Notice2023-16764
Supervisory Highlights, Issue 30, Summer 2023
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
August 7, 2023
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB or Bureau) is issuing its thirtieth edition of Supervisory Highlights.
Full Text
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<title>Federal Register, Volume 88 Issue 150 (Monday, August 7, 2023)</title>
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[Federal Register Volume 88, Number 150 (Monday, August 7, 2023)]
[Notices]
[Pages 52131-52142]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-16764]
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CONSUMER FINANCIAL PROTECTION BUREAU
Supervisory Highlights, Issue 30, Summer 2023
AGENCY: Consumer Financial Protection Bureau.
ACTION: Supervisory Highlights.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB or Bureau) is
issuing its thirtieth edition of Supervisory Highlights.
DATES: The Bureau released this edition of the Supervisory Highlights
on its website on July 26, 2023. The findings included in this report
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.
FOR FURTHER INFORMATION CONTACT: Jaclyn Sellers, Senior Counsel, at
(202) 435-7449. If you require this document in an alternative
electronic format, please contact <a href="/cdn-cgi/l/email-protection#195a5f495b46587a7a7c6a6a707b7075706d60597a7f697b377e766f"><span class="__cf_email__" data-cfemail="2d6e6b7d6f726c4e4e485e5e444f44414459546d4e4b5d4f034a425b">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
1. Introduction
Since its inception, the Consumer Financial Protection Bureau's
(CFPB's) Supervision program has assessed supervised institutions'
compliance with Federal consumer financial law and taken supervisory
action against institutions that have violated it.\1\ This includes
institutions engaged in unfair, deceptive, or abusive acts or practices
(UDAAPs) prohibited by the Consumer Financial Protection Act of 2010
(CFPA).\2\ In April 2023, the CFPB issued a policy statement on abusive
acts or practices to summarize the existing precedent, provide an
analytical framework for identifying abusive conduct, and to offer some
guiding principles.\3\
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\1\ 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.
\2\ 12 U.S.C. 5531, 5536.
\3\ CFPB Policy Statement on Abusive Acts or Practices,
available at <a href="https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/">https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/</a>.
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This edition of Supervisory Highlights notes recent supervisory
findings of abusive acts or practices supervised institutions engaged
in across multiple product lines. Examiners also continue to find that
supervised institutions are engaging in prohibited unfair and deceptive
acts or practices. The CFPB will continue to supervise for, and enforce
against, practices that may violate Federal consumer financial law,
harm consumers, and impede competition.
Most supervised institutions rely on technology solutions to run
their businesses and offer or provide consumer financial products or
services. Supervision assesses information technology utilized by
supervised entities, and information technology controls, that may
impact compliance with Federal consumer financial law or risk to
consumers. Examiners have identified several violations of Federal
consumer financial law that were caused in whole or in part by
insufficient information technology controls. This edition includes for
the first time, findings from the CFPB's Supervision information
technology program.
A key aspect of the CFPB supervision program is benefitting
supervised institutions by identifying compliance issues before they
become significant. The supervision process is confidential in nature.
This confidentiality promotes candid communication between supervised
institutions and CFPB supervisory personnel concerning compliance and
related matters.
The findings included in this report 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.
To maintain the anonymity of the supervised institutions discussed in
Supervisory Highlights, references to institutions generally are in the
plural and related findings may pertain to one or more institutions.
2. Supervisory Observations
2.1 Auto Origination
The CFPB assessed the auto finance origination operations of
several
[[Page 52132]]
supervised institutions for compliance with applicable Federal consumer
financial laws and to assess whether institutions have engaged in
UDAAPs prohibited by the CFPA.\4\
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\4\ 12 U.S.C. 5531, 5536.
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2.1.1 Deceptive Marketing of Auto Loans
Examiners 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. An act or practice is
deceptive when: (1) the representation, omission, act, or practice
misleads or is likely to mislead the consumer; (2) the consumer's
interpretation of the representation, omission, act, or practice is
reasonable under the circumstances; and (3) the misleading
representation, omission, act, or practice is material.\5\
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\5\ Consumer Financial Protection Bureau v. Gordon, 819 F.3d
1179, 1192 (9th Cir. 2016).
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Examiners found that the representations made in these
advertisements were likely to mislead consumers, as the ``net
impression'' to consumers was that the advertisements applied to a
subset of cars to which they did not actually apply. Examiners further
concluded that it was reasonable for consumers to believe that the
advertised terms applied to a class of vehicles similar to the cars
pictured in the ads. These representations were material as information
about the central characteristics of a product or service--such as
costs, benefits, and/or restrictions on the use or availability--are
presumed to be material. Here, the promotional offers advertised were
significantly more restricted than a consumer may have realized. In
response to these findings, the institutions have stopped using the
deceptive advertisements and have enhanced monitoring of marketing
materials and advertisements across all product lines.
2.2 Auto Servicing
Examiners identified three unfair or abusive acts or practices at
auto servicers related to charging interest on inflated loan balances,
cancelling automatic payments without sufficient notice, and collection
practices after repossession.
2.2.1 Collecting Interest on Fraudulent Loan Charges
When supervised institutions purchase retail installment contracts
from auto dealers, dealers generally provide a document listing the
options included on the vehicle. Some dealers fraudulently included in
the document options that are not actually present on the vehicle, for
example by listing undercoating that the vehicle does not actually
have. This artificially inflates the value of the collateral, which may
make it easier for the dealer to find funding for the contract from
indirect lenders.
Examiners found that servicers engaged in unfair and abusive acts
or practices by collecting and retaining interest borrowers paid on
automobile loans that included options that were not in fact included
in the collateral, leading to improperly inflated loan amounts.
Examiners found that after initial loan processing, servicers attempted
to contact consumers to verify that options listed by the dealer are in
fact on the vehicle; consumers rarely identified discrepancies. In the
event consumers identified discrepancies, servicers reduced the amounts
that they paid dealers by the amount of the missing options. But
servicers did not reduce the amount that consumers owed on the loan
agreements and continued to charge interest tied to financing of the
nonexistent options. Similarly, after repossession servicers compared
the options actually present on the vehicle to the information
originally provided by the dealer and, where the options were not
actually included, obtained refunds from dealers that were applied to
the deficiency balances. But the servicers did not refund consumers for
the interest charged on the illusory options.
The CFPA defines an unfair act or practice as an act or practice
that: (1) that causes or is likely to cause substantial injury to
consumers; (2) which is not reasonably avoidable by consumers; and (3)
is not outweighed by countervailing benefits to consumers or to
competition.\6\ Examiners found that servicers engaged in unfair acts
or practices when they collected interest on the nonexistent options.
Examiners found that consumers suffered substantial injury when they
paid excess interest resulting from improperly inflated loan amounts.
Consumers could not reasonably avoid the injury because they had no
reason to anticipate that dealers would fraudulently include
nonexistent options and that the consumers would be charged interest
based on the inflated loan amount. And even if consumers attempted to
validate the options included, most consumers are not able to tell--
merely by sight--the options included on a car, many of which may be
hidden under the hood or otherwise not readily visible. And the injury
is not outweighed by countervailing benefits to consumers or
competition.
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\6\ 12 U.S.C. 5531, 5536.
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Examiners also found that the servicers engaged in abusive acts or
practices. An act or practice is abusive if it: (1) materially
interferes with the ability of a consumer to understand a term or
condition of a consumer financial product or service; or (2) takes
unreasonable advantage of: a lack of understanding on the part of the
consumer of the material risks, costs, or conditions of the product or
service; the inability of the consumer to protect the interest of the
consumer in selecting or using a consumer financial product or service;
or the reasonable reliance by the consumer on a covered person to act
in the best interest of the consumer.\7\
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\7\ 12 U.S.C. 5531(d)(2)(B).
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Here examiners concluded that the servicers' practices were abusive
because they took unreasonable advantage of consumers' inability to
protect their interests in the selection or use of the product by
charging interest on loan balances that were improperly inflated
because of the illusory options, which benefited the servicer to the
detriment of consumers. Servicers were aware that some percentage of
their loans had inflated balances and nevertheless collected excess
interest on these amounts while seeking and obtaining refunds on the
missing options. At the time of loan funding, consumers were unable to
protect their own interests; it was impractical for them to challenge
the practice because they did not know that certain options were
missing.\8\ After repossession, servicers continued to take advantage
of consumers' inability to protect their interests where they protected
themselves by obtaining refunds from dealers for the value of options
the collateral vehicles did not actually have but did not refund the
excess interest amounts consumers had paid based on these inflated loan
balances.
