Wednesday, July 24, 2024

April 2019 OBA Legal Briefs

  • Complaints
  • MLA SNAFU
  • Convenience fees on loan payments

Complaints

By Andy Zavoina

“We just don’t get complaints, we pride ourselves on customer service.” That may be true at some bank, perhaps one with a unicorn as a mascot, but I’ll wager most banks have customers who are unhappy about NSF and other account fees, being denied a loan, or a slow drive-up lane, or who feel that the bank should be open until 8 p.m. Regardless, even if your bank really has no complaints here are two reasons there should be a complaint monitoring system in place.

First, the revised Risk-Focused Compliance Supervision Program considers this critical. In November 2016 the FFIEC updated Uniform Interagency Consumer Compliance Rating System (CCRS). The FFIEC member agencies Ithe Fed, FDIC, NCUA, OCC and CFPB) implemented the updated rating system on consumer compliance examinations for exams after March 31, 2017. The CCRS is divided into three major categories and twelve assessment factors. The second category, used to evaluate a bank’s Compliance Program, has four assessment factors, one of which is Consumer Complaint Response. More on that in a moment, but suffice it to say that your regulatory agency wants your bank to have a plan to detect and resolve complaints if there was a “wrong” involved. How does the bank know there was a complaint? It trains staff to detect, resolve and learn from them.

Second, it only takes one complaint to get your bank on a Department of Justice or class action suit radar. Let’s examine a few real-life cases of complaints and enforcement actions. Keep in mind that these are a few we know of because they were in the mainstream media. How many smaller actions were there that we just didn’t hear about or the results were confidential, in a bank Report of Examination, and we just couldn’t hear about them?

The first case created problems for California Auto Finance (CAF). There was a single complaint made by a servicemember to the DOJ that her car was repossessed while she was on active duty. This single complaint lead to an $80,000 consent order with a record payment of $30,000 to one servicemember. Here’s a summary of what happened:

DOJ received a complaint in November 2016 from Army Private Andrea Starks. CAF had repossessed Starks’ car from her grandmother’s home the first day Starks was in basic training. Was this a case of a repossession agent on the hunt for Starks’ car and finding it unknowingly a day late, after she was protected by the Servicemembers Civil Relief Act (SCRA)? Not really, because Starks had notified CAF that she was enlisting, so they were made aware of her status and as a large subprime lender, surely, they are keenly aware of SCRA protections, or so you would think. In March 2018, the DOJ filed a lawsuit against CAF alleging violations of the SCRA, because there had been no court order allowing the repossession to take place. CAF then had to provide a list of all repossessions from December 2011 until December 2018. How long would it take your bank to provide such a list for a seven-year period?

Analysis of this list revealed a second repossession. Army Specialist Omar Martinez was in his first month of active duty when his car was repossessed. Prior to entering the military Martinez had also notified CAF of his employment change and again, CAF should have been aware of the SCRA protections. Because of the repossession’s impact on Martinez’ credit, he was unable to purchase a new car and had to rely on rideshares and taxis for over a year. According to the DOJ press release, CAF reached a private settlement with Starks. As part of the consent order, CAF agreed to pay Martinez $30,000. That’s the highest amount the DOJ has ever recovered for one servicemember.

CAF in fact did not have an SCRA compliance policy or procedures in place. In addition to the $30,000 paid to Martinez, the consent order requires CAF to train all its employees about SCRA requirements if they are involved in servicing covered loans or repossessing collateral. The consent order was still pending court approval in March 2019. This case started with a single complaint. CAF had received no others.

In the second example, a lawsuit was filed in July 2016 alleging that COPOCO Community Credit Union had violated the SCRA by repossessing cars owned by protected servicemembers without first obtaining court orders allowing it to do so. In July 2017 COPOCO and the DOJ entered into an agreement requiring the credit union to change its policies and compensate four servicemembers whose cars were repossessed in violation of the SCRA, $10,000.

This case was launched after the DOJ received a complaint from Alyssa Carriveau, the wife of U.S. Army Private First Class Christian Carriveau, alleging that COPOCO had repossessed their car, along with their two-year-old daughter’s car seat, from the driveway of their home. (Note, the DOJ and media emphasized the car seat. That’s a nice reputational knife in the back because it isn’t as though a repo agent will knock on the debtor’s door and ask them to clean out the vehicle before it is taken away.) Carriveau initially believed her car was stolen, but she later learned it had been “repoed.” Her husband, PFC Carriveau, was away at military training at the time and she was not able to get to work without the vehicle. The DOJ investigation showed COPOCO had no policies for SCRA compliance. After filing the lawsuit, the DOJ discovered three additional repossessions that violated the SCRA.

