Compliance Blog

Written by Talia Rosenberg, Regulatory Intern

As part of the Consumer Financial Protection Bureau’s (CFPB’s) supervisory authority, it has recently released another issue of Supervisory Highlights, this time taking a look at supervisory actions found between July 2014 and December 2014. The CFPB’s Supervisory Highlights serve as a way for the bureau to communicate to the public and the financial services industry information about its examination process and the types of problems its examiners have discovered.

This report can be a useful tool for credit unions, as it points to items that the CFPB carefully scrutinized during its supervisory process. Credit unions are also able to see the seriousness of noncompliance for those particular problem areas as well as the remedies other financial institutions took to correct their deficiencies. In this issue, the CFPB focused on non-public supervisory actions involving debt collection, consumer reporting, deposit overdraft practices, mortgage origination, and fair lending. Let’s briefly look at these select deficiencies here:

Consumer Reporting (2.1): CFPB examiners found that some consumer reporting agencies fail to forward to furnishers relevant documents submitted by consumers, including cancelled checks, invoices, and correspondence. They also found deficiencies in the updating of public record information, leading to errors in the reporting of dispute results to consumers.

Debt Collection (2.2): CFPB examiners came across debt collectors employing false and misleading representation in collection communications, including misrepresenting collection calls, scripts and letters as well as practices involving ACH payments that created a serious risk of deception to consumers.

Deposits (2.3): CFPB examiners discovered that multiple financial institutions recently switched from a ledger-balance method to an available-balance method without properly disclosing this change, resulting in consumers being misled as to the circumstances under which overdraft fees were assessed.

Mortgage Origination (2.4): CFPB examiners identified multiple areas in which institutions demonstrate deficiencies in compliance with Title XIV on mortgage origination activities. These deficiencies include those in loan originator compensation, use of lender credits, responses to applications, advertisement and adverse action notices. See below for a more detailed examination of these deficiencies.

Fair Lending (2.5): CFPB examiners found multiple violations of both Regulation B and ECOA treatment of protected forms of income. They found that institutions, among other improper practices, sometimes automatically decline applications that rely on income from a non-employment source or discourage applicants who receive public assistance.

Supervision Program Developments (3.1, 3.2, 3.3): The CFPB highlights recent developments in the efficiency of its operations. These include examination procedures for credit card accounts, a guidance bulletin with information on social security disability income and compliance with the Equal Credit Opportunity Act and Regulation B, and the start of the Examiner Commission Program (ECP).

Now let’s dive into Section 2.4 on Mortgage Origination:

Mortgage Origination (2.4)

            Improper Loan Originator Compensation (2.4.1): Despite the fact that Regulation Z strictly prohibits loan originators from receiving compensation based on the terms of a consumer credit transaction secured by a dwelling, CFPB examiners found that branch managers, acting as loan originators, have received compensation based on these terms. Examiners concluded that these improperly allocated expenses resulted in marketing services entities receiving income based on the profitability of retail loans, and that supervision subsequently directed this income to loan originators.

            Improper Use of Lender Credit (2.4.2): CFPB examiners discovered that, because Regulation X requires a loan originator be bound to the settlement charges listed on Good Faith Estimates (GFEs), multiple institutions have employed the practice of reducing lender credits on an HUD-1 when the amounts that should have been disclosed on the HUD-1 were found to be in excess of those disclosed on the GFE. This consequence of inadequate training and compliance procedures, while aiming to prevent the borrower from receiving excess cash-back at closing, ultimately results in an impermissible increase in the final adjusted origination charge, a violation of Regulation X.

            Improper Failure to Provide Estimates (2.4.3): Regulations X and Z both provide three-day time limits for responses to certain types of consumer applications (Regulation X pertaining to GFEs provided by lenders and Regulation Z pertaining to good faith estimates of the Truth in Lending disclosures provided by creditors respectively). However, CFPB examiners identified policies and procedures that led to unspecific reporting of when applications were received, resulting in delays past these three-day time limits and consequent violations of both Regulations X and Z.

            Improper Use of Advertisements (2.4.4): CFPB examiners found that institutions have violated the Regulation Z rule against using triggering terms in advertisements without disclosures. These institutions advertise the length of payments, amount of payments, numbers of payments and finance charges, all without providing the requisite disclosures under Regulation Z.

            Improper Action Notices (2.4.5): CFPB examiners discovered that entities have been failing to meet the requisite provisions set forth by Regulation B with regard to adverse action notices. Examiners found that these entities not only failed to consistently notify applicants of action taken within 30 days of receiving the completed application (as is required by Regulation B), but also failed to provide the necessary information within such notifications (including the name and address of the creditor, a statement describing the provision of the Equal Credit Opportunity Act, the name and address of the agency administering creditor compliance and information regarding the specific reasons for the action taken).

            Improper Compliance Management Systems (2.4.6): CFPB examiners came across many institutions that lacked effective and proper compliance management systems. While an effective compliance management system should include board and management oversight, a compliance program, a consumer complaint program and a compliance audit program, examiners found deficiencies in the comprehensiveness and content of training, the scope of compliance audits and numerous other violations of Regulations B, X and Z.

These deficiencies have reportedly resulted in approximately $19.4 million in remedial costs for more than 92,000 consumers. Even though the CFPB only retains official supervisory authority over institutions and credit unions with total assets of more than $10 billion, a credit union with less than $10 billion in assets can still use this report to ensure that it is compliant with federal consumer financial laws.  

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