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GBA 2017 Advanced Compliance SchoolManaging Lending Compliance

Financial Solutions * May 2017 1

2017 MANAGING LENDING COMPLIANCE

Patti Joyner Blenden, CRCMMay 2017

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FDIC COMPLIANCE EXAM MANUAL

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Marketing

• Product design

• Fair lending• UDAAP• Pricing and

terms design• Marketing

and advertising

Origination

• Applications• Credit check• Early

disclosures• Underwriting• Documents• Closing• Disbursement• Uploading

Servicing

• Payment crediting

• Periodic statements

• Escrow• Insurance• Error

resolution• Information

requests• Servicing

transfers

Termination

• Loan payoff• Delinquencies• Collections• Loan

workouts• Early

intervention• Loan

modifications• Repossession

or foreclosure

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COMPLIANCE MANAGEMENT SYSTEM

Board and Management

Oversight

Policies and Procedures

Training

Monitoring and Auditing

Consumer Complaint Response

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Based on the March 2017 Consumer Compliance Rating Definitions

BOARD AND MANAGEMENT OVERSIGHT

Leverage the collective knowledge and expertise of the bank and trusted partners, especially that of your loan investors

Understand the bank’s risk appetite Oversight and commitment Change management expertise is a

critical component in the lending area in particular

Comprehension, identification and management or risk

Corrective action and self-identification

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Oversight

Policies and

Procedures

Training

Monitoring and

Auditing




DETERMINING YOUR BANK’S RISK TOLERANCE

Lowest• Board and management wants to be the best of the best!

Moderate

• Risk averse• Satisfied with being just good enough• Risk tolerant

Highest• Reactive approach; gets attention when things blow up!

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RISING RISKS OF LOAN SERVICING

Operational Risk Risk to current or projected financial condition and resilience arising from

inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events.

Losses result from internal fraud; external fraud; inadequate or inappropriate employment practices and workplace safety; failure to meet professional obligations involving clients, products, and business practices; damage to physical assets; business disruption and systems failures; and failures in execution, delivery, and process management.

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Reputation Risk Risk to current or projected financial condition and resilience arising from

negative public opinion. Inherent in all bank activities and requires management to exercise an

abundance of caution in dealing with stakeholders, such as customers, counterparties, correspondents, investors, regulators, employees, and the community.

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Credit Risk Risk to current or projected financial condition and resilience arising from

an obligor’s failure to meet the terms of any contract with the bank or otherwise perform as agreed.

Compliance Risk Risk to current or projected financial condition and resilience arising from

violations of laws or regulations, or from nonconformance with prescribed practices, internal policies and procedures, or ethical standards.

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POLICIES AND PROCEDURES Compliance policies and

procedures, lending platform management programs and customer contact procedures should be comprehensive and provide actionable standards to effectively manage compliance risk in the products, services and activities of the financial institution

The compliance goals must support the safety and soundness goals of the enterprise

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Oversight


Training



LOAN SERVICING TRANSACTION CONTROLS Controls designed to ensure accuracy and compliance on a per transaction or per

occurrence basis and seek to mitigate risk within functional processing areas. Automated standardization of loan document generation Pre-closing documentation review performed by an individual who didn’t underwrite loan

to verify: Loan was approved by an individual with adequate lending authority Adequate income, employment, and property valuation documentation exists in the file The ratios used in the underwriting process were accurately calculated That any conditions are met prior to submitting for closing (common violation)

Post-closing review is equally important especially with TRID loans to cure noted errors Document the review using a checklist maintained in the loan file

Include signature, printed name, or initials of the reviewer along with a date

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TRAINING Compliance training must be

comprehensive, timely and specifically tailored to the particular responsibilities of the participants.

Program must be updated proactively in advance of new products or new laws and regulations to ensure all staff are aware of compliance responsibilities before roll-out.

Continues to be one of our biggest challenges due to so many lending compliance changes!

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Oversight


Training



TRAINING REQUIREMENTS

Applies to Board, management, bank staff, and THIRD PARTIES Staff needs specific, comprehensive training in laws, regulations, current

guidance, plus internal policies and procedures. Establish regular, comprehensive training schedule based on job

descriptions and job performance. Periodically assess knowledge and comprehension. Document whether

the participants actually understood and can retain the knowledge. Very big sticking point with regulators recently.

Training MUST BE frequently updated.

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TRAINING REQUIREMENTS (Continued)

Training – Examiner Expectations Delivery method Online

Computer-based

Appropriate?

How updated? Comprehensively updated – change management is key here!

Records – who attends? how are they evaluated?

Schedule – frequency? Are all classes crammed in there at once such that it loses importance

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LOAN COMPLIANCE TRAINING

Include the entire life cycle of loans in your CONSTANT training cycle Much greater attention to detail and individual consumer rights versus

class action settlements than ever before – CFPB complaints process, etc. Take a proactive approach to identify procedural or training weaknesses

in an effort to preclude violations. Examine results of regularly scheduled reviews to ensure timely identification of issue and train again on any revisions to procedures or lack of compliance with the previous policies and procedures.

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MONITORING AND AUDITING

Compliance monitoring practices, management information systems, reporting, audit and internal control systems must be comprehensive, timely and successful.

Programs must be monitored proactively to identify procedural or training weaknesses to preclude regulatory violations.

Update the program expeditiously to minimize compliance risk.

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Oversight


Training

Monitoring and

Auditing


LOAN SERVICING MONITORING CONTROLS Controls assessing the effectiveness of transaction level controls. Generally built into the daily operational activities of organizations, along with

separate evaluations, if necessary. Can vary widely, ranging on a number of different processes and procedures,

such as the following: Automated system checks and balances, such as batch processing,

reconciliations, quality assurance checks, system error checks. Oversight of any third-party entities who may be performing servicing activities

on behalf of the institution. Data reporting on key performance indicators or targets which may indicate a

weakness in transaction level control.

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LENDING COMPLIANCE AUDIT REPORT

Review report should always be documented in writing Scope of audit (dept., branches, product type, etc.) Number of transactions sampled

Deficiencies identified Are the deficiencies identified isolated or systemic

Description of corrective action and time frame for follow-up Ensure that the root cause was corrected, not just the symptoms! Maintain a matrix to track exceptions and assign accountability

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CONSUMER COMPLAINT RESPONSE Listen to your customers Complaints Suggestions Requested functionality

Processes and procedures for addressing consumer complaints are strong. Complaint investigations and responses are prompt and thorough.

Complaints are monitored to identify risks of potential consumer harm, program deficiencies, and customer service issues and the bank quickly takes appropriate action.

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Oversight


Training





LENDING COMPLIANCE COMPLAINT RESOLUTION May be indicative of a weakness. Establish written procedures: Designate responsibility to knowledgeable individual; Maintain a list, including oral complaints; Report periodically to Board; Include procedures for monitoring complaints to or about third parties.

Monitor the CFPB monthly complaint reports to identify the most commonly complained about issues across the country.

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LENDING COMPLIANCE

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CFPB SUPERVISORY HIGHLIGHTS

Credit reporting plays a critical role in consumers’ financial lives, a role that most consumers do not recognize because it is usually not very visible to them.

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CFPB Supervisory Highlights

Special EditionIssue 14

Winter 2017

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CFPB Supervisory Highlights

Special EditionIssue 14

Winter 2017



FAIR CREDIT REPORTING ACT (FCRA) LITIGATION “Any person who makes or arranges loans and who uses a consumer credit score … in

connection with an application initiated or sought by a consumer for a closed end loan … shall provide” to the consumer “as soon as reasonably practicable” a copy of the information obtained from a consumer reporting agency; and Notice in the form set forth in §1681g(g)(D).

FCRA provides a private right of action against a mortgage lender that willfully or negligently fails to comply with these disclosure requirements.

Damages include up to $1,000 in statutory damages per class member for “willful” violations, in addition to potential punitive damages.

There is no cap on the recovery of statutory damages in a FCRA class action. Courts have held that the reporting requirements of §1681g(g) do not apply to a loan

modification request because it is not an application for a “closed end loan.” Fourth Circuit recently rejected a FCRA claim where the evidence showed that the lender

did not “use” the borrowers’ credit information when it denied her application.

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FCRA LOAN SERVICER LITIGATION

Loan servicer liability under FCRA may arise in 2 general circumstances:

Furnisher: As a “Furnisher” of loan-specific information to Credit Reporting Agencies, a servicer may be subject to limited liability and regulatory enforcement (See 15 USC §1681s-2); and

Employer: As an “Employer” that may utilize “Consumer Reports” in making employment decisions – e.g., whether to hire prospective employees or whether to promote and/or terminate current employees (See 15 USC §1681b(b)).

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FCRA FURNISHER DUTIES

FCRA creates certain Furnisher duties that include: A duty to report accurate information to Credit Reporting Agency (“CRA”);

A duty to correct and update information;

A duty to provide notice of delinquency of accounts;

A duty to act in response to notice of identity theft;

A duty to investigate and take appropriate action in response to consumer disputes and requests for information; and

A duty to establish reasonable written policies and procedures regarding accuracy and integrity of credit reporting.

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FCRA PRIVATE CIVIL RIGHT OF ACTIONPrivate Civil Right of Action (See 15 USC §§ 1681n & 1681o): Limitation on Furnisher Liability: Subject to a private civil action only with respect to the

duty to investigate and respond to consumer disputes and requests for information where: Plaintiff notified a CRA of disputed information; The CRA notified the Furnisher of the dispute; and The Furnisher failed to reasonably investigate and modify the alleged inaccurate information.

Claims often dismissed for failure to allege each of these elements related to the notification to and from the CRA.

Administrative Enforcement (See 15 USC § 1681s): Furnisher-specific provisions of FCRA are generally enforceable only through administrative enforcement – CFPB, FTC, or other federal banking agency.

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FCRA PRIVATE CIVIL RIGHT OF ACTION & CLASS ACTIONWillful Violation – A “knowing” or “reckless” violation of FCRA: Greater of (1) actual damages or (2) statutory damages:

Statutory Damages: Not less than $100 and not more than $1,000 per violation. Class Actions: No maximum or cap on damages recoverable in a class action.

