Notice2021-26949
Supervisory Highlights, Issue 25, Fall 2021
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 14, 2021
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Bureau of Consumer Financial Protection (CFPB or Bureau) is issuing its twenty fifth edition of Supervisory Highlights.
Full Text
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<title>Federal Register, Volume 86 Issue 237 (Tuesday, December 14, 2021)</title>
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[Federal Register Volume 86, Number 237 (Tuesday, December 14, 2021)]
[Notices]
[Pages 71047-71054]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-26949]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
Supervisory Highlights, Issue 25, Fall 2021
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Supervisory highlights.
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SUMMARY: The Bureau of Consumer Financial Protection (CFPB or Bureau)
is issuing its twenty fifth edition of Supervisory Highlights.
DATES: The Bureau released this edition of the Supervisory Highlights
on its website on December 8, 2021. The findings included in this
report cover examinations completed between January 2021 and June 2021
in the areas of credit card account management, debt collection,
deposits, fair lending, mortgage servicing, payday lending, prepaid
accounts, and remittance transfers.
FOR FURTHER INFORMATION CONTACT: Jaclyn Sellers, Counsel, at (202) 435-
7449. If you require this document in an alternative electronic format,
please contact <a href="/cdn-cgi/l/email-protection#e2a1a4b2a0bda381818791918b808b8e8b969ba281849280cc858d94"><span class="__cf_email__" data-cfemail="fbb8bdabb9a4ba98989e888892999297928f82bb989d8b99d59c948d">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
1. Introduction
A key function of the CFPB is to supervise the institutions subject
to its supervisory authority.\1\ The CFPB helps consumers take control
over their economic lives through its supervision program by making
consumer financial markets more transparent and competitive. To
accomplish this, the CFPB examines institutions to assess compliance
with Federal consumer financial law, obtain information about
compliance management systems (CMS), and detect and assess risks to
consumers and markets for consumer financial products and services.\2\
The CFPB's supervision program is focused on preventing violations of
law and consumer harm before they occur.
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\1\ 12 U.S.C. 5511(c)(4).
\2\ 12 U.S.C. 5514(b) and 5515(b).
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The findings included in this report cover examinations completed
between January 2021 and June 2021 in the areas of credit card account
management, debt collection, deposits, fair lending, mortgage
servicing, payday lending, prepaid accounts, and remittance transfers.
To maintain the anonymity of the supervised institutions discussed in
Supervisory Highlights, references to institutions generally are in the
plural and the related findings may pertain to one or more
institutions. This edition of Supervisory Highlights also summarizes
recent developments in the Bureau's supervision program and remedial
actions.
The CFPB publishes Supervisory Highlights to help institutions and
the
[[Page 71048]]
general public better understand how we examine institutions for
compliance with Federal consumer financial laws. Supervisory Highlights
summarizes existing legal requirements and violations identified in the
course of the Bureau's exercise of supervisory and enforcement
authority.\3\
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\3\ If a supervisory matter is referred to the Office of
Enforcement, Enforcement may cite additional violations based on
these facts or uncover additional information that could impact the
conclusion as to what violations may exist.
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We invite readers with questions or comments about Supervisory
Highlights to contact us at <a href="/cdn-cgi/l/email-protection#9ad9dccad8c5c9efeaffe8ecf3e9f3f5f4daf9fceaf8b4fdf5ec"><span class="__cf_email__" data-cfemail="33707563716c6046435641455a405a5c5d73505543511d545c45">[email protected]</span></a>.
2. Supervisory Observations
2.1 Credit Card Account Management
The Bureau assessed the credit card account management operations
of supervised institutions for compliance with applicable Federal
consumer financial laws. Examinations of these institutions identified
violations of Regulation Z and deceptive acts or practices prohibited
by the Consumer Financial Protection Act (CFPA).
2.1.1 Billing Error Resolution Violations
Regulation Z contains billing error resolution provisions with
which a creditor must comply following receipt of a billing error
notice from a consumer. Examiners found that creditors violated the
following provisions of Regulation Z:
<bullet> 12 CFR 1026.13(c)(2) by failing to resolve a dispute
within two complete billing cycles after receiving a billing error
notice regarding the failure to credit a payment that the consumer
made;
<bullet> 12 CFR 1026.13(e)(1) by failing to reimburse a consumer
for a late fee after the creditor determined a missing payment had not
been credited to the consumer's account, as the consumer had asserted;
and
<bullet> 12 CFR 1026.13(f) by failing to conduct reasonable
investigations after receiving billing error notices related to a
missing payment and unauthorized transactions.
In response to these findings, the creditors are implementing plans
to identify and remediate affected consumers. They are also developing
and providing training to employees on Regulation Z's billing error
resolution requirements and relevant policies and procedures.
2.1.2 Deceptive marketing of credit card bonus offers
Sections 1031 and 1036 of the CFPA prohibit deceptive acts or
practices.\4\ An act or practice is deceptive when: (1) It misleads or
is likely to mislead the consumer; (2) the consumer's interpretation is
reasonable under the circumstances; and (3) the misleading act or
practice is material.
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\4\ 12 U.S.C. 5531 and 5536(a)(1)(B).
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Examiners found that credit card issuers engaged in deceptive acts
or practices by advertising to certain existing customers that they
would receive bonus offers if they opened a new credit card account and
met certain spending requirements. A consumer could reasonably conclude
that an issuer would perform according to the plain terms of its
advertisement. The bonus offers were material because they were central
characteristics of the credit card advertisements. In fact, the issuers
misled consumers because they failed to provide the advertised bonuses
to customers who satisfied these requirements. And the issuers failed
to ensure that their employees followed procedures for making correct
system entries when enrolling existing consumers.
