Tuesday, November 29, 2022

May 2017 Legal Briefs

  • Complaints – What’s your status quo?
  • Your Corporate Compliance Program
  • Prepaid Accounts Rule Delayed
  • HMDA Rule Changes Proposed

Complaints – What’s your status quo?

By Andy Zavoina

It is likely your primary regulator doesn’t provide you with feedback on what complaints it receives and how they are being resolved. You probably only hear about the subject when the examiners are in your bank and they are asking to see who complained about what, why, how the bank resolved it and how long the process took. The Consumer Financial Protection Bureau (CFPB) is an exception. It maintains THE consumer complaint database and invites these complaints regularly and on its web site.

There are many faults with the system the CFPB uses. On November 17, 2015, American Banker reported that even many employees inside the CFPB do not trust all of the data. For example, one complaint was broken down so that counted as 35 different ones! The CFPB says if different companies are listed, the complaint counts against each. I heard what was reported to be a true story of one consultant, with knowledge and consent of the bank, who complained on the CFPB database that on cookie day the tray was empty when he arrived. The complaint was logged and the bank president responded with an explanation that demand exceeded supply and he promised it would not happen again. There was also a complaint recorded against a bank and only mentioned the bank, but was actually against a payday lender. There is no verification procedure pertaining to the complaints and comments being logged, but the CFPB maintains the error rate is actually low and that these complaints are critical to its mission. Still, when the CFPB solicits complaints, it seems like it is ambulance chasing and consumers will complain believing they can gain from it, regardless of the severity of the complaint.

Nonetheless, there are benefits you can glean from the CFPB complaint data. You can understand the potential areas for risk, based on the products and services you offer (or may be considering), and those being complained about. The complaints indicate issues which pose compliance, litigation and reputation risk when ignored and they provide an impetus for the bank to have its own data collection and reporting system for complaints. Hearing about a compliance complaint against another institution involving a product/service similar to yours may also tip off your internal auditing team to an emerging problem. This means you could find and correct a potential Civil Money Penalty issue before your examiners come in, armed with the same information. This is integral to avoiding claims of Unfair Deceptive or Abusive Acts or Practices as well. It falls under the old adage “an ounce of prevention is worth a pound of cure.”

Annual Report Overview: In March the CFPB posted its 50-page report, “Consumer Response Annual Report” for the year 2016. You can download a PDF from the CFPB web site. Consider your bank’s primary products, complaints received by your bank, and how your reputation will compare against these national numbers. Also consider how any complaints you’ve received compares to the CFPB trend. As a trend, the 2016 complaints increased 7% over the prior year.

Complaints by Product               % National        % Oklahoma

Debt collection                          30                        26
Credit reporting                         19                        19
Mortgage                                   18                        18
Bank account or service              10                         5
Credit card                                  9                         8
Consumer loan                            6                         8
Payday loan                                2                         2
Prepaid cards                              0.9                     0.7
Money transfer                            0.8                     1
Other financial                             0.7                    0.1

(Rounding may cause the total to not be 100%.)

Student loans were not included in the CFPB product summary nationally, copied above, but there were 8,088 complaints in 2016 nationally and only 54 against Oklahoma. Interestingly as I compiled these numbers for the state, there were a total of 1,325 complaints in the database to Oklahoma institutions. But when I totaled the 11 product categories assigned by the CFPB there are 1,339 complaints. It would appear 14 are in more than one product category.

The above table represents the largest to smallest of the product categories as classified by the CFPB. For the top three, representing 67% of the 291,400 complaints received in 2016, Oklahoma institutions track closely to the national trends. These complaints do include entities other than banks, such as payday lenders, collection companies, credit bureaus and others. Still, your bank should have a record of complaints against it and you may use similar categories and compare yourself to these as benchmarks. Someone at the bank should also periodically monitor the bank’s name in the “Company” field if you are regulated by the CFPB and may be on its complaint database. For most of our readers, whose primary regulator is other than the CFPB, you can still use these categories for benchmarking and ensure any complaints received about you by your regulator are included. Compare your trends in the categories and create subcategories similar to what the CFPB does. While not perfect, it is what your bank will be compared to.