Punitive damages & attorneys’ fees and costs Negligent Violation: Actual damages & attorneys’ fees and costs Express Preemption: State Statutes: 15 USC § 1681t(b)(1)(F): “relating to the responsibilities of persons who furnish

information to CRA].” State UDAP Claims: Courts in the 9th Circuit, 7th Circuit, and the District of Maryland have found

state UDAP claims preempted by FCRA. Common Law: 15 USC § 1681h(e) (preempted state claims “in the nature of defamation, invasion

of privacy, or negligence”).

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TILA §1641(G) – NOTICE OF LOAN TRANSFER LITIGATION

Enacted as part of Helping Families Save Their Homes Act of 2009

“Not later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party, the creditor that is the new owner or assignee of the debt shall notify the borrower in writing of such transfer, including—A. The identity, address, telephone number of the new creditor;

B. Date of transfer;

C. How to reach an agent or party having authority to act on behalf of the new creditor;

D. Location of the place where transfer of ownership of the debt is recorded; and

E. Any other relevant information regarding the new creditor.”

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TILA §1641(G) – NOTICE OF LOAN TRANSFER (continued) Many borrowers have filed individual and class actions under this provision

asserting that they did not receive notice of transfer. Timeliness: Many courts have dismissed claims when the transfer occurred prior

to May 2009. One district court recently suggested that an untimely Section 1641(g) claim was frivolous: “[T]hose claims are ‘devoid of merit [and] no longer open to discussion.’”

Retroactivity: Ninth Circuit recently issued a detailed opinion that Section 1641(g) does not apply retroactively. District courts outside the Ninth Circuit are in accord.

Burden of Proof: As to question of when the loan transferred, who bears the burden of proof at trial?

Summary Judgment: Defendant must provide a clear record that the loan transferred prior to May 2009.

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TILA RESCISSION LITIGATION

15 USC §1635(a) – three (3) days 15 USC §1635(f) – three (3) years Assignee liability exists under TILA if the

violation “is apparent on the face of the disclosure statement” Notice v. Suit (3-year right) A borrower must provide notice of rescission

within three years of consummation. (Jesinoski) If the noteholder contests or refuses to acknowledge the right to rescind, the borrower must file suit within 1 year of the notice. (Johnson, Taylor – D.C. Cir.).

Security Interest The majority of courts have held “that unilateral notification of cancellation does not automatically void the loan contract” or security interest. (Shelton – 4th Cir.; Sanders – 10th Cir.)

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LENDING FRAUD LITIGATION Borrowers use fraud-related claims to challenge terms of loans received at origination,

claiming intentional lack of disclosure. Examples: adjustable-rate mortgages (ARMs), Option ARMs, teaser rates, etc.

Plaintiffs need to establish the loan originator knowingly made false statements with the intent to deceive and the borrower reasonably relied on the statements.

When claims are brought against an assignee, defenses involve assignee liability and holder doctrine when no evidence that assignee had actual knowledge of the alleged fraud.

With these claims, plaintiffs are challenged to establish that (1) misrepresentations have been made when they typically don’t even recall any specific conversations with the loan originator; or (2) reasonable reliance when they testify that they didn’t even read the loan documents or disclosures.

Numerous courts have held, such as the Sixth Circuit, that mistaken belief about the terms of the loan does not support a fraud claim. (Humphreys)

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RESPA SECTION 8 Section 8(a): Business Referrals: No “person shall give and no person shall

accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

“Thing of Value”: Defined broadly to include “any payment, advance, funds, loan, service, or other consideration.” 12 USC §2602(2). There must be a connection between the “thing of value” received and the agreement

to refer business. Example: Cash or marketing materials allegedly provided by title company to loan originators in exchange for the referral of business (Genuine Title).

Example: Title company acquired ownership interest in title agencies allegedly in exchange for agreement to refer future title insurance business. (Edwards)

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RESPA SECTION 8 (continued)

Recently, significant attention is paid to Marketing Services Agreements (MSAs). CFPB has taken the position that any business that flows from an entity (e.g., real estate agency) to a settlement services provider violates RESPA if the provider pays the agency for advertising or other marketing activity.

CFPB has not defined the criteria an MSA must possess to be compliant.

Expect litigation if still using an MSA or if employees are creating their own MSAs.

Statutory damages are 3 times the amount of any charge paid for the settlement service involved in the violation; no cap on class action damages.

Either prevailing party may seek to recover costs and attorneys’ fees.

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LOAN SERVICING LITIGATION AND ENFORCEMENT ACTIONS

Top of the list of priorities for federal and state regulators. Already significant litigation stemming from servicing transfer.

Likely to continue in light of combination of continued sale of mortgage servicing rights (MSRs), additional regulatory oversight and requirements, plus increased regulatory scrutiny/enforcement actions.

Private rights of action can arise under RESPA, FCRA, FDCPA, and UDAP.

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RESPA SERVICING PROVISIONS LITIGATIONServicer litigation under RESPA and Reg X post-Dodd-Frank Act amendments Responding to borrower inquiries, disputes, and requests for information: Qualified written

requests (QWR) (12 USC §2605(e)) Error resolution provisions (12 CFR §1024.35) Requests for information (12 CFR §1024.36) Expanded duties to investigate, respond to, and/or provide documents and information in

connection with a borrower’s QWR, error notice, and/or request for information Decreases the timeline for servicers to respond:

Acknowledgement of receipt of borrower notice of error, request for Information or QWR – 5 business days from receipt

Investigation and substantive response – 30 business days from receipt

Loss mitigation procedures (12 CFR §1024.41) Private Civil Right of Action (12 USC§ 605(f))

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RESPA SERVICING PROVISIONS LITIGATION HOT SPOTS

Actual Damages: May include financial damages, emotional damages, or other damages

that may result from the servicer’s conduct. Borrower must prove that the breach resulted in the actual damages –

causal link is necessary for the claim. Frequently the purported “damages” are due to the borrower’s inability

to pay, not the alleged RESPA violation. Even with the loss mitigation requirements, there is no RESPA duty

requiring loan servicers to provide borrowers with any specific loss mitigation options.

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FORCE-PLACED INSURANCE LITIGATION

New lender-placed insurance class actions continue to be filed across the country.

Mixed decisions at the motion to dismiss stage Inconsistent decisions by trial courts Many loan servicers and insurance company defendants have entered

into or are seeking approval of class-wide settlements.

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TELEPHONE CONSUMER PROTECTION ACT (TCPA) TCPA was enacted in 1991 to respond to what Congress perceived as the growing problem of unsolicited

telemarketing campaigns. Restrictions: Cellular Telephones: No person may call a cell phone, without the called party’s “prior express consent,”

with the use of: (a) an “automated telephone dialing system” (“ATDS”) or (b) artificial or prerecorded voice. Residential Land Lines: No person may call a residential land line, without the called party’s “prior express consent,”

with the use of artificial or prerecorded voice. National Do-Not-Call Registry: FCC regulations implementing the TCPA prohibit any person from initiating a

“telephone solicitation” to any residential or cellular number that is registered on the DNC list. These restrictions apply regardless of whether made with an ATDS or artificial or prerecorded voice.

Telemarketing Calls: Same restrictions apply, except that called party must have given “prior express written consent” to the call.

Penalties: The greater of actual damages or $500 per violation, which is applied on a per-call basis. Court may treble statutory damages if it finds the defendant “willfully or knowingly” violated the TCPA. Some courts

find a willful and knowing violation where the defendant’s actions were voluntary, regardless of whether defendant knew or should have known that actions may violate the TCPA. This is an exceedingly low standard.

No cap on damages, so potential damages are limited only by the number of calls made during a particular campaign.

Debt Collection: In most instances, debt collection calls are considered to be exempt non-telemarketing calls, but are still covered by the prior express consent provisions for autodialed or pre-recorded calls to wireless numbers.

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BORROWER FORECLOSURE CHALLENGESPre-Foreclosure Sale Challenges: Counterclaims (including class action claims) and defenses in judicial foreclosure states Actions seeking to enjoin or prohibit pending non-judicial foreclosures Post-Foreclosure Sale Challenges: Wrongful foreclosure or wrongful eviction claims State statutory UDAP claims Common law claims Common Challenges in Both Scenarios: Actions challenging standing to foreclose (i.e., challenge to ownership of note &

mortgage and/or to the securitization of the loan) Actions challenging compliance with state statutory foreclosure requirements Actions challenging loan modification application review and denial (including “dual

tracking” allegations) 43

DUAL TRACKING LITIGATION CHALLENGES Reg X (12 CFR §1024.41): Effective Jan. 10, 2014.

Generally restricts a loan servicer from beginning foreclosure proceedings or conducting a sale in pending proceedings if the borrower has submitted a complete loss mitigation application.

Enforceable under RESPA, Section 6(f); 12 USC § 2605(f).

State UDAP and Consumer Protection Statutes: May arise where state law expressly prohibits dual tracking; May arise through attempted enforcement of Regulation X; or May arise as an “unfair,” “deceptive,” or “unconscionable” act under state law.

State Common Law: Breach of contract (trial period plan, forbearance plan, application terms, etc.); Implied covenant of good faith and fair dealing; and Misrepresentation (negligent or intentional).

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2017 TRID: WHERE ARE WE NOW?TILA REGULATION Z

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TRID LOAN PURPOSE

Describe the consumer’s intended use for the loan per TRID definitions Purpose is disclosed using one of four descriptions, per this hierarchy! Purchase: Loan will be used to finance the acquisition of the identified Property

(collateral property)

Refinance: Loan will be used to refinance an existing obligation that is secured by the identified Property (even if creditor is not holder or servicer of original obligation)

Construction: Loan will finance initial construction of a dwelling on property disclosed on Loan Estimate

Home Equity Loan: Loan will be used for any other purpose not listed in the categories above

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TRICKY TRID PURPOSE CODES

4 TRID Purpose Codes & Hierarchy

•Purchase•Refinance•Construction•Home Equity

3 HMDA Purpose Codes & Hierarchy

•Purchase•Home Improvement•Refinance

47If multiple purpose loans, use the highest ranking purpose category above

SIX EVENTS JUSTIFYING REVISED LOAN ESTIMATES The law sets out 6 events that justify a revised Loan Estimate for purposes of

resetting fees and performing the transaction’s good-faith analysis of fees within allowed tolerances. Those 6 events include: Only time Revision is Required: Interest rate lock Changed circumstances increasing settlement charges Changed circumstances impacting the consumer’s loan eligibility or the value of the

property securing the loan Consumer-requested changes Expiration of the original Loan Estimate Construction loan settlement delays

Revised Loan Estimates may be required, used to reset tolerances if allowed, or reissued only as clarification for the consumer’s benefit without tolerance reset

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MORTGAGE LOAN LE – WRITTEN LIST OF PROVIDERS Written List of Providers must match the Loan Estimate! If a consumer is permitted to shop for a settlement service, TRID’s

§1026.19(e)(1)(vi)(C) requires the creditor to provide the consumer with a written list identifying at least 1 available provider of that service and stating the consumer may choose a different provider for that service.

