Notice2024-31670
Supervisory Highlights, Issue 37 (Winter 2024)
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
January 6, 2025
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB) is issuing its thirty seventh edition of Supervisory Highlights.
Full Text
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<title>Federal Register, Volume 90 Issue 3 (Monday, January 6, 2025)</title>
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[Federal Register Volume 90, Number 3 (Monday, January 6, 2025)]
[Notices]
[Pages 607-613]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-31670]
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CONSUMER FINANCIAL PROTECTION BUREAU
Supervisory Highlights, Issue 37 (Winter 2024)
AGENCY: Consumer Financial Protection Bureau.
ACTION: Supervisory Highlights.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB) is issuing its
thirty seventh edition of Supervisory Highlights.
DATES: This edition of Supervisory Highlights covers recent supervisory
findings in the areas of deposits, furnishing, and short-term small
dollar lending. The findings in this edition of Supervisory Highlights
cover select examinations that were generally completed between January
1, 2024, to October 1, 2024.
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#1a595c4a58455b79797f696973787376736e635a797c6a78347d756c"><span class="__cf_email__" data-cfemail="6b282d3b29342a08080e181802090207021f122b080d1b09450c041d">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
1. Introduction
The Consumer Financial Protection Bureau's (CFPB) Supervision
program assesses supervised institutions' compliance with Federal
consumer financial law including unfair, deceptive, or abusive acts or
practices (UDAAPs) prohibited by the Consumer Financial Protection Act
of 2010 (the CFPA).\1\
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\1\ 12 U.S.C. 5531, 5536.
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This edition of Supervisory Highlights covers recent supervisory
findings in the areas of deposits, furnishing, and short-term small
dollar lending. In connection with deposits, Supervision continues to
find that supervised institutions are charging consumers unfair
overdraft and non-sufficient funds fees, and this edition provides an
update on Supervision's work in this space. Aside from the refunds
discussed in the context of deposits accounts below, mortgage
originators and servicers have also recently reported issuing refunds
related to unfair, deceptive, or otherwise unlawful fees and charges,
which the CFPB anticipates reporting on in an upcoming edition of
Supervisory Highlights. In short, mortgage servicers have reported
issuing $4,251,815 in refunds for 91,931 affected loans. Mortgage
originators reported issuing $115,605,024 in refunds for 134,912
affected loans. In connection with furnishing, examiners continue to
find violations of the Fair Credit Reporting Act (FCRA) \2\ and its
implementing regulation, Regulation V.\3\ These violations include
failing to maintain policies and procedures regarding identify theft
and the accuracy and integrity of information. Additionally, examiners
continue to find that furnishers are not investigating indirect
disputes. This edition of Supervisory Highlights also includes, for the
first time, supervisory findings in connection with Buy Now, Pay Later
and paycheck advance products. More specifically examiners identified
multiple violations of law including UDAAPs in connection with both Buy
Now Pay Later and paycheck advance products. This edition also
highlights how weak technology controls can cause or contribute to
violations of Federal consumer financial law. For example, Supervision
found that the way that core processors configured their platforms
caused violations of Federal consumer financial law.
[[Page 608]]
Additionally, an institution violated the law by rolling out a
dysfunctional online banking platform that made it difficult for credit
union members to perform basic banking functions for weeks, with some
features unavailable for more than six months. One area of particular
concern associated with technology that the CFPB expects to highlight
in future publications is the risk associated with ``Bring Your Own
Device'' (BYOD) policies, which refers to being able to conduct
business on a personally owned device, rather than a company issued
device. BYOD policies may increase security risks including, for
example, data breaches, malware, and unauthorized access to sensitive
data. Institutions that permit BYOD should ensure that they take steps
to mitigate the risks associated with these policies.
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\2\ 15 U.S.C. 1681 et seq.
\3\ 12 CFR part 1022.
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The findings in this edition of Supervisory Highlights cover select
examinations that were generally completed between January 1, 2024, to
October 1, 2024. 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.\4\ We invite readers with
questions or comments about Supervisory Highlights to contact us at
<a href="/cdn-cgi/l/email-protection#93d0d5c3d1ccc0e6e3f6e1e5fae0fafcfdd3f0f5e3f1bdf4fce5"><span class="__cf_email__" data-cfemail="0f4c495f4d505c7a7f6a7d79667c6660614f6c697f6d21686079">[email protected]</span></a>.
