First CFPB Supervisory Highlights Issued Under Director Chopra Cites “Wide-Ranging Violations of Law”

Earlier this week, the Consumer Financial Protection Bureau released the Fall 2021 edition of its Supervisory Highlights (“Supervisory Highlights” or “Report”). This marks the first edition issued under Director Rohit Chopra, President Biden’s pick to head the agency. The press release accompanying this edition of Supervisory Highlights cites “wide-ranging violations of law” and asserts that “irresponsible or mismanaged firms harmed Americans during the COVID-19 pandemic,” statements that signal that the Chopra-led Bureau is taking an aggressive approach to supervision and is scrutinizing supervised entities closely.

Supervisory Observations

This edition of Supervisory Highlights covers examinations completed between January 2021 and June 2021 and identifies violations in eight areas: credit card account management, debt collection, deposits, fair lending, mortgage servicing, payday lending, prepaid accounts, and remittance transfers. As is the Bureau’s common practice, the Report refers to institutions in the plural even if the related findings pertain to only a single institution.

• Credit Card Account Management. The Report details several findings related to credit cards, including violations of Regulation Z and the prohibition against unfair, deceptive, and abusive acts and practices (“UDAAPs”). With respect to Regulation Z, Bureau examiners determined that creditors failed to comply with requirements related to billing errors. Specifically, the Bureau details alleged failures concerning the timing of resolving notices of billing errors (within two complete billing cycles), reimbursing late fees when payment had not been credited to an account, and conducting reasonable investigations based on consumer allegations of missing payments and unauthorized transactions. The Report indicates that creditors are working to identify and remediate affected customers and develop training on Regulation Z’s billing error resolution requirements for employees.

The Bureau also alleged deceptive practices relating to the marketing of credit card bonus offers in two separate instances. First, examiners determined that credit card issuers engaged in deceptive acts by failing to provide advertised bonuses to existing customers who satisfied the bonus program requirements of opening a new account and meeting the spending requirements. Moreover, the Bureau noted that issuers failed to ensure employees followed procedures to enroll existing consumers correctly. Second, the examiners determined that issuers also engaged in deceptive acts when their advertising to consumers failed to disclose or adequately disclose material information about qualifying for the bonus. In this situation, the bonus was tied to applying for the card online, so consumers who otherwise satisfied advertised requirements, but applied through a different channel, did not receive the bonus. In response to these findings, issuers are modifying applicable advertisements and undertaking remedial and corrective actions.

• Debt Collection. According to the Report, examiners found that larger participant debt collectors were at risk of violating the Fair Debt Collection Practices Act (“FDCPA”) as it relates to using false representations or deceptive means to collect a debt. The Report explained that debt collectors, in the context of discussing the consumer restarting a payment plan, represented that making the final payment of the plan would improve the consumer’s creditworthiness. The Bureau, however, indicated that this could lead the least sophisticated consumer to assume that deleting derogatory information would result in improved creditworthiness, when in fact numerous factors influence a consumer’s creditworthiness and making a final payment may not necessarily improve a person’s credit score. As a result of the findings, the debt collectors revised their FDCPA policies and procedures and enhanced their training and monitoring systems.

• Deposits. Examiners determined that supervised entities had violated Regulation E’s requirements concerning error resolution for misdirected payments. Bureau examiners determined that consumers’ electronic funds transfers (“EFTs”) were misdirected to unintended recipients, even though the consumer had provided correct token information (the recipient’s phone number or email address), constituting a “token error” under Regulation E. Examiners determined that institutions violated Regulation E by not determining that token errors constituted incorrect EFTs under Regulation E.

In addition, the Report detailed violations of Regulation E based on the institutions’ failure to conduct reasonable investigations into alleged consumer complaints regarding misdirected payments. Specifically, the institutions did not consider whether the transfers went to unintended recipients because of a token error, nor did they consider relevant information in their own records, or reasonably obtainable information, to determine whether the consumer’s error notice was an error under Regulation E.

• Fair Lending. According to the Supervisory Highlights, Bureau examiners found that mortgage lenders discriminated against African-American and female borrowers in the granting of pricing exceptions based on competitive offers from other institutions in violation of the Equal Credit Opportunity Act (“ECOA”) and Regulation B. The Bureau found statistically significant disparities for the incidence of pricing exceptions for African Americans and female applicants as compared to similarly situated white and male borrowers. The lenders permitted pricing exceptions where applicants had  competitive offers from other lenders, but their policies and procedures did not specifically address the circumstances under which a loan officer could grant such exceptions, instead relying on an unwritten policy that a consumer must initiate or request a competitor price match exception. The examiners found instances where pricing exceptions for competitive offers were made to non-Hispanic white and male borrowers without evidence of customer initiation, and noted that supporting documentation was not retained. Importantly, according to the Bureau, the lenders failed to take corrective action when business line personnel raised concerns about a lack of documentation to support the pricing exception decisions. In response to the findings, lenders will take remedial and corrective actions to be reviewed by the Bureau.

In addition, Bureau examiners found that some lenders inquired about the applicant’s religion for religious institutions applying for small business loans and denied credit to an applicant to who did not respond to this inquiry. According to the Bureau, these actions constituted a violation of ECOA and Regulation B which prohibit discrimination on the basis of religion. The Report concluded that the violations caused consumers monetary harm, resulting in revisions to policies and procedures and remediation to injured consumers identified through lookbacks.