Settlement service providers identified on the written list must correspond to the settlement services for which the consumer may shop as disclosed on the Loan Estimate, Loan Costs, “C. Services You Can Shop For.”

Creditor does not have to list services that are required – it’s optional! Is your process effective for ensuring the unique terms for each transaction is

correctly reflected in the document disclosures? Geographic concerns remain high when the property is out of market!

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MORTGAGE LOAN LE – WRITTEN LIST OF PROVIDERS PROPOSAL

Current: If the creditor permits the consumer to shop but fails to provide the list required, good faith is determined pursuant to §1026.19(e)(3)(ii) instead of §1026.19(e)(3)(iii) regardless of the provider selected by the consumer, unless the provider is an affiliate of the creditor in which case good faith is determined pursuant to §1026.19(e)(3)(i).

Proposal: If the creditor permits the consumer to shop consistent with but fails to provide the list required or the list does not comply with the requirements, good faith is determined under §1026.19(e)(3)(i) instead of §1026.19(e)(3)(iii) regardless of the provider selected by the consumer.

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MORTGAGE LENDING CD – CONTACT INFORMATION

License number or unique identifier Section 1026.38(r)(3) and (5) requires the disclosure of a license number

or unique identifier for each person (including natural persons) identified in the table who does not have a NMLSR ID if the applicable State, locality, or other regulatory body with responsibility for licensing and/or registering such person’s business activities has issued a license number or other unique identifier to such person under §1026.38(r)(3) and (5). Look to state licensing requirements to determine if a number is available. Real estate agents Title agents Licensed escrow agents

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TRID RECORD RETENTION – CLOSING DISCLOSURE A creditor shall retain each completed disclosure required under

§1026.19(f)(1)(i) or (f)(4)(i), and all documents related to such disclosures, for five years after consummation, notwithstanding paragraph (ii)(B) of this section.

Examples:i. Amortization Schedules (Loam Terms, Projected Payments, Loan Calculations)ii. Calculation of Taxes, Insurance & Assessmentsiii. All documentation supporting revisions to Loan Estimates or Closing Disclosuresiv. Each version of the application, the LE or CD and whether the revised LE or CD reset

tolerances or did not reset tolerancesv. Customer communicationvi. All invoices, payment and funding records (Closing Costs and Cash to Close)

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REGULATION Z (§1026.19(F)(2)

Subsequent Changesi. Changes before consummation not requiring a new waiting period ii. Changes before consummation requiring a new waiting periodiii. Changes due to events occurring after consummationiv. Changes due to clerical errorsv. Refunds related to the good faith analysis

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REGULATION Z (§1026.19(F)(2) – SUBSEQUENT CHANGES

Changes before consummation not requiring a new waiting period i. If the disclosures provided become inaccurate before consummation,

the creditor shall provide corrected disclosures reflecting any changed terms to the consumer so that the consumer receives the corrected disclosures at or before consummation. The creditor shall permit the consumer to inspect the disclosures, completed to set forth those items known to the creditor at the time of inspection, during the business day immediately preceding consummation, but the creditor may omit from inspection items related only to the seller’s transaction.

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REGULATION Z (§1026.19(f)(2) – SUBSEQUENT CHANGES

Changes before consummation requiring a new waiting periodii. If one of the following disclosures provided becomes inaccurate in the

following manner before consummation, the creditor shall ensure that the consumer receives corrected disclosures containing all changed terms in accordance with the requirements of paragraph (f)(1)(ii)(A) of this section:

A. The APR disclosed under §1026.38(o)(4) becomes inaccurate, as defined in §1026.22.

B. The loan product is changed, causing the information disclosed under §1026.38(a)(5)(iii) to become inaccurate.

C. A prepayment penalty is added, causing the statement regarding a prepayment penalty required under §1026.38(b) to become inaccurate.

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Changes due to events occurring after consummationiii. If during the 30-day period following consummation, an event in

connection with the settlement occurs causing the disclosures to become inaccurate, and such inaccuracy results in a change to an amount actually paid by the consumer, the creditor shall deliver or place in the mail corrected disclosures not later than 30 calendar days after receiving information sufficient to establish that such event has occurred.

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Changes due to clerical errorsiv. If disclosures contain non-numeric clerical errors, creditor must deliver or

place in the mail corrected disclosures no later than 60 calendar days after consummation.

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Refunds related to the good faith analysisv. If amounts paid by the consumer exceed the amounts specified under

paragraph (e)(3)(i) or (ii) of this section [comparison of CD fees to LE fees for zero, 10% cumulative, or unlimited tolerance], the creditor complies with paragraph (e)(1)(i) of this section if the creditor refunds the excess to the consumer no later than 60 calendar days after consummation, and the creditor complies if the creditor delivers or places in the mail corrected disclosures that reflect such refund no later than 60 calendar days after consummation.

The “good faith analysis” is all about whether the fee amounts are within the appropriate levels for the 3 fee tolerance categories!

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https://www.nar.realtor/sites/default/files/reports/2016/2016-q3-mortgage-originators-survey-11-15-2016.pdf

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NAR 3RD QUARTER 2016 SURVEY OF MORTGAGE ORIGINATORS

The share of transactions delayed due to TRID rose to 2.6 %, but both TRID and non-TRID cancelations fell.

More than half of lenders passed TRID-related costs to consumer with a weighted average increase of $220.

Only 16.7 % of participating lenders shared the closing disclosure (CD) unconditionally with REALTORS®, while 50 % did not share under any circumstances.

83.3 % of respondents indicated that the CFPB’s July clarification sharing did not impact their decision to share the CD. Several lenders indicated that more clarification was needed or that they were not aware of the CFPB’s statement.

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https://www.nar.realtor/sites/default/files/reports/2016/2016-q4-mortgage-originators-survey-02-01-2017.pdf

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NAR 4TH QUARTER 2016 SURVEY OF MORTGAGE ORIGINATORS 55.6% of lenders indicated some level of problems getting appraisals, with 11.1%

indicating it was significant. Lenders viewed fewer new appraisers, a reluctance to perform certain

appraisals, and high refinance volumes as the main drivers of the shortage However, 27.8% of lenders do not accept appraisals in which any part is

performed by a trainee, while 44.4% require direct supervision of all aspects performed by a trainee.

9.8% of respondents had faced a “rush fee” in which fees are increased to meet a time constraint. In this sample, rush fees averaged 37.1% higher.

16.7% of respondents felt that rising rates will weaken demand for purchase mortgages, but 44.4% felt that strong employment and income growth will partially offset rising rates

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http://www.fanniemae.com/resources/file/research/mlss/pdf/mortgage-lender-sentiment-survey-findings-q12017.pdf

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FANNIE MAE MORTGAGE LENDER SENTIMENT SURVEYQUARTER 1 2017, PUBLISHED MARCH 27, 2017

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REGULATOR CONCERNS

Consumer harm remains a high priority as anticipated! True to their word, the regulatory exam teams focused on compliance

management systems in early TRID exams Compliance with the TRID rules is now a part of the consumer

compliance examination Most of my bank clients are reporting fair and balanced reviews while

the examiners continue to learn the rules, just like the industry Audits continue to identify a lot of technical clerical violations (fee

names, consistency between personnel, geographic differences in services and fees to be provided in the local area, etc.)

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INVESTOR CONCERNS

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TRID ASSIGNEE LIABILITY Assignees may be held liable for creditor TILA violations where:

The violation is apparent on the face of the disclosure (e.g., the LE or CD, as applicable); and The assignment was voluntary.

“Apparent on the face of the disclosure statement” Disclosure can be determined incomplete or inaccurate by a comparison among disclosure

statements, any itemization of amount financed, the note, or any other disclosure of disbursement; or The disclosure does not use required terms or format.

The CFPB has reinforced this standard for TRID: In response to industry concerns regarding the secondary market’s reaction to TRID, Director Cordray

stated in his December 29 letter that “there is no general TILA assignee liability unless the violation is apparent on the face of the disclosure documents and the assignment is voluntary.”

The CFPB “believes the risk of private liability to investors is negligible for good-faith formatting errors and the like.”

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TRID CIVIL LIABILITY

TRID Rule does not clarify which statutory liability applies to different parts of the TRID Rule or to the TRID forms

TRID preamble directs us to look at the statutory authority utilized for each provision. CFPB felt this was sufficient guidance for the courts, industry and consumers. REALLY????

CFPB issues Loan Estimate and Closing Disclosure with Truth in Lending Act statutory citations listed on each LE: http://files.consumerfinance.gov/f/documents/201605_cfpb_loan-estimate-with-

truth-in-lending-act-disclosure-citations.pdf CD: http://files.consumerfinance.gov/f/documents/201605_cfpb_closing-disclosure-

with-truth-in-lending-act-disclosure-citations.pdf

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TRID STATUTORY CURES

One of the biggest investor and lender issue today remains a “gray area” Two primary TILA areas address potential damages for legal violations TILA §130(b) [15 USC § 1640(b)]

Borrowers must be notified of an error within 60 calendar days of discovery of an error, prior to notification by borrowing including a lawsuit, and “make whatever adjustments in the appropriate account are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower”

TILA §130(c) [15 USC § 1640(c)]

Creditors are given a legal defense for unintentional bona fide errors, excluding errors of legal judgment. Statute provides a useful example such as “computer malfunction and programming.” Creditors must prove what has been historically difficult to prove:

Error was unintentional and was a clerical error

Procedures designed to avoid and prevent errors of this type were regularly maintained 75

POTENTIAL TRID TYPES OF LAWSUITS Assuming a private right of action, TRID claims may form the basis of affirmative claims

or defenses, and definitely anticipated to be counterclaims to delay foreclosure. Asserted violations may include: Failure to provide Loan Estimate within three (3) days of application, as defined in

TRID. An application is considered received once the consumer provides all of the following: (i) name; (ii) income; (iii) SSN; (iv) address of the property; (v) estimated value of the property; and (vi) loan amount requested. The previous “any other information deemed necessary by the loan originator” removed from Regulation X.

