The Consumer Financial Protection Bureau’s (CFPB) 17th edition of Supervisory Highlights details trends the bureau’s examiners observed at covered banks, credit unions and certain nonbanks pertaining to debt collection, mortgage servicing, payday lending, auto loan servicing, credit card account management and small business lending from December 2017 to May 2018.
The latest edition is absent some noteworthy portions that have been staples of past reports, such as information about mortgage origination examinations and non-public enforcement activity. However, the inclusion of examiners’ findings from small business lending exams was new, and provided insight about compliance with Equal Credit Opportunities Act (ECOA) requirements among such entities.
“With some notable exceptions, the examinations found that supervised entities generally are complying with applicable federal consumer financial laws,” the report states.
Mortgage servicing
Although mortgage origination exams were excluded from the report, the bureau included several detailed observations about mortgage servicing practices examiners picked up on. Some of those practices were deemed as either unfair or deceptive under the Dodd-Frank Act.
Mortgage servicing examinations have continued to place an increasingly heighted focus on the loss mitigation process. Examiners are particularly interested in how servicers handle trial modifications in which consumer abide by payment agreements.
“One or more recent mortgage servicing examinations observed unfair acts or practices relating to conversion of trial modifications to permanent status and initiation of foreclosures after consumers accepted loss mitigation offers,” the report states. “Recent examinations also identified unfair acts or practices when institutions charged consumers amounts not authorized by modification agreements or by mortgage notes.”
Examiners also observed incidents where consumers were charged unauthorized amounts by mortgage servicers as a result of data errors that affected 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 practice was deemed unfair by examiners and the overcharges resulted in substantial injury to consumers, according the report.
“Consumers could not reasonably avoid this injury, which was caused by errors in the servicers’ systems,” the report states. “The injury to consumers is not outweighed by any countervailing benefits to consumers or to competition. No benefits to competition are apparent from the systemic errors that resulted in erroneous billing statements. And the expense of instituting validation procedures for loan-modification data is unlikely to be substantial enough to affect institutional operations or pricing. In response to the examination findings, the servicers are remediating affected consumers and correcting loan modification terms in their systems.”
A deceptive practice occurred in one or more instances where a mortgage servicer erroneously conveyed to borrowers that they would not initiate foreclosure proceedings on the borrower’s non-primary residence after approving them for loss mitigation.
“The misrepresentations were likely to mislead borrowers when the servicers expressly indicated that the servicers would not initiate foreclosure proceedings if borrowers accepted the loss mitigation offers,” the report states. “The borrowers’ interpretation of the misrepresentations was reasonable in this circumstance, i.e., that the servicers would not initiate foreclosure after the borrowers accepted the loss mitigation offers. The misrepresentations were material because they were likely to prompt borrowers to accept the loss mitigation offers to avoid the initiation of foreclosure proceedings.”
Although it was not found to rise to the level of a legal violation, examiners found one particular loss mitigation activity related to foreclosure sales concerning as it could result in borrower deception.
“Examinations observed that when borrowers submitted complete loss mitigation applications less than 37 days from a scheduled foreclosure sale date, one or more servicers sent the borrowers notices indicating that the applications were complete and stating that the servicer(s) would notify the borrowers of the decision on the applications in writing within 30 days,” the report states. “But after sending these notices, the servicers proceeded to conduct the scheduled foreclosure sales without making a decision on the borrowers’ loss mitigation applications.”
Borrowers reasonably could interpret such statement as meaning foreclosure sales would be postponed until a decision was finalized, examiners determined.
Small business lending
The bureau praised the fact that many of the small businesses it examined had effective ECOA compliance systems in place.
“In the course of conducting ECOA small business lending reviews, bureau examination teams have observed instances in which one or more financial institutions effectively managed the risks of an ECOA violation in their small business lending programs,” the report states.
The bureau highlighted some proper ECOA practices examiners saw at various businesses, including the conducting semi-annual risk assessments and monitoring pricing-exemption practices.
“Examinations at one or more institutions observed that the board of directors and management maintained active oversight over the institutions’ compliance management system (CMS) framework,” the report states. “Institutions developed and implemented comprehensive risk-focused policies and procedures for small business lending originations and actively addressed the risks of an ECOA violation by conducting periodic reviews of small business lending policies and procedures and by revising those policies and procedures as necessary. Examinations also observed that one or more institutions maintained a record of policy and procedure updates to ensure that they were kept current.”
Debt collection
One compliance missteps examiners found related to debt collection was the failure to comply with the Fair Debt Collection Procedures Act (FDCPA) requirement that company’s obtain and mail debt verification when requested by a consumer. Failure to cease debt collection activity in light of such a request and not resume until debt validation is mailed is a violation of 809(b) of the FDCPA. After notifying multiple parties engaged in such activity, the bureau stated that the parties are revisiting their debt collection policies.