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\8\ CFPB Policy Statement on Abusive Acts or Practices, at 14,
available at <a href="https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/">https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/</a> (explaining that
``inability'' includes situations where it is ``impractical'' for
consumers to protect their interests).
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In response to these findings, Supervision directed the servicers
to cease the practice.
2.2.2 Canceling Automatic Payments Without Sufficient Notice
Examiners found that servicers engaged in unfair acts or practices
by suspending recurring automated
[[Page 52133]]
clearing house (ACH) payments prior to consumers' final payment without
sufficiently notifying consumers that the final payment must be made
manually. Consumers could enroll in automatic payments by completing a
written electronic funds transfer authorization. The authorizations
contained a small print disclosure that servicers would not
automatically withdraw the final payment; servicers did not provide any
additional communication to consumers before the final payment was
required. Many consumers enrolled in these automatic payments for a
period of years and relied on the automatic payments. But servicers
cancelled the final withdrawal and did not debit the final payment,
resulting in missed payments and late fee assessment by servicers.
Consumers suffered substantial injury when servicers failed to provide
adequate notice that they would not debit the final payment, including
the late fees servicers charged consumers when consumers missed these
payments. Consumers could not reasonably avoid this injury because they
believed their payments would be processed automatically and the only
disclosure that the payment would be cancelled was written in fine
print in the initial enrollment paperwork. And the injury is not
outweighed by countervailing benefits to consumers or competition.
In response to these findings, servicers remediated consumers and
revised their policies and procedures.
2.2.3 Requiring Consumers To Pay Other Debts To Redeem Vehicles
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.
Examiners found that servicers engaged in unfair and abusive acts
or practices by engaging in the blanket practice of cross-
collateralizing loans and requiring consumers to pay other debts to
redeem their repossessed vehicles.
Accelerating and demanding repayment on other debts before
returning repossessed vehicles was unfair. It caused substantial injury
to consumers because consumers were required to pay accelerated and
cross-collateralized amounts across multiple loans or lose their
vehicles. Consumers could not reasonably avoid the harm caused by this
practice. While servicers occasionally allowed consumers to pay lesser
amounts, they did so only if consumers objected or argued about the
debt and consumers were not meaningfully made aware that arguing about
the cross-collateralization could result in a lesser payment amount.
And even if the consumer objected, representatives still used the
cross-collateral provisions as a coercive collection tactic. A blanket
practice of cross-collateralizing and demanding repayment does not
benefit consumers and the harm outweighs any countervailing benefits to
consumers or competition.
This practice was abusive because it also took unreasonable
advantage of a lack of understanding of consumers of the material
risks, costs, or conditions of their loan agreements. When consumers
sought to reinstate their loans after repossession, servicers utilized
contractual remedies to accelerate all debts owed to them which
resulted in a significant monetary advantage to servicers while
imposing a corresponding degree of economic harm on the consumer. These
practices also inflicted significant emotional and psychological
distress. The advantage gained by the servicers was unreasonable in the
ordinary case of vehicle repossession. And consumers lacked an
understanding of the material risks, costs, or conditions of the
specific contractual remedies allowing for cross-collateralization at
issue in the relevant loans.\9\
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\9\ See CFPB Policy Statement on Abusive Acts or Practices, at
12, available at <a href="https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/">https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/</a> (explaining
that ``risks'' includes the consequence of default).
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In response to these findings, servicers remediated consumers and
revised policies and procedures.
2.3 Consumer Reporting
Companies that regularly assemble or evaluate information about
consumers for the purpose of providing consumer reports to third
parties are ``consumer reporting companies'' (CRCs).\10\ These
companies, along with the entities--such as banks, loan servicers, and
others--that furnish information to the CRCs for inclusion in consumer
reports, play a vital role in the availability of credit and have a
significant role to play in the fair and accurate reporting of credit
information. They are subject to several requirements under the Fair
Credit Reporting Act (FCRA) \11\ and its implementing regulation,
Regulation V,\12\ including the requirement to reasonably investigate
disputes and to furnish data subject to the relevant accuracy
requirements. In recent reviews, examiners found deficiencies in CRCs'
compliance with FCRA permissible purpose-related policy and procedure
requirements and furnisher compliance with FCRA and Regulation V
dispute investigation requirements.
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\10\ The term ``consumer reporting company'' means the same as
``consumer reporting agency,'' as defined in the Fair Credit
Reporting Act, 15 U.S.C. 1681a(f), including nationwide consumer
reporting agencies as defined in 15 U.S.C. 1681a(p) and nationwide
specialty consumer reporting agencies as defined in 15 U.S.C.
1681a(x).
\11\ 15 U.S.C. 1681 et seq.
\12\ 12 CFR part 1022.
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2.3.1 CRC Duty To Maintain Reasonable Policies and Procedures Designed
To Limit Furnishing Consumer Reports to Persons With Permissible
Purpose(s)
The FCRA requires that CRCs must maintain reasonable procedures
designed to limit the furnishing of consumer reports to persons with at
least one of the permissible purposes enumerated under section 604(a)
of the FCRA.\13\ In recent reviews of CRCs, examiners found that CRCs'
procedures relating to ensuring end users of consumer reports have a
requisite permissible purpose failed to comply with this obligation
because the CRCs' procedures posed an unreasonable risk of improperly
disclosing consumer reports to persons without a permissible purpose.
For example, examiners identified multiple deficiencies in the CRCs'
procedures, such as failing to maintain an adequate process for re-
assessing end users' permissible purpose(s) where indicia of improper
consumer report use by an end user is present. This created heightened
risk of improper consumer report disclosures. In some instances,
examiners found that such deficiencies resulted in CRCs furnishing
consumer reports to end users despite having reasonable grounds to
believe the end users did not have a requisite permissible purpose.
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\13\ 15 U.S.C. 1681e(a).
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In response to these findings, CRCs are revising policies and
procedures for, and their oversight of, onboarding end users and
periodically re-assessing end users' permissible purpose(s). CRCs also
are revising processes relating to the monitoring of end users,
including the identification of end users exhibiting
[[Page 52134]]
indicia of impermissible consumer report use.
2.3.2 Furnisher Duty To Review Policies and Procedures and Update Them
as Necessary To Ensure Their Continued Effectiveness
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.\14\ Specifically, in
recent reviews of auto furnishers, examiners found that furnishers
failed to review and update policies and procedures after implementing
substantial changes to their dispute handling processes. For example,
furnishers changed software systems for use in the investigation of
disputes but maintained policies and procedures that referenced only
systems no longer in use, inhibiting the continued effectiveness of
those policies and procedures. In response to these findings,
furnishers are updating their policies and procedures to reflect
current systems and training staff to use them in handling disputes.
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\14\ 12 CFR 1022.42(c).
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2.3.3 Furnisher Duty To Conduct Reasonable Investigations of Direct
Disputes
Examiners are continuing to find that furnishers are violating the
Regulation V duty to conduct a reasonable investigation of direct
disputes.\15\ In recent reviews of mortgage furnishers, examiners found
the furnishers failed to conduct any investigations of direct disputes
that were received at an address provided by the furnishers to CRCs and
set forth on consumer reports. Rather than investigate direct disputes
sent to these qualifying addresses under Regulation V, the furnishers
responded to the disputes by instructing the consumers to re-send their
direct disputes to certain other addresses of the furnishers and only
investigated the disputes to the extent the consumers re-sent them per
these instructions. In response to these findings, furnishers are
updating their policies and procedures to ensure that they conduct
reasonable investigations of direct disputes that are sent to addresses
provided by the furnishers to CRCs and set forth on consumer reports.
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\15\ 12 CFR 1022.43(e).
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2.3.4 Furnisher Duty To Notify Consumers That a Dispute Is Frivolous or
Irrelevant
Examiners are continuing to find that furnishers are violating the
Regulation V duty to provide consumers with notices regarding frivolous
or irrelevant disputes.\16\ In recent reviews of third-party debt
collector furnishers, examiners found that furnishers failed to send
any notice to consumers whose direct disputes they determined were
frivolous or irrelevant. For example, 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 response to these findings,
furnishers are establishing policies and procedures to identify and
respond to frivolous or irrelevant disputes, including sending a letter
to the consumer notifying the consumer of the determination that a
dispute is frivolous or irrelevant and identifying the additional
information needed to investigate the consumer's dispute.
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\16\ 12 CFR 1022.43(f)(2).