Lack of attention to the consummation date, state-by-state. Loan Estimates must be provided no later than seven (7) days before consummation, and that date is governed by state law.

Lack of “Good Faith”; final charges out of tolerances If the consumer pays more than the estimate, it is considered not to be in good faith with certain exceptions and subject to certain limited thresholds.

76



Cordray’s letter to the Mortgage Bankers

Association, December

2015

77

CFPB CORDRAY’S LETTER TO MORTGAGE BANKING ASSOCIATIONREGARDING TILA LIABILITY AND CURES

78



79


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TRID BEST PRACTICES

Set parameters for as many bank policy decisions as possible in your TRID loan origination systems. Reduce the potential human errors as much as you possibly can, making sure parameters match bank policy!

Centralize important TRID processes and discretionary decisions to the greatest extent possible! Lenders and brokers should not determine whether a valid change of circumstance exists and the impact on disclosures (i.e. reissue and reset tolerances, etc.) These decisions are best made by a smaller number of individuals with appropriate expertise.

Generate Loan Estimates and Closing Disclosure forms by an experienced centralized processing group.

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TRID BEST PRACTICES (CONTINUED)

Maintain a strong pre-closing review of all LE and CD documents to identify as many errors and violations BEFORE consummation as possible!

Require that all loans also undergo a post-closing compliance review in addition to your normal quality control reviews. TRID specific cures provide the best protections post-closing if the errors are identified no later than 60 calendar days after closing.

Finding and correcting errors immediately after loan closing may not stop restitution of incorrectly disclosed fees, but it will certainly help the lender reduce the likelihood of enforcement actions and private litigation.

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TRID BEST PRACTICES (CONTINUED) Make it a standard practice to issue a new Written Service Provider List (WSPL)

each and every time you issue a revised Loan Estimate. The TRID regulations require a WSPL when the initial Loan Estimate is provided to

disclose to applicants at least one available provider of every settlement service. However, the TRID regulations do not address whether the lender should issue a new list when a new provider is introduced due to a changed circumstance or a borrower- initiated change. If no new WSPL is provided including the new provider, the consumer will be assumed to not have the opportunity to shop for the newly added service, and the fees will be included in the “zero tolerance” category.

The best practice to protect the creditor’s ability to minimize any fee refunds is to ensure that an accurate and complete WSPL is issues with each LE!

83

TRID BEST PRACTICES (CONTINUED) Ensure that your loan origination system has a thorough and retainable audit

trail. Identify all user note capability and indicate the sequence of events, consumer and third party communications and other items documenting loan changes from cradle to grave in the origination process. Property information provided by the Borrower, the Seller or the Realtor Appraisal results, including property specific and market adjustments Change in loan amount or loan types or any other transaction information

Due to the complexity of the TRID rules, periodically review the entire mortgage origination compliance program every 3 or 6 months to correct anything quickly. Identify gaps in your processes and fix them immediately!!! Report findings to management and the board.

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LOAN COMPLIANCE MANAGEMENT SUMMARY

Understand the change and how it affects your bank. Plan to implement. Ensure completed within applicable time frames. Understand and monitor the implementation process. Ensure testing is conducted, including bank systems and third parties. Verify policies and procedures are updated. Ensure training is provided based on specific responsibilities in addition to

general requirements. Ensure monitoring procedures are developed and implemented. Confirm audit treats revised regulations or guidance as high risk areas.

85

PATTI JOYNER BLENDEN, [email protected]

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Financial Solutions’ Interpretation Risk-Focused Consumer Compliance Program Guidelines

May 2017

Regulation Risk Table

Risk Statute / Regulation* Section(s) for Review

1 = Low Right to Financial Privacy Act (RFPA)(Reg S) Rule of 78’s Unlawful Internet Gambling Enforcement Act (UIGEA)(Reg GG)

All All All

2 = Low Moderate

Real Estate Settlement Procedures Act (RESPA)(Reg X) Expedited Funds Availability Act (EFAA)(Reg CC) Reserve Requirements (Reg D) Consumer Leasing (Reg M)

RESPA mortgage servicing transfer disclosure All All All

3 = Moderate

Insider Credit (Reg O) Affiliate Transactions (Reg W) Consumer Financial Privacy (Reg P) Equal Credit Opportunity Act (ECOA)(Reg B) Truth in Savings Act (TISA)(Reg DD) Fair Credit Reporting Act (FCRA)(Reg V)(Reg FF) Unfair or Deceptive Acts or Practices (UDAAP)(Reg AA) Office of Foreign Asset Control (OFAC) Fair Debt Collection Practices Act (FDCPA)

All All All All disclosure and notice provisions All except those rated “4” All Cosigner provisions and consumer loan prohibitions All All (Best practices expectation for banks collecting their own debts; CFPB pushing for direct coverage)

4 = High Moderate

Truth in Lending Act (TILA) (Reg Z) National Flood Insurance Act (Reg H) Real Estate Settlement Procedures Act (RESPA) (Reg X) Electronic Funds Transfer Act (EFTA) (Reg E) Truth in Savings Act (TISA) (Reg DD) Servicemembers Civil Relief Act (SCRA) Military Lending Act (MLA) Community Reinvestment Act (CRA)(Reg BB)

All All All provisions except mortgage servicing & Section 8 All ODP provisions, rewards checking and add-on products All All All

5 = High

Bank Secrecy Act (BSA) & Anti-Money Laundering (AML) & USA PATRIOT Act Fair Lending Real Estate Settlement Procedures Act (Reg X) Home Mortgage Disclosure Act (HMDA) and CRA TILA’s Ability-to-repay (ATR), qualified mortgage (QM) and any toxic loan features (e.g., negative amortization, interest-only payment, prepayment penalties, balloon payments) TILA/RESPA Integrated Disclosures (TRID) Unfair, Deceptive or Abusive Acts or Practices (UDAAP)

All

All RESPA Section 8 provisions All All mortgage reform 2013 & 2014 and TRID changes

All All provisions except those rated “3” and rules NOTE: UDAAP compliance is the most all-encompassing, subjective expectation that crosses all products, all lines of business and all entities!!!

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Supervisory Highlights Issue 15, Spring 2017

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Table of contents Table of contents......................................................................................................... 1

1. Introduction ........................................................................................................... 2

2. Supervisory observations .................................................................................... 3

2.1 Mortgage origination ................................................................................ 3

2.2 Mortgage servicing .................................................................................... 9

2.3 Student loan servicing ............................................................................ 12

2.4 Fair lending ............................................................................................. 14

3. Remedial actions ................................................................................................ 16

3.1 Public enforcement actions .................................................................... 16

3.2 Non-public supervisory actions .............................................................. 21

4. Supervision program developments ................................................................. 22

4.1 Examination procedures ......................................................................... 22

4.2 Service provider examination program .................................................. 23

4.3 Spike and trend monitoring .................................................................... 25

4.4 Recent CFPB guidance ............................................................................ 26

4.5 Production incentives ............................................................................. 27

5. Conclusion .......................................................................................................... 28

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1. Introduction The Consumer Financial Protection Bureau (CFPB or 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].

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mailto:[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

1 Section 1411 of the Dodd-Frank Act, Public Law 111-203, adding section 129C(a) to TILA, codified at 15 USC 1639c(a)).

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presumption of compliance with these ability-to-repay (ATR) requirements for creditors

originating a specific category of loans called “qualified mortgage” (QM) loans.2

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.

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 Section 1412 of the Dodd-Frank Act, adding section 129C(b) to TILA, codified at 15 USC 1639c(b).

3 12 CFR 1026.43(c).

4 12 CFR 1026.43(e).

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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.

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

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.

6 12 CFR 1026.43(c)(3).

7 12 CFR 1026.43(c)(4).

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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

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

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

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.

9 Comment 43(c)(3)-1.

10 12 CFR 1026.43(c)(2)(vii), (c)(4), and (c)(7).

11 Comment 43(c)(2)(i)-1.

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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

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

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).

13 12 CFR 1026.43(c)(2)(i) (emphasis added).

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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.

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 Procedures14 and TILA

Examination Procedures.15 For summaries of the ATR rule, creditors can review the Bureau’s

Readiness Guide16 and Small Entity Compliance Guide.17 However, only the regulation and its

accompanying commentary can provide complete and definitive information about the

requirements.

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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https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/mortgage-origination-examination-procedures/

https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/mortgage-origination-examination-procedures/

http://files.consumerfinance.gov/f/201509_cfpb_truth-in-lending-act-exam-procedures.pdf

http://files.consumerfinance.gov/f/201509_cfpb_truth-in-lending-act-exam-procedures.pdf

http://files.consumerfinance.gov/f/201509_cfpb_readiness-guide_mortgage-implementation.pdf

http://files.consumerfinance.gov/f/201509_cfpb_readiness-guide_mortgage-implementation.pdf

http://files.consumerfinance.gov/f/201603_cfpb_atr-qm_small-entity-compliance-guide.pdf

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.

2.2.1 Dual tracking Regulation X generally20 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

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).

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.

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http://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-mortgage-servicing-special-edition-issue-11/

http://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-mortgage-servicing-special-edition-issue-11/

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

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

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.

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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notice or filing for fees charged to the consumer in these circumstances, for other economic

harms, and non-economic harms such as emotional distress.

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 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

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.

25 12 USC 5536(a)(1)(B).

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.

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

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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https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201702_cfpb_Enrollment-Status-Student-Loan-Report.pdf

https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201702_cfpb_Enrollment-Status-Student-Loan-Report.pdf

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

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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, which yields an integrated probability that can be used to proxy for an

individual’s race and ethnicity.29

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

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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http://files.consumerfinance.gov/f/201409_cfpb_report_proxy-methodology.pdf

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.

30 The surname data are available on the Census Bureau’s website, 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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https://github.com/cfpb/proxy-methodology

https://www.census.gov/topics/population/genealogy/data/2010_surnames.html

3. Remedial actions

3.1 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.

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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https://www.consumerfinance.gov/about-us/newsroom/cfpb-fines-experian-3-million-deceiving-consumers-marketing-credit-scores/

https://www.consumerfinance.gov/about-us/newsroom/cfpb-fines-experian-3-million-deceiving-consumers-marketing-credit-scores/

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.

