[Federal Register Volume 81, Number 225 (Tuesday, November 22, 2016)]
[Notices]
[Pages 83811-83821]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28094]


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BUREAU OF CONSUMER FINANCIAL PROTECTION


Supervisory Highlights: Fall 2016

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Supervisory highlights; notice.

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SUMMARY: The Bureau of Consumer Financial Protection (CFPB) is issuing 
its thirteenth edition of its Supervisory Highlights. In this issue of 
Supervisory Highlights, we report examination findings in the areas of 
auto originations, automobile loan servicing, debt collection, mortgage 
origination, student loan servicing, and fair lending. As in past 
editions, this report includes information about a recent public 
enforcement action that was a result, at least in part, of our 
supervisory work. The report also includes information on recently 
released examination procedures and Bureau guidance.

DATES: The Bureau released this edition of the Supervisory Highlights 
on its Web site on October 31, 2016.

FOR FURTHER INFORMATION CONTACT: Adetola Adenuga, Consumer Financial 
Protection Analyst, Office of Supervision Policy, 1700 G Street NW., 
20552, (202) 435-9373.

SUPPLEMENTARY INFORMATION: 

1. Introduction

    In this thirteenth edition of Supervisory Highlights, the Consumer 
Financial Protection Bureau (CFPB) shares recent supervisory 
observations in the areas of automobile loan origination, automobile 
loan servicing, debt collection, mortgage origination, mortgage 
servicing, student loan servicing and fair lending. The findings 
reported here reflect information obtained from supervisory activities 
completed during the period under review. Corrective actions regarding 
certain matters remain in process at the time of this report's 
publication.
    CFPB supervisory reviews and examinations typically involve 
assessing a supervised entity's compliance with Federal consumer 
financial laws. When Supervision examinations determine that a 
supervised entity has violated a statute or regulation, Supervision 
directs the entity to implement appropriate corrective measures, such 
as refunding moneys, paying of restitution, or taking other remedial 
actions. Recent supervisory resolutions have resulted in total 
restitution payments of approximately $11.3 million to more than 
225,000 consumers during the review period. Additionally, CFPB's 
supervisory activities have either led to or supported two recent 
public enforcement actions, resulting in over $28 million in consumer 
remediation and an additional $8 million in civil money penalties.
    This report highlights supervision-related work generally completed 
between May 2016 and August 2016 (unless otherwise stated), though some 
completion dates may vary. Please submit any questions or comments to 
[email protected].

2. Supervisory Observations

    Recent supervisory observations are reported in the areas of 
automobile loan origination, automobile loan servicing, debt 
collection, mortgage origination, mortgage servicing and student loan 
servicing. Worthy of note are the beneficial practices centered on good 
compliance management systems (CMS) found during the period under 
review in the areas of automobile loan origination (2.1.1), debt 
collection (2.3.7), and mortgage origination (2.4.1).

2.1 Automobile Origination

    The Bureau's rule defining larger participants in the auto loan 
market went into effect in August 2015.\1\ The consequence was that the 
Bureau now has supervisory authority over auto lending not only by the 
largest banks, but also by various other large financial companies. 
Examinations completed in the period under review focused on assessing 
CMS and automobile financing practices to determine whether entities 
are complying with applicable Federal consumer financial laws.
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    \1\ 12 CFR 1090.108.
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2.1.1 CMS Strengths

    During the period under review at one or more entities, examiners 
determined that the overall CMS of their automobile loan origination 
business was strong for its size, risk profile, and operational 
complexity. These institutions effectively identified inherent risks to 
consumers and managed consumer compliance responsibilities. They 
maintained: Strong board and management oversight; policies and 
procedures to address compliance with all applicable Federal consumer 
financial laws relating to automobile loan origination; current and 
complete compliance training designed to reinforce policies and 
procedures; adequate internal controls and monitoring processes with 
timely corrective actions where appropriate; and processes for 
appropriately escalating and resolving consumer complaints and 
analyzing them for root causes, patterns or trends.
    These entities also showed strength in their oversight programs for 
service providers. In particular, they defined processes that outlined 
the steps to assess due diligence information, and their oversight 
programs varied commensurate with the risk and

[[Page 83812]]

complexity of the processes or services provided by the relevant 
service providers.

2.1.2 CMS Deficiencies

    Despite improvements at a number of other entities, examiners found 
that the overall CMS at one or more entities remained weak. These 
weaknesses included failure to: Create and implement consumer 
compliance-related policies and procedures; develop and implement 
compliance training; perform adequate root cause analysis of consumer 
complaints to address underlying issues identified through complaints; 
and adequately oversee service providers.
    Also, the board of directors and management failed to: Demonstrate 
clear expectations about compliance; have an adequate compliance audit 
program; adopt clear policy statements regarding consumer compliance; 
and ensure that compliance-related issues are raised to the entity's 
board of directors or other principals.
    The relevant financial institutions have undertaken remedial and 
corrective actions regarding these weaknesses, which are under review 
by the Bureau.

2.2 Automobile Loan Servicing

    The Bureau began supervising nonbank auto loan servicing companies 
after the rule defining larger participants came into effect in August 
2015. In addition to automobile loan originations, the Bureau is 
examining auto loan servicing activities, primarily assessing whether 
entities have engaged in unfair, deceptive, or abusive acts or 
practices prohibited by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act).\2\ As in all applicable markets, 
Supervision also reviews practices related to furnishing of consumer 
information to consumer reporting agencies for compliance with the Fair 
Credit Reporting Act (FCRA) and its implementing regulation, Regulation 
V. In the Bureau's recent auto servicing examinations, examiners have 
identified unfair practices relating to repossession fees.
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    \2\ 12 U.S.C. 5514(a)(1)(B).
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2.2.1 Repossession Fees and Refusal To Return Property

    To secure an auto loan, a borrower gives a creditor a security 
interest in his or her vehicle. When a borrower defaults, the creditor 
can exercise its right under the contract and repossess the secured 
vehicle. Depending upon state law and the contract with the consumer, 
auto loan servicers may in certain cases charge the borrower for the 
cost of repossessing the vehicle.
    Borrowers often have personal property and belongings in vehicles 
that are repossessed. These items often are not merely incidental, but 
can be of substantial emotional attachment or practical importance to 
borrowers, which are not appropriate matters for the creditor to decide 
for itself. State law typically requires auto loan servicers and 
repossession companies to maintain borrowers' property so that it may 
be returned upon request. Some companies charge borrowers for the cost 
of retaining the property.
    In one or more recent exams, Supervision found that companies were 
holding borrowers' personal belongings and refusing to return the 
property to borrowers until after the borrower paid a fee for storing 
the property. If borrowers did not pay the fee before the company was 
no longer obligated to hold on to the property under state law (often 
30-45 days), the companies would dispose of the property instead of 
returning it to the borrower and add the fee to the borrowers' balance.
    CFPB examiners concluded that it was an unfair practice to detain 
or refuse to return personal property found in a repossessed vehicle 
until the consumer paid a fee or where the consumer requested return of 
the property, regardless of what the consumer agreed to in the 
contract. Even when the consumer agreements and state law may have 
supported the lawfulness of charging the fee, examiners concluded there 
were no circumstances in which it was lawful to refuse to return 
property until after the fee was paid, instead of simply adding the fee 
to the borrower's balance as companies do with other repossession fees. 
Examiners observed circumstances in which this tactic of leveraging 
personal situations for collection purposes was extreme, including 
retention of tools essential to the consumer's livelihood and retention 
of personal possessions of negligible market value but of substantial 
emotional attachment or practical importance for the consumer.
    Examiners also found that in some instances, one or more companies 
were engaging in the unfair practice of charging a borrower for storing 
personal property found in a repossessed vehicle when the consumer 
agreement disclosed that the property would be stored, but not that the 
borrower would need to pay for the storage. In these instances, based 
on the consumer contracts, it was unfair to charge these undisclosed 
fees at all.
    In response to examiners' findings, one or more companies informed 
Supervision that it ceased charging borrowers to store personal 
property found in repossessed vehicles. In Supervision's upcoming auto 
loan servicing exams, examiners will be looking closely at how 
companies engage in repossession activities, including whether property 
is being improperly withheld from consumers, what fees are charged, how 
they are charged, and the context of how consumers are being treated to 
determine whether the practices were lawful.

