New Consumer Compliance Supervision Bulletin

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The Federal Reserve published a Consumer Compliance Supervision Bulletin. Click here. which provides high level summaries of a variety of compliance issues the agency has observed in its supervised entities.  The two key focuses of the bulletin are fair lending risks and Unfair, or Deceptive Acts of Practices (UDAP), which are important areas of concern for credit unions as well.  Below is a summary of the bulletin’s highlights:

Fair Lending:
Redlining: Institutions should conduct a redlining review to properly mitigate risk, which includes assessing:

  • Whether the CRA assessment area excludes minority census tracts
  • Whether the lending record shows significant disparities
  • Whether the branching strategy excludes minorities
  • Whether the marketing and outreach strategy excludes minorities
  • A review of complaints to determine whether the institution treats certain geographies differently on a prohibited basis

Mortgage Target Pricing: Fair lending risks can arise if the institution has several mortgage loan originators with different target prices, and the mortgage loan originators with the higher target prices tend to serve minority areas. Manage risk by implementing policies and procedures to control the risk that discretion could lead to a fair lending violation, and by monitoring pricing by race/ethnicity across mortgage loan originators, including the annual percentage rate, interest rate, fees, and overages, using statistical analysis if there is sufficient volume. 

Small Dollar Loans: fair lending issues can arise from lack of clear pricing criteria, such as lack of rate sheets or other pricing guidelines, broad pricing discretion at the loan officer level, lack of clear documentation of reasons for pricing decisions (including exceptions), and lack of monitoring for potential pricing disparities. You can mitigate the risk by providing loan officers with rate sheets that clearly describe the objective criteria for pricing decisions, by ensuring that loan officers document the reasons for any exceptions to the pricing criteria, and by monitoring exceptions (frequency and amount) for potential disparities on a prohibited basis.

Discrimination based on disability income or pregnancy: Some banks have required applicants receiving Social Security Disability Income to demonstrate income stability by submitting a doctor’s letter describing the nature of the disability and whether it is expected to continue for at least three years. However, Fannie Mae, Freddie Mac, and Department of Housing and Urban Development’s (HUD) Federal Housing Administration do not require a bank to request a doctor’s letter as evidence of stable income. Additionally, some banks have treated women on maternity leave as though they are unemployed for underwriting purposes. To mitigate this risk, review policies, procedures, and training to ensure that they are designed to address this risk and to ensure compliance with the Fair Housing Act, the Equal Credit Opportunity Act, and Regulation B (Equal Credit Opportunity).

Unfair or Deceptive Acts or Practices:
Student Financial Products and Services: Several violations of Section 5 of the Federal Trade Commission (FTC) Act (which prohibits UDAP) were observed when banks, sometimes through third parties, entered into agreements with post-secondary schools to provide student deposit accounts, debit, and pre-paid card services as methods for disbursing financial aid refunds. Institutions can manage risks by ensuring that terms and features of student deposit accounts and campus cards are clearly disclosed to consumers, enabling students and their families to select the products and services that are appropriate for them.   Institutions can manage the risks related to unfair or deceptive acts or practices involving third-party service providers by adopting the following practices:

  • Prior to entering into an agreement with a third-party service provider, evaluate a service provider’s financial condition and experience in providing the proposed service
  • Monitor consumer complaint activity, even if the service provider is contractually responsible for complaint resolution
  • Ensure that personnel with oversight and management responsibilities for service providers are actively engaged in assessing and monitoring the outsourcing arrangement. For example, if a service provider has responsibility for consumer-facing communication, bank personnel can manage risks by reviewing any such communication prior to its dissemination to ensure that any fees, limitations, and other characteristics of the product are adequately disclosed

Overdrafts: Overdrafts can present an elevated UDAP risk. UDAP violations and risks have been identified when a bank makes misleading omissions or representations concerning its overdraft program. In addition, unfair or deceptive practices have arisen in connection with the use of third-party vendor software to process overdraft transactions and assess overdraft fees. To manage this risk, institutions need to exercise appropriate vendor management, understand the bank’s overdraft processing methodology and ensure that the bank does not provide incorrect information to consumers about that methodology, and refrain from assessing unfair overdraft fees on point of sale transactions when they post to consumers’ accounts with insufficient available funds after having authorized those transactions based on sufficient available funds.

Loan officer misrepresentations: Loan officers have made misrepresentations that consumers would qualify for certain mortgage loan programs notwithstanding prior bankruptcies or short sales that subsequently prevented them from qualifying. Consumers have in some cases relied on loan officer misrepresentations to their detriment, and banks have been required to pay restitution as a result.  Institutions should refrain from representing to consumers that they do, or will, qualify for a loan while qualification remains uncertain. They should clearly and accurately disclose the full set of requirements for loan qualification, including the documentation required by the institution for the applicant to qualify.

Source:  CUNA’s Compliance Blog

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