Today, the Consumer Financial Protection Bureau (CFPB) released its 36-page Summer edition of Supervisory Highlights report which focuses on unfair, deceptive, and abusive acts or practices across many consumers financial products. The latest edition of the Supervisory Highlights report covers findings from CFPB supervisory examinations completed from July 2022 to March 2023.
CFPB Director Rohit Chopra stated that “Today’s report furthers our efforts to highlight conduct that violates federal law, including the prohibition on abusive practices in consumer financial services,” “The CFPB is also inspecting more financial data brokers engaged in consumer reporting, as well as nonbank entities using authorities that previously went unused.”
The report emphasizes UDAAP Issues in the following areas:
Higher prices in auto lending
- Car prices rose dramatically during the recent pandemic, leading to larger loan amounts, higher monthly payments, and consequently, a higher rate of loan delinquencies.
- Auto lenders have originated loan balances above the real value of the car being purchased and engaged in illegal collection practices while servicing these loans.
- Examiners found that consumers were misled in marketing materials by auto lenders about the quality of car they were eligible for under the terms of an auto loan offer. The cars pictured were often significantly larger, more expensive, and newer than the advertised loan offers were good for.
Unfair or abusive acts or practices by servicers
- Servicers charged interest on loans based on fraudulent representations by dealers that the vehicle had options and enhancements that it did not actually have. When servicers identified discrepancies, they did not reduce the amount that consumers owed on the loan agreements and continued to charge interest tied to financing of the nonexistent options.
- Servicers did not properly notify consumers that the final payment of an auto loan often had to be made manually to close out the loan and were surprised when they were hit with late fees even though they had automatically paid their balance for years.
- Servicers engaged in the practice of blanket cross-collateralization by accelerating and requiring payments from all consumers on unrelated debts, such as credit cards, before consumers could reclaim their repossessed vehicles.
Unlawful debt collection attempts including on medical debt
- Examiners found 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.
- The debt collectors violated the Fair Debt Collection Practices Act by collecting an amount not permitted by law or agreement, by falsely representing the character, amount, or legal status of a debt, by engaging in conduct which had the natural consequence of harassing, oppressing, or abusing the consumer, and by using false, deceptive, or misleading representations in connection with the collection of a debt.
- 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.
- The CFPB has identified ongoing medical debt issues and is partnering with other agencies on how these high costs are impacting consumers.
Illegal payday lender collection practices
- The CFPB examinations also found unfair and abusive acts employed by payday lenders in their collection practices. Lenders would put language in loan agreements that prohibited consumers from revoking their consent for the lender to call, text, or e-mail the consumers about collection on the outstanding balance.
- Lenders also made false collection threats that would often purport their authority to garnish wages of borrowers, when no such authority exists. In some cases, the lender would actually make an unauthorized wage deduction 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.
Deposits
- The CFPB also continues its examinations of supervised institutions for compliance with Regulation E, which implements the Electronic Fund Transfer Act (EFTA). The CFPB also examines for compliance with other relevant statutes and regulations, including Regulation DD, which implements the Truth in Savings Act.
- 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 programs 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.
- 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.
- 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.
Other Key Areas of Note
- Consumer Reporting
- In reviews of Consumer Reporting Company (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.
- 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. 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.
- 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.
- Fair Lending
- As with the Fall 2021 Supervisory Highlights, 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.
- Examiners observed that certain lenders-maintained policies and procedures that permitted the granting of pricing exceptions to consumers, including pricing exceptions for competitive offers.
- For example, a lender may lower the 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 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.
- 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.
- The CFPB’s review 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 details regarding how that review should be conducted, creating fair lending risk around how the reviewing official exercises discretion.
This edition of the Supervisory Highlights provides valuable takeaways and continues to focus on the theme of consumer protection. It is important for all institutions to review policies, procedures, disclosures and practices with a UDAAP lens to ensure that risks are identified and mitigated.