Your monthly compliance news roundup
In March 2019, the Consumer Financial Protection Bureau (CFPB) released its Winter 2019 Supervisory Highlights report. Supervisory Highlights is a periodic publication of the CFPB created to share key findings from CFPB examinations to help regulated institutions comply with federal consumer financial protection law. The Winter 2019 Supervisory Highlights is the eighteenth edition issued by the CFPB, all of which may be accessed on the CFPB’s website.
The Winter 2019 Supervisory Highlights report describes several noteworthy examination findings of which financial institutions should be aware. These findings relate to the prohibition against unfair, deceptive, or abusive acts or practices (UDAAP) and highlight the nuance with which institutions must scrutinize their processes to ensure compliance. One notable UDAAP finding described within the report impacts financial institutions that offer online bill payment services. Although most online bill payment transactions are executed electronically, certain payees still only accept paper checks, which financial institutions must submit after receiving their customer’s online payment instruction.
At one or more institutions, the CFPB found that financial institutions represented that payments made through an online bill payment service would be debited on the date selected by the consumer or a few days after the selected date. However, the institutions did not adequately disclose that, in instances where a payee accepts only a paper check, the debit may occur earlier than the date selected by the consumer. In some instances, this caused consumers to incur overdraft charges. The CFPB found that the failure to notify consumers that bill payment transactions may be debited on a date earlier than the date selected constituted a deceptive act or practice. In response to these findings, the institutions involved revised consumer-facing bill payment disclosures and refunded consumers who were charged overdraft fees.
Another notable UDAAP finding featured in the Winter 2019 Supervisory Highlights report relates to inaccurate denial reasons provided by mortgage servicers in response to verbal borrower requests to cancel private mortgage insurance (PMI). The CFPB found that certain mortgage servicers inaccurately informed borrowers that their requests to cancel PMI were denied because the principal balance had not reached the 80% loan to value (LTV) ratio necessary to trigger cancellation under the Homeowners Protection Act (HPA). However, examiners found that, in many instances, the loans had reached the 80% LTV threshold, and cancellation was denied due to other criteria not being satisfied. Because the borrower requests to cancel PMI were received verbally, rather than in writing, the inaccurate denial reasons were not found to be violations of the HPA. Nonetheless, examiners found the mortgage servicers’ representations to be deceptive because they misrepresented the reason for denial and conditions for PMI cancellation. In response to these findings, the mortgage servicers involved modified templates, and associated policies and procedures, to ensure that PMI cancellation notices state accurate denial reasons.
The Winter 2019 Supervisory Highlights report demonstrates that, under new leadership, the CFPB continues to identify and cite regulatory violations, including UDAAP. Given these findings, financial institutions should take proactive steps to monitor and manage regulatory compliance risks. Financial institutions should review and evaluate consumer complaints, policies and procedures, and the terms and features of the products and services they offer for potential UDAAP implications. They should also ensure that communications with consumers, including those made on a discretionary basis, are accurate and avoid representations that are likely to mislead a reasonable consumer.
After an extended period of rulemaking and delay, the CFPB’s Prepaid Accounts Rule finally took effect on April 1, 2019. The original final rule was published in the Federal Register on November 22, 2016, with an effective date of October 1, 2017. Due to industry concern over implementation, the CFPB delayed the effective date by six months to April 1, 2018. However, prior to this revised effective date, the CFPB amended several provisions of the original final rule and further delayed the effective date until April 1, 2019.
The Prepaid Accounts Rule was created to establish comprehensive consumer protections for prepaid accounts, which were previously unprotected by federal consumer financial law. The rule amends Regulation E, which implements the Electronic Fund Transfer Act (EFTA), to create specific provisions governing disclosures, error resolution, and periodic statements for prepaid accounts. The rule also amends Regulation Z, which implements the Truth in Lending Act (TILA), to establish requirements for prepaid accounts that include a credit feature.
In preparation of the effective date, the Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) released updated TILA and EFTA examination procedures which reflect the changes made by the Prepaid Accounts Rule and also reflect regulatory expectations regarding compliance. Prepaid account issuers and other financial institutions involved with prepaid products should perform a full analysis of their prepaid programs, including confirmation of compliance for any third parties that are responsible for preparing disclosures or other consumer materials. In addition, compliance programs should be updated to implement strong controls and oversight of these recent changes.
In April 2019, the Office of Management and Budget (OMB) issued a Memorandum (OMB Memorandum) to the heads of executive departments and agencies on compliance with the Congressional Review Act (CRA). The stated purpose of the OMB Memorandum was to reinforce the obligations, under the CRA, of federal agencies to ensure more consistency with CRA requirements across the executive branch. The OMB Memorandum also sets forth guidelines for the Office of Information and Regulatory Affairs (OIRA) to use for purposes of classifying regulatory actions as “major.”
Enacted in 1996, the CRA establishes procedures by which Congress may disapprove of a broad range of regulatory rules issued by federal agencies by enacting a joint resolution of disapproval. If the president signs the joint resolution of disapproval, or it is enacted by Congress over the president’s veto, the rule may not take effect and the agency may issue no substantially similar rule without subsequent statutory authorization.