Examiners also found that the credit card issuers engaged in
deceptive acts or practices by advertising to other consumers that they
would receive certain bonuses if they opened new credit card accounts
in response to the advertisements and met certain spending
requirements. The issuers, however, failed to disclose or adequately
disclose that consumers must apply online for the new credit card to
receive the bonus. In fact, if the consumers otherwise satisfied the
requirements but applied through a different channel, the credit card
issuers failed to provide the bonus, as promised. The advertising's
overall net impression misled or was likely to mislead consumers who
could reasonably conclude that they needed only to satisfy the
specified spending requirements, as the application channel was not
disclosed or was inadequately disclosed. The representation regarding
the bonus offer terms was material because it related to a core feature
of the product. Thus, the credit card issuers' failure to adequately
disclose the online limitation in light of the representation
constituted a deceptive act or practice.
In response to these findings, the issuers are modifying applicable
advertisements and undertaking remedial and corrective actions.
2.2 Debt Collection
The Bureau has supervisory authority to examine certain
institutions that engage in consumer debt collection activities,
including nonbanks that are larger participants in the consumer debt
collection market and nonbanks that are service providers to certain
covered persons.\5\ Recent examinations of larger participant debt
collectors identified risks of violations of the Fair Debt Collection
Practices Act (FDCPA).
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\5\ 12 U.S.C. 5514(e).
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2.2.1 Risk of a False Representation or Deceptive Means To Collect or
Attempt To Collect a Debt
Section 807(10) of the FDCPA prohibits the use of any false
representation or deceptive means to collect or attempt to collect any
debt.\6\ Examiners found that debt collectors discussed restarting a
payment plan with consumers and represented that improvements to the
consumers' creditworthiness would occur upon final payment under the
plan and deletion of the tradeline. However, numerous factors influence
an individual consumer's creditworthiness, including potential
tradelines previously furnished by prior owners of the same debt. As a
result, such payment may not improve the credit score of the consumers
to whom the representation is made. Examiners found that such
representations could lead the least sophisticated consumer to conclude
that deleting derogatory information would result in improved
creditworthiness, thereby creating the risk of a false representation
or deceptive means to collect or attempt to collect a debt in violation
of section 807(10). In response to these findings, the collectors
revised their FDCPA policies and procedures. They also enhanced
training and monitoring systems to prevent, identify, and address risks
to consumers that may arise from deceptive statements by collection
agents and third-party service providers about the effects of payment
or non-payment on consumer credit, credit reporting, or credit scoring.
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\6\ 15 U.S.C. 1692e(10).
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2.3 Deposits
The CFPB examines institutions for compliance with Regulation E,\7\
which implements the Electronic Fund Transfer Act (EFTA).\8\ The CFPB
also examines for compliance with other relevant statutes and
regulations, including Regulation DD,\9\ which implements the Truth in
Savings Act,\10\ and the CFPA's prohibition on unfair, deceptive, and
abusive acts or practices (UDAAPs).\11\ Examiners found that
institutions violated Regulation E.
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\7\ 12 CFR 1005 et seq.
\8\ 15 U.S.C. 1693 et seq.
\9\ 12 CFR 1030 et seq.
\10\ 12 U.S.C. 4301 et seq.
\11\ 12 U.S.C. 5531, 5536.
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[[Page 71049]]
2.3.1 Regulation E Error Resolution for Misdirected Payments
Supervision conducted examinations of institutions in connection
with the provision of person-to-person digital payment network
services. Regulation E defines the term ``error'' to include, among
other things, ``[a]n incorrect electronic fund transfer to or from the
consumer's account.'' \12\ Regulation E requires institutions to
investigate promptly and determine whether an error occurred.\13\
Examiners found that, in certain cases, due to inaccurate or outdated
information in the digital payment network directory, consumers'
electronic fund transfers (EFTs) were misdirected to unintended
recipients, even though the consumer provided the correct identifying
token information for the recipient, i.e., the recipient's current and
accurate phone number or email address. These misdirected transfers are
referred to as ``token errors.'' Token errors are incorrect EFTs
because the funds are not transferred to the correct account.\14\
Examiners found that institutions violated Regulation E by failing to
determine that token errors constituted ``incorrect'' EFTs under
Regulation E.
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\12\ 12 CFR 1005.11(a)(1)(iii).
\13\ 12 CFR 1005.11(c).
\14\ 12 CFR 1005.11(a)(1)(ii).
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Additionally, institutions violated Regulation E by failing to
conduct reasonable error investigations when the institutions received
error notices from consumers that alleged that the consumers had sent
funds via a person-to-person payment network, but that the intended
recipients had not received the funds.\15\ The institutions reviewed
only whether they processed the transactions in accordance with the
sender's payment instructions and not whether the transfer went to an
unintended recipient due to a token error. The institutions did not
consider relevant information in their own records, or information that
they reasonably could obtain during their investigation, to consider
whether the consumer's error notice constituted an error under
Regulation E.
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\15\ 12 CFR 1005.11(c)(1).
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These violations caused monetary harm to consumers. As a result of
these findings, the institutions are revising their policies and
procedures, are conducting lookbacks, and will provide remediation to
injured consumers.
2.4 Fair Lending
The Bureau's fair lending supervision program assesses compliance
with the Equal Credit Opportunity Act (ECOA) \16\ and its implementing
regulation, Regulation B,\17\ as well as the Home Mortgage Disclosure
Act (HMDA) \18\ and its implementing regulation, Regulation C,\19\ at
institutions subject to the Bureau's supervisory authority. Examiners
found lenders violated ECOA and Regulation B.