Consumer loan complaints is the only category of concern where Oklahoma exceeds the national numbers. Complaints in this category relate to account terms and changes, managing the loan, inability to repay, and taking out the loan, as a few examples. When a bank is proactive on customer service issues it can deflect many complaints. Those customers unable to pay may need options, or there may be nothing else the bank can do to assist. Just because there is a complaint, that does not make the bank wrong, but until you review your own trends, policies and procedures, you will not know.

Debt collection: The top subcategories of collection complaints, from highest to lowest, included attempting to collect debts not owed (41%), verification of a debt (20%), communication tactics (15%), false statements by a collector (9%), threats of legal action and improper contact (9%). Each of these areas can be important both for debts the bank collects and for those it may outsource to collection agencies. If you see trends like these, refresher training on verifying the debt is still owed, knowing when contact may be made, and what can and cannot be said may be timely to avoid potential complaints and penalties.

Credit Reporting: While only a few banks were listed as the “Company” pertaining to credit reporting errors, the top three, Equifax, Experian and TransUnion will be going back to the banks as furnishers of the data for verification of what the correct record is and what was reported. The major issue complained about was the accuracy of the information (74%) which includes “that is not me” and incorrect terms of credit or the credit status, followed by the next subcategory which is about the investigation to correct the misinformation (11%), improper use of reports (6%), the inability to obtain a credit report or score (6%) and credit monitoring (3%).

The two major subcategories accounted for 65% of the inaccurate information complaints. “That’s not me” was 35%. This category is important because it relates to ID theft and red flag issues and could indicate a problem with verification of borrowers at the loan desk, by mail and for internet and telephone applications. Account status came in at 30%, largely relating to issues on reporting payments as timely and accounts which are actually closed.

Is Loan Operations or your designated area aware of the Fair Credit Reporting Act requirements when a credit entry is disputed? There are time requirements for responding or the record gets eliminated. That does not help your bank or other lenders when correctly reported, derogatory information, is removed because it could not be verified in a timely manner.

Mortgage Loans: Mortgage loan complaints came in at number three. The CFPB sent 84% of them, or 43,000 complaints, to the institutions for review and response. Another 11% went to other regulators to handle and a small percentage (3%) were incomplete, with the remaining mortgage complaints pending responses.
The complaints were put into six subcategories: making payments (40%), unable to pay (38%), applying for the loan (10%), signing agreements (6%), receiving credit offers (3%) and others (3%).

Similar to debt collections (above) and consumer loans (below) managing one’s debt is problematic for many consumers. In the case of mortgages some of these issues are exacerbated because the borrower must deal with loan servicing issues and escrow accounts, both of which can be new terms to a home owner. Issues relating to applying and signing for loans total only 6% but these issues immediately raise fair lending concerns as complaints go. Banks should pay careful attention to the process of making mortgage loans and informing consumers of the process and expectations as well as where to get answers when questions arise. Perhaps providing this up front would reduce these complaints.

Bank accounts: Bank accounts come in a distant fourth but these are at the heart of day-to-day operations. The five types of accounts consumers had complaints about were checking accounts (58%), other products and services (33%), savings accounts (6%), certificates of deposit (3%) and check cashing without a bank account (0.7%). The complaints were about account management (46%), deposits and withdrawals (24%), sending and receiving payments (11%), problems caused by low balances (9%) and debit card use (9%).

The account management complaints addressed issues with confusing marketing pieces, being denied accounts, fees, joint account requirements and others. The availability of deposits, problems and penalties when making withdrawals, unauthorized transactions, and lost or missing funds were categorized as Deposits and Withdrawals. Combined, these two areas are 68% of the bank account complaints. Overdrafts, bounced check fees and similar items came in at number four in the section just behind check payment problems, fraudulent payments and wire transfers.

A big issue for review here is the marketing of products. “Confusing marketing” sounds too much like fees may be hidden or terms of products could be unfair or deceptive. Does your bank have a review and approval process for products and services being advertised? The bank definitely needs its marketing pieces to be understandable and clear. Further, any questions about terms the customer has should be addressed at the new accounts desk after products are discussed and disclosed. “Do you have any questions?” And “if any come to mind, feel free to call customer service at…” Monitoring complaints about overdrafts should also be a priority as this is still a hot button with examiners. Oklahoma institutions were at half the national numbers for complaints in this area. Our banks are already doing well, but always look for room to improve.

