ARE YOU IN COMPLIANCE? Steve Cornell, Senior Manager.

ARE YOU IN COMPLIANCE?

Steve Cornell, Senior Manager

The material appearing in this presentation is for informational purposes

only and is not legal or accounting advice. Communication of this

information is not intended to create, and receipt does not constitute, a

legal relationship, including, but not limited to, an accountant-client

relationship. Although these materials may have been prepared by

professionals, they should not be used as a substitute for professional

services. If legal, accounting, or other professional advice is required, the

services of a professional should be sought.

Key topics for today’s meeting

Key Regulatory Compliance hot topics affecting Credit Union’s today

Key focus issues to expect in a Consumer Financial Protection Bureau (CFPB) exam

Key Regulatory Compliance Issues

Fair Lending

• Fair Lending Program Focus Areas– Timely and accurate notification of results of credit

decisions (decline notices)– Decision models (underwriting software) which

appears to include unfair criteria (for example: arbitrary minimum loan limits, criteria related to age)

– Higher pricing for approved loans made to protected classes (minorities, women), particularly 1-4 family secured loans

– Practices which appear to discourage application (often verbal, policy)

Fair Lending

• The act and regulation may prohibit a creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.

Sun Trust Bank – Fair Lending Enforcement Action

Sun Trust – Fair Lending

• Alleged more than 20,000 African-American and Hispanic borrowers were charged more than similarly-situated and qualified non-Hispanic white borrowers, between 2005 and 2009 [Disparate Treatment].

• The suit alleged that minority borrowers in 75 geographic markets from Virginia Beach, VA to San Francisco, CA, paid more in loan fees, or were charged higher interest rates based solely on race or national origin.


• SunTrust set prices based on objective credit-related criteria but allowed its own loan officers as well as its national network of brokers to adjust those prices without regard to borrower risk, often resulting in black and Latino customers paying more than white borrowers.


• SunTrust "incentivized discrimination" by sharing the inflated charges with those loan officers and brokers, Perez [Thomas E. Perez, assistant attorney general for the Civil Rights Division] said.

• “Those minority borrowers had no idea white customers with similar credit would pay less ...

“That is discrimination with a smile.“ [Thomas E. Perez]


Unfair, Deceptive and Abusive Acts and Practices Act (UDAAP)• Unfair, Deceptive and Abusive Acts and

Practices (UDAAP)– Deceptive advertising (“free”, “no-cost”, hidden costs)– Abusive collection practices (coercion, practices

contrary to FDCPA rules)– Inaccurate customer disclosures (fees, costs, product

features)– Lack of required verbal disclosures (costs, including

APR, APY, specific product features)– Charging customers when not authorized (overdraft

programs, regular account fees)

Unfair, Deceptive and Abusive Acts and Practices Act (UDAAP)• Overdraft Protection Programs

– Inadequate disclosure of fees and costs to consumers (“Free Checking”)

– Lack of “opt-in” for overdraft protection programs for everyday ACH and Point of Sale Transactions (“A-9” forms)

– Posting patterns which encourage overdrafts (largest to smallest items posting)

WoodForest Bank - Overdraft Protection

Program Case

WoodForest Bank - UDAAP

Unfair Practice - Fees• Until approximately December 31, 2009, customers

were automatically enrolled in PrivilegePay thirty (30) days after account opening.

• Customers enrolled in PrivilegePay were charged a per transaction fee each time a transaction causes a customer’s account to become overdrawn.

• Prior to September 2009, the Bank had no daily, monthly, or other limit on the amount of overdraft fees a customer could incur.

WoodForest Bank - Overdraft

Unfair Practice - Fees• The Bank imposed limits on the amount by which

an account may be overdrawn at any time although some customers are allowed to exceed the overdraft limit for their accounts.

• The Bank also did not monitor customer accounts for excessive usage of PrivilegePay.

• Prior to approximately May 15, 2010, accounts that were not brought to a positive balance within seven days were charged a “continuous overdraft fee.”

WoodForest Bank - Overdraft

Assertion – Unfair Practice:• This practice was considered unfair because, once

continuous overdraft fees began, many Bank customers were unable to avoid the assessment of continuous overdraft fees.


Deceptive Practice - Marketing• The Bank marketed or promoted its deposit

account products through a brochure that highlighted:– Free or low cost features of certain accounts while

omitting information about costly features of the account, such as overdraft protection;

– Certain accounts represented as “well-suited for customers who had previous difficulty in managing their Bank accounts” while omitting information about the costs of overdraft protection


Assertion – Deceptive Practice• The brochure was deceptive because it omitted

information about high-cost features of accounts at the Bank, such as PrivilegePay.


