[Federal Register Volume 82, Number 91 (Friday, May 12, 2017)]
[Notices]
[Pages 22119-22126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09658]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
Supervisory Highlights: Spring 2017
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Supervisory Highlights; notice.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau or CFPB)
is issuing its fifteenth edition of its Supervisory Highlights. In this
issue of Supervisory Highlights, we report examination findings in the
areas of mortgage servicing, student loan servicing, mortgage
origination, 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 April 26, 2017.
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
The Consumer Financial Protection Bureau is committed to a consumer
financial marketplace that is fair, transparent, and competitive, and
that works for all consumers. The Bureau supervises both bank and
nonbank institutions to help meet this goal. In this fifteenth edition
of Supervisory Highlights, the CFPB shares recent supervisory
observations in the areas of mortgage servicing, student loan
servicing, mortgage origination, and fair lending. In particular, we
describe key new developments around spike and trend monitoring,
service provider examinations, and production incentives. The findings
reported here reflect information obtained from supervisory activities
that were generally completed between September 2016 and December 2016
(unless otherwise stated). Corrective actions regarding certain matters
may remain in process at the time of this report's publication.
CFPB supervisory reviews and examinations typically involve
assessing a supervised entity's compliance management system and
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 implementing new policies, changing
written communications, improving training or monitoring, or otherwise
changing conduct to ensure the illegal practices cease. Supervision
also directs the entity to send consumers refunds, pay restitution,
credit borrower accounts, or take other remedial actions. Recent
supervisory resolutions have resulted in total restitution payments of
approximately $6.1 million to more than 16,000 consumers during the
review period. Additionally, CFPB's recent supervisory activities have
either led to or supported five recent public enforcement actions,
resulting in over $39 million in consumer remediation and an additional
$19 million in civil money penalties.
Please submit any questions or comments to
[email protected].
2. Supervisory Observations
Recent supervisory observations are reported in the areas of
mortgage origination, mortgage servicing, student loan servicing, and
fair lending.
2.1 Mortgage Origination
2.1.1 Observations and Approach to Compliance With the Ability To Repay
(ATR) Rule Requirements
Prior to the mortgage crisis, some creditors offered consumers
mortgages without considering the consumer's ability to repay the loan,
at times engaging in the loose underwriting practice of failing to
verify the consumer's debts or income. The Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act) amended the Truth
in Lending Act (TILA) to provide that no creditor may make a
residential mortgage loan unless the creditor makes a reasonable and
good faith determination based on verified and documented information
that, at the time the loan is consummated, the consumer has a
reasonable ability to repay the loan according to its terms, as well as
all applicable taxes, insurance (including mortgage guarantee
insurance), and assessments.\1\ The Dodd-Frank Act also amended TILA by
creating a presumption of compliance with these ability-to-repay (ATR)
requirements for creditors originating a specific category
[[Page 22120]]
of loans called ``qualified mortgage'' (QM) loans.\2\
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\1\ Section 1411 of the Dodd-Frank Act, Public Law 111-203,
adding section 129C(a) to TILA, codified at 15 U.S.C. 1639c(a)).
\2\ Section 1412 of the Dodd-Frank Act, adding section 129C(b)
to TILA, codified at 15 U.S.C. 1639c(b).
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To implement these statutory provisions, the Bureau amended
Regulation Z to require that a creditor shall not make a loan that is a
covered transaction (i.e., in general, a closed-end, dwelling-secured
consumer credit transaction) unless the creditor makes a reasonable and
good faith determination at or before consummation that the consumer
will have a reasonable ability to repay the loan according to its terms
(ATR rule).\3\ For a QM loan, the rule provides a safe harbor for
compliance with the ATR requirement for loans that are not higher-
priced covered transactions and a presumption of such ATR compliance
for higher-priced covered transactions.\4\ The Bureau's ATR rule has
been in effect since January 10, 2014. Since the effective date of the
ATR rule, Supervision has observed that most entities examined by the
Bureau are generally complying with the ATR rule.
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\3\ 12 CFR 1026.43(c).
\4\ 12 CFR 1026.43(e).
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This section focuses on recent supervisory examination observations
and Supervision's approach to determining compliance with the ATR rule,
including general requirements associated with the ATR rule for non-QM
loans and verification requirements for information relied upon in
making determinations of ability to repay. Specifically, this section
discusses how Supervision assesses a creditor's ATR determination that
includes reliance on verified assets and not income. It also explains
whether a creditor can make a reasonable and good faith determination
of ability to repay based on down payment size for a consumer with no
verified income or assets.
2.1.2 Reasonable and Good Faith Determination Requirement and Basis for
Determination
The ATR rule outlines minimum requirements for making
determinations of ability to repay. Specifically, the rule enumerates
factors a creditor must consider when making an ATR determination,\5\
but beyond the requirements set forth in the rule, the ATR rule does
not establish underwriting standards to which creditors must adhere.
Creditors have flexibility in creating their own underwriting standards
when making ATR determinations, as long as those standards incorporate
the minimum requirements set forth in the rule. Therefore, Supervision
evaluates whether a creditor's ATR determination is reasonable and in
good faith by reviewing relevant lending policies and procedures and a
sample of loan files and assessing the facts and circumstances of each
extension of credit in the sample.