Credit cards: Credit card complaints are just below the national numbers. The major complaints here are billing disputes (17%), other issues (a potpourri at 13%), and identity theft/fraud (12%) with all other subcategories of issues in single digits as it relates to a piece of this pie.

If your bank handles credit cards, one or more persons handling disputes need to be familiar with the Reg Z rules for your products as well as vendor rules. Common complaints deal with how payments are applied with different balance tiers and interest rate enhancements on special promotions such as balance transfers. Banks should not create programs that are difficult to manage. These need to be automated and understandable. UDAAP issues often involve credit card product add-ons. And as mentioned above, identity theft needs to be addressed carefully as the bank should be reviewing these issues regularly.

Student loans: There were 8,101 complaints nationally pertaining to student loans or about 2.8%. There were 54 student loan complaints including Oklahoma institutions or 3.9%. None of the institutions identified appeared to be banks. Navient Solutions, LLC, which services a majority of student loans, appears to have most of the complaints. Servicing was the major area of complaints (67%) followed by problems paying the loan (30%) and getting a student loan (2%).

Consumer loans: The final category of complaints we will examine are consumer loans. In this category, Oklahoma exceeded national count by 2%. The CFPB splits these into six main subcategories: vehicle loans (48%), installments (37%), vehicle leases (8%), personal lines of credit (4%), title loans (2%) and pawn loans (0.5%). Banks are less concerned over leases, title loans and pawn loans, leaving an Oklahoma breakdown of vehicle loans (54%), installments (36%) and personal lines (3%). These percentages are to the consumer loan category. As a percentage of the total, vehicle loan complaints are 6% higher, installments are 1% higher and personal lines are 1% lower.

What are the complaints about so that you can benchmark your bank and try to improve where needed? The CFPB used six subcategories: managing the loan (45%), inability to pay (22%), taking out the loan (18%), shopping for the loan (12%), other (2%) and unexpected fees and interest (1%). The first subcategory on managing the loan deals with billing, late fees, GAP and credit insurance and credit reporting, to name a few. Debt collection is a recurring issue and included here is setoff. “Taking out the loan” problems included mid-deal changes, changes after closing on rates and fees and required add-on products, to name a few. Shopping for the loan was an issue when there were high pressure sales tactics and denials as well as confusing marketing and advertisements.

You may not have much empathy for the past due borrower, but many are simply good people having hard times. Understanding and working through those “unable to pay” months can be good for the bank/borrower relationship. While this does not mean accepting losses, it is better to work with, than against, a borrower. Weigh the risk of loss and reducing losses against the time it takes to collect a loan, the prospect of collecting all that is owed and collateral values. As noted, not all complaints are valid, but many are. Explaining GAP insurance and ensuring that advertising is readily understandable are two other things many banks can strive to do better.

Summary: It is an option of the company/institution to report any monetary relief provided to the complainant. Based on those reporting, the CFPB’s report indicates the median amount of relief included $316 for 360 debt collection complaints, $29 for 150 credit reporting complaints (payments from the big three varied greatly), $500 for 1,190 mortgage complaints, $108 for 4,060 bank account and services complaints, $105 for 4,250 credit card complaints, $200 for 530 consumer loan complaints, $245 for 250 student loan complaints, $375 for 60 payday loan complaints, and $200 for 270 prepaid card complaints.

At the end of the day, some tasks bankers do are more important than others. Improving relationships with customers, avoiding complaints and the risks associated with them, and doing a better job of selling products and services should rate highly based on these objectives. These objectives are in part better accomplished when the bank is monitoring the pulse of its customer base with complaint management and benchmarking to know how it compares against peers. The CFPB database is not complete as to being a sum of all complaints, but with nearly 300,000 complaints last year, it has many attributes that are useful.

Here are a few last take-aways from the consumer complaint database.

1. If your bank is named, ensure the complaint is actually about your bank, and this is not a case of your bank just being mentioned.

2. Keep your own database using Excel, Access, another database program or a vendors’ product so you can be proactive and not reactive to trends and risk avoidance.

3. When your examiners see trends in complaints from the CFPB and its own records, expect to be asked what you are doing in these areas.

4. Use your bank’s complaint information in your risk rating system. Reviewing the above you can see strong implications in fair lending, Reg B, FCRA, Reg Z, Reg E and UDAAP to name a few.

