The Bureau of Consumer Financial Protection (CFPB), on September 6, 2018, published a new issue of its Supervisory Highlights report. This issue of Supervisory Highlights, the only one issued this year so far, provides information on the CFPB’s supervisory findings in the areas of auto loan servicing, credit card account management, debt collection, mortgage servicing, and payday lending. Of particular interest is that the CFPB included findings from fair lending examinations of small business lending at supervised institutions, and provides information on its Office of Innovation’s efforts to update the CFPB’s no action letter and trial disclosure program policies.
Updates to the No Action Letter and Trial Disclosure Policies
The report notes that the CFPB’s new Office of Innovation is “in the process of revising” the CFPB’s “no action letter” and “trial disclosure” policies to increase participation by companies seeking to advance new products and services. The CFPB did not provide any timeframe or description of the process it is using for these revisions.
As you may know, the CFPB issued its current “Final Policy on No-Action Letters” in February 2016 under former Director Cordray. Many in the industry have viewed the current policy as unworkable, and only one no action letter has been issued under the current policy (the report provides a status update on the CFPB’s ongoing work monitoring the entity that obtained that no action letter). The trial disclosure policy is authorized under section 1032(e) of the Dodd-Frank Act and allows the public to obtain a compliance safe harbor to test trial disclosures with the purpose of improving on a model form. This policy has also been viewed as unworkable, though it could provide significant benefits to the industry if utilized, as it could result in significant regulatory changes.
It would be beneficial if the CFPB published proposed changes to these policies for notice and comment, as input from the industry could greatly enhance the CFPB’s efforts. These two policies could significantly benefit the public by enabling further innovation in the consumer financial services markets. We encourage the industry to provide input to the agency to assist its efforts in improving these policies.
UPDATE: The CFPB will publish a proposed policy on trial disclosure programs on Monday, Sept. 9, 2018, with comments due Oct. 10, 2018. You can find the proposal here: https://www.federalregister.gov/documents/2018/09/10/2018-19385/policy-to-encourage-trial-disclosure-programs. I will post a summary of that proposal on this blog. Please note that our firm is uniquely positioned to assist your organization with submitting a comment letter to this proposal, or designing a trial disclosure program. While at the CFPB, I led the CFPB’s qualitative and quantitative consumer testing of the TRID mortgage disclosures, which remains the most extensive testing the CFPB has conducted. I can provide your organization with unique insight into the intersection of consumer testing, policy objectives, and regulatory requirements.
Small Business Lending
The report notes that the Equal Credit Opportunity Act applies to business-purpose credit and that the CFPB began conducting examinations of institutions’ small business lending in 2016 and 2017 for compliance with ECOA. The CFPB stated that these examinations focused on the risks of an ECOA violation in underwriting, pricing, and redlining. The CFPB stated that it, “anticipates an ongoing dialogue with supervised institutions and other stakeholders as [it] moves forward with supervision work in small business lending.”
The CFPB stated in the report that it found that institutions “effectively managed the risks of an ECOA violation in their small business lending programs,” including self-monitoring. However, the CFPB stated that it observed institutions collect and maintain only limited data on small business lending decisions, which could impede their ability to monitor and test for the risks of ECOA violations through statistical analyses. This is an interesting point, considering that the CFPB retained in its Spring 2018 rulemaking agenda its rulemaking to implement Dodd-Frank Act section 1071. As I’ve written about before, this provision added section 1691c–2 to ECOA requiring the CFPB to issue rules creating a data collection and reporting requirement for small, women-owned, and minority-owned business loans, similar to HMDA. The agenda scheduled “prerule activities” for March 2019.
The report also notes that the CFPB’s supervisory program includes a fair lending assessment of the institution’s compliance management system related to small business lending, using Module II of the ECOA Baseline Review Modules. These reviews include assessments of the institution’s board and management oversight, compliance program (policies and procedures, training, monitoring, and/or audit, and complaint response), and service provider oversight. The examinations also use the Interagency Fair Lending Examination Procedures.
Mortgage Servicing Findings
The CFPB’s findings in mortgage servicing exams included servicers that failed to timely place consumers who successfully completed trial modifications into permanent modifications. One or more servicers failed to move hundreds of consumers to permanent modification for more than 30 days. The CFPB also identified servicers that charged consumers more than permitted under loan modification agreements. The CFPB stated that the errors were data driven, affecting the modified loan’s starting balance, step-rate and interest-rate changes, deferred interest, and amortization maturity date when the loan was entered into the servicing system. The CFPB identified both of these issues as unfair practices under the Dodd-Frank Act’s prohibition against unfair, deceptive, or abusive act or practices (UDAAP).
The CFPB also identified servicers initiating foreclosure after representing that they would not do so if a consumer accepted a loss mitigation offer by a certain date, and the consumer timely accepted. Again, the CFPB labeled this practice a UDAAP violation. The CFPB also identified as a risk of a deceptive practice under UDAAP a servicer providing a notice to consumers who submitted a complete loss mitigation application less than 37 days from a scheduled foreclosure sale that the servicer would notify them of a decision on the application within 30 days, but proceeded to conduct the scheduled foreclosure sales without making a decision on the application. Notably, the report stated that the CFPB, “did not find that this conduct amounted to a legal violation but observed that it could pose a risk of a deceptive practice.”
In the CFPB’s auto loan servicing examinations, the CFPB identified failures of servicers to apply insurance payments after a total vehicle loss according to the promissory note and failed to cancel repossessions according to their programs, which the CFPB labeled unfair practices. In its credit card examinations, the CFPB identified failures to reevaluate APRs after rate increases according to the CARD Act. In its debt collection examinations, the CFPB identified failures of debt collectors to cease debt collection and properly validate debts according to the FDCPA. In its payday lending examinations, the CFPB identified as a UDAAP issue a lender providing notices that it would repossess consumers’ vehicles when it had no practice or relationships to do so. In addition, the CFPB identified violations of UDAAP and Regulation E involving the use of unauthorized debit card or ACH credentials to initiate electronic funds transfers. The CFPB also identified invalid authorizations of preauthorized electronic funds transfers being used in loan agreements.
If you would like to discuss any of these issues, please contact us. We advise many clients on these and similar issues. In addition, if you are interested in pursuing a no action letter or a trial disclosure program under the CFPB’s current policies, our firm can assist. As noted above, while at the CFPB, I led the CFPB’s qualitative and quantitative consumer testing of the TRID mortgage disclosures and can assist your organization in designing a trial disclosure program.
You can access the report here: https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-releases-latest-supervisory-highlights/