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\5\ 12 CFR 1026.43(c)(2). A creditor must consider: (i) The
consumer's current or reasonably expected income or assets, other
than the value of the dwelling, including any real property attached
to the dwelling, that secures the loan; (ii) if the creditor relies
on income from the consumer's employment in determining repayment
ability, the consumer's current employment status; (iii) the
consumer's monthly payment on the covered transaction, calculated in
accordance with paragraph (c)(5) of the ATR rule; (iv) the
consumer's monthly payment on any simultaneous loan that the
creditor knows or has reason to know will be made, calculated in
accordance with paragraph (c)(6); (v) the consumer's monthly payment
for mortgage-related obligations; (vi) the consumer's current debt
obligations, alimony, and child support; (vii) the consumer's
monthly debt-to-income (DTI) ratio or residual income, calculated in
accordance with paragraph (c)(7); and (viii) the consumer's credit
history.
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2.1.3 Verification Using Third-Party Records and Verification of Income
or Assets
The ATR rule generally requires that creditors verify the
information that they will rely upon to determine the consumer's
repayment ability, using reasonably reliable third-party records.\6\ A
creditor must verify the amounts of income or assets the creditor
relies on to determine a consumer's ability to repay the loan using
third-party records that provide reasonably reliable evidence of the
consumer's income or assets.\7\ The ATR rule does not require that
creditors adhere to a prescribed method of verifying income or assets.
Creditors may refer to the non-exhaustive list of records set forth in
the ATR rule in verifying the consumer's income or assets.\8\
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\6\ 12 CFR 1026.43(c)(3).
\7\ 12 CFR 1026.43(c)(4).
\8\ 12 CFR 1026.43(c)(4). Creditors may verify the consumer's
income by using a tax-return transcript issued by the Internal
Revenue Service (IRS). Examples of other records the creditor may
use to verify the consumer's income or assets include: (i) Copies of
tax returns the consumer filed with the IRS or a State taxing
authority; (ii) IRS Form W-2s or similar IRS forms used for
reporting wages or tax withholding; (iii) payroll statements,
including military leave and earnings statements; (iv) financial
institution records; (v) records from the consumer's employer or a
third party that obtained information from the employer; (vi)
records from a Federal, State, or local government agency stating
the consumer's income from benefits or entitlements; (vii) receipts
from the consumer's use of check cashing services; and (viii)
receipts from the consumer's use of a funds transfer service.
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When assessing a creditor's compliance with ATR rule requirements,
Supervision determines whether the creditor considered the required
underwriting factors in determining the ability to repay. Then
examiners determine whether the creditor properly verified the
information it relied upon in making that determination. Records a
creditor uses for verification, including to verify income or assets,
must be specific to the individual consumer.\9\ For example, as
discussed in the October 2016 issue of Supervisory Highlights, a
creditor violated the ATR requirements by failing to properly verify
income relied upon when considering the consumer's monthly debt-to-
income ratio and determining the consumer's ability to repay.\10\
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\9\ Comment 43(c)(3)-1.
\10\ 12 CFR 1026.43(c)(2)(vii), (c)(4), and (c)(7).
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2.1.4 Reliance on the Consumer's Verified Assets and Not Income When
Making an ATR Determination
The ATR rule provides that a creditor may base its determination of
ability to repay on current or reasonably expected income from
employment or other sources, assets other than the dwelling (and any
attached real property) that secures the covered transaction, or
both.\11\ The income and/or assets relied upon must be verified. In
situations where a creditor makes an ATR determination that relies on
assets and not income, CFPB examiners would evaluate whether the
creditor reasonably and in good faith determined that the consumer's
verified assets suffice to establish the consumer's ability to repay
the loan according to its terms, in light of the creditor's
consideration of other required ATR factors, including: the consumer's
mortgage payment(s) on the covered transaction, monthly payments on any
simultaneous loan that the creditor knows or has reason to know will be
made, monthly mortgage-related obligations, other monthly debt
obligations, alimony and child support, monthly DTI ratio or residual
income, and credit history. In considering these factors, a creditor
relying on assets and not income could, for example, assume income is
zero and properly determine that no income is necessary to make a
reasonable determination of the consumer's ability to repay the loan in
light of the consumer's verified assets.\12\
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\11\ Comment 43(c)(2)(i)-1.
\12\ For example, if a creditor considers monthly residual
income to determine repayment ability for a consumer with no
verified income, it might allocate the consumer's verified assets to
offset what would be a negative monthly residual income (given that
the ATR rule requires a creditor considering residual monthly income
to do so by considering remaining income after subtracting total
monthly debt obligations from total monthly income).
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[[Page 22121]]
2.1.5 Reliance on Down Payment Size To Support Repayment Ability for a
Consumer With No Verified Income or Assets
As an initial matter, a down payment cannot be treated as an asset
for purposes of considering the consumer's income or assets under the
ATR rule. As described above, the ATR rule requires creditors to
consider a consumer's reasonably expected income or assets, ``other
than the value of the dwelling, including any real property attached to
the dwelling that secures the loan.'' \13\ Additionally, while the size
of a down payment generally affects the loan amount, the ATR rule
already accounts for this by focusing the relevant inquiry on a
consumer's ability to repay the loan according to its terms. All else
being equal, a larger down payment will lower the loan size and monthly
payment and will in this way improve a consumer's repayment ability.