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\16\ 15 U.S.C. 1691-1691f.
\17\ 12 CFR pt. 1002.
\18\ 12 U.S.C. 2801-2810.
\19\ 12 CFR pt. 1003.
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2.4.1 Pricing Discrimination
ECOA prohibits a creditor from discriminating against any
applicant, with respect to any aspect of a credit transaction, on the
basis of race or sex.\20\
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\20\ 15 U.S.C. 1691(a)(1). ECOA also prohibits a creditor from
discriminating against any applicant, with respect to any aspect of
a credit transaction, on the basis of color, religion, national
origin, marital status, or age (provided the applicant has the
capacity to contract), because all or part of the applicant's income
derives from any public assistance program, or because the applicant
has in good faith exercised any right under the Consumer Credit
Protection Act, 15 U.S.C. 1691(a).
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Examiners observed that mortgage lenders violated ECOA and
Regulation B by discriminating against African American and female
borrowers in the granting of pricing exceptions based upon competitive
offers from other institutions. The failure of the lenders' mortgage
loan officers to follow the lenders' policies and procedures with
respect to pricing exceptions for competitive offers, the lenders' lack
of oversight and control over their mortgage loan officers' use of such
exceptions, and managements' failure to take appropriate corrective
action surrounding self-identified risks all contributed to the
observed pricing disparities.
The examination team observed that lenders maintained policies and
procedures that permitted mortgage loan officers to provide pricing
exceptions for consumers, including pricing exceptions for competitive
offers, but did not specifically address the circumstances when a loan
officer could provide pricing exceptions in response to competitive
offers. Rather, the lenders relied on managers to promulgate a verbal
policy that a consumer must initiate or request a competitor price
match exception.
The examination team identified lenders with statistically
significant disparities for the incidence of pricing exceptions for
African American and female applications compared to similarly situated
non-Hispanic white and male borrowers. Examiners did not identify
evidence that explained the disparities observed in the statistical
analysis. Instead, examiners identified instances where lenders
provided pricing exceptions for a competitive offer to non-Hispanic
white and male borrowers with no evidence of customer initiation.
Furthermore, examiners noted that lenders failed to retain
documentation to support pricing exceptions. Also, lenders' fair
lending monitoring reports and business line personnel raised fair
lending concerns regarding the lack of documentation to support pricing
exception decisions. Despite such concerns, lenders did not improve the
processes or document customer requests to match competitor pricing
during the review period. In response to these findings, lenders plan
to undertake remedial and corrective actions regarding these
violations, which are under review by the Bureau.
2.4.2 Religious Discrimination
ECOA prohibits discrimination on the basis of religion \21\ and its
implementing Regulation B states: ``A creditor shall not inquire about
the race, color, religion, national origin, or sex of an applicant or
any person in connection with a credit transaction.'' \22\ Regulation B
also states that ``a creditor shall not take a prohibited basis
[including religion] into account in any system of evaluating
creditworthiness of applicants.'' \23\
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\21\ 15 U.S.C. 1691(a)(1). ECOA also prohibits a creditor from
discriminating against any applicant, with respect to any aspect of
a credit transaction, on the basis of race, color, sex, national
origin, marital status, or age (provided the applicant has the
capacity to contract), because all or part of the applicant's income
derives from any public assistance program, or because the applicant
has in good faith exercised any right under the Consumer Credit
Protection Act, 15 U.S.C. 1601, et seq. 15 U.S.C. 1691(a).
\22\ 12 CFR pt. 1002.5(b).
\23\ 12 CFR pt. 1002.6(b)(1).
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Examiners found that lenders violated ECOA and Regulation B by
improperly inquiring about small business applicants' religion and by
considering an applicant's religion in the credit decision. For
religious institutions applying for small business loans, lenders
utilized a questionnaire which contained explicit inquiries about the
applicant's religion. Examiners determined that lenders also denied
credit to an applicant identified as a religious institution because
the applicant did not respond to the questionnaire.
In response to these findings, lenders updated the questionnaire to
ensure compliance with ECOA and Regulation B. In addition, lenders also
identified affected applicants and provided an offer for each
identified applicant to reapply for a small business loan.
[[Page 71050]]
2.5 Mortgage Servicing
The Bureau is prioritizing mortgage servicing supervision work in
light of the increase in borrowers needing loss mitigation assistance
this year.\24\ Recent mortgage servicing examinations have identified
various Regulation Z and Regulation X violations, as well as unfair and
deceptive acts or practices prohibited by the CFPA. Under sections 1031
and 1036 of the CFPA, an act or practice is unfair when: (1) It causes
or is likely to cause substantial injury; (2) the injury is not
reasonably avoidable by consumers; and (3) the substantial injury is
not outweighed by countervailing benefits to consumers or to
competition.
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\24\ See CFPB Bulletin 2021-02, ``Supervision and Enforcement
Priorities Regarding Housing Insecurity'' (Mar. 31, 2021).
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Examiners found that mortgage servicers engaged in the following
unfair acts or practices:
<bullet> Charging delinquency-related fees to borrowers in
Coronavirus Aid, Relief, and Economic Security (CARES) Act
forbearances;
<bullet> failing to terminate EFTs after receiving notice that the
consumer's bank account had been closed and an insufficient fund (NSF)
fee had been assessed; and
<bullet> assessing fees for services that exceeded the actual cost
of the services performed.
