5Fair 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 loansPractices which appear to discourage application (often verbal, policy)
6Fair LendingThe 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.
8Sun 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.
9Sun Trust – Fair Lending 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.
10Sun Trust – Fair Lending 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 ...
11Sun Trust – Fair Lending “That is discrimination with a smile.“ [Thomas E. Perez]
12Unfair, 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)
13Unfair, Deceptive and Abusive Acts and Practices Act (UDAAP) Overdraft Protection ProgramsInadequate 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)
14WoodForest Bank - Overdraft Protection Program Case
15WoodForest Bank - UDAAP Unfair Practice - FeesUntil 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.
16WoodForest Bank - Overdraft Unfair Practice - FeesThe 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.”
17WoodForest 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.
18WoodForest Bank - UDAAP Deceptive Practice - MarketingThe 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
19WoodForest Bank - UDAAP Assertion – Deceptive PracticeThe brochure was deceptive because it omitted information about high-cost features of accounts at the Bank, such as PrivilegePay.
20WoodForest Bank - UDAAP Deceptive Practice – Written DisclosuresBank 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.
21WoodForest Bank - UDAAP Assertion – Deceptive PracticeThe omission of this information was deceptive because it led customers to believe that they would not be automatically reinstated into PrivilegePay.
22WoodForest Bank - UDAAP 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
23Third Party Vendor Management - Compliance Assessment of risk related to third party relationshipsFocus on product branding, ownership of third party processes impacting consumersMonitoring of controls at third party, including call and correspondence monitoring
24Complaint ManagementConsideration of Complaints in Exams(CFPB Examination Manual - UDAAP 9)Consumer complaints play a key role in detection of UDAAPAbsence of complaints does not ensure an absence of UDAAPSpecific focus is placed on how institutions receive, monitor, and respond to complaints received
25Complaint Management What is a Complaint (UDAAP Perspective)? Assertion features of products or services are not delivered as advertisedAssertion the consumer did not understand product or service would be delivered in the manner receivedAssertion information regarding the product was not delivered when the product or service was acceptedDissatisfaction with product or service in general
26Complaint ManagementExpectation Regarding Management of UDAAP and ComplaintsInstitutions must have clear policies and procedures for collection and response to consumer complaintsEmployees must be trained to observe institutional policies and proceduresResponse 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
27Complaint ManagementExpectation Regarding Management of UDAAP and ComplaintsTrends regarding complaints should be reported periodically to Executive Management and Board of Directors for appropriate actionComplaints 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
28Complaint Management How Examiners Test Complaint Management Identify all sources of complaints:CFPB DatabasesInternet Sources (www.ripoffreport;Better Business BureauOther 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)
29Complaint Management How Examiners Test Complaint Management Evaluate for Trends (concentration on specific products and services)Review Institutional response to trendsOption to conduct further detailed testing an analysis if evidence of consumer complaints regarding compliance areas considered higher risk or suspicion of UDAAP is present
30Upcoming Compliance Implementations and Emerging Compliance Issues
31Truth in Lending – Ability to Repay Effective January 2014Applies to all closed end loans secured by 1-4 family dwellings (including attached land)Excludes open end credit, 12 month or less term loansEight 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).
32Truth in Lending – Ability to Repay Information relied upon must be verifiedStandards must be developed for institution and evenly appliedMust be reasonable and in good faith (equitable and effective)Records must be retained for 36 months following consummation
33Truth 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
34Fair Lending – Indirect Auto Lending Indirect Auto Lending Programs - CFPB Bulletin (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