However, the size of a down payment does not directly indicate a
consumer's ability to repay the loan according to its terms on a going-
forward basis because a down payment is not an asset available for this
purpose. Therefore, standing alone, down payments will not support a
reasonable and good faith determination of the ability to repay.
Supervision cannot anticipate circumstances where a creditor could
demonstrate that it reasonably and in good faith determined ATR for a
consumer with no verified income or assets based solely on the down
payment size. This would be the case even where the loan program as a
whole has a history of strong performance.
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\13\ 12 CFR 1026.43(c)(2)(i) (emphasis added).
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For every mortgage origination examination of Bureau supervised
entities where Bureau examiners are assessing compliance with the ATR
rule, Supervision will evaluate whether the creditor made a reasonable
and good faith determination of the consumer's ability to repay in
light of the facts and circumstances specific to each individual
extension of credit. For further information on Supervision's approach
to the ATR rule, Supervision encourages supervised entities to review
the Bureau's Mortgage Origination Examination Procedures \14\ and TILA
Examination Procedures.\15\ For summaries of the ATR rule, creditors
can review the Bureau's Readiness Guide \16\ and Small Entity
Compliance Guide.\17\ However, only the regulation and its accompanying
commentary can provide complete and definitive information about the
requirements.
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\14\ Mortgage Origination Examination Procedures, available at
https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/mortgage-origination-examination-procedures/.
\15\ TILA Examination procedures, available at http://files.consumerfinance.gov/f/201509_cfpb_truth-in-lending-act-exam-procedures.pdf.
\16\ Readiness guide, available at http://files.consumerfinance.gov/f/201509_cfpb_readiness-guide_mortgage-implementation.pdf.
\17\ See Ability-to-Repay and Qualified Mortgage Rule--Small
Entity Compliance Guide, available at http://files.consumerfinance.gov/f/201603_cfpb_atr-qm_small-entity-compliance-guide.pdf.
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2.2 Mortgage Servicing
The June 2016 edition of Supervisory Highlights discussed how
outdated mortgage servicing technology and lapses in auditing and staff
training have led to persistent compliance deficiencies with loss
mitigation acknowledgement notices, loan modification denial notices,
servicing transfers, and in other areas.\18\ Supervision continues to
observe serious problems with the loss mitigation process at certain
servicers, including at one or more servicers that failed to request
from borrowers the additional documents and information they needed to
obtain complete loss mitigation applications, only to deny the
applications for missing those documents.\19\ Supervision directed
these servicers to enhance policies, procedures, and monitoring to
ensure that they promptly address the specific deficiencies found in
each exam. Other issues reviewed during Supervision's most recent
mortgage servicing examinations include dual tracking, problems with
the maintenance of escrow accounts, and deficient periodic statements.
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\18\ See Supervisory Highlights Mortgage Servicing Special
Edition, available at http://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-mortgage-servicing-special-edition-issue-11/.
\19\ 12 CFR 1024.41(c)(2)(iv).
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2.2.1 Dual Tracking
Regulation X generally \20\ prohibits a servicer from making the
first notice or filing required by applicable law for any judicial or
nonjudicial foreclosure process (``first notice or filing'') if a
consumer timely submits a complete loss mitigation application, unless
certain circumstances are met.\21\ This prohibition on foreclosure
filing also extends to certain situations where a consumer timely
submits all the missing documents and information as stated in a
servicer's loss mitigation acknowledgment notice--that is, it applies
to ``facially complete'' applications.\22\
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\20\ Pursuant to 12 CFR 1024.41(f)(1), the prohibition does not
apply in three scenarios: (1) The borrower's mortgage loan
obligation is more than 120 days delinquent, (2) the foreclosure is
based on a borrower's violation of a due-on-sale clause, or (3) the
servicer is joining the foreclosure action of a subordinate
lienholder.
\21\ Pursuant to 12 CFR 1024.41(f)(2), the servicer may make the
first notice or filing, stated generally, if the borrower's
application is properly denied and the borrower has no further right
to appeal, the borrower rejects all the options offered, or the
borrower fails to perform under an agreement on a loss mitigation
option.
\22\ 12 CFR 1024.41(c)(2)(iv); 12 CFR 1024.41(f)(2) and comments
41(c)(2)(iv)-1 and -2.
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Examiners found that one or more servicers did not properly
classify loss mitigation applications as facially complete after
receiving the documents and information requested in the loss
mitigation acknowledgment notice and failed to afford these eligible
consumers with foreclosure protections for facially complete
applications as required by Regulation X. The servicer(s) made the
first notice or filing even though the consumers had timely submitted
facially complete applications and were entitled to Regulation X's
foreclosure protections. Supervision also determined that the
servicer(s) violated Regulation X by failing to maintain policies and
procedures reasonably designed to properly evaluate a borrower who
submits a loss mitigation application for all loss mitigation options
for which the borrower may be eligible.\23\ Supervision directed the
servicer(s) to improve policies, procedures, and practices related to
facially complete loss mitigation applications to ensure that the
servicer(s) will not make a first notice or filing after receiving
documents and information from a borrower until the servicer reviews
the documents and information and determines that they do not comprise
a facially complete application.\24\ The servicer(s) remediated
consumers affected by the improper first notice or filing for fees
charged to the consumer in these circumstances, for other economic
harms, and non-economic harms such as emotional distress.