2.3 Debt Collection

    The Bureau examines certain bank creditors that originate and 
collect their own debt, as well as nonbanks that are larger 
participants in the debt collection market. During recent examinations, 
the Bureau's examiners have identified several violations of the Fair 
Debt Collection Practices Act (FDCPA), including charging consumers 
unlawful convenience fees, making several false representations to 
consumers, and unlawfully communicating with third parties in 
connection with the collection of a debt. Additionally, examiners have 
identified several violations of the FCRA, including failing to 
investigate indirect disputes, and having inadequate furnishing 
policies and procedures. Examiners also observed a beneficial practice 
that involved using collections scripts and guides to improve 
compliance when communicating with consumers.

2.3.1 Unlawful Fees

    Prior editions of Supervisory Highlights noted that the FDCPA 
limits situations where a debt collector may impose convenience 
fees.\3\ Under Section 808(1) of the FDCPA,\4\ a debt collector may not 
collect any amount unless such amount is expressly authorized by the 
agreement creating the debt or permitted by law. In one or more exams, 
examiners observed that one or more debt collectors charged consumers a 
``convenience fee'' to process payments by phone and online. Examiners 
determined that this convenience fee violated Section 808(1) where the 
consumer's contract does not expressly permit convenience fees and the 
applicable state's law was silent on whether such fees are permissible. 
Additionally, under section 807(2)(B) of the FDCPA,\5\ a debt collector 
may not make false representations of compensation which may be 
lawfully received by the debt collector.

[[Page 83813]]

Examiners determined that collectors who demanded these unlawful fees, 
stated that the fees were ``nonnegotiable,'' or withheld information 
from consumers about other avenues to make payments that would not 
incur the fee after the consumer requested such information violated 
section 807(2)(B) of the FDCPA.
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    \3\ CFPB, Supervisory Highlights, 2.2.1 (Fall 2014).
    \4\ 15 U.S.C. 1692f(1).
    \5\ 15 U.S.C. 1692e(2)(B).
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    Supervision also found that one or more debt collectors violated 
section 808(1) of the FDCPA by charging collection fees in states where 
collection fees were prohibited or in states that capped collection 
fees at a threshold lower than the fees that were charged. Examiners 
also observed a CMS weakness at one or more collectors that had not 
maintained any records showing the relationship between the amount of 
the collection fee and the cost of collection.
    The relevant entities have undertaken remedial and corrective 
actions regarding these violations; these matters remain under review 
by the Bureau.

2.3.2 False Representations

    Section 807(10) of the FDCPA \6\ prohibits debt collectors from 
using any false representation or deceptive means to collect a debt or 
obtain information concerning a consumer. At one or more debt 
collectors, examiners identified collection calls where employees 
purported to assess consumers' creditworthiness, credit scores, or 
credit reports, which were misleading because collectors could not 
assess overall borrower creditworthiness. Collectors also misled 
consumers by representing that an immediate payment would need to be 
made in order to prevent a negative impact on consumers' credit.
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    \6\ 15 U.S.C. 1692e(10).
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    In one or more instances, examiners observed that collectors had 
impersonated consumers while using the relevant creditors' consumer-
facing automated telephone system to obtain information about the 
consumer's debt. Examiners concluded that this constituted a false 
representation or deceptive means to collect or attempt to collect any 
debt or to obtain information concerning a consumer.
    On one or more collection calls, examiners heard collectors tell 
consumers that the ability to settle the collection account was revoked 
or would expire. Examiners determined that these statements were false 
or were a deceptive means to collect a debt because the consumers still 
had the ability to settle. The relevant entities have undertaken 
remedial and corrective actions regarding these violations; these 
matters remain under review by the Bureau.

2.3.3 Communication With Third Parties

    Section 805 of the FDCPA \7\ prohibits debt collectors from 
communicating in connection with the collection of a debt with persons 
other than the consumer, unless the purpose is to acquire information 
about the consumer's location. Under section 804 of the FDCPA,\8\ when 
communicating with third parties to acquire information about the 
consumer's location, a collector is prohibited from disclosing the name 
of the debt collection company unless the third party expressly 
requests it.
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    \7\ 15 U.S.C. 1692c(b).
    \8\ 15 U.S.C. 1692b(1).
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    At one or more debt collectors, examiners identified several 
instances where collectors disclosed the debt owed by the consumer to a 
third party. These third-party communications were often caused by 
inadequate identity verification during telephone calls. Additionally, 
examiners observed several instances where collectors identified their 
employers to third parties without first being asked for that 
information by the third party.
    The relevant entities have undertaken remedial and corrective 
actions regarding these violations; these matters remain under review 
by the Bureau.

2.3.4 Furnishing Policies and Procedures

    Regulation V \9\ requires a furnisher to establish and implement 
reasonable written policies and procedures regarding the accuracy and 
integrity of the information furnished to consumer reporting agencies. 
Furnishers must consider the guidelines in Appendix E to Regulation V 
\10\ in developing their policies and procedures and incorporate those 
guidelines that are appropriate. Examiners observed that one or more 
entities failed to provide adequate guidance and training to staff 
regarding differentiating FCRA disputes from general customer 
inquiries, complaints, or FDCPA debt validation requests. As a result, 
employees could not review the historic records of FCRA disputes or 
perform effective root cause analyses of disputes.
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    \9\ 12 CFR 1022.42(a).
    \10\ 12 CFR 1022, App. E.
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    Supervision directed one or more entities to develop and implement 
reasonable policies and procedures to ensure that direct and indirect 
disputes are appropriately logged, categorized, and resolved. In 
addition, Supervision directed one or more entities to develop and 
implement a training program appropriately tailored to employees 
responsible for logging, categorizing, and handling FCRA direct and 
indirect disputes.

2.3.5 FCRA Dispute Handling

    Section 623(b)(1) of the FCRA \11\ requires furnishers to conduct 
investigations and report the results after receiving notice of a 
dispute from a consumer reporting agency. Examiners determined that one 
or more debt collectors never investigated indirect disputes that 
lacked detail or were not accompanied by attachments with relevant 
information from the consumer, in violation of Section 623(b)(1) of the 
FCRA.
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    \11\ 15 U.S.C. 1681s-2(b)(1).
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    For disputes that consumers make directly with furnishers under 
Section 1022.43(f)(3) of Regulation V, furnishers are required to 
provide the consumer with a notice of determination if a direct dispute 
is determined to be frivolous. The notice of determination must include 
the reasons for such determination and identify any information 
required to investigate the disputed information. At one or more debt 
collectors, examiners observed that for disputes categorized as 
frivolous, the notices did not say what the consumer needed to provide 
in order for the collector to complete the investigation. The relevant 
entities have undertaken remedial and corrective actions regarding 
these violations; the matters are under review by the Bureau.

2.3.6 Regulation E Authorization for Preauthorized Electronic Fund 
Transfers

    Regulation E \12\ requires companies to provide consumers with a 
copy of the authorization for preauthorized electronic fund 
transfers.\13\ Examiners found that one or more debt collectors failed 
to provide consumers with a copy of the terms of the authorization, 
either electronically or in paper form. Some of the debt collectors 
instead sent consumers a payment confirmation notice before each 
electronic fund transfer. This notice did not describe the recurring 
nature of the preauthorized transfers from the consumer's account, such 
as by describing the timing and amount of the recurring transfers. 
Examiners found that the payment confirmation notices did not meet

[[Page 83814]]

Regulation E's requirement to send consumers a written copy of the 
terms of the authorization.
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    \12\ 12 CFR 1005.10(b).
    \13\ See CFPB Compliance Bulletin 2015-06, available at http://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/bulletin-consumer-authorizations-preauthorized-EFT/.
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    Supervision directed one or more entities to revise their policies 
and procedures to ensure compliance with the requirement to provide 
consumers with a copy of the authorization as required by Regulation E. 
Supervision also directed the debt collectors to modify their training 
and monitoring to reflect this change and to prevent future violations 
of Regulation E.