The agreement called for the Carriveaus, whose car was returned the day after repossession, to be credited $5,000 to the balance of their motor vehicle loan and to receive a lump sum $2,500 paid to them directly.

As for the other servicemembers, who COPOCO claimed never even made any claim against them, each would be awarded $10,000, less any amounts that were past due at the time of repossession which were still owed. They would also receive the amount of lost equity in the repossessed vehicle and interest accrued on the lost equity. COPOCO also paid a $5,000 penalty to the DOJ. Again, one complaint started this case.

In our third example, Wells Fargo reached a $4 million settlement with the DOJ. Like the two prior cases, this involved repossessions. This may be low hanging fruit for the DOJ as the tests are fairly simple — was the debtor a covered servicemember, and was there a court order issued allowing the repossession?

This case began when the DOJ received a complaint from the Army’s Legal Assistance Program alleging that Wells Fargo had repossessed Army National Guardsman Dennis Singleton’s car while he was preparing to deploy to Afghanistan. Wells Fargo repossessed the car, sold it at a public auction and then tried to collect a deficiency balance of over $10,000 from Singleton. While seeking assistance with debt consolidation, Singleton met with a National Guard attorney and learned about his rights under the SCRA. The attorney requested information from Wells Fargo about the original loan and repossession and asked for copies of the correspondence and Singleton’s payment history. Wells Fargo never responded to that request and the attorney requested the DOJ’s assistance. The ensuing investigation revealed 413 repossessions of vehicles owned by covered servicemembers. There was also a companion enforcement order from the OCC which assessed a $20 million civil money penalty and required Wells Fargo to make restitution to servicemembers harmed by the bank’s SCRA.

Staff from each of these lenders could have handled these cases differently and the outcomes could have been dramatically different. This is why bank staff needs to be trained and know how to handle complaints while recognizing those complaints which should be elevated for immediate attention to others at the proper level in the organization. Recognizing a problem that may be an anomaly with low risk differs from a systemic problem, which is likely to be widespread, and an isolated complaint concerning a subjective error differs from a complaint alleging a violation of law.

So let’s go back to the CCRS and determine what your bank needs to do as to complaint resolution, because it will influence your compliance management system rating. Assigned ratings range from 1 to 5, reflecting an increasing order of concern. The CCRS ratings are as follows:

• 1 reflects a strong CMS and the bank takes action to prevent violations of law and consumer harm.

• 2 is a satisfactory CMS that shows the bank is managing consumer compliance risk for the products and services offered and limits violations of law and consumer harm.

• 3 indicates a deficient CMS, and the bank has an increased risk with products and services and a recognized inability to limit violations of law and consumer harm.

• 4 reflects a CMS seriously deficient at managing risk with the bank’s products and services and/or at preventing violations of law and consumer harm. “Seriously deficient” indicates fundamental and persistent weaknesses in crucial CMS elements and severe inadequacies in core compliance areas necessary to operate within the scope of statutory and regulatory consumer protection requirements and to prevent consumer harm.

• 5 reflects a CMS critically deficient at managing risk for the bank’s products and services offered and/or at preventing violations of law and consumer harm. “Critically deficient” indicates an absence of crucial CMS elements and a demonstrated lack of willingness or capability to take the appropriate steps necessary to operate within the scope of statutory and regulatory consumer protection requirements and to prevent consumer harm.

As to the CCRS section specifically addressing complaint responses, the FFIEC provided the criteria used to evaluate a 1 to 5 rating. These are the benchmarks that will be used for your rating.

1. Processes and procedures for addressing consumer complaints are strong. Consumer complaint investigations and responses are prompt and thorough.

• Management monitors consumer complaints to identify risks of potential consumer harm, program deficiencies, and customer service issues and takes appropriate action.

2. Processes and procedures for addressing consumer complaints are adequate. Consumer Complaint investigations and responses are generally prompt and thorough.

• Management adequately monitors consumer complaints and responds to issues identified.

3. Processes and procedures for addressing consumer complaints are inadequate. Consumer complaint investigations and responses are not thorough or timely.