Your corporate compliance program

By Andy Zavoina

In the wake of negative news regarding corporate ethics, whistleblower and compliance programs at Wells Fargo this last year, bank management should expect a higher set of standards from examiners and from litigators, if it comes to that, pertaining to corporate compliance and governance programs. Perhaps “wake” is not descriptive enough. Tsunami is perhaps a better term considering some of what happened at Wells Fargo. Learning from another’s mistakes is much more pleasant than learning from your own.

Overview: In a nutshell, Wells Fargo management set unrealistic cross-selling goals and wanted customer contact personnel to ensure all customers had at least eight account products. This was directed from the top to the bottom of the organizational chart more as a mandate than a goal. This unrealistic goal created a toxic environment at the sales desk. One employee said the incentive in cross-selling was not to get bonuses, but rather to hold onto the job. There was so much pressure on staff that many began to “force” customers into products they did not want or need, and still other employees even more desperate opened deposit and credit card accounts for customers without the customers’ knowledge. Some two million accounts were opened that were not authorized by the “owner.” Controls that were in place to prevent fraud required acceptance of the products, so the bank employees would circumvent the controls by opening an email account in the name of the unknowing customer to affirm acceptance for electronically. Other accounts required the transfer of funds from an active account of the customer, so the employee would secretly transfer the funds, then transfer them back. If a customer complained the bank would just try to blow it off as a temporary mistake which had already been corrected. I believe a case could be made that this is identity theft, but to the benefit of the employees the emphasis has been appropriately placed on management, and the unrealistic goals which could not be achieved otherwise.

When this story broke, Wells Fargo said that it had fired 5,300 employees who violated the standards the bank had set because of these unauthorized accounts. It later became clear many of these employees were not making goals or were found to have been “caught” creating the bogus accounts. In fact, it was the top-down pressure from senior management that pushed them this far. Senior management, including Carrie Tolstedt and Chief Executive John Stumpf left the bank. Tolstedt was reclassified as being fired for cause even though she had already entered into early retirement. She then forfeited stock options worth more than $47 million. The bank also “clawed back” $28 million of Stumpf’s bonus. In total the bank took back almost $180 million in compensation. This is a large part of what the bank was fined. The bank was under intense pressure to make an example of the two key management officers who were seen as creating the program. The board later fired four others in management positions, a retail bank chief risk officer, a regional president, a former regional president in and head of consumer credit solutions and a head of community bank strategy and initiatives.

Penalties/Effects: The pain didn’t end there. The bank had to pay a $185 million penalty from the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC) and the City of Los Angeles. There was $2.5 million in restitution ordered. Congress held hearings. The CEO and others in management departed. And there was a 55% decline in credit card applications, a 43% drop in checking accounts, plus, stock values fell and lawsuits are being initiated by shareholders and ex-employees alike. This is a brief recap from the press: The once sound reputation of a bank with solid management is forever tarnished, and so with it goes the reputation of our financial industry. This is one where the community bank cannot say “don’t confuse us with Wall Street banks.” While one of the largest banks, Wells Fargo branches are next to ours.

On February 8, 2017 the Department of Justice published guidance on how it will assess compliance programs. The document is titled “Evaluation of Corporate Compliance Programs” and this must be taken in concert with exiting DOJ materials. Bank counsel should be familiar with this as it will provide information on what the DOJ will review in a criminal investigation and highlights the attributes considered desirable in a strong culture of compliance. It probes the actions and words of management to determine the real commitment to compliance.

Corrective Actions: If you don’t already have one, consider a whistleblower program that employees may use without fear of retaliation. In the Wells Fargo case there were examples of complaints being handled by the banker the complaint was against, and the complaining employee fired for an unrelated reason a short time later. If possible, allow anonymous complaints. Some organizations have 24-hour tip lines.

Incentive-based goal setting and cross-selling are not bad things. But moderation is key. The bank should consider programs that include one or more of the common metrics for measuring the success of the program. Volume metrics were those criticized by the CFPB. Wells Fargo’s “Eight is Great” was extravagant and overzealous. Goals must be reasonable. These metrics should not be eliminated, but controlled and realistic. Growth metrics may be more reasonable as well as those geared toward profitability or revenues measured for different periods of time. Each has a place, but they all need controls. Employees at Wells Fargo were “gaming” the program, Some metrics are harder to game, such as growth and profitability. Programs based on volume require more controls and therefore more monitoring. Consider risk-rating incentive plans to identify and mitigate risks, and to accept what is reasonable.