2.3.7 Effective and Beneficial Use of Scripts and Guides in Compliance 
With FDCPA

    Debt collection calls must comply with the FDCPA and any applicable 
state laws and regulations. At one or more entities, exam teams 
observed a well-established, formal compliance program that met CFPB's 
supervisory expectations. In particular, agents were supplied with 
guides and scripts to improve adherence to compliance policies. Script 
adherence was regularly monitored and infractions led to salary/bonus 
reductions. Additionally, compliance personnel analyzed trends of 
violations, conducted root cause analyses, and escalated identified 
violation trends to management for proposed changes to policies and 
procedures. Examiners found that, as a result, collection agents at one 
or more entities consistently followed collection scripts which led to 
greater compliance.

2.4 Mortgage Origination

    The Bureau continues to examine entities' compliance with 
provisions of the CFPB's Title XIV rules,\14\ existing Truth in Lending 
Act (TILA) and Real Estate Settlement Procedures Act (RESPA) \15\ 
disclosure provisions,\16\ and other applicable Federal consumer 
financial laws. Examiners also evaluate entities' CMS.
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    \14\ These Title XIV rules include the Loan Originator Rule (12 
CFR 1026.36), the Ability to Repay rule (12 CFR 1026.43), and rules 
reflecting amendments to the Equal Credit Opportunity Act and Truth 
in Lending Act regarding appraisals and valuations (12 CFR 1002.14 
and 12 CFR 1026.35).
    \15\ TILA is implemented by Regulation Z and RESPA by Regulation 
X.
    \16\ These mortgage origination examination findings cover a 
period preceding the effective date of the Know Before You Owe 
Integrated Disclosure Rule. The disclosures reviewed in these exams 
are the Good Faith Estimate (GFE), the Truth in Lending disclosure, 
and the HUD-1 form.
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2.4.1 CMS Strengths

    During the period under review at one or more institutions, 
examiners determined that the overall CMS was strong for the size, risk 
profile, and operational complexity of their mortgage origination 
business. Board and management took an active role in reviewing and 
approving policies and procedures; the compliance program addressed 
compliance with applicable Federal consumer financial laws; training 
was tailored to the institutions' job functions and was updated and 
delivered annually; the monitoring function adapted to changes and took 
corrective action to address deficiencies; institutions had policies 
and procedures that established clear expectations for timely handling 
and resolution of complaints and analyzed the root causes of 
complaints; and audit programs that were comprehensive and independent 
of the compliance program and business functions.

2.4.2 CMS Deficiencies

    Despite the identified strengths at one or more institutions, 
examiners concluded that the overall mortgage origination CMS at one or 
more other institutions was weak because it allowed violations of 
Regulations G, N, X, and Z to occur. For example, one or more 
institutions did not conduct compliance audits of mortgage origination 
activities, had weak oversight of service providers, and had not 
implemented procedures for establishing clear expectations to 
adequately mitigate the risk of harm arising from third-party 
relationships. Supervision directed the entities' management to take 
corrective action.

2.4.3 Failure To Verify Total Monthly Income in Determining Ability To 
Repay

    Regulation Z requires creditors to make a reasonable and good faith 
determination of a consumer's ability to repay (ATR) at or before 
consummation.\17\ Accordingly, Regulation Z sets forth eight factors a 
creditor must consider \18\ when making the required ATR 
determination.\19\ A creditor must verify the information that will be 
relied upon in determining the consumer's repayment ability and this 
verification must be specific to the individual consumer.\20\ One 
factor Regulation Z requires a creditor to consider is the consumer's 
current or reasonably expected income or assets.\21\ Another factor a 
creditor must consider is the consumer's monthly debt-to-income (DTI) 
ratio or residual income. Regulation Z outlines how to calculate the 
monthly DTI ratio, residual income, and the total monthly income.\22\ 
Total monthly income \23\ used to calculate the consumer's monthly 
debt-to-income ratio or residual income must be verified using third-
party records that provide reasonably reliable evidence of the 
consumer's income or assets, specific to the individual consumer.\24\ 
Whether the creditor considers the consumer's current or reasonably 
expected income or the consumer's assets, a creditor remains obligated 
to consider the consumer's monthly DTI ratio or residual income in 
accordance with Regulation Z. This means that a creditor must verify 
the income that it relies on in considering the monthly DTI ratio or 
residual income.\25\
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    \17\ 12 CFR 1026.43(c)(1).
    \18\ One of the eight factors, the consumer's current employment 
status under 12 CFR 1026.43(c)(2)(ii), is conditional and considered 
if the creditor relies on income from the consumer's employment.
    \19\ 12 CFR 1026.43(c)(2)(i)-(c)(2)(viii).
    \20\ 12 CFR 1026.43(c)(3); Official Interpretation to 43(c)(3)-1 
[Verification Using Third-Party Records--Records Specific to the 
Individual Consumer]. Records a creditor uses for verification under 
Sec.  1026.43(c)(3) and (4) must be specific to the individual 
consumer. Records regarding average incomes in the consumer's 
geographic location or average wages paid by the consumer's 
employer, for example, are not specific to the individual consumer 
and are not sufficient for verification.
    \21\ 12 CFR 1026.43(c)(2)(i).
    \22\ 12 CFR 1026.43(c)(2)(vii); (c)(7).
    \23\ 12 CFR 1026.43(c)(7)(i)(B).
    \24\ 12 CFR 1026.43(c)(3); (c)(4); Official Interpretations to 
43(c)(3)-1 and 43(c)(4)-1.
    \25\ 12 CFR 1026.43(c)(2)(i), (vii).
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    In one or more instances, supervised entities offered mortgage loan 
programs that accepted alternative income documentation for salaried 
consumers as part of their underwriting requirements. According to the 
supervised entities, they relied primarily on the assets of each 
consumer when making an ATR determination, but also established a 
maximum monthly DTI ratio in their underwriting policies and 
procedures.\26\ For these loans, examiners confirmed the assets were 
verified using reasonably reliable third-party records such as 
financial institution records. However, examiners found that the income 
disclosed on the application to calculate the consumer's monthly DTI 
ratio was not verified, but instead was tested for reasonableness using 
an internet-based tool that aggregates employer data and estimates 
income based upon each consumer's residence zip code address, job 
title, and years in their current occupation.
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    \26\ The originated loans in these programs were not designated 
by the supervised entities as qualified mortgage loans.
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    Supervision concluded that this practice of failing to properly 
verify the consumer's income relied upon in considering and calculating 
the consumer's monthly DTI ratio violated ATR requirements.\27\ 
Supervision directed these supervised entities to revise their 
underwriting policies and

[[Page 83815]]

procedures in order to comply with the consideration, calculation, and 
verification of income requirements concerning the consumer's monthly 
DTI ratio or residual income when making the consumer's repayment 
ability determination.
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    \27\ 12 CFR 1026.43(c)(2)(vii), (c)(4), and (c)(7).
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2.4.4 Failure To Provide Timely Disclosures

    Creditors are required to provide several disclosures to consumers 
no later than three business days after receiving a consumer's 
application for a close-end loan secured by a first lien on a dwelling. 
For examinations covering the period prior to the October 3, 2015, 
effective date for the Know Before You Owe mortgage disclosure rule, 
these disclosures included a written notice of the consumer's right to 
receive a copy of all written appraisals developed in connection with 
the application,\28\ and a good faith estimate (GFE) of settlement 
costs.\29\ Creditors were also required to provide a clear and 
conspicuous written list of homeownership counseling organizations.\30\ 
One or more institutions failed to provide these disclosures within 
three business days after receiving the consumer's application. The 
institutions agreed to strengthen their monitoring and corrective 
action functions to address the timeliness of disclosures.
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    \28\ 12 CFR 1002.14(a)(2).
    \29\ 12 CFR 1024.7(a)(1).
    \30\ 12 CFR 1024.20(a)(1).
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2.4.5 Failure To Ensure That Loan Originators Are Properly Licensed or 
Registered Under the Applicable SAFE Act Regulation