Additionally, examiners found that mortgage servicers engaged in
deceptive acts or practices by incorrectly disclosing transaction and
payment information in borrowers' online mortgage loan accounts.
Examiners also found violations of Regulation X requirements to
evaluate borrowers' complete loss mitigation applications within 30
days of receipt, Regulation Z requirements relating to overpayments to
borrowers' escrow accounts, and Homeowners Protection Act (HPA)
requirements to automatically terminate private mortgage insurance
(PMI) pursuant to the applicable deadline.
2.5.1 Charging Delinquency-Related Fees to Borrowers in CARES Act
Forbearances
Examiners found that mortgage servicers engaged in unfair acts or
practices by charging late fees and default-related fees to borrowers
in CARES Act forbearances. Section 4022(b)(3) of the CARES Act
prohibits a mortgage servicer from imposing ``fees, penalties, or
interest beyond the amounts scheduled or calculated as if the borrower
made all contractual payments on time and in full under the terms of
the mortgage contract'' in connection with a CARES Act forbearance.\25\
Examiners found that, due to human and system errors, mortgage
servicers charged late fees and default-related fees to borrowers in
violation of this provision of the CARES Act. Borrowers experienced
substantial injury in the form of illegal fees, which were significant,
especially for consumers experiencing economic hardship from the COVID-
19 pandemic. The mortgage servicers failed to refund some of the fees
until almost a year later. Borrowers likely suffered further harm if
they could not pay other expenses because of the fees. The injury was
also widespread and impacted a large number of borrowers. Borrowers
could not reasonably avoid the injury because they could not anticipate
that the mortgage servicers would assess unlawful fees and borrowers
had no reasonable means to avoid imposition of the fees. Charging the
illegal fees did not provide any countervailing benefit to consumers or
competition. In response to these findings, the mortgage servicers
remediated impacted borrowers and corrected credit reporting to
accurately reflect the current balance and amount past due. The
mortgage servicers also corrected the underlying system errors.
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\25\ 15 U.S.C. 9056(b)(3).
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2.5.2 Failing To Terminate Preauthorized EFTs
Examiners found that mortgage servicers engaged in unfair acts or
practices by failing to terminate preauthorized EFTs resulting in
repeated NSF fees for failed preauthorized EFTs where the consumer's
account was closed. Examiners found that mortgage servicers, despite
receiving notice of account closures, continued to initiate EFTs from
the closed accounts each month after the initial NSF until the consumer
affirmatively canceled the preauthorized EFT arrangement. Borrowers
experienced substantial injury because the mortgage servicers'
practices resulted in repeated NSF fees. Borrowers could not reasonably
avoid the injury because they could not anticipate that the mortgage
servicers would continue to attempt the EFTs, particularly where, in
some cases, the EFT agreement disclosed that the EFTs would terminate
when the relevant account closes. The continued attempts to withdraw
payment from closed accounts and fees associated with the subsequent
NSF transactions did not provide any countervailing benefit to
consumers or competition. In response to these findings, the mortgage
servicers remediated impacted borrowers and are changing their
practices so that they cancel preauthorized EFTs upon receiving notice
of a failed draw attempt tied to a closed account.
2.5.3 Charging Consumers Unauthorized Amounts
Examiners found that mortgage servicers engaged in unfair acts or
practices by overcharging consumers for services rendered by a service
provider. Examiners found that the mortgage servicers overcharged
borrowers between $3 and $15 more than the actual cost of home
inspection and Broker Price Opinion fees. The mortgage servicers caused
substantial injury to consumers by collecting or attempting to collect
fees in excess of the expenses actually incurred. In some instances,
borrowers paid money they were not obligated to pay under the loan
notes. Consumers could not reasonably avoid the injury because the fees
were not disclosed to consumers. The injury resulting from the
overcharges was not outweighed by countervailing benefits to consumers
or competition. Examiners found that the lack of Board and management
oversight, training, and monitoring and audit helped enable this unfair
practice. In response to these findings, the mortgage servicers are
providing remediation to affected borrowers and have changed their
practices.
2.5.4 Misrepresenting Mortgage Loan Transaction and Payment History in
Online Accounts
Examiners found that mortgage servicers engaged in deceptive acts
or practices by providing inaccurate descriptions of payment and
transaction information in borrowers' online mortgage loan accounts.
The inaccurate description and information were likely to mislead
borrowers because the information was false. It was reasonable for
borrowers to rely on their mortgage servicers to report accurate
mortgage payments and account transaction histories. The inaccurate
descriptions and information were material because they were likely to
affect borrowers' conduct regarding their mortgage payments. In
response to these findings, the mortgage servicers are implementing
corrective actions to ensure the accuracy of account information. The
mortgage servicers will also communicate website changes to borrowers
and provide access to customer service representatives. Finally, the
mortgage servicers are providing remediation to affected borrowers.
[[Page 71051]]
2.5.5 Failing To Evaluate Complete Loss Mitigation Applications Within
30 Days
Regulation X generally requires servicers to provide consumers with
a written notice within 30 days of receiving the complete loss
mitigation application that states the servicers' determination of
which loss mitigation options, if any, they will offer the
consumer.\26\ Examiners found that mortgage servicers violated
Regulation X because the servicers did not evaluate the borrowers'
complete loss mitigation applications and provide a written notice
stating the servicers' determination of available loss mitigation
options within 30 days of receiving the complete loss mitigation
applications. The mortgage servicers indicated that the delays were
partly attributable to increased borrower assistance requests, lack of
availability of key vendors, and a slowdown in economic activity due to
shelter-in-place requirements. Examiners found that the mortgage
servicers had not engaged in good faith efforts to comply with the 30-
day timeline. In response to these findings, the mortgage servicers
implemented additional controls and increased staffing to help ensure
timely evaluation of complete loss mitigation applications.