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\4\ 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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2. Supervisory Observations
2.1 Deposits
Supervision examined the deposit operations of supervised
institutions to assess whether they engaged in any UDAAPs prohibited by
the CFPA.\5\ In these examinations, Supervision identified unfair
overdraft and non-sufficient funds (NSF) fees as well as unfair acts or
practices related to consumer requests to stop payment of preauthorized
debit card transactions.
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\5\ 12 U.S.C. 5531, 5536.
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2.1.1 Unanticipated Overdraft Fees and Re-Presentment NSF Fees
In recent examinations of depository institutions and service
providers, Supervision continued to cite unfair acts or practices at
institutions that charged consumers for unfair unanticipated overdraft
fees, such as Authorize-Positive Settle-Negative (APSN) overdraft fees,
during this time period.\6\ Supervision also continued to cite
institutions in connection with charging consumers NSF fees on the
transaction that already incurred an NSF fee when it was previously
declined.\7\
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\6\ APSN overdraft fees are overdraft fees that financial
institutions assess for debit card or ATM transactions for which the
consumer had a sufficient available balance at the time the consumer
authorized the transaction, but which, given the delay between
authorization and settlement, the consumer's account balance is
insufficient to cover at the time of settlement. See Supervisory
Highlights: Junk Fees Update Special Edition, Issue 31, 4-7 (March
2023) <a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-junk-fees-update-special-edition-issue-31-fall-2023">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-junk-fees-update-special-edition-issue-31-fall-2023</a> ; Supervisory Highlights: Junk Fees Special
Edition, Issue 29, 3-6 (March 2023), <a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-junk-fees-special-edition-issue-29-winter-2023/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-junk-fees-special-edition-issue-29-winter-2023/</a>; Consumer
Financial Protection Circular 2022-06, Unanticipated Overdraft Fee
Assessment Practices, at 8-12 (Oct. 26, 2022), <a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2022-06-unanticipated-overdraft-fee-assessment-practices/">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2022-06-unanticipated-overdraft-fee-assessment-practices/</a>.
\7\ These transactions, called re-presentments, occur when,
after declining a transaction because of insufficient funds and
assessing an NSF fee for the transaction, the consumer's account-
holding institution returns the transaction to the merchant's
depository institution, and the merchant presents the same
transaction to the consumer's account-holding institution for
payment again. In some instances, when the consumer's account
remains insufficient to pay for the transaction upon re-presentment,
the consumer's account-holding institution again returns the
transaction to the merchant and assesses another NSF fee for the
transaction, without providing consumers a reasonable opportunity to
prevent another fee after the first failed presentment attempt.
Absent restrictions on the assessment of NSF fees by the consumer's
account-holding institution, this cycle can occur multiple times,
and consumers may be charged multiple fees for a single transaction.
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Since the CFPB heightened its supervisory attention on overdraft
and NSF fees in 2022, financial institutions have agreed to refund
nearly $250 million to consumers--approximately $184 million in unfair
unanticipated overdraft fees charged on transactions that were
authorized when the consumer had sufficient funds, and approximately
$66 million in unfair NSF fees charged on the same transaction that
already incurred an NSF fee when it was previously declined. This $250
million reflects $240 million that the CFPB previously announced in
October 2023 and April 2024, and an additional $10 million that
financial institutions have agreed to refund since the period covered
by those announcements.
2.1.2 Core Processor Practices
Supervision continued to examine core processors in their capacity
as service providers to large depository institutions. Core processors
provide critical deposit, payment, and data processing services to many
supervised institutions, and the system functionality that these
entities develop drives many fee practices, including overdraft and NSF
fee practices.
In examinations of core processors, examiners found that core
processors had enhanced their core platforms during the review periods
to enable client institutions to avoid assessing re-presentment NSF
fees and APSN overdraft fees. However, examiners also found that the
core processors configured their platforms so that the platforms would
continue to assess the fees by default unless the client institutions
took affirmative action to avoid assessing these fees. Examiners
concluded that, in the offering and providing of core service
platforms, core processors engaged in an unfair act or practice by
assessing APSN overdraft fees and re-presentment NSF fees through their
core platforms. An act or practice is unfair when: (1) it causes or is
likely to cause substantial injury to consumers; (2) the injury is not
reasonably avoidable by consumers; and (3) the injury is not outweighed
by countervailing benefits to consumers or to competition.\8\
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\8\ 12 U.S.C. 5531 and 5536.
