by Amy Kleinschmit, Chief Compliance Officer
CFPB – Supervisory Report
The Consumer Financial Protection Bureau (CFPB) recently released its summer Supervisory Highlights report that cover examinations in the areas of auto origination, auto servicing, consumer reporting, debt collection, deposits, fair lending, information technology, mortgage origination, mortgage servicing, payday and small dollar lending, and remittances that were completed from July 1, 2022, to March 31, 2023. As emphasized by the CFPB, the report “found unfair, deceptive, and abusive acts or practices across many consumer financial products.”
With regard to auto origination, the CFPB found that supervised institutions engaged in the deceptive marketing of auto loans when they used advertisements that pictured cars that were significantly larger, more expensive, and newer than the advertised loan offers were good for.
The report also found a number of UDAAP issues with auto servicing – including, requiring consumers to pay other debts to redeem vehicles. The Report noted that “Some vehicle financing contracts contain clauses allowing servicers to use the vehicle to secure other unrelated unsecured debts consumers owe to the company, such as credit card debt; this is referred to as cross-collateralization. Examiners found that after servicers repossessed vehicles, they accelerated the amount due on the vehicle finance contract and also accelerated any other amounts the consumer owed to the entity. When consumers called to recover the vehicles, the servicers required consumers to pay the full amount on all accelerated debts, which included both debt for the vehicle and other debts.” The CFPB found that accelerating and demanding repayment on other debts before returning repossessed vehicles was unfair.
The CFPB stated – “A blanket practice of cross-collateralizing and demanding repayment does not benefit consumers and the harm outweighs any countervailing benefits to consumers or competition.”
Another area of review was with regard to consumer reporting. The CFPB examiners found that furnishers are violating the Regulation V duty to periodically review their policies and procedures concerning the accuracy and integrity of furnished information and update them as necessary to ensure their continued effectiveness.
Another area of concern for CFPB was that furnishers were violating Regulation V duty to provide consumers with notices regarding frivolous or irrelevant disputes. As explained in the Supervisory Highlights - when furnishers determined that disputes sent by consumers were duplicative of prior disputes, the furnishers did not investigate the disputes nor send notices to consumers setting forth the reasons for their determination and the information the consumers needed to submit for the furnishers to investigate the disputed information.
In the area of deposits, the CFPB took issue with a financial institutions’ assessment of both nonsufficient funds (NSF) and line of credit transfer fees on the same transaction.
Fair lending was another area of review for the CFPB – specifically with regard to granting pricing exceptions to consumers, including pricing exceptions for competitive offers. CFPB examiners identified lenders with statistically significant disparities for the incidence of pricing exceptions at differential rates on a prohibited basis compared to similarly situated borrowers. This also extended to fair lending training concerns, the CFPB found that some lenders did not have training that explicitly addressed fair lending risks associated with pricing exceptions, including the risks of providing different levels of assistance to customers, on prohibited bases, in connection with a customer’s request for a price exception. Other training programs did not cover pricing exceptions risk for employees who have discretionary pricing authority.
With regard to discriminatory lending restrictions, the CFPB emphasized that use of criminal history in credit decisioning may create a heightened risk of violating ECOA and Regulation B. “A common thread in the CFPB review was that the discovery of criminal records prompted enhanced or second-level underwriting review. However, policies and procedures at several institutions did not provide detail regarding how that review should be conducted, creating fair lending risk around how the reviewing official exercises discretion.”
UDAAP and IT – the CFPB’s report included findings that financial institutions “engaged in unfair acts or practices by failing to implement adequate information technology security controls that could have prevented or mitigated cyberattacks.”
NCUA – Update Guidance on Liquidity Risks and Contingency Planning
The National Credit Union Administration (NCUA) recently issued Letter to Credit Unions 23-CU-06 which included updated guidance on the importance of contingency fundings plans, which can be found here.
The guidance directs that – “Depository institutions should assess the stability of their funding and maintain a broad range of funding sources that can be accessed in adverse circumstances. In addition, depository institutions should be aware of the operational steps required to obtain funding from contingency funding sources, including potential counterparties, contact details, and availability of collateral. As part of operational readiness, depository institutions should regularly test any contingency borrowing lines to ensure the institution’s staff are well versed in how to access them and that they function as envisioned.”
The NCUA advises credit unions to review and revise contingency funding plans periodically and more frequently as market conditions and strategic initiatives change in order to address evolving liquidity risks.
If the Federal Reserve discount window is part of the credit unions’ contingency funding plans, the NCUA directs that the credit union establish and maintain operational readiness to borrow from the discount window. The NCUA goes on to explain, “operational readiness includes establishing borrowing arrangements and ensuring collateral is available for borrowing in an amount appropriate for a depository institution’s potential contingency funding needs. Depository institutions should ensure they are familiar with the pledging process for different collateral types and be aware that pre-pledging collateral can be useful if liquidity needs arise quickly. Depository institutions that include the discount window as part of their contingency funding plan should also consider conducting small value transactions at regular intervals to ensure familiarity with discount window operations.”
The guidance concludes with additional information about the Central Liquidity Facility.
Avoiding Prohibited Discrimination Practices in Automated Underwriting Systems
This week the NCUA issued a “reminder” to emphasize that “that having a policy or practice of requiring manual underwriting as an exception to automated underwriting systems based on a minimum or maximum age violates ECOA and its implementing regulation, Regulation B.” The NCUA provides the following example to illustrate – “having system parameters that require applicants or co-applicants to be at least 25 years of age and no older than 70 years of age at the time of application to receive an automatic approval. Applications that meet the system criteria for automatic approval are offered credit pending verification of income and review of collateral, as applicable. Applications that do not meet the system criteria for automatic approval are referred to an underwriter for a manual review.”
The NCUA also reminds credit unions, “creditors may not require manual underwriting as an exception to automated underwriting systems based on an applicant’s marital status. An example of such prohibited marital status discrimination is including system parameters that permit automatic approval of married joint applicants but require a manual review of applications submitted by unmarried joint applicants.”
Last year the NCUA issued Letter to Credit Unions 22-CU-04 which discussed Equal Credit Opportunity Act nondiscrimination requirements. The letter discussed violations the NCUA has observed involving credit unions. ECOA violations can result in administrative enforcement and referral to the Department of Justice for potential prosecution.
The FBI recently issued a warning about a phone scam in which the caller spoofs the FBI phone number and claims to be a special agent. The victim is told their identity and/or bank accounts have been compromised. The caller tells the victims they need to immediately move their money to gift cards or cryptocurrency. The caller asks for information that will verify this has been done; that information is used to then steal those funds.
Remind your staff and members that law enforcement will never call you and ask you to transfer money to gift cards; they won’t advise you to move financial accounts into cryptocurrency.
As noted in the alert, the FBI reminds the public to be vigilant and never share personal identifying information with a caller with whom you have not initiated contact or have not verified as legitimate. To check out someone who purports to be from the FBI, find the phone number of the local FBI field office and call that number directly. The field office will verify any legitimate contact.
As always, DakCU members may contact Amy Kleinschmit with any compliance related questions.
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