    Regulation Z requires that loan originator organizations ensure 
that, before individuals who work for them act as loan originators in 
consumer credit transactions, they must be licensed or registered as 
required by the SAFE Act, its implementing Regulations G and H, and 
state SAFE Act implementing law.\31\ One or more Federally-regulated 
depository institutions used employees of a staffing agency to 
originate loans on their behalf. These employees were improperly 
registered in the National Multistate Licensing System and Registry 
(NMLSR) as employees of the depository institutions. The staffing 
agency was not a Federally-regulated depository, and its employees were 
not eligible to register under Regulation G; instead, their eligibility 
was governed by Regulation H and applicable state law. Supervision 
directed the institutions to discontinue the practice of using 
employees of third parties who are not properly registered or licensed.
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    \31\ 12 CFR 1026.36(f)(2).
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2.5 Student Loan Servicing

    The Bureau continues to examine Federal and private student loan 
servicing activities, primarily assessing whether entities have engaged 
in unfair, deceptive, or abusive acts or practices prohibited by the 
Dodd-Frank Act. In the Bureau's recent student loan servicing 
examinations, examiners identified a number of unfair or deceptive acts 
or practices.

2.5.1 Income-Driven Repayment Plan Applications

    Borrowers with Federal loans are eligible for specific income-
driven repayment (IDR) plans that allow them to lower their monthly 
payments to an affordable amount based on their monthly income.\32\ In 
response to a request for information last year, the Bureau heard from 
a significant number of consumers and commenters that borrowers are 
encountering problems when attempting to enroll and apply for IDR 
plans.\33\ In August of this year, the Bureau issued a midyear update 
on student loan complaints. The report notes that the Bureau has 
received complaints on issues relating to enrollment in IDR plans since 
the Bureau began accepting Federal student loan servicing 
complaints.\34\
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    \32\ See https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven.
    \33\ See Consumer Financial Protection Bureau, Student Loan 
Servicing: Analysis of public input and recommendations for reform, 
pg. 27-38 (September 2015), available at http://files.consumerfinance.gov/f/201509_cfpb_student-loan-servicing-report.pdf.
    \34\ Consumer Financial Protection Bureau, Midyear update on 
student loan complaints: Income-driven repayment plan application 
issues (Aug. 2016), available at http://files.consumerfinance.gov/f/documents/201608_cfpb_StudentLoanOmbudsmanMidYearReport.pdf.
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    During one or more recent exams of student loan servicers, 
examiners determined that servicers were engaging in the unfair 
practice of denying, or failing to approve, IDR applications that 
should have been approved on a regular basis. When servicers fail to 
approve valid IDR applications, borrowers can be injured by having to 
make higher payments, losing months that would count towards loan 
forgiveness, or being subjected to unnecessary interest capitalization.
    In light of this unfair practice, Supervision has directed one or 
more servicers to remedy borrowers who were improperly denied, and 
significantly enhance policies and procedures to promptly follow up 
with consumers who submit applications that are incomplete, prioritize 
applications that are approaching recertification deadlines, and 
implement a monitoring program to rigorously verify the accuracy of IDR 
application decisions. Servicers seeking guidance on how to improve IDR 
application processing may wish to refer to the policy memo published 
by the Department of Education on July 20, 2016.\35\
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    \35\ Under Secretary Ted Mitchell, Policy Direction on Student 
Loan Servicing, pg. 20-22 (July 20, 2016), available at http://www2.ed.gov/documents/press-releases/loan-servicing-policy-memo.pdf.
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2.5.2 Borrower Choice for Payment Allocation

    Supervision has continued to identify unfair practices relating to 
how servicers provide borrower choice on allocating payments among 
multiple loans.\36\ Borrowers often have to take out multiple student 
loans to pay for school, and servicers usually manage multiple student 
loans by compiling them into one account, billing statement, and/or 
consumer profile. But borrowers generally retain the right to choose 
how their payments are allocated among the discrete student loan 
obligations.
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    \36\ See CFPB, Supervisory Highlights, 2.5.1 (Fall 2014), 
available at http://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf; CFPB, Supervisory 
Highlights, 2.5.1 (Fall 2015), available at http://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf.
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    In one or more recent exams, Bureau examiners cited servicers for 
the unfair practice of failing to provide an effective choice on how 
payments should be allocated among multiple loans where the lack of 
choice can cause a financial detriment to consumers. One or more 
servicers failed to provide an effective choice by, for example, not 
giving borrowers the ability to allocate payments to individual loans 
in certain circumstances, not effectively disclosing that borrowers 
have the ability to provide payment instructions, or not effectively 
disclosing important information (like the allocation methodology used 
when instructions are not provided).
    Examiners have found that failing to provide borrowers with an 
effective choice on how to allocate payments can result in financial 
detriment when a servicer allocates payments proportionally among all 
loans absent payment instructions from the borrower. For payments that 
exceed a borrower's monthly payment, borrowers may wish to allocate 
funds to loans with higher interest rates instead of a default 
proportional allocation. For payments that are lower than a borrower's 
monthly payment, borrowers may wish

[[Page 83816]]

to allocate funds in a manner that minimizes late fees, interest 
accrual, or the severity of delinquency, or in other manners, rather 
than proportionally allocating the underpayment.
    After finding this unfair practice, the Bureau directed one or more 
servicers to hire an independent consultant to conduct user testing of 
servicer communications in order to improve how the communications 
describe the basic principles of the servicer's payment allocation 
methodologies, as well as the consumer's ability to provide payment 
instructions. Servicers seeking guidance on how to improve their 
billing statements, Web sites, or allocation methodologies may wish to 
consider the applicable content in the Department of Education's recent 
policy memo.\37\
---------------------------------------------------------------------------

    \37\ Under Secretary Ted Mitchell, Policy Direction on Student 
Loan Servicing, pg. 27-36 (July 20, 2016), available at http://www2.ed.gov/documents/press-releases/loan-servicing-policy-memo.pdf.
---------------------------------------------------------------------------

2.5.3 Communications Relating to Paid-Ahead Status

    When borrowers submit a payment in an amount that would cover the 
current month's payment and at least another monthly payment, servicers 
apply the excess funds immediately to accrued interest and principal. 
Unless borrowers choose otherwise, servicers also typically advance the 
due date such that $0 is billed in the months that were covered by the 
extra funds from the overpayment.\38\ These loans are considered to be 
``paid ahead,'' and borrowers don't have to make payments when they are 
billed $0. However, a significant amount of accrued interest can 
accumulate during a paid ahead period, depending on how long the 
borrower doesn't pay, because interest continues to accrue. When 
borrowers resume making monthly payments on a loan, their payments must 
be applied to that accumulated interest before any money is used to pay 
down principal on that loan.
---------------------------------------------------------------------------

    \38\ Regulation requires servicers to advance the due date, 
unless the borrower instructs otherwise, for Federal loans. 34 CFR 
682.209(b); 34 CFR 685.211(a).
---------------------------------------------------------------------------

    On one or more occasions, Supervision cited a student loan servicer 
for a deceptive practice relating to how the servicer describes what 
the consumer owes and when. Supervision concluded that one or more 
servicers' billing statements could have misled reasonable borrowers to 
believe additional payments during or after a paid-ahead period would 
be applied largely to principal. The bills noted that $0.00 was due in 
months that the borrower was paid ahead, but misled consumers as to how 
much interest would accrue or had accrued, and how that would affect 
the application of consumers' payments when the borrower began making 
payments again.
    After finding this deceptive practice, the Bureau directed one or 
more servicers to hire an independent consultant to conduct user 
testing of servicer communications to improve how the servicer 
communicates about these concepts. Servicers seeking guidance on what 
to include in their billing statements may wish to consider the 
applicable content in the Department of Education's recent policy 
memo.\39\
---------------------------------------------------------------------------