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\26\ 12 CFR 1024.41(c)(1). This notice is only required if the
servicer receives a loss mitigation application more than 37 days
before a foreclosure sale.
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2.5.6 Incorrect Handling of Partial Payments
Regulation Z contains certain requirements for treatment of partial
payments. Servicers can take any of the following actions when
receiving a partial payment: (i) Credit the partial payment upon
receipt, (ii) return the partial payment to the consumer, or (iii) hold
the payment in a suspense or unapplied funds account.\27\ Regulation Z
requires servicers that retain partial payments in a suspense or
unapplied funds account to: (i) Disclose to the consumer the total
amount of funds being held on periodic statements (if periodic
statements are required) and (ii) on accumulation of sufficient funds
to cover a periodic payment treat such funds as a periodic payment
received.\28\
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\27\ 12 CFR 1026.36(c)(1)(ii), supp. I, comment 36(c)(1)(ii)-1.
\28\ 12 CFR 1026.36(c)(1)(ii).
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Examiners found that mortgage servicers violated Regulation Z by
applying payments in excess of the amount due to the borrowers' escrow
accounts, rather than handling them in accordance with the requirements
in 12 CFR 1026.36(c)(1)(ii). In situations where the excess payments
were less than $100, the mortgage servicers attempted to refund the
excess payment by applying them to the borrowers' escrow accounts.
However, these amounts remained in the escrow accounts and the mortgage
servicers failed to either return them to the borrowers or
alternatively credit the payment to the borrowers' next regularly
scheduled monthly payment. In response to these findings, the mortgage
servicers have changed their practices to apply excess payments as
specified in the underlying loan note in compliance with Regulation Z.
2.5.7 Failing to Automatically Terminate PMI Timely
The HPA requires that servicers automatically terminate PMI when
the principal balance of the mortgage loan is first scheduled to reach
78 percent of the original value of the property based on the
applicable amortization schedule, as long as the borrower is
current.\29\ Examiners found that mortgage servicers violated the HPA
when they failed to terminate PMI on the date the principal balance of
the mortgage was first scheduled to reach 78 percent loan-to-value on a
mortgage loan that was current. The root cause of the issue was human
error, which resulted in inaccurate data in the mortgage servicers' PMI
termination report. In response to these findings, the mortgage
servicers have corrected their PMI termination reports and implemented
a quality control process to help ensure timely PMI terminations in the
future.
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\29\ 12 U.S.C. 4902(b)(1).
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2.6. Payday Lending
The Bureau's Supervision program covers institutions that offer or
provide payday loans. Examinations of these lenders identified unfair
and deceptive acts or practices and violations of Regulation E under
EFTA.
2.6.1 Erroneous Debiting and Misrepresentations Surrounding Failure To
Honor Loan Extensions
Examiners found that lenders engaged in unfair acts or practices
when they debited or attempted to debit from consumer's accounts the
remaining balance of their loans on the original due date after the
consumers (1) applied for a loan extension, and (2) received a
confirmation email stating that only an extension fee would be charged
on the due date. The practice caused or was likely to cause substantial
injury in the form of unexpected debits of the full loan balance, as
well as possible bank fees. The injury was not reasonably avoidable
because consumers were not informed in advance that remitting a payment
or otherwise having their account balance altered would result in
cancellation of a loan extension, and received communications
indicating that the loan extension had been granted and that only an
extension fee would be charged on the original due date. The
substantial injury was not outweighed by countervailing benefits to
consumers or to competition.
Based on similar facts, examiners found that lenders engaged in
deceptive acts or practices when they misrepresented in loan extension
confirmation emails to consumers that consumers would pay only
extension fees on the original due dates of their loans. The
misrepresentations were likely to mislead a reasonable consumer into
believing that the extensions were consummated and only the extension
fees would be debited on the due date. The misrepresentations were
material because the possibility of debiting the full loan amount was
likely to affect a consumer's payment decisions. In response to these
findings, lenders plan to undertake remedial and corrective actions
regarding these violations, which are under review by the Bureau.
2.6.2 Unauthorized, Duplicate Debits and Failure To Retain Records
Examiners found that lenders engaged in unfair acts or practices
when they debited or attempted one or more additional, identical,
unauthorized debits from consumers' bank accounts after consumers
called to authorize a loan payment by debit card and lenders' systems
erroneously indicated the transactions did not process. In other
instances, lenders debited or attempted one or more duplicate,
unauthorized debits on consumer accounts due to a coding error. Both
types of acts or practices caused or were likely to cause substantial
injury because they deprived consumers of access to their funds and
created significant risks that consumers would be charged bank fees.
Consumers could not reasonably avoid the resulting substantial injury
because they had no reason to anticipate debits or attempted debits
they had not authorized and could not prevent them from occurring. The
substantial injury was not outweighed by countervailing benefits to
consumers or to competition. The lenders' cost to fix the problem would
not outweigh the injury to consumers.
[[Page 71052]]
Based on the same facts, lenders violated Regulation E,\30\ when
they failed to retain, for a period of not less than two years,
evidence of compliance with the requirements imposed by EFTA.\31\ In
response to these findings, lenders plan to undertake remedial and
corrective actions regarding these violations, which are under review
by the Bureau.
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\30\ 12 CFR 1005.13(b)(1).