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2.3.5 Furnisher Duty To Inform Consumers of Information Needed To
Investigate Frivolous or Irrelevant Disputes
Examiners are continuing to find that furnishers are violating
their Regulation V duty, after making a determination that a direct
dispute is frivolous or irrelevant, to include in their notices to
consumers the reasons for that determination and to identify any
information required to investigate the disputed information.\17\ In
recent reviews of mortgage furnishers, examiners found that furnishers
sent frivolous or irrelevant notices to consumers that failed to
accurately convey what information the consumers needed to submit for
the furnishers to investigate the disputed information. For example,
furnishers sent consumers a frivolous notification stating that
consumers must provide their entire unredacted credit report for the
furnishers to investigate the dispute, even though an entire unredacted
credit report was not required for the investigation and an excerpt of
the relevant portion of the credit report would have sufficed. In
response to these findings, furnishers are updating the content of
their frivolous or irrelevant notices to eliminate the language
requesting an entire unredacted credit report as a prerequisite for
investigation.
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\17\ 12 CFR 1022.43(f)(3).
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2.3.6 Furnishers' Failure To Provide Adequate Address-Disclosures for
Notices
Section 623(a)(1)(A) of the FCRA requires that a furnisher must not
furnish to any CRC any information relating to a consumer if the
furnisher knows or has reasonable cause to believe that the information
is inaccurate.\18\ A furnisher is not subject to section 623(a)(1)(A)
if the furnisher clearly and conspicuously specifies to consumers an
address at which consumers may notify the furnisher that information it
furnished is inaccurate.\19\ The FCRA does not require a furnisher to
specify such an address. If a furnisher clearly and conspicuously
specifies such an address, it is not subject to section 623(a)(1)(A)
but must comply with section 623(a)(1)(B) of the FCRA, which provides
that a furnisher shall not furnish information relating to a consumer
to a CRC if it has been notified by the consumer, at the address
specified for such notices, that certain information is inaccurate and
such information is, in fact, inaccurate.\20\ A furnisher that
specifies an address may also be subject to section 623(a)(2) of the
FCRA if it determines that information it has furnished is not complete
or accurate and fails to notify the CRC and provide corrections.\21\
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\18\ 15 U.S.C. 1681s-2(a)(1)(A).
\19\ 15 U.S.C. 1681s-2(a)(1)(C).
\20\ Id. (cross-referencing 15 U.S.C. 1681s-2(a)(1)(B)).
\21\ 15 U.S.C. 1681s-2(a)(2).
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Examiners are continuing to find that furnishers are not clearly
and conspicuously specifying to consumers an address for notices at
which a consumer may notify the furnisher that information is
inaccurate. In reviews of third-party debt collection furnishers,
examiners found that the only notice or dispute address furnishers
provided to consumers was an address included on debt validation
notices for the purpose of disputing the validity of a debt. Examiners
found that the debt validation notices did not specify to consumers an
address for, or otherwise specify that the debt validity dispute
address may also be used for, notices relating to inaccurately
furnished consumer report information. As a result, examiners found
that the furnishers have not met the requirement in section
623(a)(1)(C) of the FCRA to not be subject to section 623(a)(1)(A) and
therefore are subject to the stricter
[[Page 52135]]
prohibition under section 623(a)(1)(A) of the FCRA against furnishing
information the furnishers know or have reasonable cause to believe is
inaccurate.
2.4 Debt Collection
The CFPB has supervisory authority to examine certain institutions
that engage in consumer debt collection activities, including very
large depository institutions, nonbanks that are larger participants in
the consumer debt collection market, and nonbanks that are service
providers to certain covered persons. Recent examinations of larger
participant debt collectors identified violations of the Fair Debt
Collection Practices Act (FDCPA) as well as the CFPA.
2.4.1 Unlawful Attempts To Collect Medical Debt
Examiners found that debt collectors continued collection attempts
for work-related medical debt after receiving sufficient information to
render the debt uncollectible under State worker's compensation law
absent written evidence to the contrary, which the collector did not
obtain from its client. The collectors made multiple calls over several
years, during which they implied that the consumer owed the debt and
asserted that the ambulance ride that gave rise to the debt originated
from the consumer's home, despite evidence in their files that it
originated from the consumer's workplace. Examiners found that, through
these practices, the debt collectors violated the FDCPA by collecting
an amount not permitted by law or agreement,\22\ by falsely
representing the character, amount, or legal status of a debt,\23\ by
engaging in conduct which had the natural consequence of harassing,
oppressing, or abusing the consumer,\24\ and by using false, deceptive,
or misleading representations in connection with the collection of a
debt.\25\
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\22\ 15 U.S.C. 1692f(1).
\23\ 15 U.S.C. 1692e(2)(A).
\24\ 15 U.S.C. 1692d.
\25\ 15 U.S.C. 1692e.
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In response to these findings, Supervision directed the debt
collectors to establish and maintain adequate collection policies,
procedures, and training to include specific limitations on
circumstances under which the collectors may contact consumers in
connection with pending workers' compensation claims; enhancing call
monitoring to include a review of accounts with a pending workers'
compensation claim; and ensuring accounts are monitored for pending
workers' compensation claims and collection attempts on such accounts
are ceased.
2.4.2 Deceptive Representations About Interest Payments
Examiners found that debt collectors advised consumers that if they
paid the balance in full by a date certain, any interest assessed on
the debt would be reversed. The debt collectors then failed to credit
the consumers' accounts with the accrued additional interest, resulting
in the consumers paying more than the agreed upon amount. Examiners
found this practice to be deceptive in violation of the CFPA.\26\ In
response to these findings, Supervision directed the debt collectors to
remediate all consumers who had overpaid.
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\26\ 12 U.S.C. 5536(a)(1)(B).
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2.5 Deposits
The CFPB continues to examine financial institutions to assess
whether they have engaged in UDAAPs prohibited by the CFPA.\27\ The
CFPB also continues its examinations of supervised institutions for
compliance with Regulation E,\28\ which implements the Electronic Fund
Transfer Act (EFTA).\29\ The CFPB also examines for compliance with
other relevant statutes and regulations, including Regulation DD,\30\
which implements the Truth in Savings Act.\31\
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\27\ 12 U.S.C. 5531, 5536.
\28\ 12 CFR 1005 et seq.
\29\ 15 U.S.C. 1693 et seq.
\30\ 12 CFR 1030 et seq.
\31\ 12 U.S.C. 4301 et seq.
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2.5.1 Unfair Line of Credit Usage and Fees
The CFPA prohibits any ``covered person'' from ``engag[ing] in any
unfair, deceptive, or abusive act or practice.'' \32\
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\32\ 12 U.S.C. 5536.
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Examiners found unfair acts or practices due to institutions'
assessment of both nonsufficient funds (NSF) and line of credit
transfer fees on the same transaction. The institutions offered a line
of credit program that consumers could opt-in to. If a consumer's
checking account did not have sufficient funds to pay for a
transaction, the institutions would transfer funds from the line of
credit to cover the transaction and assess a line of credit transfer
fee, as well as interest on the amount of credit extended. In some
instances, the line of credit might not have sufficient funds to cover
the transaction, in which case the institutions would deny the
transaction and assess an NSF fee on the denied transaction. As the
transaction was declined, no funds from the line of credit would be
transferred to pay the transaction. But, if there were insufficient
funds in the consumer's checking account to pay the NSF fee and that
NSF fee overdrew the consumer's account, the institutions would
automatically transfer funds from the line of credit to the consumer's
checking account and assess a line of credit transfer fee.
Supervision found the institutions' practice of assessing both the
NSF and the line of credit transfer fee on the same transaction is an
unfair act or practice. These acts or practices caused or were likely
to cause substantial injury in the form of two fees being assessed on
the same denied transaction. Consumers who enrolled in the line of
credit program were charged two fees instead of the single fee charged
to those who were not enrolled, even though in both cases the
transaction was returned unpaid. A consumer could not reasonably avoid
this substantial injury as the consumer had no notice of the potential
for double fees or ability to avoid the double fees in this automated
process and would not reasonably expect that enrolling in a program
meant to prevent overdraft and decrease fees related to denied
transactions would instead increase them. These acts or practices did
not provide benefits to consumers or competition.
The supervised institutions believed they had safeguards in place
to not assess NSF fees and line of credit fees on the same transaction.
Specifically, they programmed their systems to not assess both of these
fees on the same day. The way the institutions' systems posted NSF
fees, however, meant that the NSF and line of credit fees were incurred
on different days, even though they were part of the same transaction.