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The assessment of re-presentment NSF fees and APSN fees results in
substantial injury to consumers. These fees also increased the risk of
consumers incurring additional fees on subsequent transactions caused
by the fees, which lowered consumers' account balances. The core
processors caused these injuries because they were a predictable and
foreseeable consequence of their core platforms' limitations and
configuration. Where the platforms were configured to assess the fees
by default, it was foreseeable to the core processors that their
clients would fail to take affirmative action to cease charging these
fees and thus continue to assess these fees. As with the fees
themselves, the relevant system limitations and configurations were not
reasonably avoidable by consumers and not outweighed by any
countervailing benefits to consumers or competition.
In response to these findings, the core processors enhanced their
core platforms to not only enable their client institutions to prevent
the assessment of these fees but also to ensure that clients would not
assess these fees by default if the clients did not take action to
prevent their assessment.
2.1.3 Improper Re-Presentment Processing Practices
Supervision has reviewed depository institutions' practices in
processing automated clearinghouse (ACH) transactions to ensure that
they are taking adequate steps to prevent the
[[Page 609]]
origination of improper re-presentment transactions by their merchant
and business clients. When a consumer pays for goods or services, the
consumer may authorize the merchant to debit their bank account by
submitting an ACH transaction to the consumer's bank. The merchant will
originate the ACH transaction by passing an ACH debit entry along to
its bank, referred to as an ``originating depository financial
institution'' (ODFI), which will then send the entry to the consumer's
bank, referred to as a ``receiving depository financial institution''
(RDFI). The RDFI then may either post the transaction and debit the
consumer's bank account or return the transaction to the ODFI because
of insufficient funds in the consumer's account. The network rules
governing ACH transactions impose certain formatting and processing
requirements to identify re-presentment transactions. As explained
above, in response to supervisory findings, core processors have
enhanced their platforms to enable institutions to avoid charging NSF
fees on readily identifiable re-presentment transactions. Accordingly,
when an ODFI does not ensure that its clients comply with these
formatting and processing requirements or otherwise do not originate
improper re-presentment transactions, ACH transactions may not be
readily identifiable as re-presentments by the RDFI and, by extension,
the RDFI's core platform may fail to prevent charging NSF fees on re-
presentment transactions.
The ACH network rules also generally limit the number of
permissible re-presentments for a single transaction by limiting an
ODFI and its clients to a maximum of two re-presentment attempts after
the initial presentment is returned for insufficient funds. However, as
the CFPB has previously observed, an ODFI's clients may, in an attempt
to obtain payment from consumers, seek to improperly re-present
transactions to circumvent this limit on the number of permissible
representments.\9\
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\9\ CFPB, Online Payday Loan Payments (2016), at 14 (explaining
that, according to CFPB analysis of online ACH payments, 50 percent
of failed payments are re-presented after three failed payment
attempts), <a href="https://www.consumerfinance.gov/data-research/research-reports/online-payday-loan-payments/">https://www.consumerfinance.gov/data-research/research-reports/online-payday-loan-payments/</a>.
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Supervision found that depository institutions engaged in an unfair
act or practice in their capacity as ODFIs by processing transactions
for payment as initial presentments when the transactions were in fact
re-presentments without taking steps to address indicia of inaccuracy.
Examiners found that these institutions, in their capacity as ODFIs,
did not monitor their originator clients' use of their ACH processing
services to identify or prevent them from improperly re-presenting
transactions. These depository institutions possessed information that
strongly suggested that a percentage of ACH transactions that they
processed as ODFIs were re-presented items that were improperly
formatted and submitted by their originator clients as new
transactions. These indicia included ACH entries reflecting
transactions from the same payee, in the same amount, made close in
time, which lacked indications that the transactions were recurring
payments or otherwise reflected separate transactions.
By failing to monitor originators to identify and prevent improper
re-presentment practices, these depository institutions caused or were
likely to cause substantial injury to consumers in the form of NSF fees
that could otherwise have been avoided. These fees would not have been
assessed had the transaction been properly re-presented because the
transaction would then either be identifiable as a re-presentment and
the NSF fee would have been waived by the bank's core platform or would
have not been submitted at all to the extent that the business client
had already submitted the maximum number of re-presentment attempts.
Although the supervised depository institutions, as ODFIs, did not
actually assess these NSF fees, examiners found they caused the injury
because the assessment of these fees was a probable and foreseeable
consequence of their processing transactions for payment as initial
presentments when the transactions were in fact re-presentments.
