CFPB Supervisory Highlights: Driving Concerns in Automotive Lending
In October, the CFPB issued its Supervisory Highlights focusing on auto financing issues. As with many other areas of regulatory concern, the primary concerns were accurate disclosures, adhering to contractual requirements, and add-on products. The guidance lays out specific issues and risks that banks may expect regulators to focus on in future exams.
The Bureauās guidance specifically calls out the term āas low asā in advertising (e.g., āas low as 3.99% APRā), stating that this language is misleading if consumers do not have a reasonable chance of obtaining the stated rate. A prescreened offer, for example, should not state an āas low asā rate that is well below what the bank knows the consumer could qualify for. Similarly, the rate stated should be an actual rate that has been offered to consumers on the advertised product.
Repossessions were also of particular concern in the Supervisory Highlights. The Bureau described issues leading to wrongful repossessions, such as failure to correctly process a payment deferral or the cancellation of a repossession request. It also describes instances where the lenderās lien had not been properly recorded under applicable state law, which would of course make any repossession of the vehicle a potential legal risk in addition to a compliance issue.
In terms of servicing, the Bureau noted that banks that use a different payment allocation method for loans post-maturity should clearly disclose that to consumers. Additionally, servicers should ensure that titles are timely provided to consumers after loan payoff. It is also worth noting that state law may also have timing requirements for lenders to provide title.
The largest area of concern overall, however, was clearly with add-on products. The findings run a full gamut of issues ā charging for products the consumer did not agree to, financing add-on products for which the collateral is not eligible (particularly GAP coverage on salvage vehicles), failure to accurately disclose the payee for add-on products, unreasonably difficult requirements associated with cancelling the products or failure to honor cancellation requests, failure to refund unearned premiums after early termination, inaccurate refund amounts, delays in providing refunds, and continuing to collect periodic payments (or to refund such payments) when the servicer knew the loan balance would be paid by GAP waiver agreements. Each of these practices may present some UDAAP risk, in addition to potential concerns related to Regulation Z requirements or more straightforward legal risks.
Lastly, credit reporting remains a perennial issue. The CFPBās Highlights specifically mention instances in which creditors reported information they knew to be inaccurate or failing to timely update or correct information reported to credit bureaus.
In many of the areas of concern, the Bureau noted that services performed by third parties must still comply with regulatory requirements. Banks working with third party service providers may want to review their third-party risk management programs to ensure that they are requiring vendors to adhere to regulatory requirements and ensure that any third-party monitoring programs have specific components designed to identify the concerns outlined in the Supervisory Highlights.
As always, Compliance Alliance offers a variety of tools to assist members in developing third party risk management or internal audit programs. Our Hotline team is also available to answer any questions you may have.
OOPS! Navy Federal Credit Unionās Costly Mistakes
Navy Federal Credit Union (āNFCUā) recently entered into a $95 million settlement and consent order with the Consumer Financial Protection Bureau regarding its āOptional Overdraft Protection Programā (āOOPSā). The scope of the practices at issue spanned from 2017 to 2022 and, like many other recent regulator actions, focused on āsurpriseā overdraft fees. The CFPB took issue with two practices in particular ā first, āauthorize positive, settle negativeā (APSN) transactions and, second, undisclosed processing times on peer-to-peer (āP2Pā) payments. With both of these practices, the Bureau argued, consumers were not provided with the information necessary for them to be able to anticipate that certain transactions would incur an overdraft and the related fees.
Regulator concern over ASPN transactions should not come as a surprise to banks, as this is not the first time that it has been addressed in guidance. ASPN transactions happen when a customer has a positive balance at the time they initiate a transaction, but due to intervening transactions, lacks sufficient funds at the time that the transaction is actually posted. Regulator guidance has recommended that banks adopt an available balance method that calculates the account balance based on authorized, as well as actually settled, transactions. The available balance method should enable the customer to see the actual funds available to pay new transactions, rather than showing only transactions that have settled.