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\23\ See 112 CFR 1024.38(b)(2)(v) (setting forth the requirement
that servicers shall maintain policies and procedures reasonably
designed to properly evaluate a borrower who submits an application
for a loss mitigation option for all loss mitigation options for
which the borrower may be eligible pursuant to any requirements
established by the owner or assignee of the borrower's mortgage loan
and, where applicable, in accordance with the requirements of
section 1024.41).
\24\ This excludes circumstances where Regulation X permits a
servicer(s) to make a first notice or filing.
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2.2.2 Paying the Wrong Consumer's Insurance Premiums With Escrow Funds
One or more servicers disbursed funds from some borrowers' escrow
accounts to pay insurance premiums owed by other borrowers. The
practice
[[Page 22122]]
created escrow shortages and increased monthly payments that consumers
with affected escrow accounts could not avoid. Supervision cited this
practice as unfair and directed that in addition to remediating
affected consumers, the servicer(s) adopt policies and procedures to
ensure that insurance payments are made properly from escrow
accounts.\25\
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\25\ 12 U.S.C. 5536(a)(1)(B).
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2.2.3 Vague Periodic Statements
In connection with periodic statements required under Regulation Z,
examiners found one or more servicers used the phrases ``Misc.
Expenses'' and ``Charge for Service'' when describing transaction
activity that caused a credit or debit to the amount currently due as
displayed on periodic statements. Supervision cited the servicer(s) for
violating Regulation Z requirements that the transaction activity
listed on periodic statements include a brief description of the
transactions because the phrases ``Misc. Expenses'' and ``Charge for
Service'' were not adequate or specific enough to comply with the
rule's requirement.\26\ Supervision directed the servicer(s) to provide
more specific descriptions in order to facilitate consumer
understanding of the fees and charges imposed.
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\26\ 12 CFR 1026.41(d)(4).
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2.3 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. Examiners identified an unfair act or practice and a
deceptive act or practice relating to payment deferments in the
Bureau's recent student loan servicing examinations.
2.3.1 Failing To Reverse Adverse Consequences of Erroneous Deferment
Terminations
Many student loan lenders offer deferments during periods in which
a borrower is attending school. To manage that benefit, student loan
servicers rely on enrollment data supplied by schools via a third-party
enrollment reporting company, National Student Clearinghouse. In
general, schools regularly provide updated data files on their
students' enrollment status to an enrollment reporting company, which
in turn, facilitates the updating of enrollment data files that are
sent to student loan servicers.\27\ Each year, data about tens of
millions of current and former students pass through this data exchange
service. The servicers' automated systems will then trigger changes in
a borrower's loan status. For Federal loans, a third-party enrollment
reporting company often reports information through the Department of
Education.
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\27\ For more information on this process, see the Bureau's
recent report on the topic. CFPB, Student Data & Student Debt: How
student enrollment status problems can make student loans more
expensive, Feb. 2017, available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201702_cfpb_Enrollment-Status-Student-Loan-Report.pdf.
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During one or more exams of student loan servicers, examiners found
that incorrect information received from a third-party enrollment
reporting service provider caused the servicer to automatically
terminate deferments prematurely, while borrowers were still enrolled
at least half-time in school. Based on subsequent reporting, the
servicers corrected the premature termination and retroactively placed
the borrowers back in deferment. However, examiners found that the
servicers engaged in an unfair practice because they did not reverse
the adverse financial consequences of the erroneous deferment
termination, including late fees charged for non-payment during periods
when the borrower should have been in deferment, and interest
capitalization that occurred because the borrower's deferment was
erroneously terminated. This practice was especially harmful to
borrowers where the enrollment reporting data resulted in multiple
premature deferment terminations, because interest capitalized multiple
times, increasing principal balances by thousands of dollars in some
instances.
Supervision determined these servicers engaged in the unfair
practice of failing to reverse late fees and interest capitalization
events after determining that they had erroneously terminated
borrowers' in-school deferment based on enrollment reporting data.
Supervision directed one or more servicers to engage an independent
audit to find accounts that were adversely affected and remediate the
resulting harm.
2.3.2 Deceptive Statements About Interest Capitalization During
Successive Deferments
Student loan lenders usually offer a variety of deferment and
forbearance options that allow borrowers to cease payments for a brief
period of time. Often, when a forbearance or deferment ends, the
interest that has accrued during the forbearance or deferment period is
capitalized, meaning that the interest is added to the principal amount
that accrues interest.
At one or more servicers, examiners found that servicers were
placing borrowers into successive periods of forbearance or deferment
where a new period immediately followed the previous period. When that
happened, the servicers would capitalize interest after each period of
deferment or forbearance, instead of capitalizing once when the
borrower eventually reentered repayment. Since capitalized interest is
added to the borrower's loan balance, capitalizing interest multiple
times rather than once increases the amount the borrower ultimately
must repay.
