Peering into the Future: 2023 Supervisory Highlights (Pt. 2)
Last week, Nick, NAFCU’s Director of Regulatory Compliance, blogged about a portion of the CFPB's most recent Supervisory Highlights. The violations described have allowed credit unions to see where examiners are likely to be paying the most attention and applying scrutiny. Let's continue our look into the CFPB's crystal ball.
Deceptive Marketing of Auto Loans
According to the CFPB, some institutions were using advertisements that pictured cars "significantly larger, more expensive, and newer than the advertised loans were good for." This practice may lead a reasonable consumer to believe that the advertised terms applied to the vehicles pictured. Information about the central characteristics of a product or service (such as costs, benefits, and/or restrictions on the use or availability) is presumed to be material. Subsequently, CFPB examiners found that these institutions engaged in the deceptive marketing of auto loans.
The CFPB has found that mortgage lenders were violating the Equal Credit Opportunity Act (ECOA) and Regulation B by granting pricing exceptions across a range of ECOA-protected characteristics. It seems to be acceptable to the Bureau to grant a pricing exception to match a competitor's offer and retain the consumer. What the Bureau does not accept is those pricing exceptions causing a disparate impact. Specifically, examiners observed that certain lenders did not maintain policies and procedures to permit the granting of pricing exceptions, including documentation, training, and monitoring interactions to ensure policies are being followed. The CFPB also found that some lenders failed to take appropriate corrective action once a disparate impact was realized. Lastly, the CFPB noted that some lenders did not provide evidence of legitimate, nondiscriminatory reasons that explained the disparities. As a response to its findings, the CFPB directed lenders to:
- Enhance or implement pricing exception policies and procedures as well as policies requiring the retention of documentation for all pricing exceptions; and
- Develop and implement a monitoring and audit program.
Discriminatory Lending Restrictions
Some underwriting policies observed by the CFPB include a look at the criminal history of the applicant. The CFPB found that restrictions on lending based on criminal history are “likely to have a disparate impact based on race and national origin”, in turn, creating a heightened risk of violating ECOA and Regulation B. Notably, the CFPB recommends that when the discovery of a criminal record prompts enhanced or second-level underwriting review there should be policies and procedures that detail how that review should be conducted.
ECOA and Regulation B also prohibit discrimination against applicants based on all or part of the applicant's income being derived from a public assistance program. The CFPB was able to identify lenders whose policies and procedures either excluded income derived from certain public assistance programs or imposed stricter standards on that income. In response, the CFPB directed lenders to review, identify and provide relief to any applicant negatively affected by these policies. Additionally, the Bureau directs lenders to ensure public assistance income is treated the same as other sources of income.
Legal Obligations on Disclosures
Regulation Z requires disclosures to reflect the terms that both parties to the transaction are legally bound by. The CFPB found that an institution's promissory note stated that the "result of the margin plus the current index should be rounded up or down to the nearest one-eighth of one percentage point." However, due to the loan origination system not being programmed to round, the fully indexed rate calculated and provided on the disclosures did not reflect the terms in the promissory note.
Loss Mitigation Applications
Violations of Regulation X have appeared in the past few supervisory highlights. Regulation X gives servicers 30 days to evaluate completed loss mitigation applications and provide borrowers with written notice stating which options, if any, are available. The CFPB found that servicers either failed to evaluate the application in 30 days or failed to provide options to the borrower after evaluation. In some cases, servicers failed to provide the required information regarding loss mitigation, including specific reasons for denial, correct payment and duration information for forbearance and information in periodic statements about loss mitigation programs.
The CFPB additionally found that servicers engaged in unfair acts or practices by delaying the processing of a borrower's request to enroll in loss mitigation options, including COVID-19-related extensions, due to incomplete applications. Borrowers also had a reasonable expectation that servicers would enroll them in the options they applied for being that servicers controlled the processing of applications.
To take it even further, the CFPB found that servicers moved toward foreclosure even though they informed the borrower that they would evaluate their complete loss mitigation application within 30 days. In these cases, the application was received 37 days or less before foreclosure, so the servicers were not required by Regulation X to evaluate the application in 30 days. But, the servicers created the overall net impression that foreclosure would not occur until a decision was rendered on the application by informing the borrowers, orally and/or in writing, that the applications would be evaluated within 30 days. The CFPB considered these representations to be material.
The CFPB notes that Regulation X also requires servicers to provide borrowers with a written acknowledgment notice that contains a statement that the borrower should consider contacting “servicers of any other mortgage secured by the same property to discuss loss mitigation options”, within 5 days of receipt of a loss mitigation application. Some servicers did not include this required language on Spanish language application acknowledgment notices.
In response to all the loss mitigation violations, servicers were required to cease the practice and develop policies and procedures that aligned with Regulation X.
Assigning Continuity of Contact Personnel
Regulation X also requires servicers to establish continuity of contact with delinquent borrowers by maintaining policies and procedures to assign personnel to delinquent borrowers by the 45th day of delinquency. These personnel must be available to answer delinquent borrowers' questions via telephone and be able to perform certain functions. The CFPB found that servicers weren't doing any of the above and as a response, the CFPB required servicers to update their servicing platforms, develop new monitoring reports, implement additional trainings, and revise policies and procedures to align with Regulation X.
After a Transfer of Mortgage Servicing
The CFPB found that some servicers were violating Regulation X by treating payments “received by the transferor servicer during the 60-day period, but not transmitted by the transferor to the transferee until after the 60-day period, as late.” During the 60-day period beginning on the effective date of the transfer, Regulation X requires servicers to not treat payments as late if the transferor receives them on or before the due date.
Regulation X also requires transferee servicers to identify necessary documents and information that may not have been included in a servicing transfer and obtain the information from the transferor servicer. In some examples, "servicers failed to obtain copies of the security instruments, or any document reestablishing the security instrument to establish the lien securing the mortgage loans after servicing transfers." As a result, certain servicers were required to update their policies and procedures and implement new training.
Differentiating Loan Compensation Based on Product Type
The CFPB has previously clarified that compensation based on product type is included in the prohibition on compensating mortgage loan originators based on the terms of a transaction. Nonetheless, the CFPB has found that some institutions were using a compensation plan that compensated differently for loan product types that were not offered in-house, in turn violating Regulation Z by basing compensation on the terms of the transaction.
Remittance transfer providers are required to develop and maintain written policies and procedures designed to ensure compliance with the error resolution requirements that apply to remittance transfers. The Bureau states that AML policies and procedures are not substitutes for Remittance Rule policies. Specifically, remittance rule policies must provide “detailed guidance to employees on how to distinguish notices of error”; provide notifications required by the Remittance Rule “to consumers when the institutions determined an error, no error, or a different error occurred”; and alert employees to the remedies available to consumers under the Remittance Rule. Most importantly, there also must be procedures to put these policies into effect.
For more information on these findings and other developments, you can find Issue 30 of the CFPB’s Supervisory Highlights here.
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