The issue with the P2P payments is almost the flip side of the same issue. With the P2P payments, NFCU would display P2P deposits to the consumerās account before they had been settled and before the funds were truly available to the consumer. A consumer viewing these transactions could potentially believe the funds to be available and initiate transactions based on that belief, only to incur overdraft fees if their transactions settled before the P2P funds became available. As with APSN transactions, the available balance method cures this issue by displaying to the consumer the funds that are actually available to them.
Going forward, banks will want to evaluate their practices to assess the risk of overdraft fees that could be considered a āsurprise.ā While most banks have adopted the preferred available balance method, the issue of surprise overdrafts may sometimes nonetheless arise in the context of transaction posting errors. In cases where transactions did not process correctly, banks may occasionally post transactions later than normal or in situations where the transactions were not correctly factored into the customerās available balance. In these cases, based on the NFCU action and other related guidance, it appears that there may be UDAAP risk in assessing overdraft fees when these transactions are added, as it would raise the same concern that the consumer may not have reasonably been able to anticipate that overdraft fees would be incurred.
This settlement adds to a variety of other indicators that regulators are focusing heavily on overdraft fees, much of which is summarized in the OCCās 2023 Bulletin on this topic and in the recent CFPB Circular on Reg E Opt-Ins. As always, our Compliance Alliance Hotline team is also available to assist with any questions you may have.
Regulators Are Seeing Red: DOJ Fair Lending Enforcement Actions
Recent enforcement actions brought by the Department of Justice (āDOJā) and the Consumer Financial Protection Bureau (āCFPBā) are a reminder to lenders that regulators and law enforcement remain very concerned about redlining. In the past few years, as part of the DOJās Combatting Redlining Initiative, the DOJ and the CFPB have brough several actions enforcing the fair lending prohibition against redlining. We have heard from some banks that recent exams have focused heavily on fair lending and redlining concerns lately and that regulators have referred redlining findings to the DOJ for possible action.
The term āredliningā originates from the discriminatory practices lenders commonly engaged in prior to the implementation of fair lending laws. Lenders would draw āred linesā on maps of their lending area to designate majority-minority neighborhoods or areas in which they would not lend. While much fair lending analysis will focus on whether the lenderās decision is based on a prohibited characteristic about the applicant or borrower, redlining is a form of prohibited discrimination where the lenderās decision is based on a prohibited characteristic about the area in which the borrower lives or the collateral is located.
Redlining is a type of ādisparate impactā discrimination ā a facially neutral policy such as āthe bank will not make loans secured by collateral in this area, regardless of the demographics of the individual borrowerā that will reduce credit availability disproportionately among people who desire to purchase homes in that area. If the redlined area is demographically different than other areas in which the bank does lend, the overall effect of the policy is to reduce credit availability based on a prohibited factor. Because redlining was a common practice in the past and the fair lending laws were specifically intended to eliminate this practice, any type of geographically-based lending criteria are likely to invite regulatory scrutiny.
The DOJās enforcement actions demonstrate how redlining may occur without the actual red lines that lenders used in the past. Part of the DOJās theory of the case is that discouragement may be a type of redlining. For example, in the Citadel complaint, the DOJ asserts that Citadelās marketing and branch locations were both heavily focused on non-minority areas in the greater Philadelphia area while failing to make similar efforts to provide services to minority communities in Philadelphia. In both the Citadel action and a similar action against a mortgage lender (Fairway), the DOJ focused heavily on the lenders’ failure to open offices or branches, as well as to advertise, in the majority-minority areas within their assessment areas. It is worth noting that the DOJ also alleged that Citadel did not have adequate fair lending training or internal risk assessments and that it also disregarded fair lending recommendations made by a third-party auditor.
These recent actions serve as a reminder that banks should use the internal fair lending tools available to them, such as risk assessments and internal audits, to avoid compliance issues, and also that serious failures to comply with fair lending requirements may be quite costly. As always, Compliance Alliance offers a variety of tools to assist members in developing rigorous fair lending programs and our Hotline team is available to answer any questions you may have.