\31\ 12 CFR 1005.10(b).
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2.7 Prepaid Accounts
The Bureau now examines financial institutions who issue prepaid
accounts and their service providers, such as program managers, for
compliance with Regulation E,\32\ which implements EFTA,\33\ in
connection with prepaid accounts. The Bureau also examines for
compliance with other relevant statutes and regulations, including
Regulation Z,\34\ which implements the Truth in Lending Act,\35\ and
the CFPA's prohibition on UDAAPs \36\ related to prepaid accounts.
Examiners identified violations of Regulation E and EFTA.
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\32\ 12 CFR pt. 1005.
\33\ 15 U.S.C. 1693 et seq.
\34\ 12 CFR pt. 1026.
\35\ 15 U.S.C. 1601 et seq.
\36\ 12 U.S.C. 5531, 5536.
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2.7.1 Prepaid Account Stop Payment and Waiver Violations
Examiners found violations related to stop-payment waivers at
financial institutions. EFTA and Regulation E provide that a consumer
``may stop payment of a preauthorized electronic fund transfer from the
consumer's account by notifying the financial institution orally or in
writing at least three business days before the scheduled date of the
transfer.'' \37\ Under EFTA, the right to stop such payments cannot be
waived in writing or through any other agreement.\38\ Examiners found
that financial institutions included language in their Terms of Use
agreements that waived a consumer's rights under both EFTA and
Regulation E. The Terms of Use required consumers to first notify the
merchants in order to exercise, through the financial institutions, the
consumers' right to stop a pre-authorized payment. This is inconsistent
with the consumers' rights set forth under both EFTA and Regulation E
and a violation of EFTA.\39\
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\37\ 12 CFR 1005.10(c)(1); see also 15 U.S.C. 1693e(a).
\38\ 15 U.S.C. 1693l.
\39\ 15 U.S.C. 1693l.
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Relatedly, examiners found that financial institutions enforced the
provisions of the Terms of Use and failed to honor stop-payment
requests that they received either orally or in writing at least three
business days before the scheduled date of the transfer, as required by
Regulation E.\40\ Their service providers improperly required consumers
to first contact the merchant before they would process any stop-
payment requests. And, in certain cases, their service providers also
subsequently failed to process stop-payment requests due to system
limitations, even after a consumer had contacted the merchant.
Therefore, examiners concluded that the financial institutions had
violated Regulation E.\41\
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\40\ 12 CFR 1005.10(c).
\41\ 12 CFR 1005.10(c).
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In response to these findings, the financial institutions are
developing and implementing comprehensive CMS for their service
providers and ceasing and desisting from violating EFTA and Regulation
E.
2.7.2 Prepaid Account Notice of Error Investigation Violations
As noted in the Summer 2020 edition of Supervisory Highlights,\42\
both EFTA section 908(a) and Regulation E require a financial
institution investigating an alleged EFT error, when it determines that
no error or a different error occurred, to communicate certain
information to consumers. This information includes the investigation
determination and an explanation of the determination.\43\ To give
purpose to both obligations, the meaning of an ``explanation'' is not
synonymous with that of a ``determination.'' Financial institutions
must go beyond just providing their findings and actually explain those
findings. Examiners found that financial institutions failed to explain
their determinations within the report of results, in violation of
Regulation E.
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\42\ Supervisory Highlights, Issue 22 (Summer 2020), available
at: <a href="https://www.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-22_2020-09.pdf">https://www.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-22_2020-09.pdf</a>.
\43\ 12 U.S.C. 1693f(a) and 1693f(d) and 12 CFR 1005.11(d)(1).
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In response to these findings, financial institutions are
developing and implementing comprehensive CMS programs capable of
ensuring compliance with all of EFTA and Regulation E's
requirements.\44\
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\44\ 12 CFR 1005.11(d)(1).
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Similarly, and as discussed in the deposits section of the Summer
2021 edition of Supervisory Highlights,\45\ if a financial institution
is unable to complete its investigation within 10 business days of
receiving a notice of error, Regulation E provides that a financial
institution may take up to 45 days from receipt of the error notice to
investigate and determine if an error occurred, as long as the
financial institution, among other things, provisionally credits the
consumer's account in the amount of the alleged error (including
interest where applicable) within 10 business days of receiving the
error notice.\46\
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\45\ Supervisory Highlights, Issue 24 (Summer 2021), available
at: <a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-24-summer-2021/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-24-summer-2021/</a>.
\46\ 12 CFR 1005.11(c)(2).
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If the alleged error involves an EFT that was not initiated within
a State, resulted from a point-of-sale debit card transaction, or
occurred within 30 days after the first deposit to the account was
made, the applicable time for provisional credit is 20 business days
instead of 10 business days and the financial institution may take up
to 90 days, instead of 45 days, to investigate and determine whether an
error occurred, provided the institution otherwise complies with the
requirements of Regulation E.\47\
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\47\ 12 CFR 1005.11(c)(3). See also 12 CFR 1005.2(l).
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Examiners found that financial institutions violated Regulation E
by failing to: (i) Promptly begin their investigations upon receipt of
an oral error notice, (ii) complete investigations of disputed point-
of-sale debit transactions within 90 days of the initial error notice,
after issuing provisional credit where required, and (iii) report the
investigation results in the determination letter sent to
consumers.\48\
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\48\ 12 CFR 1005.11(c)(1)-(3).
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In response to these findings, the financial institutions are
enhancing their CMS to ensure compliance with the requirements of EFTA
and Regulation E applicable to prepaid accounts.\49\
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\49\ 12 CFR 1005.11(c)(1)-(3).