• Management does not adequately monitor consumer complaints.

4. Processes and procedures for addressing consumer complaints and consumer complaint investigations are seriously deficient.

• Management monitoring of consumer complaints is seriously deficient.

5. Processes and procedures for addressing consumer complaints are critically absent. Meaningful investigations and responses are absent.

• Management exhibits a disregard for complaints or preventing consumer harm.

In particular, pay attention to management’s responsibilities. Upper management will not be responsible to investigate or reply to complaints. But it will be responsible for establishing the culture, supported by sound policies, procedures and training that will determine the bank’s rating. Management must be involved in complaint management and compliance must provide periodic reports describing what is happening.

Other than improved customer satisfaction, what incentive does a bank have to work harder on complaint resolutions? In addition to being recognized for a better CMS rating, your CCRS rating helps define your examination schedule. As an example, a small (<$250M) FDIC-examined bank with a 1 or 2 rating is due to be examined each 30-36 months, while a 3-rated bank can expect an exam each 12-24 months.

Larger FDIC banks with a 1 or 2 rating are recommended for a compliance examination each 24-26 months while those with a 3 should expect an exam on a 12-24-month interval.

MLA SNAFU

By Andy Zavoina

I was disturbed by a recent question involving the Military Lending Act (MLA). The actual question was not difficult but playing the part of my 4-year-old grandson I would ask, “why” and to that answer, “why” and so on. This can be done to get to the root of a problem, and it is something auditors should do often. At the crux of the matter, this bank misinterpreted a provision of the law and the consequences could be severe.

Let’s get some housekeeping out of the way first. The law I’m addressing is actually the Department of Defense regulation “Limitations on Terms of Consumer Credit Extended to Service Members and Dependents (under Military Lending Act)” and is commonly referred to as the MLA.

When a covered loan is made to a covered borrower there are disclosures which must be made, and legally required terms of the contract between the bank and the borrower. The nature of the problem here started with the basics, so let’s review some of those. A “covered borrower” (§232.3(g)) is a person who, at the time they become obligated on a consumer credit transaction is:

1. A regular or reserve member of the Army, Navy, Marine Corps, Air Force, or Coast Guard, serving on active duty under a call or order that does not specify a period of 30 days or fewer, or such a member serving on Active Guard and Reserve duty as that term is defined in 10 U.S.C. 101(d)(6), or

2. A dependent of someone meeting the qualifications of the above. There is more to the definition of a dependent but typically this would be a spouse. For the particulars, review 232.3(g) and 10 USC 1072(2) but a quick test would be if they have a dependent ID card, they are a dependent.

Consumer credit (§ 232.3(f)(1)) means credit offered or extended to a covered borrower primarily for personal, family, or household purposes, that is:

(i) Subject to a finance charge; or

(ii) Payable by a written agreement in more than four installments.

That is a very broad definition, but the Department of Defense (DoD) included exceptions. For these purposes, consumer credit does not mean:

1. A residential mortgage, which is any credit transaction secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling, any refinance transaction, home equity loan or line of credit, or reverse mortgage;

2. Any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased;

3. Any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased;

4. Any credit transaction that is an exempt transaction for the purposes of Regulation Z (other than a transaction exempt under 12 CFR 1026.29) or otherwise is not subject to disclosure requirements under Regulation Z; and

5. Any credit transaction or account for credit for which a creditor determines that a consumer is not a covered borrower by using a method and by complying with the recordkeeping requirement set forth in § 232.5(b).

Exceptions 2 and 3 above can be problematic. When read as above a lender may believe a purchase money loan is exempted and that was the root of my banker question. The DoD has published additional guidance on the MLA and these sections in particular. Without having to revise the MLA, it was clarified through a Question and Answer document that a lender must understand what the DoD considers “to finance the purchase of” a motor vehicle or personal property. Here is the guidance:

Question: Does credit that a creditor extends for the purpose of purchasing a motor vehicle or personal property, which secures the credit, fall within the exception to “consumer credit” under 32 CFR 232.3(f)(2)(ii) or (iii) where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property?

Answer: The answer will depend on what the credit beyond the purchase price of the motor vehicle or personal property is used to finance. Generally, financing costs related to the object securing the credit will not disqualify the transaction from the exceptions, but financing credit-related costs will disqualify the transaction from the exceptions.

