The Consumer Financial Protection Bureau recently issued its semi-annual Supervisory Highlights report, which summarizes non-public supervisory actions that occurred during the second half of 2014. These reports provide regulated institutions with insight into the CFPB’s recent areas of focus and identify specific practices that the agency has concluded are violations of law. Over this period, $19.4 million of redress was awarded to over 92,000 consumers in non-public enforcement actions brought by the CFPB.
Summary of Supervisory Actions
The CFPB identified violations in the following areas:
1) Mortgage originator compensation, advertising, and disclosure practices.
- Regulation Z’s advertising disclosure requirements were violated by mortgage loan originators that advertised loan terms on social media, including loan duration, payment amounts, and finance charges, without providing the required disclosures.
- Regulation Z’s prohibition on loan originator compensation that is tied to loan profitability was violated when a marketing services company, owned by loan originators, received compensation based on the terms of transactions.
- Amounts disclosed on HUD-1 disclosures differed from the amounts on the Good Faith Estimate (GFE) disclosures in violation of Regulation X. The changes causing the discrepancy and violation were in connection with a reduced lender credit, to prevent a consumer receiving excess cash-back at closing, but the changes impermissibly increased borrower origination charges.
- Regulations X and Z require mortgage disclosures to be provided not later than three days after an application is received by a creditor. Inadequate procedures to define when an application was received, and resulting failures to provide timely disclosures, resulted in violations of both Regulations X and Z.
- Regulation B requires adverse action notices to be provided within 30 days. Violations, including inadequate disclosures and late disclosures, were attributed to inadequate compliance programs.
- Compliance management system failures stemming from:
- Inadequate compliance resources;
- Inadequate training for members of the board and employees, including inaccurate or out of date materials and incomplete programs; and
- Third party audits that were too limited in scope, failed to identify numerous violations, and not reported to the board.
2) Deposit accounts and overdraft fees.
The following violations stemmed from the decision by certain financial institutions to switch deposit accounts from a ledger-balance method, where only settled transactions are calculated in an account’s balance, to an available-balance method, where an account’s balance is based on both authorized (but not settled) transactions and then settled transactions:
- Failure to disclose or sufficiently disclose these changes, resulting in deception (apparently under Title X of the Dodd-Frank Act) with respect to the circumstances under which overdraft fees would be assessed; and
- Failure to disclose the possibility of two overdraft fees that might result under the available-balance method as follows: if a transaction does not produce an overdraft at the time of authorization, but because of a subsequent unrelated transaction that brings the account negative and results in an overdraft, the original transaction may incur a second overdraft upon settlement. The CFPB found that the occurrence of a second overdraft fee was not adequately disclosed, and as a result, consumers could not avoid those charges. These facts resulted in both deception and unfairness violations (also apparently under Title X of the Dodd-Frank Act).
3) Regulation B’s requirement to consider non-employment income.
The Equal Credit Opportunity Act (ECOA) and Regulation B prohibit discrimination based on public sources of income. Violations occurred where creditors employed, and advertised, a practice of regularly refusing to grant credit to applicants relying on non-employment income without assessing each particular applicant’s situation.
4) Consumer report issue resolution.
Credit reporting agencies failed to meet their dispute handling obligations under the Fair Credit Reporting Act (FCRA), including failing to forward all appropriate information when a dispute was filed and failing to update public record information.
5) Debt collection practices.
- Misrepresentations in collections calls, scripts, and letters in violation of the FCRA, including misstating participation criteria for, and overstating the benefits of, federal student loan rehabilitation programs.
- Misrepresentations regarding when recurring ACH transactions could be modified were considered deceptive under Title X of the Dodd-Frank Act (e.g. stating that ACH payments could be modified or cancelled up to 24 hours before the scheduled transfer, when in fact 72 hours’ notice was required).
The CFPB also notes in the report that it recently issued Credit Card Account Management Examination Procedures, it now has 400 examiners, and it has released a new Examiner Commissioner Program (ECP) to set standards and processes for the certification of accomplished examiners.
Our Assessment
The CFPB’s non-public enforcement actions have largely been consistent with our understanding of the agency’s continued focus on compliance management systems, marketing practices, overdrafts, ECOA and Regulation B, and the FCRA.
We found the action related to mortgage servicer advertising on social media particularly interesting. Regulation Z’s advertising requirements require certain disclosures to be clearly and conspicuously provided when advertising APRs, penalty fees, or annual fees, among other terms. The rules allow electronic advertisements to disclose a link that takes a consumer to the disclosures rather than the disclosures themselves. When advertising in space-constrained environments, including social media or search engines, even providing an abbreviated link to the disclosures may be difficult. This action indicates that the CFPB is monitoring the advertising of credit on social media, and likely other similar platforms, but does little to resolve the compliance challenges faced by industry. To that end, in an information request related to credit cards issued by the CFPB earlier this month, the CFPB sought information about how creditors satisfy disclosure requirements originally intended for a “paper and pencil” world when operating in a digital environment. The CFPB may consider providing additional guidance on credit advertising disclosures, which will likely be helpful to both creditors and consumers alike.