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

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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https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-prospect-mortgage-pay-35-million-fine-illegal-kickback-scheme/

https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-prospect-mortgage-pay-35-million-fine-illegal-kickback-scheme/

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.

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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https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-citi-subsidiaries-pay-288-million-giving-runaround-borrowers-trying-save-their-homes/

https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-citi-subsidiaries-pay-288-million-giving-runaround-borrowers-trying-save-their-homes/

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.

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.

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/.

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https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-transunion-and-equifax-pay-deceiving-consumers-marketing-credit-scores-and-credit-products/

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.

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

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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https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-moneytree-deceptive-advertising-and-collection-practices/

https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-moneytree-deceptive-advertising-and-collection-practices/

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.

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March 2017

Supervisory Highlights Consumer Reporting Special Edition

Issue 14, Winter 2017

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1 SUPERVISORY HIGHLIGHTS CONSUMER REPORTING SPECIAL EDITION (ISSUE 14)

Table of Contents 1. Executive Summary .............................................................................................. 2

2. Supervisory observations at consumer reporting companies ......................... 3

Data Accuracy

2.1 Data governance ....................................................................................... 5

2.2 Quality control programs to assess the accuracy and integrity of consumer reports, including oversight of third-party public records providers ................................................................................................... 5

2.3 Furnisher oversight and data monitoring by CRCs ................................. 6

2.4 Resold merged reports .............................................................................. 8

Dispute Handling and Resolution

2.5 Reasonable reinvestigation of disputes and consideration of relevant information ............................................................................................. 10

2.6 Notice to furnishers of disputes ............................................................... 11

2.7 Notice to consumers of dispute results ................................................... 11

3. Supervisory observations at furnishers ........................................................... 12

3.1 CMS/Data Governance………………………………………………………………… 12

3.2 Reasonable written policies and procedures requirement .................... 13

3.3 Guidelines for furnishers in Appendix E of Regulation V of the Fair Credit Reporting Act ............................................................................... 14

3.4 Data accuracy requirements .................................................................... 17

3.5 Dispute handling requirements .............................................................. 19

3.6 Permissible purpose requirements ......................................................... 21

4. Conclusion .......................................................................................................... 21

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1. Executive Summary

Credit reporting plays a critical role in consumers’ financial lives, a role that most consumers do not recognize because it is usually not very visible to them. Credit reports on a consumer’s financial behavior can determine a consumer’s eligibility for credit cards, car loans, and home mortgage loans – and they often affect how much a consumer is going to pay for that loan. Federal law provides an important framework to ensure the players in the consumer reporting system receive the benefits of our risk-based credit economy.

The Consumer Financial Protection Bureau (CFPB) is the first Federal agency to have supervisory authority over many of the key institutions in the consumer reporting system. First are the creditors and others that supply the information about consumers’ financial behavior, referred to as furnishers, including banks, mortgage servicers, student loan servicers, and debt collectors. Second are the consumer reporting companies (CRCs), including the largest consumer reporting companies, consumer report resellers, and specialty consumer reporting companies. CRCs sell the information in the form of consumer reports to creditors and other users and provide them to consumers. Third are those that use the information for credit decisions as well as employment, insurance, and other decisions. The CFPB’s jurisdiction over the major players in each of these categories is unique and has allowed the Bureau to take an integrated approach to improving the accuracy of information across the system.

We prioritized this market for oversight to promote our vision of a consumer reporting system: a system where furnishers provide and CRCs maintain and distribute data that are accurate, supplemented by an effective and efficient dispute management and resolution process for consumers.

The CFPB’s vision is rooted in the obligations and rights set forth in the Fair Credit Reporting Act (FCRA) and Regulation V.1 In the last two years, we identified failings in compliance management systems and violations of law both at CRCs and at furnishers. As a result, we have directed specific improvements in data accuracy and dispute resolution at one or more CRCs, including:

stepped-up oversight of incoming data from furnishers; institution of quality control programs of compiled consumer reports; monitoring of furnisher dispute metrics to identify and correct root causes; enhanced oversight of third-party public records service providers; enforced independent obligation to reinvestigate consumer disputes, including review of

relevant information provided by consumers; and improved communication to consumers of dispute results.

1 15 USC 1681, et seq. and 12 CFR pt. 1022.

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We directed both bank and nonbank furnishers to develop reasonable written policies and procedures regarding accuracy of the information they furnish and to take corrective action when they furnished inaccurate information. In addition, we took significant steps to ensure furnishers’ dispute handling processes comply with the law in response to failures either to conduct investigations or to send results of dispute investigations to consumers.

This Special Edition of Supervisory Highlights details these most recent supervisory observations in the consumer reporting market. In sum, our work is producing an entirely different approach to ensuring compliance at the major consumer reporting companies: one of proactive attention to compliance, as opposed to a defensive, reactive approach in response to consumer disputes and lawsuits. This proactive approach to compliance management will reap benefits for consumers – and the lenders that use consumer reports – for many years to come.

2. Supervisory observations at consumer reporting companies

The CFPB’s supervisory authority over CRCs extends to those that are larger participants in the consumer reporting market.2 Participants in this market include nationwide consumer reporting companies, consumer report resellers, and specialty consumer reporting companies.3 Recent supervisory reviews of CRCs have evaluated the compliance management system (CMS) for assuring the accuracy throughout the lifecycle of the data the CRC collects, maintains, and uses to prepare consumer reports.4 Recent reviews also evaluated whether the CRCs comply with the FCRA’s requirements regarding consumer dispute processes.5

Overall, and as a result of these reviews, CRCs have made significant advances to promote greater accuracy, the oversight of furnishers, and enhancements to the dispute resolution function. Continued improvements are necessary in these and other areas. Supervision has directed many CRCs to take actions in these areas and will monitor closely the progress by these CRCs.

2 Larger participants in the consumer reporting market are defined in 12 CFR 1090.104.

3 The term “consumer reporting company” means the same as “consumer reporting agency,” as defined in the Fair Credit Reporting Act, 15 USC 1681a(f), including nationwide consumer reporting agencies as defined in Section 1681a(p) and nationwide specialty consumer reporting agencies as defined in Section 1681a(x).

4 These reviews have evaluated CMS to ensure compliance with 15 USC 1681e(b), which requires CRCs to “follow reasonable procedures to assure maximum possible accuracy of the information [included in a consumer report] concerning the individual about whom the report relates.”

5 The FCRA’s dispute process requirements applicable to CRCs are detailed at 15 USC 1681i.

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Data Accuracy The accuracy of the data maintained by the CRCs is the backbone on which our credit-based economy relies. Consumers depend on the accuracy of the credit reporting data to obtain credit and to realize their financial goals. Similarly, financial institutions and other industries (for example, mortgage and auto lending) that are heavily dependent on credit markets also rely on the accuracy of data in these reports to calibrate the appropriate risk-based credit to offer consumers.

Initial accuracy reviews indicated that CRC(s)’ data governance functions were decentralized and had undefined responsibilities. They lacked quality control policies and procedures to test compiled consumer reports for accuracy, had inconsistent practices for vetting furnishers and providing data quality feedback to them, and had insufficient monitoring and oversight of furnishers once approved to provide data. The following sections detail improvements CRC(s) are implementing to remedy these deficiencies.

To demonstrate some of the data accuracy enhancements that Supervision has directed many CRCs to undertake, Supervision created this diagram:

FIGURE 1: CONSUMER REPORT DATA ACCURACY LIFECYCLE

Source: CFPB 2017.

Elements of CRC Data Accuracy

Public Records Sources

Data Furnishers Consumer

Account

History

Consumer

Reports to

Consumers,

Users &

Resellers

CRC Data

Feedback &

Corrective Action

Bankruptcies /

Tax Liens /

Judgments

Data

Governance

Quality

Control

Public

Records

Oversight

Furnisher Vetting

and Data

Monitoring

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2.1 Data governance Data governance systems are crucial to accuracy and data integrity obligations of the CRCs. Effective data governance policies establish and clearly document the company’s system of decision rights and accountabilities for handling consumer information and managing any changes that may affect such information.

One or more CRCs have improved their data governance policies and procedures and formalized a data governance program. As an example, one or more CRCs established data governance structures with personnel authorized and directed to:

oversee policies, procedures, data quality metrics, and trends; approve policies and procedures, as well as escalate decisions to higher authorities

within the CRC(s); oversee furnisher monitoring, law and policy, and procedures; take actions against furnishers that fail to comply with the established requirements,

including ceasing to accept data furnished from noncompliant furnishers; review and track metrics relating to data governance on a regular basis; and oversee a centralized repository of data definitions, business rules, and data quality

rules.

2.2 Quality control programs to assess the accuracy and integrity of consumer reports, including oversight of third-party public records providers Creation of quality control programs that assess the accuracy and integrity of data included in consumer reports

In a prior issue of Supervisory Highlights, we explained that, following the initial reviews of accuracy programs, examiners found that one or more CRCs lacked quality control policies and procedures to test compiled consumer reports for accuracy.6

In follow-up reviews at one or more CRCs, examiners found the following improvements:

establishment of robust quality control programs that regularly assess the accuracy of information included in consumer reports;

6 CFPB, Supervisory Highlights, 2.1.2 (Summer 2015) (explaining that “[w]hile processes existed to analyze and improve the quality of incoming data, there was no post-compilation report review or sampling to test the accuracy of [compiled] consumer reports.”).

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as part of the quality control program, development of tests to identify whether consumer reports are produced regarding the wrong consumer and whether consumer reports contain mixed file data, and development of systems designed to measure the accuracy of consumer reports and identify patterns and trends in errors; and

utilization of the results of the quality control program to take corrective action by identifying the source of identified inaccuracies and making necessary system improvements to prevent the recurrence of such errors.

Enhancements in oversight of third-party public records providers

Examiners have also noted improvements in the oversight of public records providers at one or more CRCs. In the initial accuracy reviews, examiners noted that one or more CRCs did not adequately oversee the accuracy or integrity procedures at third-party providers of public records data.7 In follow-up reviews, examiners concluded that one or more CRCs improved oversight in this area by:

enhancing the CRC(s)’ standards for the public records data that will be accepted, including greater frequency of updates and stricter identity-matching criteria; and

increasing the frequency and scope of audits of its third-party public records provider, thereby strengthening the CRC(s)’ ability to identify potential sources of inaccuracy and identity-matching errors.

We will continue to monitor the status of these system improvements.

