CFPB “Hot-Button” Areas to Know

The Consumer Financial Protection Bureau (CFPB) recently released its Winter 2015 “Supervisory Highlights”, which describe a number of regulatory concerns identified by the CFPB in its examination process for the six month period of July 2014-December 2014. The violations and other regulatory concerns identified by the CFPB during that period provide a good indication to regulated entities of potential problem areas that should be evaluated and, if needed, updated and corrected within their organizations.

The CFPB focused particularly on the following concerns:

1. Whether consumer reporting agencies were properly responding to disputed credit report items;
2. Whether bank and non bank creditors complied with the Fair Credit Reporting Act and the Fair Debt Collection Practices Act in connection with collection activities involving delinquent loan accounts;
3. Whether financial institutions engaged in deceptive practices in modifying the basis for calculating a customer’s account balance when determining whether an item would result in an overdraft (and, accordingly, an overdraft fee); and
4. Whether mortgage lenders were complying with various federal statutes and regulations affecting the residential mortgage lending business.

This Update will focus particularly on the concerns identified for mortgage lending activities.

Federal law prohibits a mortgage loan originator from being compensated in any way based upon the terms of a residential mortgage loan. This regulation is complex and frequently difficult to apply to individual compensation arrangements. The CFPB determined that branch managers who also served as mortgage loan originators in many cases were being compensated based on branch profitability in a manner that violated the restriction on compensation.

Federal law requires that within three business days of a mortgage loan application, the loan applicant must be provided with a “good faith estimate” of closing costs. The CFPB found that in certain “no cost” refinance transactions, the disclosures provided to the borrower were inaccurate and violated federal law. The CFPB required the lenders to refund the excess amounts. Additionally, the CFPB concluded that some lenders did not have adequate procedures to clearly determine the date upon which an “application” was received, and accordingly such lenders failed to measure the timing requirements correctly for delivery of a good faith estimate.

The CFPB found that certain lenders failed to comply with advertising disclosure requirements when advertising through various social media formats. Lenders are reminded that the rules governing advertisements generally, and which determine whether certain special disclosures must be provided in connection with a loan advertisement, apply to advertisements made through social media to the same extent as they apply to the advertisements in traditional print or broadcast media.

The CFPB found that creditors failed to provide the required “adverse action” notice to loan applicants of the creditor’s decision not to approve the application within the requisite 30-day period after application. The failures were attributed to weaknesses in the lenders’ audit and compliance programs.

The CFPB emphasized that at one or more institutions, a weak compliance management system allowed numerous violations of federal law to occur. Here, the CFPB noted that the necessary components for an effective compliance management system would include

1. Board and management oversight
2. Compliance program
3. Consumer complaint management program, and 
4. Compliance audit program.

The CFPB encourages each institution’s board of directors and senior management to adopt clear policy statements on consumer compliance, establish compliance policies and procedures, and assign resources to the compliance function necessary to adequately address compliance and regulatory requirements. The institution’s compliance audit program should assist the board in determining whether the policies adopted by the board are being implemented, identifying any significant gaps in the board’s policies and standards. This emphasis of the CFPB on compliance management systems should be a wakeup call for every institution to make certain that matters involving compliance and regulation are given substantial attention at the board and senior executive level, and that the appropriate emphasis be communicated to all employees.

The CFPB found that some institutions failed to consider appropriately public assistance income or other sources of income available to loan applicants. Federal law prohibits a creditor from discriminating against a loan applicant on the basis that some or all of the applicant’s income is provided through a public assistance program. Further, federal law requires that such income not be excluded in evaluating an applicant’s ability to repay. The CFPB concluded that lenders had failed to comply with requirements regarding these statutorily protected forms of income, with some lenders automatically declining applications that relied on income from a non employment source, such as social security income or retirement benefits. The CFPB also noted that on November 18, 2014, it issued a Bulletin to provide guidance to lenders regarding permissible verification of social security disability income:

http://files.consumerfinance.gov/f/201411_cfpb_bulletin_disability-income.pdf

The Bulletin states that requiring impermissible documentation from applicants that receive and rely on social security disability income could violate fair lending restrictions regarding evaluation of a loan applicant based on public assistance income. The Bulletin particularly calls into question the permissibility of seeking additional information about the applicant’s disability or a doctor’s note regarding the likely duration of such disability. Lenders should review this Bulletin and make sure that their treatment and evaluation of social security disability income is consistent with this CFPB’s guidance.

The Winter 2015 Supervisory Highlights are available at: http://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf.

Please contact Dave Dresher with Bradley Arant Boult Cummings LLP (205.521.8605; ddresher@bradley.com) for more information on CFPB-related issues.

Republished with permission. This article, “CFPB ‘Hot-Button’ Areas to Know,” first appeared in Principal Trends & Interest, a Newsletter for Community Banks in April 2015.