Supervision determined that one or more servicers had engaged in
deceptive practices by stating that interest would capitalize at the
end of the deferment period. Reasonable consumers likely understood
this to mean interest would capitalize once, when the borrower
ultimately exited deferment and entered repayment. These misleading
statements were material because, given the significant financial
consequences of interest capitalization, the borrower may have decided
to take a different action. Supervision directed one or more servicers
to engage an independent audit to find accounts that were adversely
affected and remediate the resulting harm. One or more servicers
started capitalizing interest only after the final forbearance or
deferment in a series, and reversed past capitalization events based on
successive deferments or forbearances.
2.4 Fair Lending
2.4.1 Update to Proxy Methodology
In the Summer 2014 edition of Supervisory Highlights,\28\ the
Bureau reported that examination teams use a Bayesian Improved Surname
Geocoding (BISG) proxy methodology for race and ethnicity in their fair
lending analysis of non-mortgage credit products. The BISG methodology
relies on the distribution of race and ethnicity based on place-of-
residence and surname, which are publicly available information from
Census. The method involves constructing a probability of assignment to
race and ethnicity based on demographic information associated with
surname and then updating this probability using the demographic
characteristics of the census block group associated with place of
residence. The updating is performed through the application of a
Bayesian algorithm,
[[Page 22123]]
which yields an integrated probability that can be used to proxy for an
individual's race and ethnicity.\29\
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\28\ See Supervisory Highlights (Summer 2014), available at
http://files.consumerfinance.gov/f/201409_cfpb_supervisory-highlights_auto-lending_summer-2014.pdf.
\29\ For more information on the methodology, see Consumer
Financial Protection Bureau, Using publicly available information to
proxy for unidentified race and ethnicity (Sept. 2014), available at
http://files.consumerfinance.gov/f/201409_cfpb_report_proxy-methodology.pdf.
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In December, the U.S. Census Bureau released a list of the most
frequently occurring surnames based on the most recent census, which
includes values for total counts and race and ethnicity shares
associated with each surname. In total, the list provides information
on the 162,253 surnames that appear at least 100 times in the most
recent census, covering approximately 90% of the population.\30\ As of
April 2017, examination teams are relying on an updated proxy
methodology that reflects the newly available surname data from the
Census Bureau. The new surname list; statistical software code, written
in Stata; and other publicly available data used to build the BISG
proxy are available at: https://github.com/cfpb/proxy-methodology.
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\30\ The surname data are available on the Census Bureau's Web
site, see Frequently Occurring Surnames from the 2010 Census (last
revised Dec. 27, 2016), https://www.census.gov/topics/population/genealogy/data/2010_surnames.html.
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3. Remedial Actions
3.1.1 Public Enforcement Actions
The Bureau's supervisory activities resulted in or supported the
following public enforcement actions.
3.1.1 Experian
On March 23, 2017, the Bureau announced an enforcement action
against Experian and its subsidiaries for deceiving consumers about the
use of credit scores it sold to consumers.\31\ In its advertising,
Experian falsely represented that the credit scores it marketed and
provided to consumers were the same scores lenders use to make credit
decisions. In fact, lenders did not use the scores Experian sold to
consumers. In some instances, there were significant differences
between the scores that Experian provided to consumers and the various
credit scores lenders actually use. As a result, Experian's credit
scores in these instances presented an inaccurate picture of how
lenders assessed consumer creditworthiness.
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\31\ See CFPB Fines Experian $3 Million for Deceiving Consumers
in Marketing Credit Scores, available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-fines-experian-3-million-deceiving-consumers-marketing-credit-scores/.
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Experian also violated the Fair Credit Reporting Act (FCRA), which
requires a credit reporting company to provide a free credit report
once every twelve months and to operate a central source--
AnnualCreditReport.com--where consumers can obtain their report. Until
March 2014, consumers getting their report through Experian had to view
Experian advertisements before they got to the report. This violates
the FCRA prohibition of such advertising tactics.
The CFPB ordered Experian to truthfully represent how its credit
scores are used and pay a $3 million civil money penalty.
3.1.2 Prospect Mortgage, Planet Home Lending, Re/Max Gold Coast, and
Keller Williams Mid-Willamette
The Bureau entered consent orders against Prospect Mortgage, Keller
Williams Mid Willamette (KW Mid-Willamette), Re/Max Gold Coast (RGC),
and Planet Home Lending (Planet) on January 31, 2017.\32\ The Bureau
found that Prospect gave, and KW Mid-Willamette, RGC, and Planet
received, a thing of value in exchange for mortgage loan referrals.
This arrangement violated Section 8 of the Real Estate Settlement
Procedures Act, which prohibits kickbacks for the referral of
settlement service business.
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\32\ See CFPB Orders Prospect Mortgage to Pay $3.5 Million Fine
for Illegal Kickback Scheme, available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-prospect-mortgage-pay-35-million-fine-illegal-kickback-scheme/.
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Among other things, the Bureau found that KW Mid-Willamette paid a
cash equivalent to its agents in return for referrals to Prospect. In
addition, as part of its agreement to refer settlement service business
to Prospect, RGC required hundreds of consumers to prequalify with
Prospect before accepting an offer to buy a property where RGC
represented the seller. The Bureau also found that Planet, a mortgage
servicer, called consumers in an attempt to steer them to Prospect.