2.3 Furnisher oversight and data monitoring by CRCs

Furnisher vetting

In a previous issue of Supervisory Highlights, we noted that one or more CRCs initially vetted new furnishers to ensure reliability of and adherence to furnisher membership requirements.8 However, the reviews also noted that there was insufficient ongoing monitoring, or re-vetting, of furnishers once a furnisher passed the initial vetting.9 In recent follow-up reviews, we determined that these policies and procedures have improved. One or more CRCs established and implemented enhanced controls to re-vet furnishers on a risk basis to ensure furnishers continue to meet initial and ongoing requirements. Such controls include:

the review of an existing furnisher’s ability to maintain minimum data security standards;

7 CFPB, Supervisory Highlights, 2.1.1 (Summer 2015).

8 Id.

9 Id.

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the re-vetting of furnishers where the furnisher’s management changes could impact its capacity to meet membership requirements; and

a process to temporarily cease accepting data from identified furnishers that fail re-vetting until required improvements are made by the furnisher, during which time trade line information reported by the furnisher is suppressed, and the furnisher must then demonstrate compliance with the reporting requirements before its furnished data will again be included in consumer reports.

One or more CRCs established policies and procedures to monitor and identify furnishers who do not meet data submission and quality requirements and to take corrective action where appropriate. Examiners found that the improved monitoring program(s) include:

actively monitoring for inactive data furnishers, notifying furnishers when monthly data submissions are missed, and ceasing to accept data from furnishers who fail to furnish updated data for a number of consecutive months;

monitoring for furnishers that do not comply with the CRC(s)’ data submission thresholds establishing the maximum number of times a furnisher’s data can be rejected by the CRC(s); and

alerting furnishers when anomalies are detected in furnished data to identify and correct potential sources of inaccuracy.

Monitoring of furnisher dispute data

We also reviewed one or more CRCs’ policies and procedures to monitor furnisher dispute data as a component of their data accuracy programs. For example, data indicating that particular furnishers receive a higher rate of disputes from consumers under the FCRA, or respond to disputes in ways that indicate the furnisher is not investigating disputes, can be useful to CRCs in identifying sources of data inaccuracy. Examiners found that one or more CRCs:

monitored furnisher responses to consumer disputes to identify furnishers with response rates and other patterns potentially indicating that they are not meeting their reinvestigation requirements, for example because the furnisher does not respond to consumer disputes;

identified furnishers with particular response rates that are higher in one area than expected and notified the identified furnishers of the CRC(s)’ concerns;

requested the furnisher to investigate the cause of the anomaly and correct its practices where needed; and

for any furnisher that does not respond and correct its practices, the CRC(s) took further action, including ceasing to accept data from the furnisher.

At one or more CRCs, examiners observed that these new procedures improved furnishers’ dispute response levels, for example by eliminating data provided by furnishers that refuse to reasonably investigate disputes and, for those furnishers that wish to continue furnishing, increasing the rate at which the furnishers investigate and respond to disputes within the time periods required under the FCRA.

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However, examiners also noted that one or more CRCs had not yet implemented policies or procedures to monitor furnisher dispute data. Based on these findings, Supervision directed the CRC(s) to develop and implement internal processes to monitor furnisher dispute responses and to detect furnishers with dispute rates or dispute responses that may indicate risk of inaccurate consumer data or other consumer harm. Directives included:

establishing the necessary employee training and escalation guidelines for reporting furnisher monitoring issues to senior management;

instituting procedures for monitoring furnisher dispute data; and establishing adequate corrective action measures designed to minimize the risk of

reporting inaccurate data.

Providing data quality reports to furnishers

In a prior issue of Supervisory Highlights, we noted one or more CRCs lacked systematic or consistent policies and procedures for providing feedback to furnishers regarding the quality of data furnished.10 For example, these reviews identified that the CRC(s) designed reports that would identify for each furnisher whether its data had been rejected and what kind of formatting errors were identified. This information could be helpful to the furnisher to improve its data quality, but the examiners found that one or more CRCs relied on furnishers to request the reports or, in some cases, imposed a fee before the reports were provided to furnishers.11

In follow-up reviews, examiners found that one or more CRCs improved furnisher access to data quality reports. The CRC(s) made receipt of certain data-quality reports mandatory for all data furnishers at no cost, thereby resulting in increased visibility and availability of such reports to furnishers on a regular basis.

2.4 Resold merged reports Examiners also evaluated the accuracy and dispute handling procedures at one or more reseller CRCs.12 In these reviews, we found that the reseller(s) lacked reasonable procedures to assure maximum possible accuracy because the reseller(s) used systems with known programming errors that introduced inaccuracies in consumer report data when the reseller(s) merged consumer report data they had purchased from multiple CRCs. In light of these findings, the reseller(s) conducted a comprehensive review to determine the full impact on consumers. Additionally, examiners directed the reseller(s) to enhance accuracy procedures to prevent similar data-merge errors.

10 CFPB, Supervisory Highlights, 2.1.1 (Summer 2015).

11 Id.

12 The term “reseller” is defined in 15 USC 1681a(u).

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Dispute Handling and Resolution Supervision also continued its focus on CRCs’ compliance with the FCRA’s requirements to process and investigate consumer disputes. When a consumer believes there is inaccurate information in his or her consumer report, the FCRA enables consumers to dispute the information. The consumer may provide relevant supporting information with the dispute, such as a cancelled check to demonstrate payment or a document to demonstrate that the consumer is not liable for the credit account or debt.

Once a determination regarding the dispute is made, timely and clear notification to the consumer of the results of the dispute helps ensure the consumer understands whether a change was made and the reason for the decision. A well-functioning dispute resolution process is critical to promoting confidence in the consumer reporting system and in empowering consumers to take charge of their financial lives. A strong system that efficiently and clearly resolves consumer disputes so that consumers do not needlessly re-dispute information benefits CRCs and furnishers as well.

In previous issues of Supervisory Highlights, we discussed earlier CFPB reviews of the dispute handling procedures in place at one or more CRCs and the subsequent improvements in those processes:13

consumers now are able to use online portals to submit disputes and upload attachments of supporting documentation;

CRC(s) have implemented systems to forward to furnishers relevant dispute documents submitted by consumers;

CRC(s) have made improvements to call center scripts and training regarding solicitation of relevant information from consumers with disputes; and

CRC(s) no longer require that consumers obtain or purchase a recent consumer report before the CRC(s) accept disputes filed online or by telephone.

Building on these improvements, subsequent reviews at one or more CRCs have focused on the dispute resolution procedures in place to conduct a reasonable investigation of consumer disputes and communicate the results of the investigation adequately to the consumer.

To aid in our description of the dispute process, Supervision created the following simplified diagram depicting a number of key steps taken by CRC(s) when processing, investigating, and responding to consumer disputes:

13 CFPB, Supervisory Highlights, 2.1 (Fall 2014) (initial dispute handling reviews); CFPB, Supervisory Highlights, 2.1 (Winter 2015) (dispute handling follow-up reviews).

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FIGURE 2: DISPUTE INVESTIGATION AND RESOLUTION PROCESS

Source: CFPB 2017.

2.5 Reasonable reinvestigation of disputes and consideration of relevant information

The FCRA requires that, when a consumer disputes the completeness or accuracy of any item contained in his or her consumer file with the CRC, the CRC must conduct a reasonable reinvestigation to determine whether the disputed item is inaccurate and record the current status of the disputed information or delete the item from the file.14 As part of the CRC’s reasonable reinvestigation, the CRC is required to review and consider all relevant information submitted by the consumer.15

Examiners found that one or more CRCs did not comply with this obligation in certain circumstances. For example, in cases where consumers submitted certain categories of

14 15 USC 1681i(a).

15 15 USC 1681i(a)(4).

CRC Dispute Investigation (30 – 45 days maximum)

Data Furnisher Investigates if

Verification Requested

Consumer 1. Consumer

files dispute

with CRC

8. CRC sends notice

of results and

additional info to

consumer

2. Dispute Received

and Classified

3. CRC resolves internally

if possible

4. Notice or Request for Verification sent to

Furnisher

5. Investigation by CRC or Furnisher Completed

6. CRC updates consumer file if

necessary

Notice or Request for Verification

(and supporting info) sent to

furnisher

Response to verification

returned upon

completed investigation 7. If changes

made, CRC

sends notice

to furnisher

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documentary evidence in support of a dispute, one or more CRCs failed to review and consider the attached documentation and relied entirely on the furnisher to investigate the dispute. To correct this violation, examiners directed the CRC(s) to revise policies and procedures regarding dispute reinvestigations to ensure appropriate and reasonable review and consideration of consumer proof documents.

2.6 Notice to furnishers of disputes When a consumer files a dispute with a CRC, the FCRA requires the CRC to provide notification of the dispute within five business days to the furnisher who provided the information that is in dispute.16 At one or more CRCs, examiners found instances where the required notice was not provided because the furnishers’ contact information was no longer valid at the time of the consumers’ disputes. As a result, examiners required the CRC(s) to implement changes to comply with the FCRA’s dispute handling requirements, including ensuring that contact information with furnishers remains current for the purpose of providing required dispute notifications.

The FCRA also requires that, following a dispute investigation, the CRC must provide prompt notice of any modification or deletion to the furnisher.17 Examiners found that one or more CRCs failed in certain circumstances to provide this required notice. Supervision directed the CRC(s) to develop processes to ensure that data furnisher notifications of deletions or modifications are provided to the furnisher in all instances required by the FCRA.

2.7 Notice to consumers of dispute results The FCRA requires that, upon completion of the reasonable reinvestigation, the CRC must provide written notice of the results to the consumer not later than five business days after completion of the reinvestigation.18

Examiners found that one or more CRCs sent dispute notices to consumers that did not report the results of the reinvestigation. In particular, at one or more CRCs, examiners identified consumer dispute notices that failed to articulate clearly the results of the dispute investigation to the consumer as required by the FCRA. The notices, instead, simply indicated that the dispute investigation was complete but did not state the result of that investigation. To correct this violation, examiners directed one or more CRCs to describe more precisely the result of the investigation, such as whether changes were made as a result of the dispute investigation.

16 15 USC 1681i(a)(2)(A).

17 15 USC 1681i(a)(5)(A)(ii).

18 15 USC 1681i(a)(6)(A).