Thus, the safeguard was inadequate. In response to these findings, the
institutions committed to system changes and remediated $113,358 to
4,147 consumers. The system change implemented by the supervised
institutions was to avoid the issue altogether by entirely eliminating
NSF fees for unpaid transactions.
2.6 Fair Lending
The CFPB's fair lending supervision program assesses compliance
with the Equal Credit Opportunity Act (ECOA) \33\ and its implementing
regulation, Regulation B,\34\ as well as the Home Mortgage Disclosure
Act (HMDA) \35\ and its implementing regulation, Regulation
[[Page 52136]]
C,\36\ at institutions subject to the CFPB's supervisory authority.
ECOA prohibits a creditor from discriminating against any applicant,
with respect to any aspect of a credit transaction, on the basis of
race, sex, color, religion, national origin, sex (including sexual
orientation and gender identity), 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.\37\
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\33\ 15 U.S.C. 1691-1691f.
\34\ 12 CFR pt. 1002.
\35\ 12 U.S.C. 2801-2810.
\36\ 12 CFR pt. 1003.
\37\ 15 U.S.C. 1691(a).
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During recent examinations, Examiners found lenders violated ECOA
and Regulation B.
2.6.1 Pricing Discrimination
In the Fall 2021 issue of Supervisory Highlights, the CFPB
discussed findings 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.\38\ Since then, Supervision conducted additional
examinations assessing mortgage lenders' compliance with ECOA and
Regulation B with respect to the granting of pricing exceptions based
on competitive offers from other institutions. The CFPB again found
that mortgage lenders violated ECOA and Regulation B by discriminating
in the incidence of granting pricing exceptions across a range of ECOA-
protected characteristics, including race, national origin, sex, or
age.
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\38\ Supervisory Highlights, Issue 25, Fall 2021, sec. 2.4.1.
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Examiners observed that certain lenders maintained policies and
procedures that permitted the granting of pricing exceptions to
consumers, including pricing exceptions for competitive offers.
Generally, a pricing exception is when a lender makes exceptions to its
established credit standards. For example, a lender may lower a rate to
match a competitor's offer and retain the consumer. 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. Weaknesses in the
lenders' policies and procedures with respect to pricing exceptions for
competitive offers, the failure of mortgage loan officers to follow
those policies and procedures, the lenders' lack of oversight and
control over their mortgage loan officers' discretion in connection
with and use of such exceptions, or managements' failure to take
appropriate corrective action risks contributed to the observed
disparities in the incidence of granting pricing exceptions. Examiners
did not identify evidence of legitimate, non-discriminatory reasons
that explained the disparities observed in the statistical analysis.
In several instances, examiners identified policies and procedures
that were not designed to effectively mitigate ECOA and Regulation B
violations or manage associated risks of harm to consumers. Some
policies permitted mortgage loan officers to request a pricing
exception by submitting a request into the loan origination system
without requiring that the request be substantiated by documentation.
While those requests were subject to managerial review, there were no
guidelines for the bases for approval or denial of the exception
request or the amount of the exception. Other policies had limited
documentation requirements--and sometimes no documentation requirements
for pricing exceptions below a certain threshold. This meant that the
lenders could not effectively monitor whether the pricing exception
request was initiated by the consumer and/or supported by a competitive
offer to the consumer. Other policies granted some loan officers
pricing exception authority up to certain thresholds without the need
for competitive offer documentation or management approval. As a
result, the lenders did not flag those discretionary discounts as
pricing exceptions and did not monitor them. Some policies had more
robust documentation and approval requirements. But those institutions
did not effectively monitor interactions between loan officers and
consumers to ensure that the policies were followed and that the loan
officer was not coaching certain consumers and not others regarding the
competitive match process. In other instances, examiners determined
that loan officers were not properly documenting the initiation source
of the concession request nor were they retaining and documenting
competitors' pricing information in borrowers' files as required by the
lender policy.
Examiners also identified weaknesses in training programs. 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.
Finally, examiners concluded that management and board oversight at
lenders was not sufficient to identify and address risk of harm to
consumers from the lender's pricing exceptions practices. Similarly,
examiners observed that some lenders failed to take corrective action
based on their statistical observations of disparities in pricing
exceptions. Some lenders failed to document whether additional
investigation into observed disparities was warranted, review the
causes of such disparities, or consider actions that might reduce such
disparities.
In response to these findings, the CFPB directed lenders to, among
other things: enhance or implement pricing exception policies and
procedures to mitigate fair lending risks, including enhancing
documentation standards and requiring clear exception criteria; enhance
or implement policies requiring the retention of documentation for all
pricing exceptions, including document regarding whether the pricing
exception request was initiated by the consumer; develop and implement
a monitoring and audit program to effectively identify and mitigate
potential disparities and/or fair lending risks associated with the
pricing exception approval process; or to identify and remediate harmed
consumers.
2.6.2 Discriminatory Lending Restrictions
The CFPB recently reviewed lending restrictions in underwriting
policies and procedures at several lenders to evaluate fair lending
risks and to assess compliance with ECOA and Regulation B. The reviews
focused on lending restrictions relating to how those lenders handled
the treatment of applicants' criminal records and whether the lenders
properly treated income derived from public assistance.
Regarding prior contact with the criminal justice system, both
national data and the history of discrimination in the justice system
suggest that restrictions on lending based on criminal history are, in
many circumstances, likely to have a disparate impact based on race and
national origin.\39\ Thus, the use of criminal history in credit
decisioning may create a heightened risk of violating ECOA and
Regulation B. The CFPB's review
[[Page 52137]]
identified risky policies and procedures at several institutions for
several areas of credit, including mortgage origination, auto lending,
and credit cards, but most notably within small business lending. 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. There were
variations amongst the policies and procedures as to how the lender
identified criminal records and which violations or charges triggered
further review or denial. For example, some lenders generally denied
credit when it identified applicants with felony convictions for
financial crimes but did not deny credit for arrests or non-felony
convictions. Other lenders treated criminal indictments, fraud cases,
sexual offenses, and industry bans as significant risks. But without
clear guidelines and well-defined standards designed to meet legitimate
business needs, lenders risked violating ECOA and Regulation B by
applying these underwriting restrictions in a manner that could
discriminate on a prohibited basis.
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\39\ CFPB, Justice-Involved Individuals and the Consumer
Financial Marketplace (Jan. 2022), available at <a href="https://files.consumerfinance.gov/f/documents/cfpb_jic_report_2022-01.pdf">https://files.consumerfinance.gov/f/documents/cfpb_jic_report_2022-01.pdf</a>.
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With respect to the proper treatment of public assistance income in
underwriting, ECOA and Regulation B prohibit discrimination against
applicants, with respect to any aspect of a credit transaction, because
all or part of the applicant's income derives from any public
assistance program.\40\ Examiners identified lenders whose policies and
procedures excluded income derived from certain public assistance
programs or imposed stricter standards on income derived from public
assistance programs. Lenders maintained a written policy that expressly
prohibited underwriters from considering Home Assistance Payments
provided by the Section 8 Housing Choice Voucher Homeownership
Program.\41\ Lenders participated in mortgage lending programs that
provided consumers with a benefit in the form of a mortgage credit
certificate but did not treat those benefits as income under their
underwriting standards. Some lenders maintained a policy with a six-
year continuity-of-income requirement for applicants relying primarily
on public assistance income that was stricter than the three-year
requirements applicable to other applicants' income.
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\40\ 15 U.S.C. 1691(a)(3); 12 CFR 1002.4(a).
\41\ In 2015, the CFPB issued a compliance bulletin reminding
creditors of their obligations under ECOA and Regulation B to
provide non-discriminatory access to credit for mortgage applicants
using income from the Section 8 Housing Choice Voucher Homeownership
Program. CFPB Bulletin 2015-01, Section 8 Housing Choice Voucher
Homeownership Program, available at <a href="https://files.consumerfinance.gov/f/201505_cfpb_bulletin-section-8-housing-choice-voucher-homeownership-program.pdf">https://files.consumerfinance.gov/f/201505_cfpb_bulletin-section-8-housing-choice-voucher-homeownership-program.pdf</a>.
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In response to these findings, the CFPB directed lenders to review,
identify, and provide relief to any applicant negatively affected by
these policies. Lenders were also directed to revise and implement
policies and procedures and enhance related systems to ensure public
assistance income is evaluated under standards applicable to other
sources of income.