Planet provided a `warm transfer' to a Prospect loan agent to
facilitate Prospect receiving the consumers' refinance business. Planet
and Prospect split the net proceeds from these refinances.
The Bureau also found that Planet violated the Fair Credit
Reporting Act by obtaining consumer reports without a permissible
purpose. Finally, as described in the consent order, the Bureau found
that Prospect paid hundreds of counterparties for referrals using desk
license agreements, marketing services agreements, and lead agreements.
These actions illustrate the legal risks associated with these types of
agreements--as described in the Bureau's Compliance Bulletin 2015-05--
for both the parties making and the parties receiving payments for
referrals of real estate settlement services. Prospect was ordered to
pay a $3.5 million civil penalty, and the real estate brokers and
servicer were ordered to pay a combined $495,000 in consumer relief.
3.1.3 CitiFinancial Servicing and CitiMortgage
On January 23, 2017, the Bureau took separate actions against
CitiFinancial Servicing and CitiMortgage, Inc. for giving the runaround
to struggling homeowners seeking options to save their homes.\33\ Among
other things, the Bureau found that CitiFinancial kept consumers in the
dark about foreclosure relief options. When borrowers applied to have
their payments deferred, CitiFinancial failed to consider it as a
request for foreclosure relief options. Such requests for foreclosure
relief trigger protections required by CFPB mortgage servicing rules,
which include helping borrowers complete their applications and
considering them for all available foreclosure relief alternatives. As
a result, CitiFinancial violated the Real Estate Settlement Procedures
Act and borrowers may have missed out on foreclosure relief options
that may have been more appropriate for them.
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\33\ See CFPB Orders Citi Subsidiaries to Pay $28.8 Million for
Giving the Runaround to Borrowers Trying to Save Their Homes,
available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-citi-subsidiaries-pay-288-million-giving-runaround-borrowers-trying-save-their-homes/.
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The Bureau also found that some borrowers who asked CitiMortgage
for assistance were sent a letter demanding dozens of documents and
forms that had no bearing on the application or that the consumer had
already provided. Many of these documents had nothing to do with a
borrower's financial circumstances and were actually not needed to
complete the application. Letters sent to borrowers in 2014 requested
documents with descriptions such as ``teacher contract,'' and ``Social
Security award letter.'' CitiMortgage sent such letters to about 41,000
consumers. In doing so, CitiMortgage violated the Real Estate
Settlement Procedures Act, and the Dodd-Frank Act's prohibition against
deceptive acts or practices.
The CFPB order requires CitiMortgage to pay an estimated $17
million in remediation to consumers, and pay a civil penalty of $3
million; and requires CitiFinancial Services to refund approximately
$4.4 million to consumers, and pay a civil penalty of $4.4 million.
[[Page 22124]]
3.1.4 Equifax and TransUnion
On January 3, 2017, the Bureau took action against Equifax, and
against TransUnion, and their subsidiaries for deceiving consumers
about the usefulness and actual cost of credit scores they sold to
consumers.\34\ In their advertising, TransUnion and Equifax falsely
represented that the credit scores they marketed and provided to
consumers were the same scores lenders typically use to make credit
decisions. The companies also claimed that their credit scores and
credit-related products were free, or in the case of TransUnion, cost
only ``$1.'' In fact, the scores sold by TransUnion and Equifax were
not typically used by lenders to make those decisions. Moreover,
consumers who signed up for credit scores or credit-related products
received a free trial of seven or 30 days, after which they were
automatically enrolled in a subscription program. Unless they cancelled
during the trial period, consumers were charged a recurring fee--
usually $16 or more per month.
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\34\ See CFPB Orders TransUnion and Equifax to Pay for Deceiving
Consumers in Marketing Credit Scores and Credit Products, available
at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-transunion-and-equifax-pay-deceiving-consumers-marketing-credit-scores-and-credit-products/.
_____________________________________-
Equifax also violated the FCRA, which requires a credit reporting
agency to provide a free credit report once every 12 months and to
operate a central source_AnnualCreditReport.com--where consumers can
get their report. Until January 2014, consumers getting their report
through Equifax first had to view Equifax advertisements. This violates
the FCRA, which prohibits such advertising until after consumers
receive their report.
The CFPB ordered TransUnion and Equifax to truthfully represent the
value of the credit scores they provide and the cost of obtaining those
credit scores and other services. Between them, TransUnion and Equifax
must pay a total of more than $17.6 million in restitution to
consumers, and a $5.5 million civil money penalty.
3.1.5 Moneytree, Inc.
On December 16, 2016, the Bureau took action against Moneytree for
misleading consumers with deceptive online advertisements and
collections letters, and for making unauthorized electronic transfers
from consumers' bank accounts.\35\ Specifically, the CFPB found that
Moneytree deceived consumers about the price of check-cashing services,
made false threats of vehicle repossession when collecting overdue
unsecured loans, and withdrew funds from consumers' accounts without
proper written authorization. The CFPB ordered the company to cease its
illegal conduct, provide $255,000 in refunds to consumers, and pay a
civil penalty of $250,000.
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\35\ See CFPB Takes Action Against Moneytree for Deceptive
Advertising and Collection Practices, available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-moneytree-deceptive-advertising-and-collection-practices/.