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3. Supervisory observations at furnishers

Furnishers of information play a crucial role in the accuracy and integrity of consumer reports when they provide information to CRCs. Inaccurate information from furnishers can lead to inaccurate reports and consequent harm to consumers and the market. For example, inaccurate information on a consumer report can affect a consumer’s ability to obtain credit, housing, or employment. Moreover, furnishers have an important role in the dispute process when consumers dispute the accuracy of information on their consumer reports. Consumers may dispute information that appears on their consumer report directly to furnishers (“direct disputes”) or indirectly through CRCs (“indirect disputes”), and furnishers are required to investigate both types of consumer disputes to verify the accuracy of the information furnished.19 A timely and responsive reply to a consumer dispute may reduce the impact that inaccurate negative information on a consumer report may have on the consumer. The FCRA and Regulation V set forth requirements for furnishers concerning both accuracy and dispute handling. To ensure compliance with these requirements, Supervision has conducted a number of reviews at a variety of furnishers subject to its supervisory authority.

Supervision found CMS weaknesses and numerous violations of the FCRA and Regulation V that required corrective action by furnisher(s).

3.1 CMS/Data governance As the CFPB has emphasized, we expect institutions subject to our supervisory authority to structure their CMS in a manner sufficient to comply with Federal consumer financial laws and appropriately address associated risks of harm to consumers.20 This expectation includes ensuring the furnisher implements and maintains a CMS sufficient to ensure compliance with furnisher obligations required under the FCRA, as appropriate.

In one or more reviews of furnisher(s), examiners found several weaknesses in CMS, including the following:

weak oversight by management and the Board of Directors over furnishing practices; no formal data governance program; failure to update policies and procedures; weak training of employees who conduct furnishing and dispute handling operations; and

19 15 USC 1681s-2(a)(8) and 15 USC 1681s-2(b). 12 CFR 1022.43.

20 CFPB, Supervisory Highlights, 2.1 (Summer 2013).

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weak monitoring and corrective action, including failure to conduct follow up testing on consumer account files submitted to and rejected by one or more CRAs.

Supervision directed the furnisher(s) to take appropriate action to address these weaknesses in their CMS programs as they relate to their actions in furnishing information to CRCs.

3.2 Reasonable written policies and procedures requirement

Regulation V requires furnishers to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the information relating to consumers that they provide to CRCs.21 Such policies and procedures must be appropriate to the nature, size, complexity, and scope of each furnisher’s activities.22 Supervision found that one or more furnisher(s) failed to meet this requirement by failing to have policies and procedures:

for handling and investigating direct disputes from consumers;

for the creation and retention of documentation to substantiate final dispute decisions;

to prevent duplicative or mixed file reporting;

to instruct how to conduct reasonable investigations of consumer disputes, including directing dispute-handling agents to compare the disputed information to all available information in all systems of record that could contain information relevant to a consumer’s dispute;

to prevent dispute-handling agents from responding “verified” immediately upon receipt of a dispute, instead of ensuring a reasonable reinvestigation was completed timely; and

for the third-party service providers conducting the furnishing on behalf of the furnisher(s).

For furnishing consumer deposit account information, Supervision found that furnisher(s):

had enterprise-wide FCRA policies, but the policies were inadequate to address furnishing activity for consumer deposit accounts;

failed to establish, implement, and maintain reasonable written policies and procedures consistent with Regulation V regarding the accuracy and integrity of consumer deposit account information furnished;

had policies for furnishing consumer deposit account information that were overly broad and not supplemented with sufficiently-detailed operating procedures and guidance for consumer deposit-related furnishing;

21 12 CFR 1022.42(a).

22 Id.

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had procedures that did not address the requirement to notify a consumer of the results of a dispute investigation; and

had procedures that failed to address the requirement to update and correct inaccurate consumer deposit information.

Supervision directed the furnisher(s) to correct the deficiencies.

3.3 Guidelines for furnishers in Appendix E of Regulation V

Regulation V requires furnishers, as they create policies and procedures, to consider and incorporate, as appropriate, the guidelines of Appendix E to Regulation V.23 These guidelines address key business functions, such as record retention, training, third-party oversight, and receipt of feedback from CRCs and others that contribute to a furnisher’s ability to ensure the accuracy and integrity of the data furnished to CRCs. In the past year, examiners evaluated furnishers’ consideration and incorporation of the Appendix E guidelines as appropriate to each institution. As a result of the reviews, examiners observed the following failures of furnisher(s) to meet this requirement of Regulation V and required the corrective actions described below.

Accuracy with respect to transferred accounts (date of first delinquency)

Appendix E of Regulation V states that a furnisher’s policies and procedures should be reasonably designed to promote furnishing information that is accurate, which includes furnishing information that reflects the terms of and liability for accounts, as well as consumers’ performance on such accounts.24 Appendix E also states that a furnisher’s policies and procedures should address furnishing information about consumers following transfers of accounts in a manner that prevents re-aging of accounts and other problems that may affect the accuracy or integrity of the information furnished.25

Examiners found that one or more furnishers’ written policies and procedures for furnishing did not address situations where information is absent on incoming loan servicing data transfers. Specifically, if a transferor’s servicer did not provide the date of first delinquency (DOFD), the policies and procedures did not require follow-up to obtain and accurately report the DOFD. The DOFD affects consumers because the FCRA directs that certain negative information not be included on consumer reports for longer than a specified period of time.26 If the DOFD date is

23 12 CFR 1022.42(b).

24 12 CFR 1022.42, Appendix E, I(b)(1).

25 12 CFR 1022.42, Appendix E, III(g).

26 15 USC 1681c(a).

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incorrect, the negative information associated with the specific tradeline may persist in the consumer file longer than legally permissible. The policies and procedures of the furnisher(s) directed agents to furnish information about such accounts even though the DOFD was not known. Supervision directed furnisher(s) to revise their written policies and procedures to ensure the DOFD from the transferor servicer was obtained and the furnishing of payments received on charged-off loans was updated accordingly.

Maintaining records In developing its policies and procedures, a furnisher should address how to “maintain[ ]records for a reasonable period of time, not less than any applicable recordkeeping requirement, in order to substantiate the accuracy of any information about consumers it furnishes that is subject to a direct dispute.”27

Examiners found at one or more furnishers that the policies and procedures for handling direct and indirect disputes required only the retention of certain documents. Examiners found that the retained documents did not substantiate the accuracy of the furnishers’ decision as to the dispute. Deficient documentation included the failure to memorialize what the agent reviewed or the logic of the agent’s investigation. Examiners attributed these failures to the weak policies and procedures and the failure to conduct monitoring or a compliance audit to identify the inadequate record retention. Examiners also found that when furnisher(s) processed an indirect dispute, they did not retain a copy of the attachments submitted by consumers to the CRC in connection with the dispute. By not retaining attachments, a furnisher compromises its ability to conduct ongoing quality checks of its dispute investigations. Supervision directed furnisher(s) to retain attachments submitted with indirect disputes for a reasonable amount of time.

Additionally, examiners found that furnisher(s) did not have adequate written policies and procedures in place to properly identify and track direct disputes. Accordingly, examiners were unable to verify that the furnisher(s) undertook a reasonable reinvestigation within the legally required timeframe. Supervision directed the furnisher(s) to ensure records related to disputes are maintained for a reasonable amount of time. Supervision made this direction to rectify the furnisher(s)’ failure to consider the guidelines as required by Regulation V in developing their policies and procedures.

Feedback from consumer reporting companies

In establishing and implementing its policies and procedures, a furnisher should consider any feedback received from CRCs, consumers, or other appropriate parties.28 The feedback may

27 12 CFR 1022.42, Appendix E, III(c).

28 12 CFR 1022.42, Appendix E, II(a)(3).

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indicate compliance gaps or persistent violations that the furnisher should address.29 Examiners found instances where furnisher(s) failed to:

have policies or procedures for the handling of feedback received from CRCs related to data quality;

review exception reports or identify, correct, and resubmit invalid data identified by the exception reports; and

have policies and procedures that provide sufficient guidance to dispute-handling agents on how to proceed when the information provided by the consumer is inconsistent with the information contained in the furnisher’s system.

Oversight of service providers

Furnishers’ policies and procedures should address appropriate and effective oversight of relevant service providers whose activities may affect the accuracy and integrity of information furnished to CRCs.30 Examiners found that furnisher(s)’ policies and procedures failed to ensure appropriate oversight of their service provider(s). The lack of policies and procedures resulted in the improper sale to one or more debt buyers of consumer deposit accounts that were erroneously charged off. Supervision directed the furnisher(s) to ensure that the written policies and procedures consider and address, as appropriate, the oversight of service providers and other guidance provided in Appendix E of Regulation V.

Quality control

Appendix E of Regulation V states that a furnisher, in developing its policies and procedures, should specify how it will establish and implement appropriate internal controls for the accuracy of information furnished. These controls can include implementing standard procedures and verifying random samples of information provided to CRCs.31 Internal controls can identify data accuracy issues early on and lead to appropriate corrective action to address such issues.

In one or more reviews, examiners found the following deficiencies in quality control:

failure to perform quality checks on the data furnished to CRCs; failure to test for the accuracy of the information after it is furnished, such as whether the

amount furnished as charged off is correct or whether the name or other identifying information of the account holder is correct;

failure to conduct ongoing periodic evaluations or audits of furnishing practices, or data furnished to CRCs; and

failure to conduct audits of dispute information to identify and correct root causes of any inaccurate furnishing.

29 Id.

30 12 CFR 1022.42, Appendix E, III(f).

31 12 CFR 1022.42, Appendix E, III(d).

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Reasonable investigations of disputes

Appendix E of Regulation V provides that furnishers’ policies and procedures should be reasonably designed to promote reasonable investigations of consumer disputes and take appropriate action based on the outcome of such investigations.32 Examiners found that one or more furnishers’ policies and procedures failed to promote reasonable investigations of disputes.

Training of staff

In developing their policies and procedures, furnishers should address how they will train the staff that participates in activities related to the furnishing of information on how to implement the policies and procedures.33 A well-trained staff is a key component of a strong compliance management system. Examiners found that one or more furnishers established policies and procedures that failed to address training related to furnishing. At one or more furnishers of consumer deposit account data, examiners also found no evidence that furnisher(s) provided training to employees related specifically to furnishing of consumer deposit-related data or dispute handling and resolution. Supervision directed one or more furnishers to update and conduct training to ensure adequate handling of direct and indirect disputes of consumer deposit account information.

