements by failing to properly verify the consumer’s income relied upon in considering and calculating the consumer’s monthly debt-to-income ratio.
- Failure to provide timely disclosures – For examinations covering the period prior to the October 3, 2015, effective date for the Know Before You Owe mortgage disclosure rule, one or more mortgage originators failed to provide the written notice of the consumer’s right to receive a copy of all written appraisals, good faith estimate of settlement costs and a clear and conspicuous written list of homeownership counseling organizations within three business days after receiving a consumer’s application.
- Failure to ensure loan originators are properly licensed or registered under the applicable SAFE Act regulation – The use of employees of third parties (staffing agencies) who aren’t properly registered or licensed to originate loans on their behalf was identified.
Student Loan Servicing
The CFPB examines federal and private student loan servicing activities. Recent examinations of one or more student loan servicers identified a number of unfair or deceptive acts or practices, including, but not limited to:
- Income-driven repayment (IDR) plan applications – Student loan servicers were in the practice of denying, or failing to approve, IDR applications that should’ve been approved.
- Borrower choice for payment allocation – Student loan servicers failed to provide borrowers an effective choice on how payments should be allocated among multiple loans.
- Communications relating to paid-ahead status – In instances where a borrower was in a “paid-ahead” status (a payment covering the current month’s payment and at least another monthly payment), loan servicers were cited for a deceptive practice relating to how the servicer describes what the consumer owes and when. It was concluded that loan statements could have misled reasonable borrowers to believe that additional payments during or after a paid-ahead period would largely be applied to principal. In addition, during this paid-ahead status, loans were accruing interest and servicers misled consumers as to how much interest would accrue or had accrued, and how that would affect the application of consumers’ payments when the borrower began making payments again.
- Systems errors – Thousands of federal student loan accounts were affected by a data error that caused a borrower’s next-to-last loan payment to be considerably smaller, contradicting their repayment plan. Subsequently, borrowers were not billed enough to cover the whole balance and continued to be billed smaller payments, increasing the total interest amount that was accrued.
The bureau’s Office of Fair Lending and Equal Opportunity ensures financial institutions provide fair, equitable and nondiscriminatory access to credit and promote the availability of credit.
Many financial institutions provide services in languages other than English, including to consumers with limited English proficiency (LEP). While conducting supervisory activity, examiners observed situations in which financial institutions’ treatment of LEP and non-English-speaking consumers posed fair lending risk. Fair lending risks identified included, but aren’t limited to:
- Limited marketing – Financial institutions only marketed some of their available credit card products to Spanish-speaking consumers, but marketed several additional credit card products to English-speaking consumers.
- Lack of documentation – Financial institutions lacked documentation describing how they decided to exclude additional credit card products from Spanish language marketing, raising questions about the sufficiency of the CMS as it relates to fair lending.
For information regarding supervisory observations, fair lending, recent public enforcement actions and supervision program developments, read the fall 2016 Supervisory Highlights in its entirety here.
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