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Prior to taking enforcement action, the Bureau identified
significant weaknesses in Moneytree's compliance management system
through multiple supervisory examinations of Moneytree's lending,
marketing, and collections activities. At the time of the violations
described in the order, Moneytree had not adequately addressed these
issues. Moneytree's failure to adequately address CFPB's supervisory
concerns was a factor in the Bureau's determination to pursue this
matter through a public enforcement action.
3.2 Non-Public Supervisory Actions
In addition to the public enforcement actions above, recent
supervisory activities have resulted in approximately $6.1 million in
restitution to more than 16,000 consumers. These non-public supervisory
actions generally have been the product of CFPB supervision and
examinations, often involving either examiner findings or self-reported
violations of Federal consumer financial law during the course of an
examination. Recent non-public resolutions were reached in auto finance
origination matters.
4. Supervision Program Developments
4.1 Examination Procedures
4.1.1 Overview and Examination Chapters
The CFPB has updated sections of its Supervision and Examination
Manual. These updates include revisions to certain sections of Part I--
Compliance Supervision and Examination (Overview and Examination
Process).\36\ The corresponding Scope Summary template has also been
updated.\37\ These revisions were necessitated by the updated Federal
Financial Institutions Examination Council (FFIEC) Uniform Interagency
Consumer Compliance Rating System, which became effective on March 31,
2017. The revisions also reflect changes in our supervisory program,
such as the refinement to our examination prioritization process.
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\36\ See the Overview and Examination Process updates, available
at https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/updated-portions-overview-and-examination-process/.
\37\ See Scope Summary template, available at https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/scope-summary-template/.
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4.1.2 Changes to Reporting Templates
New reporting templates for Supervisory Letters and Examination
Reports (collectively referred to as Reports) are now available on the
CFPB Web site.\38\ These changes aim to simplify Reports and facilitate
follow-up reporting by supervised entities about actions they are
taking to address compliance management weaknesses or legal violations
found during Bureau examinations.
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\38\ Report templates are available at https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/supervisory-report-and-letter-templates/.
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4.2 Service Provider Examination Program
In bulletins and past issues of Supervisory Highlights, the CFPB
has emphasized that effective service provider oversight is a crucial
component of any compliance management system (CMS).\39\ The CFPB
expects its supervised entities to have an effective process for
identifying and managing the risks to consumers created by the choices
made to outsource certain activities to service providers.\40\ The CFPB
has and will continue to evaluate the oversight of service providers in
its compliance management reviews according to these expectations.
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\39\ See e.g., Supervisory Highlights (Fall 2016), available at
http://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_13_Final_10.31.16.pdf; Supervisory
Highlights (Summer 2016), available at http://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_12.pdf; and Supervisory Highlights
(Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf. For Bulletins,
see Compliance Bulletin and Policy Guidance; 2016-03, Detecting and
Preventing Consumer Harm from Production Incentives available at
https://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/cfpb-compliance-bulletin-2016-03-detecting-and-preventing-consumer-harm-from-production-incentives/; and
Compliance Bulletin and Policy Guidance; 2016-02, Service Providers
(amends and reissues CFPB Bulletin 2012-03), available at https://www.consumerfinance.gov/documents/1385/102016_cfpb_OfficialGuidanceServiceProviderBulletin.pdf.
\40\ Compliance Bulletin and Policy Guidance; 2016-02, Service
Providers (amends and reissues CFPB Bulletin 2012-03), available at
https://www.consumerfinance.gov/documents/1385/102016_cfpb_OfficialGuidanceServiceProviderBulletin.pdf.
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At the same time, the CFPB recognizes the potential risks to
consumers posed by large service
[[Page 22125]]
providers,\41\ which provide technological support to facilitate
compliance with Federal consumer financial law, including software
packages, electronic system platforms, and other types of technological
tools. These compliance tools are often provided to thousands of
participants in a particular market. As such, compliance risks in an
entire market may be heightened when regulatory compliance is not
considered and integrated throughout the development lifecycle, change,
and configuration of these compliance systems.
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\41\ Compliance information systems are information systems and
processes used by financial institutions to produce consumer
financial products and services.
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Because a single service provider might affect consumer risk at
many institutions, the CFPB has begun to develop and implement a
program to supervise these service providers directly.\42\ Direct
examination of key service providers will provide the CFPB the
opportunity to monitor and potentially reduce risks to consumers at
their source.
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\42\ The Dodd-Frank Act grants the Bureau the authority to
examine ``service providers'' to certain entities. More
specifically, under Dodd-Frank Act subsections 1024(e) and 1025(d),
the Bureau has the authority to examine, in coordination with the
appropriate prudential regulator(s), service providers to entities
described in Dodd-Frank Act subsections 1024(a)(1) or 1025(a), to
the same extent as if the Bureau were an appropriate Federal banking
agency under section 7(c) of the Bank Service Company Act. And,
under Dodd-Frank Act section 1026(e), the Bureau has the authority
to examine, in coordination with the appropriate prudential
regulator(s), service providers to a substantial number of entities
described in Dodd-Frank Act subsection 1026(a), to the same extent
as if the Bureau were an appropriate Federal banking agency under
section 7(c) of the Bank Service Company Act. See Dodd-Frank Act
Sections 1024-1026, codified at 12 U.S.C. 5514-5516.