Monitoring and controls should include relevant data. What data is collected and meaningful, and how does the data include a review of associated complaints from consumers, and the metrics the bank opted to use? Does it provide measurements against the risk that was acceptable and not acceptable? And is it reported to the board in a meaningful way?

Some take-aways:

1. A sound complaint program could lead to an earlier termination of such a program when customers were becoming aware of the accounts. In this case, management was not listening.

2. The bank’s whistleblower program was rendered neutral due to management seemingly ignoring laws and ethical standards in pursuit of sales goals.

3. The Wells Fargo board was deemed to have been duped or at the very least mislead by top managers at the bank.

4. Responsible management should always respond to evidence of a problem.

5. All incentive programs will be more highly scrutinized. This does not mean banks must overreact and cancel incentive programs. They must be well structured and include controls and monitoring.

Prepaid Accounts rule delayed

By John S. Burnett

Changes may also be made

As expected, the Consumer Financial Protection Bureau has officially postponed until April 1, 2018, the effective date of its Prepaid Accounts rule. The rule, which had been scheduled to become effective October 1, makes significant amendments to Regulations E and Z to bring consumer protections already mandated for certain payroll and government benefits card accounts to the wider prepaid card marketplace. It also uses the term “prepaid account” rather than “prepaid card” to expand those coverages to prepaid accounts that aren’t card-based.

Financial institutions and others involved in the prepaid market had asked the CFPB for a delay to allow more time for significant programming and other implementation requirements. The Bureau originally proposed a six-month delay in the effective date in March. They received 28 comments from a broad range of stakeholders, “including consumer advocacy groups; national and regional trade associations; members of the prepaid industry, including issuing banks and credit unions, program managers, and a digital wallet provider; several think tanks; an association of state financial regulators; a group of state attorneys general; and others in the public.

Not surprisingly, several of the comments suggested a delay of more than six months, and a consortium of consumer advocacy groups argued for implementation as soon as possible, but no later than April 1, 2018. Two trade association commenters urged the adoption of a safe-harbor provision for participants that elect to comply with the rule before its effective date.

Among the commenters were a prepaid issuer, a digital wallet provider, and a trade association, each of whom expressed acceptance of the proposed six-month delay if the Bureau agreed to revisit the rule to address certain substantive provisions of the rule that they argued required changes to disclosures and business models that could not be implemented by April 1, 2018. Those provisions relate to (1) the linking of credit cards with digital wallets that are capable of storing funds and (2) to error resolution and limitations on liability for prepaid accounts where the financial institution has not completed its consumer identification and verification process with respect to the account. The Bureau has agreed to revisit those two provisions, in another proposed rulemaking, which may also address a limited number of other concerns.

Of course, all this activity takes place with the knowledge that there are joint resolutions in Congress that, if passed and enacted, would make the Prepaid Accounts rule null and void. Keep this matter on your list of things to watch. I know it’s on mine!

HMDA Rule changes proposed

By John S. Burnett

The CFPB has proposed some clarifications and other changes to the final HMDA rule issued in October 2015. The most significant Regulation C changes in the 2015 rule are set to go into effect on January 1, 2018. There are several parts of the rule that the Bureau wants to clarify to help lenders comply and to improve the data obtained in HMDA filings under the regulation. The CFPB’s proposal to amend Regulation C to provide those clarifications was published on April 25, with a comment period ending on May 25.

Some of the proposed changes would provide some transition guidance for selected data points such as loan purpose and the loan originator’s unique identifier on purchased loans originated before specified dates. Some key terms, such as “temporary financing” and “automated underwriting system,” would be clarified, and a new exemption would be created for a unique type of modification agreement limited to New York State.

Many of the proposed changes would revise the Official Staff Interpretations to provide better examples to assist lenders in understanding terms and HMDA-filing data points. A significant change in those interpretations would clarify that a home purchase loan doesn’t include a construction-only loan to a builder designed to be replaced by permanent financing at another time (such a loan is also excluded from coverage as temporary financing).

Although it’s likely that the Bureau will issue a final rule that tracks the proposal closely, there are always some changes that will be made when a proposal is as complex as this one. For that reason, I’ve only hit a few of the highlights. We will do a more extensive review of the final rule when it is released.