2.7 Information Technology
The CFPB's Supervision program evaluates information technology
controls at supervised institutions that may impact compliance with
Federal consumer financial law or implicate risk to consumers. The CFPB
assesses the effectiveness of information technology controls in
detecting and preventing data breaches and cyberattacks. For example,
inadequate security for sensitive consumer information, weak password
management controls, untimely software updates or failing to implement
multi-factor authentication or a reasonable equivalent could cause or
contribute to violations of law including the prohibition against
engaging in UDAAPs.\42\
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\42\ These deficiencies may also violate other Federal laws
governing data security for financial institutions such as the
Safeguards Rules issued under the Gramm-Leach-Bliley Act.
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Examiners found that institutions engaged in unfair acts or
practices prohibited by the CFPA by failing to implement adequate
information technology controls.
2.7.1 Failing To Implement Adequate Information Technology Security
Controls
Examiners found that institutions engaged in unfair acts or
practices by failing to implement adequate information technology
security controls that could have prevented or mitigated cyberattacks.
More specifically, the institutions' password management policies for
certain online accounts were weak, the entities failed to establish
adequate controls in connection with log-in attempts, and the same
entities also did not adequately implement multi-factor authentication
or a reasonable equivalent for consumer accounts.
The entities' lack of adequate information technology security
controls caused substantial harm to consumers when bad actors accessed
almost 8,000 consumer bank accounts and made fraudulent withdrawals in
the sum of at least $800,000. Consumers were also injured because they
had to devote significant time and resources to dealing with the
impacts of the incident. For example, consumers had to contact the
institutions to file disputes to determine why funds were missing from
their accounts and then wait to be reimbursed by the institutions.
Consumers may have had to spend additional time enrolling in credit
monitoring services, identity theft protection services or changing
their log-in credentials.
The impacted consumers could not reasonably avoid the injury caused
by the institutions' inadequate information technology security
controls. Consumers do not have control over certain aspects of an
institutions' security features, such as how many log-in attempts an
institution allows before locking an account or the number of
transactions it labels suspicious, requiring additional verification.
Similarly, only the institutions can implement measures to mitigate or
prevent cyberattacks such as employing controls or tools to block
automated malicious software (botnet) activity or ensuring sufficient
authentication protocols are in place such as multi-factor
authentication or an alternative of equivalent strength. Consumers do
not have control over these security measures and were unable to
reasonably avoid the injury caused by the cyberattacks. The injury to
consumers outweighs any countervailing benefits, such as avoiding the
cost of implementing information technology controls necessary to
prevent these types of attacks.
In response to these findings, the institutions are implementing
multi-factor authentication, or a reasonable equivalent, enhancing
password management practices and implementing adequate controls for
failed log-in attempts to prevent/mitigate unauthorized access to
consumer accounts. Additionally, the institutions are providing
remediation to impacted consumers.
2.8 Mortgage Origination
The CFPB assessed mortgage origination operations of several
supervised institutions for compliance with applicable Federal consumer
financial laws including Regulation Z.
[[Page 52138]]
2.8.1 Loan Originator Compensation: Differentiations Based on Product
Type
Regulation Z generally prohibits compensating mortgage loan
originators in an amount that is based on the terms of a
transaction.\43\ It defines a term of a transaction as ``any right or
obligation of the parties to a credit transaction.'' \44\ And it
provides that a determination of whether compensation is ``based on'' a
term of a transaction is made based on objective facts and
circumstances indicating that compensation would have been different if
a transaction term had been different.\45\ Accordingly, in the preamble
to the CFPB's 2013 Loan Originator Final Rule, the CFPB clarified that
it is ``not permissible to differentiate compensation based on credit
product type, since products are simply a bundle of particular terms.''
\46\
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\43\ 12 CFR 1026.36(d)(1)(i).
\44\ 12 CFR 1026.36(d)(1)(ii).
\45\ 12 CFR 1026.36(d)(1)(i), comment 36(d)(1)-1.i.
\46\ 2013 Loan Originator Compensation Rule, 78 FR 11279, 11326-
27, n.82 (Feb. 15, 2013).
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As part of their business model, institutions brokered-out certain
mortgage products not offered in-house. For example, the institutions
used outside lenders for reverse mortgage originations, but had their
own in-house cash-out refinance mortgage product. Examiners determined
that the institutions used a compensation plan that allowed a loan
originator who originated both brokered-out and in-house loans to
receive a different level of compensation for the brokered-out loans
versus in-house loans. By compensating differently for loan product
types that were not offered in-house, the entities violated Regulation
Z by basing compensation on the terms of a transaction. In response to
these findings, the entities have since revised their loan originator
compensation plans to comply with Regulation Z.
2.8.2 Loan Disclosures: Failure To Reflect the Terms of the Legal
Obligation on Disclosures
Regulation Z requires that disclosures ``shall reflect the terms of
the legal obligation between the parties.'' \47\ In most cases,
disclosures should reflect the terms to which both the consumer and
creditor are legally bound at the outset of a transaction.\48\
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\47\ 12 CFR 1026.17(c)(1).
\48\ 12 CFR 1026.17(c)(1), comment 17(c)(1)-1.
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Examiners found that the standard adjustable-rate promissory note
used by an institution stated that the result of the margin plus the
current index should be rounded up or down to the nearest one-eighth of
one percentage point. However, examiners discovered that the
institutions' loan origination system was not programmed to round.
Thus, the fully indexed rate that the entity calculated and provided on
their disclosures was calculated contrary to the promissory note for
the loan. Consequently, the supervised institutions failed to reflect
the terms of the legal obligation on disclosures in violation of
Regulation Z.\49\ In response to these findings, the supervised
institutions reconfigured their loan origination system to round
according to the promissory note.
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\49\ 12 CFR 1026.38(o)(1)(i) and 12 CFR 1026.38(o)(2)(i).
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2.9 Mortgage Servicing
Examiners identified UDAAP and regulatory violations at mortgage
servicers, including violations during the loss mitigation and
servicing transfer processes, as well as payment posting violations.
2.9.1 Loss Mitigation Timing Violations
If a servicer receives a complete application more than 37 days
before a scheduled foreclosure sale, then Regulation X \50\ requires
servicers to evaluate the complete loss mitigation applications within
30 days of receipt and provide written notices to borrowers stating
which loss mitigation options, if any, are available. Examiners found
that some servicers violated Regulation X when they failed to evaluate
complete applications within 30 days of receipt.\51\ Relatedly, some
servicers evaluated the application within 30 days but failed to
provide the required notice to borrowers within 30 days as
required.\52\ In response to these findings, servicers improved
policies and implemented additional training.
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\50\ 12 CFR 1024.41(c)(1).
\51\ 12 CFR 1024.41(c)(1)(i).
\52\ 12 CFR 1024.41(c)(1)(ii).
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Additionally, examiners found that servicers engaged in an unfair
act or practice when they delayed processing borrower requests to
enroll in loss mitigation options, including COVID-19 pandemic-related
forbearance extensions, based on incomplete applications.\53\ These
delays varied in length, including delays up to six months. Borrowers
were substantially injured because they suffered one or more of the
following harms: prolonged delinquency, late fees, default notices, and
lost time and resources addressing servicer delays. Borrowers also
experienced negative credit reporting because of the servicers' delays,
resulting in a risk of damage to their credit that may have
materialized into financial injury. Borrowers could not reasonably
avoid injury because servicers controlled the processing of
applications, and borrowers reasonably expected servicers to enroll
them in the options they applied for. And the injury to consumers was
not outweighed by benefits to consumers or competition.
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\53\ Generally, servicers must not evade the requirement to
evaluate a complete loss mitigation application by offering a loss
mitigation option based on evaluation of an incomplete application.
12 CFR 1024.41(c)(2)(i). But servicers may offer certain types of
loss mitigation options based on incomplete applications, such as
short-term loss mitigation options or certain loss mitigation
options made available to borrowers experiencing a COVID-19-related
hardship as specified by Regulation X. 12 CFR 1024.41(c)(2)(iii),
(v), & (vi). When consumers apply for these options, the Regulation
X requirement that servicers must evaluate applications within 30
days frequently does not apply because the consumer has not
submitted a complete application. 12 CFR 1024.41(c)(1). In some
instances, consumers applying for these options do submit a complete
application and the Regulation X 30-day evaluation requirement does
apply.
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In response to these findings, servicers ceased the practice and
developed improved policies and procedures.