Even if a consumer's bank did not assess NSF fees, consumers still
suffered injury in the form of improper debiting of funds. When an
originator obtains payment for a previously returned transaction by
submitting the transaction as initial presentment, rather than a re-
presentment, without the consumer's authorization, the consumer suffers
monetary harm by their account being debited without their
authorization. These injuries were not reasonably avoidable and were
also not outweighed by countervailing benefits to consumers or
competition. In response to these findings, depository institutions
implemented processes to prevent the origination of improper re-
presentment transactions by their clients, including regularly
monitoring and auditing ACH transactions to identify any re-presented
items that are miscoded as initial presentments and any other indicia
of inaccuracy.
2.1.4 Stop Payment Services of Debit Card Network Operators
Consumers frequently complain that they face challenges in stopping
payment of preauthorized debit card transactions, which they have a
right to do under the Electronic Fund Transfer Act (EFTA) and its
implementing Regulation E.\10\ Supervision has found in examinations
that depository institutions likewise face difficulties in executing
stop payment requests for recurring debit card transactions for various
reasons.
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\10\ 15 U.S.C. 1693e(a); 12 CFR 1005.10(c).
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Unlike other types of recurring payment transactions, depository
institutions' core platforms generally do not offer the capability to
stop payment of preauthorized debit card transactions. Regulation E
recognizes that, in the case of a preauthorized debit made through a
debit card network, a depository institution may not have the
capability to block a preauthorized debit from being posted to the
consumer's account given the manner in which preauthorized debit card
transactions are processed.\11\ Accordingly, it allows banks to comply
with the stop-payment requirements by using a third party, such as a
debit card network, to block the transfer, as long as the consumer's
account is not debited for the payment.\12\ To that end, some debit
card networks offer stop payment capabilities that network members may
use to stop payment of recurring debit card transactions routed through
the network. Supervision recently conducted examinations of debit card
network operators in their capacity as service providers to large
depository institutions. Examiners found that, in some debit card
networks, these network operators did not offer a network-based stop
payment service that their members may use to stop payment of a
recurring debit card transaction. Examiners also found that, in other
debit card networks, the network operators did offer such a service but
very few of its members elected to use the service.
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\11\ See comment 1005.10(c)-3.
\12\ See Id.
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Examiners concluded that these network operators engaged in an
unfair act or practice by processing preauthorized debit card payments
subject to consumer's valid stop payment requests due to the manner in
which they operated their networks. By processing such transactions,
the network operators caused substantial
[[Page 610]]
monetary injury to consumers who were charged for preauthorized debit
card transactions that they requested to be and were entitled to have
stopped. Even though the consumer's financial institution could likely
recover the amount debited through standard dispute resolution and
chargeback processes for debit card transactions, consumers would still
be deprived of their funds while the dispute was processed. In any
event, these processes are not an adequate substitute for a consumer's
right to stop payment of preauthorized debit card transactions.
Operators of networks that did not offer a stop payment service
caused this injury because it was foreseeable to them that not offering
such a capability in the network would result in network members
lacking the capability to stop payment of the transactions and, by
extension, consumers being charged for such transactions after they
submit a valid stop payment order. Even where network operators offered
a network-based stop payment capability, these operators still caused
this injury to consumers, because, given that very few network members
elected to use the capability, it was foreseeable to them that
consumers would be charged for preauthorized debits that they are
entitled to have stopped.
The substantial injury identified in these exams was not reasonably
avoidable by consumers. When entering a recurring transaction,
consumers have little reason to anticipate potential injury, and if
they did, few means to avoid it. Consumers have a reasonable
expectation that their issuing bank will comply with the requirements
of Regulation E and stop payment if a valid request is entered.
Consumers also have little to no control over which debit card networks
their transactions are routed through, and no control over whether the
network offers a stop payment service or whether their bank has
voluntarily enrolled in such a service. Lastly, in considering
countervailing benefits to consumers and competition from processing
preauthorized debit card transactions subject to a consumer's valid
stop payment request, Supervision found this practice to be injurious
in its net effects.
In response to these findings, the network operators revised and
implemented relevant network processes and capabilities to ensure that
they cease to process preauthorized debit card payments routed through
their networks that are subject to consumers' valid stop payment
requests.
