Compliance Blog

Dec 20, 2021

Fall 2021 CFPB Supervisory Highlights Part II: Mortgage Servicing, Payday Lending, Prepaid Accounts, and Remittance Transfers

NAFCU recently published Part 1 of the Fall 2021 CFPB Supervisory Highlights. Here is a summary of the remaining key issues the CFPB covers in their Fall 2021 Supervisory Highlights.

Mortgage Servicing

The Supervisory Highlights mentioned multiple mortgage servicing violations. Examiners found mortgage servicers charged “late fees and default-related fees to borrowers” in CARES Act forbearances. Examinations found these late fees and other related fees were charged because of human and system error.

The CFPB also discovered mortgage servicers did not terminate preauthorized electronic fund transfers for closed accounts and even failed to act after receiving notice of the accounts’ closures. In both situations, consumers were charged fees for failed transfers. In another related issue, a lack of company oversight and employee training led mortgage servicers to overcharge fees to borrowers. A consumer could not avoid these fees as the mortgage servicers did not disclose the fees to the borrower.

According to the Supervisory Highlights, the CFPB also found mortgage servicers violated Regulation X and Regulation Z. Mortgage servicers violated Regulation X on two fronts. First, the CFPB found mortgage servicers did not complete borrowers’ loss mitigation applications. Second, mortgage servicers did not give consumers written notice of the servicers’ decisions of potential loss mitigation choices within the regulatory-required, 30-day window. While mortgage servicers faulted the delays “…[on] increased borrower assistance requests, lack of availability of key vendors, and a slowdown in economic activity due to shelter-in-place requirements,” examiners still found mortgage servicers did not act in good faith in satisfying the 30-day timeline.

Additionally, mortgage servicers violated Regulation Z by applying excess payments to borrowers’ escrow accounts instead of returning partial payments. For example, examiners found where the excess payments “were less than $100, the mortgage servicer attempted to refund the excess payment by applying them to” the escrow account. Consequently, the mortgage servicer would keep the excess payment in escrow instead of either returning the partial payment or applying the payment to the next scheduled payment. Mortgage servicers corrected this behavior once discovered and properly applied the excess payments.

The last violation the CFPB found related to the Homeowners Protection Act and private mortgage insurance. The bureau found mortgage servicers did not terminate private mortgage insurance on the date the principal balance would reach a 78 percent loan-to-value ratio on the mortgage. This violation was blamed on human error and was corrected by instituting a quality control process. 

Payday Lending

The Supervisory Highlights underscored two types of payday loan practices examiners considered Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) violations. First, examiners discovered lenders were debiting consumer accounts the remaining balance of consumer loans even though the consumer applied for a loan extension and received email confirmation that only an extension fee was due. This practice resulted in debited consumer accounts and bank fees. The Supervisory Highlights emphasized consumers were vulnerable to harm because consumers were not informed in advance of the debit and were assured that only the extension fee was due. The CFPB also discovered lenders made misrepresentations in loan extension confirmation emails, holding out that only the extension fee payment was required.  

Second, the bureau discovered payday lending practices where lenders would debit consumer accounts after a consumer would authorize a loan payment and the lender’s systems would suggest the transaction did not go through. In other circumstances, the duplicative debiting was caused by coding error and not human error.

Regulation E

The CFPB found Electronic Fund Transfer Act (EFTA) violations involving prepaid accounts when language was inserted into the terms of use agreements that was intended to waive the consumers’ rights. When stop-payment requests were then given by the consumer, financial institutions did not follow the request. In another violation connected to Regulation E, the CFPB found financial institutions failed several of the investigative requirements under Regulation E relating to EFT errors.

The Supervisory Highlights also reported violations related to remittance transfers where financial institutions failed to properly investigate notices of errors indicating remitted funds were not available to the recipients within the availability date. Examiners also found remittance providers failed to investigate whether deductions made by the foreign recipient bank were a fee that the remitter institution was obligated to refund. As a result, remitter institutions in violation are conducting “look backs” and providing reimbursements to those who were not refunded.

As Brandy highlighted in Part I, these supervisory highlights are a helpful guidepost for credit unions to determine potential supervisory priorities for the CFPB and what other regulators may emphasize during examinations. Many of these violations occurred because of system or human error. A credit union may want to review its own policies and procedures in these regulatory areas to ensure the credit union is compliant.

About the Author

Justin White, Regulatory Compliance Counsel, NAFCU

Justin White, NAFCU-Regulatory-Compliance-Counsel

Justin joined NAFCU as a regulatory compliance counsel in August 2021. As part of the Regulatory Compliance Team, he provides daily compliance assistance to member credit unions on a variety of topics.

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