The process established by the CRA requires that federal agencies submit a rule to Congress along with a report that includes a determination by OIRA as to whether the rule is classified as “major.” The designation as a major rule signifies the rule’s relative importance and economic impact. Under the CRA, a major rule may take effect no sooner than 60 calendar days after an agency submits the rule to Congress or the rule is published in the Federal Register, whichever is later.
Although the classification of a rule as major is made by OIRA, the CRA does not require that federal agencies submit their rules to the OIRA for purposes of making such determination. Rather, this submission process has been governed by Executive Order 12866, which does not to apply to independent agencies such as the CFPB, as defined in 44 USC 3502(5). To help ensure OIRA receives the information necessary to makes its “major” determination, the OMB Memorandum establishes a separate process for independent agencies to follow which addresses the type of information the agencies must submit as well as the time frames for submission.
In addition to establishing this submission process, the OMB Memorandum directs agencies not to publish rules in the Federal Register, on their websites, or in any other public manner before OIRA has made the major determination and the agency has complied with the requirements of the CRA. When evaluating the significance of these provisions, it is important to remember that, under the CRA, the term “rule” is defined broadly to include a wide range of regulatory actions, including guidance documents, general statements of policy and interpretive rules.
The OMB Memorandum may be seen as an effort by the Trump administration to increase White House control over federal rulemaking. Although the OMB Memorandum imposes no obligations on financial institutions, industry participants with a heightened interest in the rulemaking process may wish to monitor these developments and their impact on the regulatory landscape. Additionally, before the financial services industry celebrates a potential slowdown in federal regulations, they should remember that individual states’ legislatures and attorneys general have demonstrated a willingness to step in where they feel the interests of their citizens are not served by federal regulations.
On April 1, 2019, the State of New York enacted student loan servicing legislation that will impact servicers nationwide. The law places requirements on organizations, wherever located, that service student loans owed by borrowers residing within New York. The law includes a licensing requirement for certain student loan servicers and imposes other responsibilities and restrictions, many of which impact organizations which are exempted from the licensing requirement.
The licensing requirement applies to organizations that service student loans owed by New York borrowers but contains broad exemptions that will alleviate this requirement for many financial institutions. Under the law, exempt organizations include banking organizations, foreign banking corporations, credit unions and any other entities which may be exempted by future regulation. Although exempt from the licensing requirement, the aforementioned exempt organizations are still required to notify the superintendent of financial services that they are servicing student loans in the state of New York and to comply with other responsibilities and restrictions mentioned below. Also exempt from the licensing requirement are organizations that service federal student loans. However, these organizations must also notify the superintendent that they service federal student loans and must comply with certain other responsibilities and restrictions, similar to the exempt organizations mentioned above.
Organizations that are not exempt from the licensing requirement will be required to file an application for a license with the state of New York and submit prescribed information such as financial statements and information related to the character and fitness, background and experiences of the organization’s officers, directors and principals. On an ongoing basis, licensed organizations will be required to notify the superintendent of any changes in officers, directors, partners or members and will have to obtain prior approval of any change of control of the organization.
In addition to the licensing requirement, the New York student loan servicing law imposes other responsibilities and restrictions on all organizations, including those that are exempt from licensing, that service student loans owed by New York residents. The responsibilities imposed on student loan servicers relate to the application of payments, credit reporting, the transfer of servicing, and responding to consumer inquiries. As far as the application of payments, the law requires that servicers inquire of borrowers how to apply non-conforming payment. Non-conforming payments are defined as payments that are either more or less than a borrower’s required student loan payment. With respect to credit reporting, if the organization regularly reports information to a consumer reporting agency, the law requires it to accurately report a borrower’s payment performance to at least one nationwide consumer reporting agency.
Regarding the transfer of servicing, the law imposes several requirements, including a requirement on the transferor to transfer all information on the borrower’s account to the new servicer within 45 days of the date of the transfer, and that the new servicer adopts policies and procedures to verify that it has received all such information. The new servicer must also honor all borrower benefits originally represented as being available to a borrower during repayment. The law also imposes a requirement that any transfers of servicing be completed at least 7 days before the borrower’s next payment is due. In addition to the above responsibilities, the law requires that, within 30 days of receipt, student loan servicers respond to a written inquiry from a borrower and preserve records for not less than two years following final payment of a loan.
The new law also establishes eight prohibited practices that apply to all student loan servicers, including those that are exempt from licensing. This provision of the law makes it illegal for a student loan servicer to do any of the following:
- Defraud or mislead a borrower;
- Engage in unfair, deceptive or predatory acts or practices or misrepresent or omit any material information;
- Misapply any payments;
- Provide inaccurate information to a consumer reporting agency;
- Refuse to communicate with an authorized representative of the borrower that provides signed authorization;
- Make false statements or omit material facts in connection with a report to a government agency or any investigation;
- Fail to respond within 15 calendar days to a communication from the department; and
- Fail to respond within 15 calendar days to a consumer complaint submitted to the servicer by the department.
The law also contains substantial penalty provisions which require any person found violating any of the law’s requirements to pay up to $10,000 per violation, two times the aggregate damages attributable to the violation, or two times the aggregate economic gain attributable to the violation.
For organizations that service student loans, the new law will present significant compliance challenges. Although many of the requirements are duplicative of existing federal regulations, others are unique and will require that new processes be established. As such, we recommend that student loan servicers begin reviewing the new legislation in detail and identify those provisions which will require the implementation of new or modified processes or controls to ensure compliance.