Payday lending
One or more payday lenders engaged in the deceptive practice of claiming via collection letters that they would have to repossess their vehicles if debts were not paid, according to examiners’ findings. Such a claim was misleading because the lenders did not have the business relationships necessary to take such an action and, as a general matter, did not repossess vehicles. The examiners concluded that the threat of repossession likely was simply intended as a collection tactic rather than a statement of an actual possible consequence of a borrower’s failure to pay.
“Given these facts, the examination concluded that the net impression of these representations in the context of each letter was to mislead consumers to believe that these entities would repossess or were likely to repossess consumers’ vehicles,” the report states. “The representations were material because they were likely to affect the behavior of consumers who were misled. The representations were likely to induce consumers to make payments to these entities, as opposed to allocating their funds toward other expenses. In response to the examination findings, the entity or entities are ensuring that their collection letters do not contain deceptive content.”
Some payday lenders engaged in the unfair practice of using customer account information gathered for specific purposes to debit customer accounts later on without a customer’s knowledge, according to the report. In some instances, the improper activity constituted a violation of Regulation E, which pertains to the electronic transmission of funds, because consumers could not anticipate the debits, leading to material harm in the form of potential fees.
“Examinations observed one or more entities using debit card numbers or Automated Clearing House (ACH) credentials that consumers had not validly authorized the entities to use to debit funds in connection with a single-payment or installment loan in default,” the report states. “Upon a consumer’s failure to repay the loan obligation as agreed, one or more entities attempted to initiate electronic fund transfers (EFTs) using debit card numbers or ACH credentials that borrowers had identified on authorization forms executed in connection with the defaulted loan at issue. If those attempts were unsuccessful, the entities would then seek to collect balances due and owing via EFTs using debit card numbers or ACH credentials that the borrowers had supplied to the entities for other purposes, such as when obtaining other loans or making one-time payments on other loans or the loan at issue. Through these invalidly authorized EFTs, the entities sought payment of up to the entire amount due on the loan.”
Examiners found that any countervailing benefits of the practice were outweighed by the injury to consumers in such instances.
After being informed of their noncompliance, the entity or entities indicated to the bureau that they would cease the violations, remediate affected borrowers and revise loan agreement templates and ACH authorization forms.
Auto lending
The bureau stated that its continued activity examining auto loan servicers was primarily intended to assess whether servicers have engaged in unfair, deceptive or abusive acts or practices prohibited by the Consumer Financial Protection Act (CFPA). Recent auto loan servicing examinations identified deceptive and unfair acts or practices related to billing statements and wrongful repossessions. Supervised companies agreed to review policies that led to the compliance issues and remediate instances where consumers were harmed.
“The examination found that servicers engaged in a deceptive practice by sending billing statements indicating that consumers did not need to make a payment until a future date when in fact the consumer needed to make a monthly payment,” the report states.
Examiners deemed unfair the practice of repossessing a borrower’s car after the customer had been notified that the repossession had been cancelled. Such instances often resulted from a customer account being incorrectly coded as delinquent when it was in fact current.
Credit cards
Although most credit card providers the bureau supervises were found to be in compliance with consumer financial protection laws, examiners found some notable compliance missteps at one or more companies.
Examiners analyzed providers’ advertising and marketing, account origination, account servicing, payments and periodic statements, dispute resolution, and the marketing, sale and servicing of credit card add-on products.
The most common misstep identified in the report related to periodic rate increases that violated Regulation Z, the implementing regulation of the Card Accountability Responsibility and Disclosure (CARD) Act, which requires credit card issuers to periodically re-evaluate consumer credit card accounts subject to certain increases in the applicable APR or rate to assess whether a reduction is appropriate.
“One or more examinations between January and July 2018 found that entities: (a) failed to re-evaluate all eligible accounts, (b) failed to consider the appropriate factors when re-evaluating eligible accounts, or (c) failed to appropriately reduce the rates of accounts eligible for rate reduction,” the report states. “In one or more instances, the issuers failed to re-evaluate all eligible accounts because they inadvertently excluded some eligible accounts from the pool of accounts they re-evaluated. In one or more instances, the issuers failed to consider the appropriate factors because they inappropriately conflated re-evaluation factors, among other reasons. In one or more instances, the issuers failed to appropriately reduce the rates for eligible accounts because they effectively imposed additional criteria for a rate reduction. The issuers have undertaken, or developed plans to undertake, remedial and corrective actions in response to these examination findings.”
Fair lending
The bureau provided updates on its activities related to the implementation of enhanced Home Mortgage Disclosure Act (HMDA) data collection procedures, as well as a review of its procedures for examining companies for compliance with new HMDA standards to ensure that their practices are consistent with laws and regulations intended to ensure fair lending in the financial marketplace.
Public enforcement actions
The report summarized two recent public enforcement actions – one against Citibank, N.A. in late June for violations of Regulation Z, and the other against Triton Management Group in July for violations of the CFPA and TILA.