2.2 Furnishing
Entities--such as banks, loan servicers, and others (to which we
refer herein collectively as furnishers)--that furnish information to
consumer reporting companies (CRCs) \13\ for inclusion in consumer
reports play a vital role in availability of credit and have a
significant role to play in the fair and accurate reporting of credit
information. Furnishers are subject to several requirements under the
FCRA \14\ and its implementing regulation, Regulation V,\15\ including
obligations to reasonably investigate disputes and to furnish data
subject to the relevant accuracy requirements. In recent reviews,
examiners continued to find deficiencies in furnishers' compliance with
FCRA and Regulation V requirements.
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\13\ 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).
\14\ 15 U.S.C. 1681 et seq.
\15\ 12 CFR part 1022.
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2.2.1 Duty To Maintain Reasonable Procedures To Respond To Identify
Theft Block Requests Notifications From CRCs
The FCRA requires furnishers to have reasonable procedures in place
to respond to certain notifications they receive from CRCs related to
information resulting from identity theft (i.e., identity theft block
request notifications) to prevent the refurnishing of such
information.\16\
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\16\ 15 U.S.C. 1681s-2(a)(6)(A).
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Examiners found that furnishers did not have reasonable procedures
in place to respond to identity theft block request notifications from
CRCs. Specifically, in recent reviews of installment loan furnishers,
examiners identified that the furnishers did not have any procedures in
place to respond to identity theft block request notifications received
from CRCs. Consequently, the furnishers did not process the requests
and repeatedly refurnished information that consumers asserted had
resulted from identity theft and, thus, that should have been blocked.
In response to these findings, furnishers are establishing and
implementing procedures to respond to identity theft block request
notifications received from CRCs.
2.2.2 Duty To Conduct Reasonable Investigations of Indirect Disputes
After receiving notice of a dispute of the completeness or accuracy
of any information from a CRC, furnishers are required to conduct a
reasonable investigation with respect to the disputed information.\17\
The furnisher must review all relevant information provided by the CRC
and must complete the investigation and report the results to the CRC
within a certain requisite timeframe (typically 30 days).\18\
Conducting a reasonable investigation that is responsive to the
specific allegations in a dispute often requires furnishers to at least
review information relevant to the dispute in its own possession and,
in some cases, may necessarily entail accessing or requesting third-
party documents and other information relevant to the dispute to which
the furnisher reasonably has access.
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\17\ 15 U.S.C. 1681s-2(b)(1)(A).
\18\ 15 U.S.C. 1681s-2(b)(1)(B), (C).
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Examiners are continuing to find that furnishers are violating the
FCRA duty to conduct reasonable investigations of indirect
disputes.\19\ In recent reviews of debt collector furnishers, examiners
found that the furnishers failed to conduct reasonable investigations
of certain indirect disputes in circumstances in which the furnishers
utilized automated dispute response systems that reviewed only their
own systems of record to assess the accuracy of the disputed
information. Examiners identified instances in which the furnishers,
through their automated systems, responded to CRCs verifying the
information subject to the dispute even though the furnishers' records
were insufficient to confirm the information in a reliable manner. In
each instance, the furnishers' automated systems did not consider any
records of the furnishers' clients--i.e., the entities, such as
creditors, on behalf of which the furnishers were collecting debts--
relevant to the dispute.
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\19\ See for example, Supervisory Highlights Consumer Reporting
Special Edition, cfpb_supervisory-highlights_issue-20_122019.pdf.
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In addition, examiners found that debt collector furnishers failed
to reasonably investigate certain indirect disputes in circumstances in
which the furnishers' agents responded to CRCs regarding the dispute
without investigating any relevant information on their clients'
systems of record despite the agents having access to those systems of
record. Rather than reviewing their clients' records to which they had
access to assess the accuracy of the disputed information, the
furnishers' agents forwarded the disputes to the clients for
investigation and, when the clients failed to respond, instructed CRCs
to delete the related
[[Page 611]]
consumer tradelines. Examiners found that the furnishers in these
circumstances failed to conduct reasonable investigations of indirect
disputes.
2.2.3 Duty To Establish and Implement Reasonable Policies and
Procedures Concerning the Accuracy and Integrity of Furnished
Information
Examiners are continuing to find \20\ that furnishers are violating
the Regulation V duty to establish and implement reasonable written
policies and procedures regarding the accuracy and integrity of the
information furnished to a CRC and to consider and incorporate, as
appropriate, the guidelines of appendix E to Regulation V.\21\ Recent
supervisory reviews identifying violations of this Regulation V
requirement include:
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\20\ Id.