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2.8 Remittance Transfers
The Bureau continues to examine institutions under its supervisory
authority for compliance with Regulation E, Subpart B (Remittance
Rule).\50\ The Bureau also reviews for any UDAAPs in connection with
remittance transfers. Examiners identified violations of Regulation E.
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\50\ See 78 FR 30662 (May 22, 2013), as amended (codified at 12
CFR 1005.30 through 1005.36).
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2.8.1 Failure To Investigate Notice of Errors
Section 1005.33(c)(1) of the Remittance Rule states that ``a
remittance transfer provider shall investigate promptly and determine
whether an error occurred within 90
[[Page 71053]]
days of receiving a notice of error.'' The investigation required under
12 CFR 1005.33(c)(1) must also include an effort to determine the
amount of any required monetary remediation. Among other things,
section 1005.33(c)(2)(ii)(B) of the Remittance Rule requires that, in
the event of an error for failure to make funds available by the
disclosed date of availability, a remittance transfer provider must
``[r]efund[] to the sender any fees imposed and, to the extent not
prohibited by law, taxes collected on the remittance transfer.'' A
remittance transfer provider must refund any fees charged in connection
with the remittance transfer unless the provider investigates and
determines that fees were not ``imposed . . . on the remittance
transfer.'' \51\ A deduction imposed by a foreign recipient bank may
constitute a fee that must be refunded to the sender subject to the
requirements of the Remittance Rule. Comment 33(c)-10 of the Official
Interpretation of Regulation E, however, provides that ``[a] remittance
transfer provider may correct an error, without investigation, in the
amount or manner alleged by the sender, or otherwise determined, to be
in error, but must comply with all other applicable requirements of
Sec. 1005.33.''
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\51\ 12 CFR 1005.33(c)(2)(ii)(B).
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Examiners found that providers violated section 1005.33(c) of the
Remittance Rule. These providers received notices of errors alleging
that remitted funds had not been made available to the designated
recipient by the disclosed date of availability. The providers then
failed to investigate whether a deduction imposed by a foreign
recipient bank constituted a fee that the institutions were required to
refund to the sender, and subsequently did not refund that fee to the
sender. These violations deprived consumers of their rights under the
Remittance Rule. In response to these findings, the providers are
revising their policies and procedures to comply with the fee-refund
provisions of the Remittance Rule and are conducting lookbacks. The
providers also will remediate consumers who did not receive fee refunds
that were due to them.
3. Supervisory Program Developments
3.1.1 Joint Statement on Supervisory and Enforcement Practices
Regarding the Mortgage Servicing Rules in Response to the Continuing
COVID-19 Pandemic and CARES Act
On November 10, 2021, the Board of Governors of the Federal
Reserve, the CFPB, the Federal Deposit Insurance Corporation, the
National Credit Union Administration, the Office of the Comptroller of
the Currency, and the State financial regulators (collectively,
agencies) issued a joint statement to communicate to mortgage servicers
the agencies' supervisory and enforcement approach as risks associated
with the Coronavirus Disease (COVID-19) pandemic continue to
change.\52\
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\52\ The joint statement on Supervisory and Enforcement
Practices Regarding the Mortgage Servicing Rules in Response to the
Continuing Covid-19 Pandemic and CARES Act is available at: <a href="https://files.consumerfinance.gov/f/documents/cfpb_mortgage-servicing-rules_joint-statement_2021-11.pdf">https://files.consumerfinance.gov/f/documents/cfpb_mortgage-servicing-rules_joint-statement_2021-11.pdf</a>.
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On April 3, 2020, the agencies issued the ``Joint Statement on
Supervisory and Enforcement Practices Regarding the Mortgage Servicing
Rules in Response to the COVID-19 Emergency and the CARES Act'' (April
2020 Joint Statement) to clarify the application of the Regulation X
mortgage servicing rules and explain the agencies' approach to
supervision and enforcement of the rules in response to the COVID-19
pandemic. In the April 2020 Joint Statement, the agencies announced
that until further notice, they would not take supervisory or
enforcement action against mortgage servicers for failing to meet
certain timing requirements under the mortgage servicing rules as long
as the servicers made good faith efforts to provide those required
notices or disclosures and took the related actions within a reasonable
period of time.
While the COVID-19 pandemic continues to affect consumers and
mortgage servicers, the agencies determined that the temporary
flexibility described in the April 2020 Joint Statement is no longer
necessary because servicers have had sufficient time to adjust their
operations by, among other things, taking steps to work with consumers
affected by the COVID-19 pandemic and developing more robust business
continuity and remote work capabilities. Accordingly, the temporary
supervisory and enforcement flexibility announced in the April 2020
Joint Statement no longer applies and the agencies will apply their
respective supervisory and enforcement authorities, where appropriate,
to address any noncompliance or violations of the Regulation X mortgage
servicing rules, as described in the statement.\53\
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\53\ This includes the Protections for Borrowers Affected by the
COVID-19 Emergency Under the Real Estate Settlement Procedures Act
(RESPA), Regulation X (86 FR 34848), which became effective on
August 31, 2021. Though the temporary supervisory and enforcement
flexibility announced in the April 2020 Joint Statement no longer
applies, guidance in the April 2020 Joint Statement generally
explaining the application of the CARES Act and interaction with the
Regulation X mortgage servicing rules in effect at that time remain
in place.