Deceptive Practice – Written Disclosures• Bank provided a written disclosure at account

opening that described the features of PrivilegePay, but did not mention that consumers could be automatically reinstated into PrivilegePay after their use of the program was suspended or terminated.


Assertion – Deceptive Practice• The omission of this information was deceptive

because it led customers to believe that they would not be automatically reinstated into PrivilegePay.


• Restitution of fees charged in specific circumstances estimated at $32,000,000 for a period of 5 years (2005 through 2010)

• Civil money penalty in the amount of $1,000,000

Third Party Vendor Management - Compliance• Third Party Vendor Management

– Assessment of risk related to third party relationships– Focus on product branding, ownership of third party

processes impacting consumers– Monitoring of controls at third party, including call and

correspondence monitoring

Complaint Management

• Consideration of Complaints in Exams(CFPB Examination Manual - UDAAP 9)– Consumer complaints play a key role in

detection of UDAAP– Absence of complaints does not ensure an

absence of UDAAP– Specific focus is placed on how institutions

receive, monitor, and respond to complaints received


• What is a Complaint (UDAAP Perspective)?– Assertion features of products or services are not

delivered as advertised– Assertion the consumer did not understand product or

service would be delivered in the manner received– Assertion information regarding the product was not

delivered when the product or service was accepted– Dissatisfaction with product or service in general


• Expectation Regarding Management of UDAAP and Complaints– Institutions must have clear policies and procedures for

collection and response to consumer complaints– Employees must be trained to observe institutional

policies and procedures– Response to complaints should be timely and fair (may

include restitution, or making consumer whole)– Management should monitor trending of complaints for

identifiable issues related to products and services provided to consumers


• Expectation Regarding Management of UDAAP and Complaints– Trends regarding complaints should be reported

periodically to Executive Management and Board of Directors for appropriate action

– Complaints should be monitored by 1) product or service; 2) regulation, with focus on those which may require financial restitution and are subject to additional fines or Civil Monetary Penalties; 3) regulations which may expose the institution to reputational damage


• How Examiners Test Complaint Management– Identify all sources of complaints:

• CFPB Databases• Internet Sources (www.ripoffreport; www.complaints.com; • Better Business Bureau• Other Regulatory Agencies (NCUA, State, FTC, SEC)• Institutional records (written complaint records)

– The following also may be considered for red flags for potential consumer damage:

• Return rates (ACH) • Charge back rates (card services)

http://www.ripoffreport/

http://www.complaints.com/


• How Examiners Test Complaint Management– Evaluate for Trends (concentration on specific products

and services)– Review Institutional response to trends– Option to conduct further detailed testing an analysis if

evidence of consumer complaints regarding compliance areas considered higher risk or suspicion of UDAAP is present

Upcoming Compliance Implementations and Emerging

Compliance Issues

Truth in Lending – Ability to Repay

• Effective January 2014• Applies to all closed end loans secured by 1-4

family dwellings (including attached land)• Excludes open end credit, 12 month or less term

loans• Eight factors must be considered in underwriting

(Income; employment; projected monthly payment; simultaneous loan payments; monthly payment of taxes and insurance; other debts; monthly debt-to-income ratios; credit history).

Truth in Lending – Ability to Repay

• Information relied upon must be verified• Standards must be developed for institution and

evenly applied• Must be reasonable and in good faith (equitable

and effective)• Records must be retained for 36 months following

consummation

Truth in Lending – Qualifying Mortgage Standards• Applies specific standards for “safe harbor”• Otherwise, may be challenged in court by debtor in

default as “unfair”• Freddie Mac and Fannie Mae will make separate

determinations regarding if they will purchase loans that do not meet the Qualifying Mortgage (QM) Standards

Fair Lending – Indirect Auto Lending

• Indirect Auto Lending Programs - CFPB Bulletin 2013-2 (March 2013)– Dealer Mark-Up (differential between dealer finance

rate and lender “buy” rate)– Dealer Reserves/Participation Compensation

(differential between lender “buy” rate and note rate executed by the dealer)

– Use of either may result in potential disparate treatment or disparate impact may result

Questions

Steve Cornell, Senior ManagerMoss Adams [email protected]

ARE YOU IN COMPLIANCE? Steve Cornell, Senior Manager.

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Transcript of ARE YOU IN COMPLIANCE? Steve Cornell, Senior Manager.