\21\ 12 CFR 1022.42(a), (b).
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[ssquf] In reviews of student loan furnishers, examiners found that
the furnishers relied solely on external procedures regarding the
technical steps for creating and transmitting consumer reporting files,
but maintained no internal policies or procedures with respect to
complying with the applicable requirements of the FCRA and Regulation
V. Examiners found that the furnishers' failure to establish and
implement reasonable written policies and procedures regarding the
accuracy and integrity of information furnished to CRCs contributed to
multiple systemic accuracy issues identified at the furnishers,
including, for example, continuing to report accounts that had been
discharged in bankruptcy, reporting inaccurate term durations for
certain loans, and reporting inaccurate special comment codes regarding
the status of certain accounts.
<bullet> In reviews of installment loan furnishers, examiners found
that furnishers lacked reasonable policies and procedures for
identifying practices or activities that can compromise the accuracy or
integrity of furnished information. Specifically, examiners found
weaknesses in furnishers' policies and procedures with respect to
considering feedback received from CRCs--resulting in the furnishers
failing to identify that furnishing files were rejected by CRCs--and
processing identity theft block requests received from CRCs.
Deficiencies in the furnishers' internal controls regarding the
accuracy and integrity of furnished information led to failures in
identifying, and promptly remediating, accounts that were furnished
inaccurately. Examiners also found that furnishers failed to design
means of communication with CRCs to prevent erroneous association of
information with the wrong consumers, which resulted in the furnishing
of mismatched personal information for thousands of consumers.
[ssquf] In reviews of credit card furnishers, examiners found that
the furnishers failed to maintain and implement reasonable written
furnishing policies and procedures, including by failing to adequately
provide for, among other things: the identification and handling of
frivolous or irrelevant disputes, the replacement of dispute codes
following resolution of disputes, and quality assurance with respect to
the accuracy and integrity of information furnished to CRCs. Examiners
also identified deficiencies in furnishers' policies and procedures for
correcting information after determining it to be inaccurate, finding
that, for example, such deficiencies allowed inaccuracies to persist
for over a year on average before being remediated.
In response to these findings, furnishers are implementing and/or
enhancing written policies and procedures to address the identified
procedural deficiencies.
2.3 Short-Term Small Dollar Lending
The short-term small dollar lending market continues to evolve, and
as part of this market, the Buy Now, Pay Later market, where lenders
advertise buying products over four payments, has expanded rapidly over
the past few years. The paycheck advance market, where lenders tie
funding amounts to accrued or estimated wages and those amounts are
repayable on the next payday or withheld from the next paycheck, also
has expanded rapidly in recent years. Firms sometimes market these
products as ``earned wage'' products. Certain Buy Now, Pay Later firms
and certain paycheck advance firms consented to CFPB's examination
authority. Across these examinations, examiners identified a number of
unfair, deceptive, or abusive acts or practices. In addition to the
examinations giving rise to the findings discussed in this section,
CFPB staff worked with certain State regulators on their examinations
of Buy Now Pay Later firms.
2.3.1 Failing To Timely Resolve Consumer Disputes
Consumers who used Buy Now, Pay Later loans to purchase products or
services frequently alleged that the merchants did not provide the
items or services as agreed or communicated other disputes to the
lender. Lenders engaged in unfair acts or practices by failing to
timely resolve consumer disputes in which consumers alleged they were
owed refunds for various reasons, such as where the delay was contrary
to the dispute policy on its website regarding dispute resolution
timelines. These delays were long, with hundreds of consumers deprived
of funds for months at a time. Consumers incurred substantial injury in
the form of deprivation of funds that should have been refunded in a
timely manner. Additionally, consumers whose claims were denied may
have been required to make full payments at unpredictable times after
delayed investigations during which they were not permitted to make
payments. The injuries were not reasonably avoidable as consumers
lacked control over the dispute resolution process. The substantial
injuries to consumers were not outweighed by any countervailing
benefits to consumers or competition. In response to these findings,
the Buy Now, Pay Later lenders refunded the amounts at issue and
implemented monitoring to eliminate delayed resolutions.