    \39\ Under Secretary Ted Mitchell, Policy Direction on Student 
Loan Servicing, pg. 35-36 (July 20, 2016), available at http://www2.ed.gov/documents/press-releases/loan-servicing-policy-memo.pdf.
---------------------------------------------------------------------------

2.5.4 System Errors

    Supervision continues to identify systems errors impacting student 
loan borrowers.\40\ For example, examiners found a data error affecting 
thousands of Federal loan accounts that caused borrowers' next-to-last 
payment to be significantly smaller, contrary to consumers' repayment 
plans. Because borrowers were not billed amounts that would add up to 
cover the whole balance in accordance with the borrower's repayment 
plan, the borrower continued to be billed small amounts for months or 
years, increasing the total amount of interest that accrued. On one or 
more occasions, examiners cited this practice as unfair, and directed 
the servicer to remediate consumers and fix the data corruption for 
borrowers who had not yet reached the next-to-last payment.
---------------------------------------------------------------------------

    \40\ See CFPB, Supervisory Highlights, 2.5.2 (Fall 2015), 
available at http://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf.
---------------------------------------------------------------------------

3. Fair Lending

3.1 Provision of Language Services to Limited English Proficient (LEP) 
Consumers

    The Dodd-Frank Act, the Equal Credit Opportunity Act (ECOA),\41\ 
and Regulation B mandate that the Office of Fair Lending and Equal 
Opportunity (Office of Fair Lending) ``ensure the fair, equitable, and 
nondiscriminatory access to credit''\42\ and ``promote the availability 
of credit.''\43\ Consistent with that mandate, the CFPB, including 
through its Office of Fair Lending, continues to encourage lenders to 
provide assistance to consumers with limited English proficiency (LEP 
consumers).\44\ Financial institutions may provide access to credit in 
languages other than English in a manner that is beneficial to 
consumers as well as the institution, while taking steps to ensure 
their actions are compliant with ECOA and other applicable laws.
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 1691 et seq.
    \42\ 12 U.S.C. 5493(c)(2)(A).
    \43\ 12 CFR 1002.1(b).
    \44\ According to recent American Community Survey estimates, 
there are approximately 25 million people in the United States who 
speak English less than ``very well.'' 2010-2014 American Community 
Survey 5-Year Estimates, Language Spoken at Home, available at 
http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ACS_14_5YR_S1601&prodType=table.
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3.1.1 Supervisory Observations

    In the course of conducting supervisory activity, examiners have 
observed one or more financial institutions providing services in 
languages other than English, including to consumers with limited 
English proficiency,\45\ in a manner that did not result in any adverse 
supervisory or enforcement action under the facts and circumstances of 
the reviews. Specifically, examiners observed:
---------------------------------------------------------------------------

    \45\ The Bureau recently updated its ECOA baseline review 
modules. See Supervisory Highlights: Winter 2016 4.1.1, available at 
http://files.consumerfinance.gov/f/201603_cfpb_supervisory-highlights.pdf. Among other updates, the modules include new 
questions related to the provision of language services, including 
to LEP consumers, in the context of origination and servicing. See 
ECOA Baseline Review Module 13, 21-22 (Oct. 2015), available at 
http://files.consumerfinance.gov/f/201510_cfpb_ecoa-baseline-review-modules.pdf. These modules are ``used by examiners during ECOA 
baseline reviews to identify and analyze risks of ECOA violations, 
to facilitate the identification of certain types of ECOA and 
Regulation B violations, and to inform fair lending prioritization 
decisions for future CFPB reviews.'' Id. at 1.
---------------------------------------------------------------------------

    [ssquf] Marketing and servicing of loans in languages other than 
English;
    [ssquf] Collection of customer language information to facilitate 
communication with LEP consumers in a language other than English;
    [ssquf] Translation of certain financial institution documents sent 
to borrowers, including monthly statements and payment assistance 
forms, into languages other than English;
    [ssquf] Use of bilingual and/or multilingual customer service 
agents, including single points of contact,\46\ and other forms of oral 
customer assistance in languages other than English; and
---------------------------------------------------------------------------

    \46\ See 12 CFR 1024.40(a)(1) and (2) (requiring mortgage 
servicers to assign personnel to a delinquent borrower within a 
certain time after delinquency and make assigned personnel available 
by phone in order to respond to borrower inquiries and assist with 
loss mitigation options, as applicable).
---------------------------------------------------------------------------

    [ssquf] Quality assurance testing and monitoring of customer 
assistance provided in languages other than English.

[[Page 83817]]

    Examiners have observed a number of factors that financial 
institutions consider in determining whether to provide services in 
languages other than English and the extent of those services, some of 
which include: Census Bureau data on the demographics or prevalence of 
non-English languages within the financial institution's footprint; 
communications and activities that most significantly impact consumers 
(e.g., loss mitigation and/or default servicing); and compliance with 
Federal, state, and other regulatory provisions that address 
obligations pertaining to languages other than English.\47\ Factors 
relevant in the compliance context may vary depending on the 
institution and circumstances.
---------------------------------------------------------------------------

    \47\ See, e.g., 12 CFR 1005.31(g)(1)(i) (requiring disclosures 
in languages other than English in certain circumstances involving 
remittance transfers); 12 CFR 1026.24(i)(7) (addressing obligations 
relating to advertising and disclosures in languages other than 
English for closed-end credit); 12 CFR 1002.4(e) (providing that 
disclosures made in languages other than English must be available 
in English upon request); Cal Civ Code 1632(b) (requiring that 
certain agreements ``primarily'' negotiated in Spanish, Chinese, 
Tagalog, Vietnamese, or Korean must be translated to the language of 
the negotiation under certain circumstances); Or Rev Stat Sec.  
86A.198 (requiring a mortgage banker, broker, or originator to 
provide translations of certain notices related to the mortgage 
transaction if the banker, broker, or originator advertises and 
negotiates in a language other than English under certain 
circumstances); Tex Fin Code Ann 341.502(a-1) (providing that for 
certain loan contracts negotiated in Spanish, a summary of the loan 
terms must be made available to the debtor in Spanish in a form 
identical to required TILA disclosures for closed-end credit).
---------------------------------------------------------------------------

3.1.2 Observations

    Examiners also have observed situations in which financial 
institutions' treatment of LEP and non-English-speaking consumers posed 
fair lending risk. For example, examiners observed one or more 
institutions marketing only some of their available credit card 
products to Spanish-speaking consumers, while marketing several 
additional credit card products to English-speaking consumers. One or 
more such institutions also lacked documentation describing how they 
decided to exclude those products from Spanish language marketing, 
raising questions about the adequacy of their compliance management 
systems related to fair lending. To mitigate any compliance risks 
related to these practices, one or more financial institutions revised 
their marketing materials to notify consumers in Spanish of the 
availability of other credit card products and included clear and 
timely disclosures to prospective consumers describing the extent and 
limits of any language services provided throughout the product 
lifecycle. Institutions were not required to provide Spanish language 
services to address this risk beyond the Spanish language services they 
were already providing.