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In its initial work, the CFPB is conducting baseline reviews of
some service providers to learn about the structure of these companies,
their operations, their compliance systems, and their CMS. In more
targeted work, the CFPB is focusing on service providers that directly
affect the mortgage origination and servicing markets. The CFPB will
shape its future service provider supervisory activities based on what
it learns through its initial work. As with all new examination
programs, service provider supervision is folded into the Bureau's
overall risk-based prioritization process.\43\
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\43\ See Section 3.2.3, Risk-Based Approach to Examinations,
Supervisory Highlights: Summer 2013, available at http://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf.
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4.3 Spike and Trend Monitoring
As a data-driven agency, the Bureau has prioritized detecting
issues in the market that could result in risk to consumers. The Bureau
has historically incorporated this information about market trends into
the risk-based prioritization of examinations.\44\ To this end, the
Bureau now continuously monitors spikes and trends in complaints. Our
automated capability monitors the volume of consumer complaints for all
companies named by consumers in complaint submissions. Our active
monitoring algorithms identify short, medium, and long-term changes in
complaint volumes in daily, weekly, and quarterly windows. Importantly,
the tool works regardless of company size, random variation, general
complaint growth, and seasonality.
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\44\ See Section 3.2.3, Supervisory Highlights (Summer 2013),
available at http://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf.
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The tool is intended to be an effective early warning system,
helping the Bureau to identify consumer issues quickly and engage with
companies earlier. For example, in one instance, the regional exam
team, after reviewing complaints associated with a spike in complaint
volume, immediately reached out to the company to inform senior
management and discuss consumers' concerns. The Bureau was able to
engage senior management before they were aware of the matter through
their own internal processes. The company quickly developed and
implemented a plan to correct the issues, provided accurate information
to customer service representatives, and developed a refund policy and
process for affected consumers, minimizing potential harm to consumers
and further risk of exposure for the company.
4.4 Recent CFPB Guidance
The CFPB is committed to providing guidance on its supervisory
priorities to industry and members of the public.
4.4.1 Compliance and Regulatory Implementation Resources
The Bureau is continuously working to facilitate compliance and
empower stakeholders to understand and apply Federal consumer financial
laws. In addition to official guidance provided by the Bureau, there
are a variety of tools and resources for industry and other
stakeholders. These resources include plain-language guides, rules
summaries, reference charts, sample forms, interactive Web pages, and
webinars. The Bureau refers to this ongoing work as ``regulatory
implementation.'' The implementation and guidance Web page \45\
includes links to dedicated Web pages for HMDA, the Know Before You Owe
mortgage disclosure rule, Prepaid Rule, Title XIV (which includes both
mortgage origination and mortgage servicing), remittance transfers, and
the rural and underserved counties list. There are also instructions on
how to provide feedback on the material and sign up to receive notices
on new regulatory implementation efforts and materials.
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\45\ These resources are available at http://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/.
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Another tool provided by the Bureau to support compliance and
implementation is eRegulations,\46\ a web-based, open source platform
that makes regulations easier to find, read, and use. It brings
official interpretations, regulatory history, and other information to
the forefront to clarify regulations. The eRegulations tool has been
updated to include Regulations B, C, D, E, J, K, L, M, X, Z and DD.
User feedback consistently indicates that many users have found this
platform to be very useful for navigating Bureau regulations.
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\46\ The eRegulations tool is available at https://www.consumerfinance.gov/eregulations/.
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4.5 Production Incentives
On November 28, 2016, CFPB published Compliance Bulletin 2016-03,
``Detecting and Preventing Consumer Harm from Production Incentives.''
The Bureau recognizes that many supervised entities may choose to
implement incentive programs to achieve business objectives. These
production incentives can lead to significant consumer harm if not
properly managed. However, when properly implemented and monitored,
reasonable incentives can benefit consumers and the financial
marketplace as a whole.
This bulletin compiles guidance that has previously been given by
the CFPB in other contexts and highlights examples from the CFPB's
supervisory and enforcement experience where incentives contributed to
substantial consumer harm. It also describes compliance management
steps that supervised entities should take to mitigate risks posed by
incentives.
The CFPB anticipates that careful and thoughtful implementation of
the guidance contained in this bulletin will yield substantial benefits
for both bank and nonbank financial institutions, as well as for
consumers. In particular, it should help institutions prevent,
identify, and mitigate issues that could pose significant legal,
regulatory, and
[[Page 22126]]
reputational risks that could also cause harm for consumers.
5. Conclusion
The Bureau recognizes the value of communicating our program
findings to CFPB supervised entities to help them in their efforts to
comply with Federal consumer financial law, and to other stakeholders
to foster a better understanding of the CFPB's work.
To this end, the Bureau remains committed to publishing its
Supervisory Highlights report periodically to share information about
general supervisory and examination findings (without identifying
specific institutions, except in the case of public enforcement
actions), to communicate operational changes to the program, and to
provide a convenient and easily accessible resource for information on
the Bureau's guidance documents.
Dated: April 22, 2017.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2017-09658 Filed 5-11-17; 8:45 am]
BILLING CODE 4810-AM-P