2.3.2 Misrepresenting Loan Costs or Terms
Buy Now, Pay Later lenders worked with merchant partners to
advertise their loans, and in certain instances, the merchant partner
websites advertised incorrect loan costs or terms. The lenders
exercised control and approval rights over these advertisements. Thus,
the lenders engaged in a deceptive act or practice when its merchant
partners ran advertisements on their behalf that included false
representations. These advertisements misled or were likely to mislead
reasonable consumers, and the deceptive representations were material
because they related to the cost and terms of the loans as payment
methods. In response to these findings, the lenders contacted the
relevant merchants to ensure they updated their websites and refunded
overcharges to customers. They also enhanced the marketing review
process across merchant partners.
2.3.3 Denying Credit Based On Payment Processing Deficiencies on
Earlier Loans
Buy Now, Pay Later lenders' payment platforms prevented consumers
with loan balances below $1 from making payments. Subsequently, the
lenders denied those consumers' loan applications on the basis that
consumers had not paid those balances. The lenders engaged in an unfair
act or practice by preventing consumers with loan balances below $1
from making
[[Page 612]]
payments, while denying those consumers' loan applications because of
those same balances. This conduct caused or was likely to cause
substantial injury, as it resulted in the lenders denying additional
credit for consumers with outstanding balances of less than $1. In
addition, consumers may have incurred costs attempting to secure
alternative credit. Consumers also may have spent time contacting the
lenders to resolve these outstanding balances. This practice was not
reasonably avoidable, as the lenders did not allow consumers to make
payments to cure an outstanding balance of less than $1. The
substantial injury to consumers was not outweighed by any
countervailing benefits to consumers or competition. In response to
these findings, Supervision directed the lenders to enhance system
capabilities to allow consumers to pay off or automatically remove loan
balances of less than $1 and refrain from preventing consumers from
obtaining additional loans if they have balances of less than $1.
2.3.4 Designing Consumer Interfaces To Include Misrepresentations About
Uses and Benefits of Tips and Tipping
Examiners found that lenders designed consumer interfaces for
paycheck advance products--sometimes marketed as ``earned wage''
products--to include statements and illustrations representing that if
consumers paid tips, the tips would help specific numbers of customers
and were a way to help other borrowers. In fact, lenders added tips to
general revenues.
A representation, omission, 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.\22\ Examiners found lenders engaged in deceptive
acts and practices when they misled or were likely to mislead
reasonable consumers through written and graphic references that
correlated amounts of tips provided to numbers of people helped. They
also misled or were likely to mislead reasonable consumers into
believing tips directly benefited other customers, although in reality
they added tips to general revenue. These representations were material
because they were likely to affect customers' choices regarding
tipping, including whether to tip and how much.
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\22\ 12 U.S.C. 5531.
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An abusive act or practice: (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 ability of
the consumer to protect the interest of the consumer in selecting or
using a financial product or service; or the reasonable reliance by the
consumer on a covered person to act in the interest of the
consumer.\23\ Examiners found that lenders engaged in abusive acts or
practices when they took unreasonable advantage of consumers' inability
to protect their interests in selecting or using consumer financial
products or services. Lenders took unreasonable advantage of superior
information in knowing that tips went to general revenue. Under the
circumstances and given the misrepresentations, customers lacked the
ability to make fully informed choices about whether and how much to
tip, which affected the ability to protect their monetary interests.
Lenders gained unreasonable advantages when they designed interfaces to
take advantage of consumers' misimpressions, based on specific consumer
research they conducted, and profited from tips that would not have
been made or were higher than if customers had known tips went to
general revenue.
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\23\ 12 U.S.C. 5535(a)(1)(B). See also CFPB, Policy on Abusive
Acts or Practices, (Apr. 3, 2023), <a href="https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/#1">https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/#1</a>.
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2.3.5 Blocking Loan Account Closure and Continuing to Debit Deposit
Accounts
Examiners found that lenders engaged in deceptive acts and
practices when they prevented paycheck advance product consumers from
closing their loan accounts until they resolved pending debits, and
continued debiting consumer deposit accounts, despite representations
that accounts could be closed at any time and that lenders would not
engage in collection activity. Lenders misled or were likely to mislead
consumers through confusing and conflicting representations about how
to close loan accounts and that consumers could cancel agreements and
use of services at any time, the only consequences of nonpayment being
placing loan accounts on hold. Consumers could reasonably interpret
lenders' statements to mean that they could cancel agreements and
services at any time, along with pending debits, and would not be
blocked from closing their loan accounts until pending debits were
processed. Lenders' representations were material because they were
likely to affect consumer choice regarding whether to use the service
in the first place and how they might employ funds differently if
consumers understood debits continued after attempted account closure.