3.1.3 Supervisory Activity Resulting in Enforcement Actions

    Bureau supervisory activity has also revealed violations of Federal 
consumer financial law related to treatment of LEP and non-English-
speaking consumers. In June 2014, the Bureau and the Department of 
Justice announced an enforcement action against Synchrony Bank, 
formerly known as GE Capital Retail Bank, to address violations of ECOA 
based on, among other things, the exclusion of consumers who had 
indicated that they preferred to communicate in Spanish from two 
different promotions about beneficial debt-relief offers. For as long 
as three years, the bank did not provide the offers to these consumers, 
in any language, including English, even if the consumer otherwise met 
the promotion's qualifications.\48\ In addition to requiring 
remediation to affected consumers, the bank was ordered to ensure that 
consumers who had expressed a preference for communicating in Spanish 
were not excluded from receiving credit offers.
---------------------------------------------------------------------------

    \48\ See Supervisory Highlights: Fall 2014 Section 2.7.1, 
available at http://files.consumerfinance.gov/f/201410_cfpb_supervisory-highlights_fall-2014.pdf. See also In re 
Synchrony Bank, No. 2014-CFPB-0007 (June 19, 2014), available at 
http://files.consumerfinance.gov/f/201406_cfpb_consent-order_synchrony-bank.pdf.
---------------------------------------------------------------------------

    In December 2013, the Bureau announced an enforcement action 
against American Express Centurion Bank addressing, among other 
violations of law, deceptive acts or practices in telemarketing of a 
credit card add-on product to Spanish-speaking customers in Puerto 
Rico. The vast majority of consumers enrolled in this product enrolled 
via telemarking calls conducted in Spanish. Yet American Express did 
not provide uniform Spanish language scripts for these enrollment 
calls, and all written materials provided to consumers were in English. 
As a result, American Express did not adequately alert consumers 
enrolled via telemarketing calls conducted in Spanish about the steps 
necessary to receive and access the full product benefits. The 
statements and omissions by American Express were likely to affect a 
consumer's choice or conduct regarding the product and were likely to 
mislead consumers acting reasonably under the circumstances.\49\ In 
addition to requiring remediation to affected consumers, the bank was 
ordered to, among other things, eliminate all deceptive acts and 
practices, including deceptive representations, statements, or 
omissions in its add-on product marketing materials and telemarketing 
scripts.
---------------------------------------------------------------------------

    \49\ See In re American Express Centurion Bank, No. 2013-CFPB-
0011 (Dec. 24, 2013), available at http://files.consumerfinance.gov/f/201312_cfpb_consent_amex_centurion_011.pdf.
---------------------------------------------------------------------------

3.1.4 Compliance Management

    As with any consumer-facing program, financial institutions can 
mitigate fair lending and other risks associated with providing 
services in languages other than English by implementing a strong CMS 
that considers treatment of LEP and non-English-speaking consumers. 
Although the appropriate scope of an institution's fair lending CMS 
will vary based on its size, complexity, and risk profile, common 
features of a well-developed CMS include:
    [ssquf] An up-to-date fair lending policy statement, documenting 
the policies, procedures, and decision-making related to the 
institution's provision of language services;
    [ssquf] Regular fair lending training for all officers and board 
members as well as all employees involved with any aspect of the 
institution's credit transactions, including the provision of language 
services;
    [ssquf] Review of lending policies for potential fair lending risk;
    [ssquf] Ongoing monitoring for compliance with fair lending 
policies and procedures, and appropriate corrective action if 
necessary;
    [ssquf] Ongoing monitoring for compliance with other policies and 
procedures that are intended to reduce fair lending risk (such as 
controls on loan originator discretion), and appropriate corrective 
action if necessary;
    [ssquf] Depending on the size and complexity of the financial 
institution, regular statistical analysis (as appropriate) of loan-
level data for potential disparities on a prohibited basis in 
underwriting, pricing, or other aspects of the credit transaction, 
including both mortgage and non-mortgage products such as credit cards, 
auto lending, and student lending;
    [ssquf] Regular assessment of the marketing of loan products. For 
example, institutions may elect to monitor language services for risk 
of steering, exclusion of LEP and non-English-speaking consumers from 
certain offers, or any other fair lending risk, and for risk of unfair, 
deceptive, or abusive acts or practices; and

[[Page 83818]]

    [ssquf] Meaningful oversight of fair lending compliance by 
management and, where appropriate, the financial institution's board of 
directors.\50\
---------------------------------------------------------------------------

    \50\ For additional information regarding strong CMS for 
managing fair lending risks, see Supervisory Highlights, section II, 
C (Fall 2012) available at http://files.consumerfinance.gov/f/201210_cfpb_supervisory-highlights-fall-2012.pdf and Supervisory 
Highlights, section 3.2.1 (Summer 2014) available at http://files.consumerfinance.gov/f/201409_cfpb_supervisory-highlights_auto-lending_summer-2014.pdf.
---------------------------------------------------------------------------

    While many CFPB-supervised institutions face similar fair lending 
risks, they may differ in how they manage those risks. The CFPB 
understands that compliance management will be handled differently by 
large, complex financial organizations at one end of the spectrum, and 
small entities that offer a narrow range of financial products and 
services at the other end. While the characteristics and manner of 
organization will vary from entity to entity, the CFPB expects 
compliance management activities to be a priority and to be appropriate 
for the nature, size, and complexity of the financial institution's 
consumer business.
    The Bureau remains interested in understanding how institutions 
provide products and services in languages other than English in a way 
that promotes access to responsible credit and services. The Bureau 
welcomes engagement with institutions on how to promote access for LEP 
and non-English-speaking consumers.

3.2 HMDA Data Collection and Reporting Reminders for 2017

    Beginning with Home Mortgage Disclosure Act (HMDA) data collected 
in 2017 and submitted in 2018, responsibility to receive and process 
HMDA data will transfer from the Federal Reserve Board (FRB) to the 
CFPB. The HMDA agencies have agreed that a covered institution filing 
HMDA data collected in or after 2017 with the CFPB will be deemed to 
have submitted the HMDA data to the appropriate Federal agency.\51\
---------------------------------------------------------------------------

    \51\ The HMDA agencies refer collectively to the CFPB, the 
Office of the Comptroller of the Currency (OCC), the Federal Deposit 
Insurance Corporation (FDIC), the FRB, the National Credit Union 
Administration (NCUA), and the Department of Housing and Urban 
Development (HUD).
---------------------------------------------------------------------------

    The effective date of the change in the Federal agency that 
receives and processes the HMDA data does not coincide with the 
effective date for the new HMDA data to be collected and reported under 
the Final Rule amending Regulation C published in the Federal Register 
on October 28, 2015. The Final Rule's new data requirements will apply 
to data collected beginning on January 1, 2018. The data fields for 
data collected in 2017 have not changed.
    The following information is from the Bureau's HMDA Filing 
Instructions Guide (FIG). Additional information about HMDA, the FIG 
and other data submission resources is located at: http://www.consumerfinance.gov/data-research/hmda/.

3.2.1 New HMDA Platform

    Beginning with data collected in 2017, filers will submit their 
HMDA data using a web interface referred to as the ``HMDA Platform.'' 
The following submission methods will not be permitted for data 
collected in or after 2017:
    [ssquf] PC Diskette and CD-ROM.
    [ssquf] Submission via Web (from the Data Entry Software (DES)).
    [ssquf] Email to [email protected].
    [ssquf] Paper Submissions.
    Also, beginning with the data collected in 2017, as part of the 
submission process, a HMDA reporter's authorized representative with 
knowledge of the data submitted shall certify to the accuracy and 
completeness of the data submitted. Filers will not fax or email the 
signed certification.

3.2.2 Loan/Application Register Format

    Beginning with data collected in 2017, HMDA data loan/application 
registers (LAR) will be submitted in a pipe (also referred to as 
vertical bar) delimited text file format (.txt). This means that:
    [ssquf] Each data field within each row will be separated with a 
pipe character, ``[bond]''.
    [ssquf] Zeros do not need to be added for the sole purpose of 
making a data field a specific number of characters.\52\
---------------------------------------------------------------------------

    \52\ The one exception to this instruction is for rate spreads 
collected in 2017; rate spread is entered to two decimal places 
using a leading zero, for example, 03.29.
---------------------------------------------------------------------------

    [ssquf] Filler data fields will no longer be used in the file.
    [ssquf] The loan/application register will be a text file with a 
.txt file format extension.
    Text entries in alphanumeric fields do not need to use all 
uppercase letters with the exception of:
    [ssquf] NA'' used when the reporting requirement is not applicable.
    [ssquf] Two letter state codes.
    As with previous submissions:
    [ssquf] The first row of the HMDA LAR will begin with the number 
one (1) to indicate that the data fields in row one contain data fields 
for the transmittal sheet, with information relating to your 
institution.
    [ssquf] All subsequent rows of HMDA LAR will begin with the number 
two (2) to indicate that the data fields beginning in row two contain 
data fields for LAR, with information relating to the reported loan or 
application.
    [ssquf] Each row will end with a carriage return.