2.9.2 Mispresenting Loss Mitigation Application Response Times
Examiners found that servicers engaged in deceptive acts or
practices when they informed consumers, orally and in written notices,
that they would evaluate their complete loss mitigation applications
within 30 days, but then moved toward foreclosure without completing
the evaluations. Because the servicers received the complete loss
mitigation applications 37 days or less before foreclosure, Regulation
X did not require the servicers to evaluate the application within 30
days.\54\ But the servicers informed consumers in written and oral
communications that they would evaluate borrowers' complete loss
mitigation applications within 30 days, and these representations
created the overall net impression that foreclosure would not occur
until the servicers rendered decisions on the applications. The
borrowers reasonably interpreted these representations to mean that
they would receive decisions on the applications, and potentially a
period of time to take other actions if the applications were denied,
prior to foreclosure. Finally, the servicers' representations were
material, as they prompted the borrowers to wait for notification
concerning a possible loan modification and discouraged the borrowers
from taking additional steps to prepare for foreclosure.
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\54\ 12 CFR 1024.41(c)(3)(ii)(B).
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In response to these findings, servicers ceased the practice and
[[Page 52139]]
developed improved policies and procedures.
2.9.3 Assigning Continuity of Contact Personnel
Under Regulation X, servicers are required to establish continuity
of contact with delinquent consumers by maintaining policies and
procedures to assign personnel to delinquent borrowers by, at the
latest, the 45th day of delinquency.\55\ These personnel should be made
available to answer delinquent borrowers' questions via telephone, and
the servicer shall maintain policies and procedures that are reasonably
designed to ensure these personnel can perform certain functions.\56\
These include providing accurate information about loss mitigation and
timely retrieving written information provided by the borrower to the
servicer in connection with a loss mitigation application.\57\
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\55\ 12 CFR 1024.40(a).
\56\ 12 CFR 1024.40(a)(2); 12 CFR 1024.40(b).
\57\ 12 CFR 1024.40(b)(1) and (2).
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Examiners found that servicers violated Regulation X by failing to
maintain adequate continuity of contact procedures.\58\ Servicers did
not maintain policies and procedures that were reasonably designed to
ensure that personnel were made available to borrowers via telephone
and provided timely live responses if borrowers were unable to reach
continuity of contact personnel; the servicers routinely failed to
return phone calls from borrowers.\59\ And when consumers did speak
with personnel, the personnel failed to provide accurate information
about loss mitigation options that were available.\60\ Additionally,
servicers' systems did not allow the assigned personnel to retrieve, in
a timely manner, written information that the consumer had already
provided in connection with their loss mitigation applications, causing
assigned personnel to ask for information already in the servicers'
possession.\61\
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\58\ 12 CFR 1024.40(a) and (b).
\59\ 12 CFR 1024.40(a)(2) and (3).
\60\ 12 CFR 1024.40(b)(1).
\61\ 12 CFR 1024.40(b)(2)(ii).
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In response to these findings, servicers updated their servicing
platforms, developed new monitoring reports, implemented additional
trainings, and revised policies and procedures.
2.9.4 Spanish Language Acknowledgement Notices Missing Information
Regulation X requires servicers, in most circumstances, to provide
borrowers with a written acknowledgment notice within 5 days of receipt
of a loss mitigation application.\62\ This notice must contain a
statement that the borrower should consider contacting servicers of any
other mortgage secured by the same property to discuss loss mitigation
options.\63\ Examiners found that servicers violated Regulation X by
failing to include this required language on Spanish language
application acknowledgment notices. In contrast, servicers included
this language on English language acknowledgment notices sent to
English speaking consumers. In response to these findings, servicers
updated their letter templates.
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\62\ 12 CFR 1024.41(b)(2)(i)(B).
\63\ 12 CFR 1024.41(b)(2)(i)(B).
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2.9.5 Failure To Provide Critical Loss Mitigation Information
Examiners found that servicers violated Regulation X and Regulation
Z by failing to provide specific required information in several
circumstances:
<bullet> Specific reasons for denial when they sent notices that
included vague denial reasons, such as informing consumers that they
did not meet the eligibility requirements for the program; \64\
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\64\ If a servicer denies a borrower's complete loss mitigation
application for any loan modification option available to the
borrower, then its evaluation notice required by 12 CFR
1024.41(c)(1)(ii) must include the specific reason or reasons for
the denial. 12 CFR 1024.41(d).
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<bullet> Correct payment and duration information for forbearance;
\65\ and
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\65\ When a servicer offers a short-term loss mitigation option,
such as a forbearance plan, it must promptly provide a written
notice that includes the specific payment terms and duration of the
program. 12 CFR 1024.41(c)(2)(iii).
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<bullet> Information in periodic statements about loss mitigation
programs, such as forbearance, to which consumers had agreed.\66\
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\66\ Regulation Z requires servicers to include delinquency
information on the periodic statement, or in a separate letter, if a
consumer is more than 45 days delinquent. 12 CFR 1026.41(d)(8). This
includes a requirement to provide a notice of any loss mitigation
program to which the consumer has agreed. 12 CFR 1026.41(d)(8)(iv).
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In response to these findings, servicers updated their letter
templates and enhanced monitoring.
2.9.6 Failure To Credit Payment Sent to Prior Servicer After Transfer
After a transfer of servicing, Regulation X requires that, during
the 60-day period beginning on the effective date of transfer,
servicers not treat payments sent to the transferor servicer as late if
the transferor servicer receives them on or before the due date.\67\
Examiners found that servicers treated payments received by the
transferor servicer during the 60-day period, but not transmitted by
the transferor to the transferee until after the 60-day period, as
late. This violated Regulation X because the transferor had received
the payment within the 60-day period beginning on the effective date of
the transfer. In response to these findings servicers remediated
consumers and updated policies, procedures, training, and internal
controls.
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\67\ 12 CFR 1024.33(c)(1).
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2.9.7 Failure To Maintain Policies and Procedures Reasonably Designed
To Identify Missing Information After a Transfer
Regulation X \68\ requires servicers to maintain policies and
procedures that are reasonably designed to achieve the objectives in 12
CFR 1024.38(b). Commentary to Regulation X clarifies that
``procedures'' refers to the actual practices followed by the
servicer.\69\ Under Regulation X,\70\ transferee servicers are required
to maintain policies and procedures to identify necessary documents and
information that may not have been included in a servicing transfer and
obtain such information from the transferor servicer.
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\68\ 12 CFR 1024.38(a).
\69\ 12 CFR 1024.38(a)--comment 2.
\70\ 12 CFR 1024.38(b)(4)(ii).
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Examiners found that some servicers violated Regulation X when they
failed to maintain policies and procedures reasonably designed to
achieve the objective of facilitating transfer of information during
servicing transfers. For example, servicers' policies and procedures
were not reasonably designed because they failed to obtain copies of
the security instruments, or any documents reestablishing the security
instrument, to establish the lien securing the mortgage loans after
servicing transfers. In response to these findings, servicers updated
their policies and procedures and implemented new training.
2.10 Payday and Small-Dollar Lending
During examinations of payday and small-dollar lenders, Supervision
identified unfair, deceptive, and abusive acts or practices and
violations of Regulation Z. Supervision also identified risks
associated with the Military Lending Act.
2.10.1 Unreasonable Limitations on Collection Communications
Examiners found that lenders engaged in abusive and deceptive acts
or practices in connection with short-term, small-dollar loans, by
including language in loan agreements purporting
[[Page 52140]]
to prohibit consumers from revoking their consent for the lender to
call, text, or email the consumers. The agreements stated, for example,
that consumers, ``cannot revoke this consent to call, text, or email
about your existing loan'' and that ``[n]one of our employees are
authorized to receive a verbal revocation of this authorization.''
Lenders that engage in unreasonable collections communications may
violate the CFPA's prohibition against UDAAP. By implying that
consumers could not take action to limit unreasonable collections
communications, this practice was abusive because it took unreasonable
advantage of the consumers' inabilities to protect their interests in
selecting or using a consumer financial product or service by limiting
such collections communications. The practice was also deceptive
because it misled or was likely to mislead consumers acting reasonably
as to a material fact, i.e., whether or not they could protect
themselves by limiting unreasonable communications by phone, text, or
email, and whether the lenders had an obligation to honor such
requests. The practice was further abusive and deceptive under the
above analyses because, contrary to the language of the loan
agreements, the lenders' procedures did in fact require the lenders'
representatives to allow consumers to revoke consent to communications.
In response to these findings, Supervision directed the lenders to
revise the contract language to cease misleading consumers about their
ability to limit collections calls, texts, and emails to reasonable
channels, locations, and times, and to cease taking unreasonable
advantage of consumers' inabilities to protect themselves against
unreasonable or unlawful collection communications.