Examiners also found that lenders engaged in abusive acts or
practices when they took unreasonable advantage of consumers' inability
to protect their interests when they blocked consumers from closing
their loan accounts and continued to attempt to debit their deposit
accounts, despite statements that consumers could close their accounts
any time and that lenders would not engage in collection activity.
Consumers could not protect their interests in selecting or using
paycheck advance products because they were blocked from closing their
loan accounts and were subject to repeated debits, despite
representations that they could close their loan accounts at any time
and lenders would not take repayment actions against them. At account
opening, lenders led consumers to believe they could close their
accounts anytime and avoid repeated debits. But after attempting
account closure, consumers were subject to repeated debits and
potentially to third-party fees. Lenders gained unreasonable advantage
by inducing consumers to take out paycheck advance products under false
premises, gaining more loan accounts than they otherwise would have.
2.3.6 Blocking Funds Transfers
Examiners found that lenders engaged in unfair acts or practices
when technology failures resulted in consumer having certain transfers
blocked from linked deposit accounts to other personal accounts.
Specifically, lenders offered a payment card linked to a particular
deposit account in concert with the paycheck advance product, and
during a specific time period, consumers who had not repaid the
paycheck advances timely and had balances in these linked accounts were
unable to access their funds in a timely manner. Lenders caused
substantial injury because consumers were unable to access their funds
in a timely manner and were denied access to funds. Other injury
included time spent and trouble and aggravation caused when consumers
tried to cure the problem. Consumers could not reasonably avoid or
anticipate the injury because they were not warned of the error and
could not resolve it themselves. The
[[Page 613]]
underlying technology failures and their consequences provided no
discernible benefit to consumers or competition.
3. Supervisory Developments
Set forth below are select supervision program developments
including final rules and orders that have been issued since the last
edition of Supervisory Highlights.
3.1.1 CFPB Issues Final Rule Governing Overdraft Lending at Very Large
Financial Institutions
On December 12, 2024, the CFPB issued a final rule related to
overdraft lending.\24\ The final rule updates the Federal regulations
governing overdraft fees for financial institutions with more than $10
billion in assets. Extensions of overdraft credit provided by these
institutions will now adhere to the consumer protections required of
similarly situated products, unless the overdraft fee is $5 or less, or
otherwise only recovers estimated costs and losses. The rule will allow
consumers to better comparison shop across credit products and provides
substantive protections that apply to other consumer credit.
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\24\ The final rule is available at: cfpb_overdraft-regulatory-
text-and-commentary_2024-12.pdf.
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3.1.2 CFPB Orders Federal Supervision of Google Following Contested
Designation
On December 6, 2024, the CFPB published an order establishing
supervisory authority over Google Payment Corp.\25\ This was the CFPB's
second supervisory designation order in a contested matter. While
Google Payment Corp. is already subject to CFPB's enforcement
jurisdiction, the CFPB determined that Google Payment Corp. met the
legal requirements for supervision.
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\25\ The Decision and Order is available at: cfpb_Publication-
Redacted-Decision-and-Order-Designating-Google-Payment-for-
Su_6EZQyMz.pdf.
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3.1.3 CFPB Issues Final Rule Defining Larger Participants of a Market
For General-Use Digital Consumer Payment Applications
On November 21, 2024, the CFPB issued a final rule to establish
authority over nonbank covered persons that are larger participants of
a market for providing general-use digital consumer payment
applications.\26\ The rule, which takes effect January 9, 2025, will
allow the CFPB to supervise these firms, which provide widely-used
payment wallet and funds transfer apps. Nonbank firms qualify as larger
participants if their general-use digital consumer payment applications
facilitate more than 50 million consumer payment transactions
denominated in U.S. dollars per year and they are not small business
concerns as defined by Small Business Administration regulations. The
CFPB estimates that nonbank larger participants in this market
collectively facilitated over 13 billion such consumer payment
transactions annually. The rule will help the CFPB to ensure that these
companies follow Federal consumer financial law just like large banks
and credit unions already supervised by the CFPB. The rule also will
help the CFPB to detect and assess risks to consumers and markets
including emerging risks.
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\26\ The final rule, as published in the Federal Register, 89 FR
99582 (Dec. 10, 2024).
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-31670 Filed 1-3-25; 8:45 am]
BILLING CODE 4810-AM-P
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</html>Indexed from Federal Register on January 6, 2025.
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.