3.3 Redlining

    The Office of Fair Lending has identified redlining as a priority 
area in the Bureau's supervisory work. Redlining is a form of unlawful 
lending discrimination under ECOA. Historically, actual red lines were 
drawn on maps around neighborhoods to which credit would not be 
provided, giving this practice its name.
    The Federal prudential banking regulators have collectively defined 
redlining as ``a form of illegal disparate treatment in which a lender 
provides unequal access to credit, or unequal terms of credit, because 
of the race, color, national origin, or other prohibited 
characteristic(s) of the residents of the area in which the credit 
seeker resides or will reside or in which the residential property to 
be mortgaged is located.'' \53\
---------------------------------------------------------------------------

    \53\ FFIEC Interagency Fair Lending Examination Procedures 
(IFLEP) Manual, available at https://www.ffiec.gov/pdf/fairlend.pdf.
    CFPB Supervision and Examination Manual, available at http://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations.
---------------------------------------------------------------------------

    The Bureau considers various factors, as appropriate, in assessing 
redlining risk in its supervisory activity. These factors, and the 
scoping process, are described in detail in the Interagency Fair 
Lending Examination Procedures (IFLEP). These factors generally include 
(but are not limited to):
    [ssquf] Strength of an institution's CMS, including underwriting 
guidelines and policies;
    [ssquf] Unique attributes of relevant geographic areas (population 
demographics, credit profiles, housing market);
    [ssquf] Lending patterns (applications and originations, with and 
without purchased loans);
    [ssquf] Peer and market comparisons;
    [ssquf] Physical presence (full service branches, ATM-only 
branches, brokers, correspondents, loan production offices), including 
consideration of services offered;
    [ssquf] Marketing;
    [ssquf] Mapping;
    [ssquf] Community Reinvestment Act (CRA) assessment area and market 
area more generally;
    [ssquf] An institution's lending policies and procedures record;
    [ssquf] Additional evidence (whistleblower tips, loan officer 
diversity, testing evidence, comparative file reviews); and

[[Page 83819]]

    [ssquf] An institution's explanations for apparent differences in 
treatment.
    The Bureau has observed that institutions with strong compliance 
programs examine lending patterns regularly, look for any 
statistically-significant disparities, evaluate physical presence, 
monitor marketing campaigns and programs, and assess CRA assessment 
areas and market areas more generally. Our supervisory experience 
reveals that institutions may reduce fair lending risk by documenting 
risks they identify and by taking appropriate steps in response to 
identified risks, as components of their fair lending compliance 
management programs.
    Examination teams typically assess redlining risk, at the initial 
phase, at the Metropolitan Statistical Area (MSA) level for each 
supervised entity, and consider the unique characteristics of each MSA 
(population demographics, etc.).
    To conduct the initial analysis, examination teams use HMDA data 
and census data \54\ to assess the lending patterns at institutions 
subject to the Bureau's supervisory authority. To date, examination 
teams have used these publicly-available data to conduct this initial 
risk assessment. These initial analyses typically compare a given 
institution's lending patterns to other lenders in the same MSA to 
determine whether the institution received significantly fewer 
applications from minority \55\ areas \56\ relative to other lenders in 
the MSA.
---------------------------------------------------------------------------

    \54\ The Bureau uses the most current United States national 
census data that apply to the HMDA data--for example, to date it has 
used 2010 census data for HMDA data 2011 and later. Specifically, 
the ``Demographic Profiles'' are used.
    \55\ For these purposes, the term ``minority'' ordinarily refers 
to anyone who identifies with any combination of race or ethnicity 
other than non-Hispanic White. Examination teams have also focused 
on African-American and Hispanic consumers, and could foreseeably 
focus on other more specific minority communities such as Asian, 
Native Hawaiian, or Native Alaskan populations, if appropriate for 
the specific geography. In one examination that escalated to an 
enforcement matter, the statistical evidence presented focused on 
African-American and Hispanic census tracts, rather than all 
minority consumers, because the harmed consumers were primarily 
African-American and Hispanic.
    \56\ Examination teams typically look at majority minority areas 
(>50% minority) and high minority areas (>80% minority), although 
sometimes one metric is more appropriate than another, and sometimes 
other metrics need to be used to account for the population 
demographics of the specific MSA.
---------------------------------------------------------------------------

    Examination teams may consider the difference between the subject 
institution and other lenders in the percentage of their applications 
or originations that come from minority areas, both in absolute terms 
(for example, 10% vs. 20%) and relative terms (for example, the subject 
institution is half as likely to have applications or originations in 
minority areas as other lenders).\57\
---------------------------------------------------------------------------

    \57\ This relative analysis may be expressed as an odds ratio: 
the given lender's odds of receiving an application or originating a 
loan in a minority area divided by other lenders' comparable odds. 
An odds ratio greater than one means that the institution is more 
likely to receive applications or originate loans in minority areas 
than other lenders; an odds ratio lower than one means that the 
institution is less likely do so. Odds ratios show greater risk as 
they approach zero.
---------------------------------------------------------------------------

    Examination teams may also compare an institution to other more 
refined groups of peer institutions. Refined peers can be defined in a 
number of ways, and past Bureau redlining examinations and enforcement 
matters have relied on multiple peer comparisons. The examination team 
often starts by compiling a refined set of peer institutions to find 
lenders of a similar size--for example, lenders that received a similar 
number of applications or originated a similar number of loans in the 
MSA. The examination team may also consider an institution's mix of 
lending products. For example, if an institution participates in the 
Federal Housing Administration (FHA) loan program, it may be compared 
to other institutions that also originate FHA loans; if not, it may be 
compared to other lenders that do not offer FHA loans. Additional 
refinements may incorporate loan purpose (for example, focusing only on 
home purchase loans) or action taken (for example, incorporating 
purchased loans into the analysis). Examination teams have also taken 
suggestions, as appropriate, from institutions about appropriate peers 
in specific markets.
    In considering lending patterns, examination teams also generally 
consider marketing activities and physical presence, including 
locations of branches, loan production offices, ATMs, brokers, or 
correspondents. In one or more supervisory matters, the institutions 
concentrated marketing in majority-White suburban counties of an MSA 
and avoided a more urban county with the greatest minority population 
in the MSA. In one or more other exams, examiners observed that, 
although there were disparities in branch locations, the location of 
branches did not affect access to credit in that case because, among 
other things, the branches did not accept ``walk-in'' traffic and all 
applications were submitted online. The results of the examinations 
were also dependent on other factors that showed equitable access to 
credit, and there could be cases in which branch locations in 
combination with other risk-based factors escalate redlining risk.
    For redlining analyses, examination teams generally map 
information, including data on lending patterns (applications and 
originations), marketing, and physical presence, against census data to 
see if there are differences based on the predominant race/ethnicity of 
the census tract, county, or other geographic designation. 
Additionally, examination teams will consider any other available 
evidence about the nature of the lender's business that might help 
explain the observed lending patterns.
    Examination teams have considered numerous factors in each 
redlining examination, and have invited institutions to identify 
explanations for any apparent differences in treatment. Although 
redlining examinations are generally scheduled at institutions where 
the Bureau has identified statistical disparities, statistics are never 
considered in a vacuum. The Bureau will always work with institutions 
to understand their markets, business models, and other information 
that could provide nondiscriminatory explanations for lending patterns 
that would otherwise raise a fair lending risk of redlining.