Periodically review and update furnishing policies and procedures

Regulation V requires furnishers to review their policies and procedures “periodically and update them as necessary to ensure their continued effectiveness.”34 CFPB examiners found that furnisher(s) did not review and update their furnishing policies and procedures as necessary for compliance with this requirement. Supervision directed furnisher(s) to update and implement revisions to their policies in accordance with Regulation V.

3.4 Data accuracy requirements of furnishers Reporting information with actual knowledge of errors

Inaccurate reporting undermines the central purpose of consumer reports, which is to predict, among other factors, the potential creditworthiness of consumers. Section 623(a)(1)(A) of the FCRA requires that a furnisher shall not furnish any information relating to a consumer to any

32 12 CFR 1022.42, Appendix E, I(b)(3).

33 12 CFR 1022.42(b), Appendix E, II(e).

34 12 CFR 1022.42(c).

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CRC if the furnisher knows or has reasonable cause to believe that the information is inaccurate.35

Examiners found one or more furnishers provided consumer information to CRCs while knowing or having reasonable cause to believe that the information was inaccurate because the information furnished did not accurately reflect the information in the furnisher(s)’ systems. The types of information inaccurately furnished included that:

consumers were delinquent; consumers had no payment history; consumers had a “$0” actual payment amount; consumers had an unpaid charged-off balance when consumers had, in fact, settled the

account in full; and amounts past due and bankruptcy status.

A furnisher is not subject to Section 623(a)(1)(A) if the furnisher clearly and conspicuously specifies an address for consumers to provide notice that they dispute specific information as inaccurate.36 However, the FCRA does not require a furnisher to specify such an address.37 Supervision determined that one or more furnishers did not clearly and conspicuously specify such an address to consumers.

Date of first delinquency

The date of first delinquency is important for CRCs, creditors, and consumers because it determines when information on a consumer report becomes obsolete and may no longer be reported.38 The FCRA requires furnishers of information regarding delinquent accounts to report the date of delinquency to the CRC within 90 days.39 In one or more reviews, furnisher(s) failed to report accurate dates of first delinquency on accounts when consumers who had been delinquent filed for bankruptcy. Specifically, one or more furnishers updated the date of delinquency when consumers filed for bankruptcy to reflect the date of bankruptcy filing as the date of first delinquency. Supervision directed furnisher(s) to re-evaluate the accounts with bankruptcy, charge-off, and other applicable post-delinquency statuses to confirm the date of first delinquency was reported accurately and to promptly correct and update the dates of first delinquency with the CRCs, as necessary.

35 15 USC 1681s-2(a)(1)(A).

36 15 USC 1681s-2(a)(1)(C).

37 Id.

38 15 USC 1681c(a)-(b). Information may be reported if certain exceptions specified in the statute apply.

39 15 USC 1681s-2(a)(5)(A). This provision applies to accounts placed for collection, charged to profit or loss, or subjected to similar action. The date of delinquency is the month and year of the commencement of the delinquency on the account that that immediately preceded the action (e.g., placement of the account for collection).

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Failure to update and correct inaccurate information

When furnishers become aware of inaccurate information previously furnished to a CRC, the furnisher must inform the CRC that the previously furnished information is incorrect and promptly update the information.40 Examiners found that one or more furnishers violated this requirement in the following ways:

failing to promptly update the information provided to CRCs after determining that consumer information was not complete or accurate;

failing to promptly update payment information for charged-off accounts when consumers made payments under payment plans;

lacking oversight of the furnisher’s service providers, who delayed updating incomplete or inaccurate consumer information from a range of 190 days up to 337 days; and

failing to update reports to reflect delinquencies that had been cured when a consumer had a qualifying deferment during the period of delinquency.

Supervision directed the furnisher(s) to correct these violations to ensure prompt updating and correcting of inaccurate or incomplete information.

3.5 Dispute handling requirements Notice that dispute is frivolous or irrelevant Notifications to consumers regarding action, or inaction, taken on disputes by furnishers play an important function in the dispute process. Regulation V requires furnishers to conduct a reasonable investigation of a direct dispute and report the results of the investigation to the consumer.41 There are exceptions to this requirement, including where a furnisher is unable to investigate the dispute due to the consumer not providing sufficient information, or providing substantially the same information as a previously submitted dispute, when the furnisher can make a reasonable determination that the dispute is frivolous or irrelevant.42 In those instances, the furnisher must notify the consumer of the determination no later than five business days after making the determination.43 The notice must include the reasons for such determination

40 15 USC 1681s-2(a)(2). The FCRA requires a person who (A) regularly and in the ordinary course of business furnishes information to one or more CRCs about the person's transactions or experiences with any consumer; and (B) has furnished to a CRC information that the person determines is not complete or accurate, to promptly notify the CRC of that determination and provide to the company any corrections to that information, or any additional information, that is necessary to make the information provided by the person to the company complete and accurate, and to not thereafter furnish to the company any of the information that remains incomplete or inaccurate.

41 12 CFR 1022.43(e).

42 12 CFR 1022.43(f)(1).

43 12 CFR 1022.43(f)(2).

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and identify any information required to investigate the disputed information.44 In one or more reviews, furnishers decided not to investigate consumer disputes, having determined that certain consumers did not provide sufficient information to investigate the disputed information. When the furnisher(s) made this determination, they failed to provide proper notice to consumers of a reasonable determination that a dispute was frivolous or irrelevant, in violation of Regulation V. Supervision directed furnisher(s) to provide proper notice to consumers of a frivolous or irrelevant dispute determination.

Failure to report the results of direct dispute investigations to consumers

The FCRA and Regulation V require furnishers to complete their investigations of direct disputes received from consumers and to report the results to the consumer before the applicable expiration period.45 Examiners found that one or more furnisher(s) conducted an investigation of disputes and sent the consumers response letters, but the letters did not adequately address the actual substance of the disputes. For example, if a consumer disputed that the furnisher(s) had reported the consumer as delinquent during a particular time frame, the furnisher(s) sent a form letter in response that contained only a payment history of the account, including for the time period at issue in the dispute. Supervision determined that the furnisher(s)’ policies and procedures did not provide sufficient guidance on the content of resolution letters for disputes and directed the furnisher(s) to evaluate and improve the clarity of dispute resolution letters to ensure the results are more clearly reported to consumers.

Examiners also found that furnisher(s) failed to provide the results of direct dispute investigations to consumers in bankruptcy. Examiners determined that the furnisher(s) had system errors, which misinterpreted the automatic stay provision of the bankruptcy code and suppressed result letters to consumers. Supervision directed furnisher(s) to rectify these issues.

Failure to comply with indirect dispute handling requirements

Furnishers are required, after receiving notice of a dispute of the completeness or accuracy of any information from a CRC, to conduct an investigation with respect to the disputed information.46 This includes a review of all relevant information provided by the CRC and reporting the results of the investigation to the CRC within required time periods.47 Examiners found that furnisher(s) failed to complete their dispute investigations within the time periods required by the FCRA. Examiners found that furnisher(s), in order to meet the timing requirements, responded to notice of disputes from CRCs by verifying the information when, in

44 12 CFR 1022.43(f)(3).

45 15 USC 1681s-2(a)(8)(E)(iii) and 12 CFR 1022.43(e)(3).

46 15 USC 1681s-2(b)(1)(A).

47 15 USC 1681s-2(b)(1)(B)-(D).

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fact, the furnisher(s) had not completed the investigations and had not determined the accuracy of the information disputed by the consumer. Supervision directed furnisher(s) to investigate such disputes in compliance with the FCRA, which requires furnishers to complete an investigation and provide the results of that investigation to the consumer and to the CRCs.

Examiners also found that one or more furnishers failed to conduct an investigation of indirect disputes. Supervision directed furnishers to update and implement dispute handling policies and procedures to ensure disputes are handled in accordance with the requirements of the FCRA.

3.6 Permissible purpose The FCRA prohibits a person from obtaining a consumer report unless the consumer report is obtained for a purpose authorized by the FCRA.48 This prohibition protects the privacy of consumers and prevents the potential negative impact of certain inquiries. Examiners found that one or more institutions obtained consumers’ consumer reports by falsely representing to CRCs that those consumers had applied for a loan and that the institution(s) thus had permissible purposes to obtain the reports. Supervision directed the institution(s) to:

establish and implement effective policies and procedures to ensure the consumer’s report is not obtained without a permissible purpose;

strengthen the monitoring and testing function to respond to agent violations more quickly; and

report to the board quarterly on the number of complaints and disputes involving consumer reports obtained without a permissible purpose.

4. Conclusion Supervision’s work in the consumer reporting market is ongoing and remains a high priority. Consumer reporting companies and furnishers have an obligation to maintain the accuracy of consumer data, but experience indicates that they lack incentives and under-invest in accuracy. Indeed, these most recent supervisory findings underscore Supervision’s concern about the lack of resources that furnishers in particular have devoted to this important function and the resulting violations of law.

We have targeted substantial resources to improve the accuracy of consumer information, and we will continue to do so. We have observed steady progress at consumer reporting companies to improve data governance. However, we also observed that one or more CRCs have not yet finalized the development of data governance programs as required by Supervision, although such improvements are reported to be in the implementation phase. As to furnisher monitoring programs, Supervision found one or more CRCs made significant progress in leveraging

48 15 USC 1681b(f).

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furnisher dispute data as part of an accuracy program. But Supervision also observed that one or more programs require additional development and formalization of the corrective actions taken for furnishers that have been identified through the monitoring program. Overall, we are satisfied with the steady pace of progress in addressing weaknesses identified in Supervision’s first round of accuracy and dispute resolution reviews and will continue to work with supervised companies to ensure that they invest the necessary resources to solve compliance challenges.

Supervision will continue to conduct reviews at a wide range of furnishers subject to our authority and expects furnishers to evaluate carefully their entire operations as they relate to their furnishing practices in light of the FCRA and Regulation V’s requirements. We are encouraged by some positive trends. For example, at one or more large furnishers, Supervision observed a special emphasis on evaluating, on an enterprise-wide basis, the furnisher’s FCRA compliance management system. In addition, furnishers(s) proactively established action plans for recordkeeping and taking inventory of dispute resolution letters that they will more clearly communicate the results of investigations to consumers.

Supervision will continue to prioritize new and existing FCRA areas based on insights from a robust number of data sources that help us to identify areas where the risk of consumer harm is greatest.

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