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3.1.2 CFPB Publishes CMS-IT Procedures
On September 21, 2021, the Bureau published examination procedures
for Compliance Management System--Information Technology (CMS-IT).\54\
The CMS-IT procedures are designed to assess supervised institutions'
use of IT and associated IT controls that support consumer financial
products and services. Deficiencies in IT and IT systems can pose a
risk to consumers and may be the root cause of Federal consumer
financial law violations. The procedures utilize the fundamental
elements of CMS to review the controls implemented by institutions to
manage IT and IT systems that are supporting consumer financial
operations. The new procedures are expected to help examiners
understand the controls for institutions to manage risks and comply
with Federal consumer financial laws.
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\54\ The CMS-IT procedures are available at: <a href="https://files.consumerfinance.gov/f/documents/cfpb_compliance-management-review-information-technology_examination-procedures.pdf">https://files.consumerfinance.gov/f/documents/cfpb_compliance-management-review-information-technology_examination-procedures.pdf</a>.
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3.1.3 CFPB Issues Rules To Facilitate a Smooth Transition as Federal
Foreclosure Protections Expire
On June 28, 2021, the CFPB finalized amendments to the Federal
mortgage servicing regulations to reinforce the ongoing economic
recovery as the Federal foreclosure moratoria are phased out.\55\ The
rules will help protect mortgage borrowers from unwelcome surprises as
they exit forbearance. The amendments will support the housing market's
smooth and orderly transition to post-pandemic operation. The rules
establish temporary special safeguards to help ensure that borrowers
have time before foreclosure to explore their options, including loan
modifications and selling their homes. The rules cover loans on
principal residences, generally exclude small servicers, and took
effect on August 31, 2021.
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\55\ The rule is available at: <a href="https://files.consumerfinance.gov/f/documents/cfpb_covid-mortgage-servicing_final-rule_2021-06.pdf">https://files.consumerfinance.gov/f/documents/cfpb_covid-mortgage-servicing_final-rule_2021-06.pdf</a>.
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4. Remedial Actions
4.1.1 CFPB Sues LendUp Loans for Violating a 2016 Consent Order and
Deceiving Borrowers
On September 8, 2021, the CFPB filed a lawsuit in Federal district
court accusing LendUp Loans, LLC (LendUp) of violating a 2016 consent
order and deceiving tens of thousands of
[[Page 71054]]
borrowers.\56\ In 2016, the Bureau had ordered LendUp to pay $1.83
million in consumer redress and a $1.8 million civil penalty, and to
stop misleading consumers with false claims about the cost of loans and
the benefits of repeated borrowing. In the complaint, the CFPB alleges
that, in violation of the 2016 order, LendUp has continued with much of
the same illegal and deceptive marketing. The CFPB also alleges that
LendUp illegally failed to provide timely and accurate notices to
consumers whose loan applications were denied.
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\56\ A copy of the complaint is available at:
<a href="https://files.consumerfinance.gov/f/documents/cfpb_lendup-loans-llc_complaint_2021-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_lendup-loans-llc_complaint_2021-09.pdf</a>.
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LendUp, headquartered in Oakland, California, offers single-payment
and installment loans to consumers and presents itself as an
alternative to payday lenders. A central component of LendUp's
marketing and brand identity is the ``LendUp Ladder.'' LendUp told
consumers that by repaying loans on time and taking free courses
offered through its website, consumers would move up the ``LendUp
Ladder'' and, in turn, receive lower interest rates on future loans and
access to larger loan amounts.
According to the CFPB's complaint, LendUp was not telling consumers
the truth. The CFPB's investigation found that 140,000 repeat borrowers
were charged the same or higher interest rates for loans after moving
up to a higher level on the LendUp Ladder. The investigation also found
that many borrowers had their maximum loan size reduced, even after
reaching the highest level on the ladder.
The CFPB alleges that LendUp violated the CFPB's 2016 consent
order, the CFPA, ECOA, and ECOA's implementing regulation, Regulation
B. Specifically, the CFPB alleges that LendUp:
<bullet> Deceived consumers about the benefits of repeat borrowing:
LendUp misrepresented the benefits of repeatedly borrowing from the
company by advertising that borrowers who climbed the LendUp Ladder
would gain access to larger loans at lower rates when, in fact, that
was not true for tens of thousands of consumers.
<bullet> Violated the CFPB's 2016 consent order: The CFPB's 2016
consent order prohibits LendUp from misrepresenting the benefits of
borrowing from the company. LendUp's continued misrepresentations about
the LendUp Ladder violate this order.
<bullet> Failed to provide timely and accurate adverse action
notices: Adverse action notices inform consumers why they were denied
credit, and timely and accurate notices are vital to maintaining a
transparent underwriting process and protect consumers against credit
discrimination. LendUp failed to provide adverse-action notices within
the 30 days required by ECOA for over 7,400 loan applicants. LendUp
also issued over 71,800 adverse-action notices that failed to
accurately describe the main reasons why LendUp denied the application
as required by ECOA and Regulation B.
The CFPB is seeking an injunction, damages or restitution to
consumers, disgorgement of ill-gotten gains, and the imposition of a
civil money penalty.
LendUp is also subject to a 2021 stipulated final judgment that
resolved the CFPB's claims that LendUp violated the Military Lending
Act in connection with its extensions of credit.\57\
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\57\ The stipulated final judgment can be found at: <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-settles-with-lendup-loans-llc-for-military-lending-act-violations/">https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-settles-with-lendup-loans-llc-for-military-lending-act-violations/</a>.
Rohit Chopra,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2021-26949 Filed 12-13-21; 8:45 am]
BILLING CODE 4810-AM-P
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</html>Indexed from Federal Register on December 14, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.