3.4 Consent Order Update: Ally Financial Inc. and Ally Bank

    On December 19, 2013, working in close coordination with the DOJ, 
the CFPB ordered Ally Financial Inc. and Ally Bank (Ally) to pay $80 
million in damages to harmed African-American, Hispanic, and Asian and/
or Pacific Islander borrowers. The DOJ simultaneously filed a consent 
order in the United States District Court for the Eastern District of 
Michigan, which was entered by the court on December 23, 2013. This 
public enforcement action represented the federal government's largest 
auto loan discrimination settlement in history.
    On January 29, 2016, approximately 301,000 harmed borrowers 
participating in the settlement--representing approximately 235,000 
loans--were mailed checks by the Ally settlement administrator, 
totaling $80 million plus interest. In addition, and pursuant to its 
continuing obligations under the terms of the orders, Ally has also 
made ongoing payments to consumers affected after the consent orders 
were entered. Specifically, Ally paid approximately $38.9 million in 
September 2015 and an additional $51.5 million in May 2016, to 
consumers that Ally determined were both eligible and overcharged on 
auto

[[Page 83820]]

loans issued during 2014 and 2015, respectively.\58\
---------------------------------------------------------------------------

    \58\ Additional information regarding this public enforcement 
action can be found in Supervisory Highlights, 2.6.1 (Winter 2016), 
available at http://files.consumerfinance.gov/f/201603_cfpb_supervisory-highlights.pdf and Supervisory Highlights 
(Summer 2014), available at http://files.consumerfinance.gov/f/201409_cfpb_supervisory-highlights_auto-lending_summer-2014.pdf.
---------------------------------------------------------------------------

4. Remedial Actions

4.1.1. Public Enforcement Actions

    The following public enforcement actions resulted, at least in 
part, from examination work.
First National Bank of Omaha
    On August 25, the CFPB announced an enforcement action against 
First National Bank of Omaha for its deceptive marketing practices and 
illegal billing of customers of add-on products. The bank used 
deceptive marketing to lure consumers into debt cancellation add-on 
products and it charged consumers for credit monitoring services they 
did not receive. Among other things, the bank disguised the fact that 
it was selling consumers a product, distracted consumers into making a 
purchase, made cancellation of debt cancellation products difficult, 
and billed for credit monitoring services not provided.
    The Bureau's order required First National Bank of Omaha to end 
unfair billing and other illegal practices, provide $27.75 million in 
relief to roughly 257,000 consumers harmed by its illegal practices, 
and pay a $4.5 million civil money penalty.
Wells Fargo Bank, N.A
    On August 22, the CFPB took action against Wells Fargo Bank for 
illegal private student loan servicing practices that increased costs 
and unfairly penalized certain student loan borrowers. The Bureau 
identified breakdowns throughout Wells Fargo's loan servicing process, 
including failing to provide important payment information to 
consumers, charging consumers illegal fees, and failing to update 
inaccurate credit report information. The order requires Wells Fargo to 
improve its consumer billing and student loan payment processing 
practices, provide $410,000 in relief to borrowers, and pay a $3.6 
million civil money penalty.

4.1.2 Non-Public Supervisory Actions

    In addition to the public enforcement actions above, recent 
supervisory activities have resulted in approximately $11.3 million in 
restitution to more than 225,000 consumers. These non-public 
supervisory actions generally have been the product of CFPB ongoing 
supervision and/or targeted examinations, involving either examiner 
findings or self-reported violations of Federal consumer financial law. 
Recent non-public resolutions were reached in the areas of deposits, 
mortgage servicing, and credit cards.

5. Supervision Program Developments

5.1 Examination Procedures

5.1.1 Reverse Mortgage Servicing Examination Procedures

    Today, the CFPB is publishing procedures for examining reverse 
mortgage servicers.\59\ A reverse mortgage allows older homeowners to 
borrow against the equity in their homes. Unlike a traditional home 
equity loan, instead of making payments to the servicer, the borrower 
receives payments from the lender. Over time, the loan amount grows, 
and must be repaid when the borrower dies or an event of default 
occurs. The Bureau has received complaints from consumers relating to 
the servicing of reverse mortgages. The procedures detail how examiners 
will review a reverse mortgage servicer's compliance with applicable 
regulations and assess other risks to consumers. The publication of 
these procedures precedes supervision of reverse mortgage servicers.
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    \59\ See the reverse mortgage servicing procedures, available at 
files.consumerfinance.gov/f/documents/102016_cfpb_ReverseMortgageServicingExaminationProcedures.pdf.
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5.1.2 Student Loan Servicing Examination Procedures

    The Bureau is also publishing today new procedures for examining 
student loan servicers,\60\ the entities that take payments and manage 
borrower accounts for consumers of Federal and private education loans. 
For the last few years, the Bureau has been examining student loan 
servicers using exam procedures released in 2013. The new procedures 
reflect the Bureau's new priorities based on experience in the market 
over those years. For example, we enhanced the sections related to 
servicer communications about income-driven repayment (IDR) plans, and 
relating to the IDR application process. We also enhanced the 
procedures relating to payment processing, and other communications 
with consumers like billing statements. The procedures detail how 
examiners in future student loan servicing exams will review student 
loan servicers' compliance with Federal consumer financial law, 
including the prohibition against unfair, deceptive, or abusive acts or 
practices.
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    \60\ See the student loan servicing procedures, available at 
files.consumerfinance.gov/f/documents/102016_cfpb_EducationLoanServicingExamManualUpdate.pdf.
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5.1.3 Military Lending Act Examination Procedures

    On September 30, 2016, the CFPB issued the procedures its examiners 
will use in identifying consumer harm and risks related to the Military 
Lending Act (MLA) rule.\61\ The MLA rule was updated by the Department 
of the Defense in July 2015, and these exam procedures are based on the 
approved Federal Financial Institutions Examination Council (FFIEC) 
procedures. The exam procedures provide guidance to industry on what 
the CFPB will be looking for during reviews covering the amended 
regulation.
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    \61\ See the MLA examination procedures, available at http://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/military-lending-act-examination-procedures/.
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    For most forms of credit subject to the updated MLA rule, creditors 
were required to comply with the amended regulation as of Oct. 3, 2016; 
credit card providers must comply with the new rule as of Oct. 3, 2017.

5.2 Recent CFPB Guidance

5.2.1 Amendment to the Service Provider Bulletin

    Today, the CFPB is amending and reissuing its service provider 
bulletin as CFPB Compliance Bulletin and Policy Guidance 2016-02, 
Service Providers.\62\ The amendment clarifies that the Bureau expects 
that ``the depth and formality of the entity's risk management program 
for service providers may vary depending upon the service being 
performed--its size, scope, complexity, importance, and potential for 
consumer harm--and the performance of the service provider in carrying 
out its activities in compliance with Federal consumer financial laws 
and regulations. While due diligence does not provide a shield against 
liability for actions by the service provider, using appropriate due 
diligence can reduce the risk that the service provider will commit 
violations for which the supervised entity may be responsible.''
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    \62\ See CFPB, Compliance Bulletin 2016-02, available at 
files.consumerfinance.gov/f/documents/102016_cfpb_OfficialGuidanceServiceProviderBulletin.pdf.
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    Some entities may have interpreted the Bureau's 2012 bulletin to 
mean they had to use the same due diligence

[[Page 83821]]

requirements for all service providers no matter the risk for consumer 
harm. As a result, some small service providers have reported that 
entities have imposed the same due diligence requirements on them as 
for the largest service providers. The amendment clarifies that the 
risk management program may be tailored very appropriately to the size, 
market, and level of risk for consumer harm presented by the service 
provider.
    This change is consistent with the guidance of the Federal 
prudential regulators and aligns the bulletin with the Bureau's 
approach that a risk management program should take into account the 
risk of consumer harm presented by the service being provided and 
supervised entities may tailor their due diligence based on the risk of 
consumer harm. Appropriate risk management programs would further the 
goal of ensuring that entities comply with Federal consumer financial 
laws and avoid consumer harm, including when using service providers.

6. Conclusion

    The Bureau expects that regular publication of Supervisory 
Highlights will continue to aid CFPB-supervised entities in their 
efforts to comply with Federal consumer financial law. The report 
shares information regarding general supervisory and examination 
findings (without identifying specific institutions, except in the case 
of public enforcement actions), communicates operational changes to the 
program, and provides a convenient and easily accessible resource for 
information on the CFPB's guidance documents.

    Dated: October 31, 2016.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2016-28094 Filed 11-21-16; 8:45 am]
 BILLING CODE 4810-AM-P