2.10.2 False Collection Threats
Examiners found that supervised institutions made false collection
threats related to litigation, garnishment, and late fees, each of
which constituted deceptive acts or practices in violation of the CFPA.
The lenders sent letters to delinquent payday loan borrowers in certain
states, stating that the supervised institutions ``may pursue any legal
remedies available to us'' unless the consumer contacted the
institution to discuss the delinquency. The representations misled or
were likely to mislead borrowers into reasonably believing that the
supervised institutions might take legal action against the consumer to
collect the debt if the consumer did not make timely payment. It would
be reasonable for consumers to interpret a threat to pursue ``any legal
remedies available to us'' to include the legal remedy of a lawsuit or
other similar civil action. The supervised institutions, however, never
pursued such legal action to collect on payday loans in these states.
The representations were material because threats of possible legal
action could have an impact on a consumer's decision regarding whether
and when to make payment. In response to these findings, Supervision
directed the institutions to stop engaging in the deceptive conduct.
Examiners also found that lenders engaged in deceptive acts or
practice by making false threats related to garnishment in collections
communications. Lenders used the term ``garnishment'' in communications
with consumers when referring to voluntary wage deduction process.
These representations misled or were likely to mislead reasonable
consumers by giving the false impression they would be subject to an
involuntary legal garnishment process if they did not make payment. In
fact, consumers could revoke voluntary wage deduction consent at will
under the terms of the loan agreement and prevent deductions from
occurring. Consumers acting reasonably would believe that the lenders
express references to the possibility of garnishment accurately
reflected what might happen absent the consumers making payment. The
representations were material because they may have affected a
consumer's decision regarding whether and when to make payment and
whether to revoke their consent to the voluntary wage deduction
process. In response to these findings, the entities were required to
stop engaging in the deceptive conduct.
In addition, examiners found that periodic statements provided to
borrowers falsely stated, ``if we do not receive your minimum payment
by the date listed above, you may have to pay a $25 late fee.'' Such
representations misled or were likely to mislead borrowers into
reasonably believing that they could be charged late fees, when in fact
lenders did not assess late fees in connection with the product. The
representations were material because they were likely to affect
consumers' decisions about whether and when to make payments. In
response to these findings, Supervision directed the lenders to stop
engaging in the deceptive conduct.
2.10.3 Unauthorized Wage Deductions
Examiners found that lenders engaged in unfair acts or practices
with respect to consumers who signed voluntary wage deduction
agreements by sending demand notices to consumers' employers that
incorrectly conveyed that the employer was required to remit to the
lenders from the consumer's wages the full amount of the consumer's
loan balance. In fact, the consumer had agreed to permit the lenders
only to seek a wage deduction in the amount of the individual scheduled
payment due. The lenders then collected wages from the consumers'
employers in amounts exceeding the single payment authorized by the
consumer. This wage collection practice caused substantial injury to
consumers who incurred monetary injury by having amounts deducted from
their wages in excess of what they had authorized. The consumers could
not have reasonably avoided the injury, which was caused by the lenders
seeking and obtaining wage deductions in excess of those authorized by
the consumers. The benefits to the lenders of collecting unauthorized
amounts do not outweigh the injuries to the consumers in the form of
lost wages. In response to these findings, Supervision directed lenders
to stop engaging in the practice and provide remediation to impacted
borrowers.
2.10.4 Misrepresentations Regarding the Impact of Payment of Debt in
Collections
Examiners found that lenders engaged in deceptive acts or practices
when they misrepresented to borrowers the impact that payment or
nonpayment of debts in collection may have on the sale of the debt to a
debt buyer and the subsequent impact on the borrower's credit reports.
The lenders made representations about debt sale, credit reporting
practices, and corresponding effects on consumer creditworthiness that
misled or were likely to mislead the consumer. Their agents asserted or
implied that making a payment would prevent referral to a third-party
debt buyer and a negative credit impact. However, these agents had no
basis to predict the consumer's credit situation or a potential debt
buyer's furnishing practices, the lender's contracts with debt buyer
prohibited furnishing to a CRC, and the debt was not in fact sold. It
was reasonable for a consumer experiencing repayment difficulty to
interpret the representations to mean that not making a payment would
cause a third party to subsequently report adverse credit information
and worsen their creditworthiness. The representations were material
because they were likely to affect the consumer's choices or conduct
regarding the loan. In response to these findings, Supervision directed
[[Page 52141]]
the entities to stop engaging in the deceptive conduct.
2.10.5 Risk of Harm to Consumers Protected by the Military Lending Act
Examiners found that installment lenders created a risk of harm to
borrowers protected by the Military Lending Act by, before engaging in
loan transactions, and contrary to their policies, failing to confirm
that several thousand borrowers were not covered borrowers under the
Military Lending Act as implemented by Department of Defense
regulations.\71\ These risks included potentially, originating loans to
covered borrowers at rates and terms impermissible under the Military
Lending Act; not providing covered borrowers with required disclosures;
including in loan agreements prohibited mandatory arbitration clauses;
and failing to limit certain types of repeat or extended borrowing. In
response to these findings, Supervision directed lenders to change
their practices to prevent these risks.
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\71\ 10 U.S.C. 987 and 32 CFR 232.1 et seq.
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2.10.6 Failure To Retain Evidence of Compliance With Disclosure
Requirements Under Regulation Z
Examiners found that lenders failed to retain for two years
evidence that they delivered clear and conspicuous closed-end loan
disclosures in writing before consummation of the transaction, in a
form that consumers may keep, in violation of the record-retention
provision of Regulation Z,\72\ and creating a risk of a violation of
the general disclosure requirements of Regulation Z.\73\ Copies of
disclosures in loan files did not include evidence of when or how
lenders delivered disclosures to borrowers. And lenders were unable to
produce evidence that, for electronically signed contracts, disclosures
were delivered to consumers in a form they may keep before loan
consummation. Lenders' compliance procedures did not require delivery
of loan disclosures to consumers in a form they may keep before
consummation. In response to these findings, Supervision directed
lenders to update compliance management systems to ensure clear and
conspicuous disclosures are provided in writing in a form the consumer
may keep before consummation and evidence of compliance is retained,
consistent with Regulation Z, for all disclosure channels, including
electronic or keypad.
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\72\ 12 CFR 1026.25.
\73\ 12 CFR 1026.17(a)(1) and (b).
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2.11 Remittances
The CFPB evaluated both depository and non-depository institutions
for compliance with the Electronic Funds Transfer Act (EFTA) and its
implementing Regulation E, including subpart B (Remittance Rule).\74\
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\74\ 15 U.S.C. 1693 et seq.; 12 CFR 1005.30 et seq.
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2.11.1 Failure To Develop Policies and Procedures To Ensure Compliance
With the Remittance Rule's Error Resolution Requirements
The Remittance Rule states that a remittance transfer provider
shall develop and maintain written policies and procedures that are
designed to ensure compliance with the error resolution requirements
applicable to remittance transfers. Some institutions did not develop
written policies and procedures designed to ensure compliance. This
issue was noted in prior editions of Supervisory Highlights and
continues to be an issue with institutions.\75\
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\75\ CFPB, Supervisory Highlights, Issue 26, Spring 2022,
available at <a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-26-spring-2022/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-26-spring-2022/</a>.
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For example, some institutions used their anti-money laundering
compliance policy in lieu of a specific policy tailored to the
Remittance Rule requirements. The anti-money laundering policy and
procedure included some basics, like identifying some covered
Remittance Rule errors and the basic timeframes remittance providers
had to investigate and resolve error notices. But they were not
substitutes for Remittance Rule policies. They did not provide detailed
guidance to employees on how to distinguish notices of error, the
handling of which are subject to specific Remittance Rule requirements,
from other complaints. They did not make clear employees should provide
notifications that are required by the Remittance Rule to consumers
when the institutions determined an error, no error, or a different
error occurred. The policies also did not alert employees as to the
remedies available to consumers under the Remittance Rule and
articulated remedies different than those required by the Remittance
Rule. Other institutions provided policies that indicated the
institutions knew of the Remittance Rule and its requirements and had
manuals to cover Remittance Rule compliance. However, these
institutions did not develop procedures that would put these policies
into effect. Specifically, the manuals did not provide adequate
guidance to employees to resolve error notices in a consistent and
compliant manner. Recitation of Remittance Rule requirements without
greater detail on how to effectuate compliance does not ensure
compliance as the Remittance Rule requires.