• Mortgage Servicing. Consistent with other statements the Bureau has made this year about its priorities, the Supervisory Highlights states that, due to the increased number of borrowers who are in need of loss mitigation assistance, the Bureau is prioritizing its supervision of mortgage servicers. Bureau examiners identified numerous legal violations committed by servicers, including violations of Regulation Z under the Truth in Lending Act, Regulation X under the Real Estate Settlement Procedures Act, and UDAAPs.

In addition to other violations, the report states that examiners found that some servicers engaged in unfair acts or practices by charging default-related fees, including late fees, to borrowers in CARES Act forbearances when such fees were prohibited by the CARES Act. Among other things, the Bureau asserted that borrowers could not reasonably avoid the injury caused by the fees because borrowers could not anticipate that their servicer would assess unlawful fees.

Next, Bureau examiners found that some servicers failed to comply with the Regulation X requirement to evaluate a borrower’s complete loss mitigation application and provide the consumer with a written notice stating the servicers’ determination of available loss mitigation options within 30 days of receiving a complete loss mitigation application. According to the Bureau, servicers attributed the delays to the increased number of borrower requests for assistance and other issues caused by the COVID-19 pandemic. Nevertheless, the CFPB determined that the servicers had not engaged in good faith efforts to comply with the 30-day requirement. This finding may demonstrate that the Bureau is willing to offer servicers little flexibility when handling disruptions caused by the pandemic and expects servicers to adjust their operations as necessary to comply with Regulation X requirements.

• Payday Lending. As part of its supervision of institutions offering payday loans, the Report identified unfair and deceptive acts or practices and violations of Regulation E. Examiners noted unfair acts related to lenders debiting or attempting to debit the loan balance on the original due date, even though consumers had applied for a loan extension and had received a confirmation email that the only fee that would be charged was an extension fee. Moreover, the examiners determined that lenders also engaged in deceptive acts based on misrepresentations in the loan extension confirmation emails. Based on these findings, the Report notes that lenders are undertaking remedial and corrective actions and that the Bureau is reviewing the violations.

The Bureau also noted that lenders engaged in unfair acts when they made or attempted to make unauthorized or duplicate debits of consumer accounts, either because lender systems erroneously indicated the transactions did not process or due to coding errors. Additionally, the Report alleges that lenders failed to retain records of compliance with the Electronic Fund Transfer Act (“EFTA”) in violation of Regulation E. As with the above violations, the lenders are undertaking remedial and corrective actions, and the Bureau is reviewing the violations.

• Prepaid Accounts. The Report notes violations of Regulation E and the EFTA with respect to prepaid accounts. As an initial matter, the Bureau noted violations of the EFTA concerning stop-payment waivers. Specifically, examiners noted that financial institutions included language in their Terms of Use agreements that was inconsistent with a consumer’s right under the EFTA and Regulation E, which allow a consumer to stop a preauthorized electronic fund transfer by notifying the financial institution orally or in writing at least three business days before the scheduled transfer. The Report notes that this language was inconsistent with both the EFTA and Regulation E and a violation of the EFTA.

Relatedly, the Bureau determined that financial institutions enforced their Terms of Use provisions and did not honor stop-payment requests that were made orally or in writing at least three business days before the scheduled transfer. Rather, the financial institutions’ service providers required consumers to contact the merchant before processing stop-payment requests. The service providers, in some instances, also failed to process stop-payment requests because of system limitations. The Bureau concluded these were violations of Regulation E. Based on the findings, the financial institutions are developing and implementing comprehensive compliance management systems (CMS) and ceasing and desisting from violating EFTA and Regulation E.

The CFPB also noted that financial institutions failed to provide the necessary explanation of their Regulation E error investigation determinations when informing consumers of those determinations, in violation of  Regulation E. Accordingly, the supervised entities are developing and implementing CMS programs that are able to ensure compliance with requirements under the EFTA and Regulation E. The Bureau also noted that financial institutions violated Regulation E by failing to promptly begin investigations after receiving oral error notices, failing to complete investigations within applicable timeframes, and failing to report investigation results in determination letters to consumers. In response to the findings, financial institutions are enhancing their CMS to ensure compliance with the EFTA and Regulation E’s requirements related to prepaid accounts.

• Remittance Transfers. The Report also detailed alleged violations of the Remittance Rule, concerning the failure to investigate notices of error. Examiners noted that remittance transfer providers had received notices of error alleging that remitted funds were not made available to recipients by the disclosed date of availability. However, the providers failed to investigate whether a deduction imposed by a foreign recipient bank was a fee that was required to be refunded to the consumer. Based on the findings, providers are revising policies and procedures related to fee-refund provisions and will remediate consumers who did not receive fee refunds.

Supervision Program Developments

The Report also mentions several supervision program developments. As we discuss in greater detail here, the Report details the joint statement by the Bureau and other federal and state regulators from November noting that the agencies would resume their supervision and enforcement of mortgage servicers after having announced a flexible approach to supervision and enforcement at the onset of the COVID-19 pandemic. Next, the Report indicates that the Bureau has published CMS-IT examination procedures, which are designed to assess a supervised entity’s use of IT and IT controls that support consumer financial products and services. Lastly, the Report discusses the Bureau finalizing amendments to mortgage servicing regulations based on the end of the federal foreclosure moratoria. The rules provide temporary safeguards for borrowers to evaluate their options before foreclosure.

Remedial Actions

The Report closes with a description of the public enforcement actions stemming from supervisory activity, noting the Bureau’s lawsuit in which it sued a supervised entity for violating a prior consent order, alleging the entity continued to use the same illegal and deceptive marketing. This lawsuit is a continuation of the Bureau’s stated focus on ensuring compliance with prior consent orders, and the Bureau’s willingness to litigate when it perceives an entity is not in compliance with the provisions of a consent order.