In response to these findings, institutions updated their policies
and procedures during or after the conclusion of the examinations.
3. Supervisory Program Developments
3.1 Recent CFPB Supervision Program Developments
Set forth below are recent supervision program developments
including circulars, bulletins, advisory opinions, policy statements
and exam procedures that have been issued since the last regular
edition of Supervisory Highlights.
3.1.1 CFPB Nonbank Supervisory Authorities
The CFPB has supervisory authority over nonbanks in the mortgage,
private education, and payday loan markets, regardless of the entities'
size.\76\ The CFPB also has supervisory authority over larger
participants of markets for other consumer financial products or
services defined by rule.\77\ Additionally, the CFPB has supervisory
authority over nonbank covered persons it has reasonable cause to
determine, by order, after notice and a reasonable opportunity to
respond, based on complaints or information from other sources, that
the person is engaging, or has engaged, in conduct that poses risks to
consumers with regard to the offering or provision of consumer
financial products or services.\78\ The CFPB issued a rule implementing
this provision of the CFPA in 2013. These processes were amended after
notice and comment in a final procedural rule in November 2022.\79\
Since the amended rule was finalized, the CFPB has entered into
discussions with several entities across markets regarding the CFPB's
supervision program and its benefits, including identifying potential
compliance issues before they become significant. And the CFPB has
issued several Notices of Reasonable Cause
[[Page 52142]]
commencing the risk-based supervision process under the rule. As a
result of these activities, several entities have voluntarily consented
to the CFPB's supervisory authority.
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\76\ 12 U.S.C. 5514(a)(1)(A), (D), and (E).
\77\ 12 U.S.C. 5514(a)(1)(B). To date the CFPB has issued larger
participant rules for the consumer reporting, debt collection,
student loan servicing, international money transfer, and automobile
financing markets. See 12 CFR part 1090.
\78\ 12 U.S.C. 5514(a)(1)(C).
\79\ 12 CFR part 1091; 78 FR 40352 (July 3, 2013); the
procedural rule is available at <a href="https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_supervisory-risk-determinations-rule_2022-11.pdf">https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_supervisory-risk-determinations-rule_2022-11.pdf</a>.
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Additionally, the CFPB is conducting, or has scheduled, supervisory
examinations of one or more data aggregators, including larger
participants in the consumer reporting market.
3.1.2 CFPB Issued Circular Regarding Reopening Deposit Accounts That
Consumers Previously Closed
On May 10, 2023, the CFPB issued a circular to emphasize that a
financial institution's unilateral reopening of deposit accounts that
consumers previously closed can constitute a violation of the CFPA's
prohibition on unfair acts or practices.\80\
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\80\ CFPB Circular 2023-02, Reopening deposit accounts that
consumers previously closed, available at <a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2023-02-reopening-deposit-accounts-that-consumers-previously-closed/">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2023-02-reopening-deposit-accounts-that-consumers-previously-closed/</a>.
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3.1.3 CFPB Issued an Advisory Opinion Addressing Protection of
Homeowners From Illegal Collection Tactics on Zombie Mortgages
On April 26, 2023, the CFPB issued an advisory opinion on debt
collectors, covered by the FDCPA, threatening to foreclose on homes
with mortgages past the statute of limitations.\81\ The advisory
opinion clarifies that a covered debt collector who brings or threatens
to bring a State court foreclosure action to collect a time-barred
mortgage debt may violate the FDCPA and its implementing regulation.
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\81\ CFPB Advisory Opinion, FDCPA; Time-Barred Debt, available
at <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-guidance-to-protect-homeowners-from-illegal-collection-tactics-on-zombie-mortgages/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-guidance-to-protect-homeowners-from-illegal-collection-tactics-on-zombie-mortgages/</a>.
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3.1.4 CFPB Issued Policy Statement on Abusive Acts or Practices
On April 3, 2023, the CFPB issued a policy statement to explain how
the CFPB analyzes the elements of abusiveness through relevant
examples, with the goal of providing an analytical framework to fellow
government enforcers and to the market for how to identify violative
acts or practices.\82\
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\82\ CFPB Policy Statement on Abusive Acts or Practices,
available at <a href="https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/">https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/</a>.
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3.1.5 CFPB Issued Bulletin 2023-01: Unfair Billing and Collection
Practices After Bankruptcy Discharged of Certain Student Loan Debts
On March 16, 2023, the CFPB issued a bulletin on unfair billing and
collection practices after bankruptcy discharges of certain student
loan debt.\83\ The bulletin details examiners' findings that student
loan servicers who collected on student loans that were discharged by a
bankruptcy court had engaged in an unfair act or practice in violation
of the CFPA. The CFPB issued this bulletin to notify regulated entities
how the CFPB intends to exercise its enforcement and supervisory
authorities on this issue.
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\83\ CFPB, Unfair Billing and Collection Practices After
Bankruptcy Discharges or Certain Student Loan Debts, available at
<a href="https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_unfair-billing-collection-bankruptcy-student-loan-debt_2023-01.pdf">https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_unfair-billing-collection-bankruptcy-student-loan-debt_2023-01.pdf</a>.
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3.1.6 CFPB Issued an Advisory Opinion To Protect Mortgage Borrowers
From Pay-to-Play Digital Mortgage Comparison Shopping Platforms
On February 7, 2023, the CFPB issued an advisory opinion outlining
how companies that operate digital mortgage comparison-shopping
platforms violate the Real Estate Settlement Procedures Act when they
steer shoppers to lenders by using pay-to-play tactics rather than
providing shoppers with comprehensive and objective information.\84\
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\84\ CFPB, Digital Mortgage Comparison-Shopping Platforms and
Related Payments to Operators, available at <a href="https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_respa-advisory-opinion-on-online-mortgage-comparison-shopping-tools_2023-02.pdf">https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_respa-advisory-opinion-on-online-mortgage-comparison-shopping-tools_2023-02.pdf</a>.
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3.1.7 CFPB Issued Circular on Unlawful Negative Option Marketing
Practices
On January 19, 2023, the CFPB issued a circular that states that
persons engaged in negative option marketing practices may violate the
prohibition on unfair, deceptive, or abusive acts or practices in the
CFPA.\85\ Negative option marketing practices may violate that
prohibition where a seller (1) misrepresents or fails to clearly and
conspicuously disclose the material terms of a negative option program;
(2) fails to obtain consumers' informed consent; or (3) misleads
consumers who want to cancel, erects unreasonable barriers to
cancellation, or fails to honor cancellation requests that comply with
its promised cancellation procedures.
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\85\ CFPB Circular 2023-01, Unlawful negative option marketing
practices, available at <a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2023-01-unlawful-negative-option-marketing-practices//">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2023-01-unlawful-negative-option-marketing-practices//</a>.
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3.1.8 CFPB Released Updates to Mortgage Servicing Exam Procedures
On January 18, 2023, the CFPB released its updated mortgage
servicing exam procedures.\86\ The examination procedures describe the
types of information that CFPB examiners gather to evaluate mortgage
servicers' policies and procedures; assess whether servicers are
complying with applicable laws; and identify risks to consumers related
to mortgage servicing. The updated Examination Procedures include CFPB
guidance released since the last update in June 2016.
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\86\ CFPB, Mortgage Servicing Examination Procedures, available
at <a href="https://www.consumerfinance.gov/compliance/supervision-examinations/mortgage-servicing-examination-procedures/">https://www.consumerfinance.gov/compliance/supervision-examinations/mortgage-servicing-examination-procedures/</a>.
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4. Remedial Actions
The CFPB's supervisory activities resulted in and supported the
below enforcement actions.
4.1.1 Citizens Bank
On May 23, 2023, the CFPB reached a settlement to resolve
allegations that Citizens Bank violated consumer financial protection
laws and rules that protect individuals when they dispute credit card
transactions.\87\ The CFPB alleges that Citizens Bank failed to
properly manage and respond to customers' credit card disputes and
fraud claims. The order requires Citizens Bank to pay a $9 million
civil money penalty.
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\87\ Bureau of Consumer Financial Protection v. Citizens Bank,
N.A., Stipulated Final Judgment and Order, available at <a href="https://www.consumerfinance.gov/enforcement/actions/citizens-bank/">https://www.consumerfinance.gov/enforcement/actions/citizens-bank/</a>.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-16764 Filed 8-4-23; 8:45 am]
BILLING CODE 4810-AM-P
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</html>Indexed from Federal Register on August 7, 2023.
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.