Section 232.3(f)(1) defines “consumer credit” as credit offered or extended to a covered borrower primarily for personal, family, or household purposes that is subject to a finance charge or payable by written agreement in more than four installments. Section 232.3(f)(2) provides a list of exceptions to paragraph (f)(1), including an exception for any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased and an exception for any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased.

A credit transaction that finances the object itself, as well as any costs expressly related to that object, is covered by the exceptions in § 232.3(f)(2)(ii) and (iii), provided it does not also finance any credit-related product or service. For example, a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle), and also finances optional leather seats within that vehicle and an extended warranty for service of that vehicle is eligible for the exception under § 232.3(f)(2)(ii). Moreover, if a covered borrower trades in a motor vehicle with negative equity as part of the purchase of another motor vehicle, and the credit transaction to purchase the second vehicle includes financing to repay the credit on the trade-in vehicle, the entire credit transaction is eligible for the exception under § 232.3(f)(2)(ii) because the trade-in of the first motor vehicle is expressly related to the purchase of the second motor vehicle. Similarly, a credit transaction that finances the purchase of an appliance (and is secured by that appliance), and also finances the delivery and installation of that appliance, is eligible for the exception under § 232.3(f)(2)(iii).

In contrast, a credit transaction that also finances a credit-related product or service rather than a product or service expressly related to the motor vehicle or personal property is not eligible for the exceptions under § 232.3(f)(2)(ii) and (iii). For example, a credit transaction that includes financing for Guaranteed Auto Protection insurance or a credit insurance premium would not qualify for the exception under § 232.3(f)(2)(ii) or (iii). Similarly, a hybrid purchase money and cash advance credit transaction is not expressly intended to finance the purchase of a motor vehicle or personal property because the credit transaction provides additional financing that is unrelated to the purchase. Therefore, any credit transaction that provides purchase money secured financing of a motor vehicle or personal property along with additional “cashout” financing is not eligible for the exceptions under § 232.3(f)(2)(ii) and (iii) and must comply with the provisions set forth in the MLA regulation.

When the MLA was revised many bankers believed GAP insurance could be financed with the loan and that this met the raw definition in the law. The DoD was explicit in its interpretation that financing the GAP insurance would disqualify the exemption and therefore require disclosures and certain contract terms to include a cap of 36 percent on the Military Annual Percentage Rate (MAPR). The MAPR is similar to the Annual Percentage Rate under Reg. Z except that it is more inclusive and therefore is generally greater than the APR.

If a bank missed the finite terms in the DoD guidance document which will be used to interpret the law, there could be severe consequences, found in section 232.9 (Penalties and Remedies) of the MLA.

Violators are subject to criminal and civil penalties under the rule. Moreover, consumer credit contracts that are not in compliance with the rule will be deemed void from inception.

(a) Misdemeanor. A creditor who knowingly violates 10 U.S.C. 987 as implemented by this part shall be fined as provided in title 18, United States Code, or imprisoned for not more than one year, or both.

(b) Preservation of other remedies. The remedies and rights provided under 10 U.S.C. 987 as implemented by this part are in addition to and do not preclude any remedy otherwise available under State or Federal law or regulation to the person claiming relief under the statute, including any award for consequential damages and punitive damages.

(c) Contract void. Any credit agreement, promissory note, or other contract with a covered borrower that fails to comply with 10 U.S.C. 987 as implemented by this part or which contains one or more provisions prohibited under 10 U.S.C. 987 as implemented by this part is void from the inception of the contract.

(d) Arbitration. Notwithstanding 9 U.S.C. 2, or any other Federal or State law, rule, or regulation, no agreement to arbitrate any dispute involving the extension of consumer credit to a covered borrower pursuant to this part shall be enforceable against any covered borrower, or any person who was a covered borrower when the agreement was made.

(e) Civil liability

(i) In general. A person who violates 10 U.S.C. 987 as implemented by this part with respect to any person is civilly liable to such person for:

(ii) Any actual damage sustained as a result, but not less than $500 for each violation;

(iii) Appropriate punitive damages;

(iv) Appropriate equitable or declaratory relief; and

(v) Any other relief provided by law.

(2) Costs of the action. In any successful action to enforce the civil liability described in paragraph (e)(1) of this section, the person who violated 10 U.S.C. 987 as implemented by this part is also liable for the costs of the action, together with reasonable attorney fees as determined by the court.

(3) Effect of finding of bad faith and harassment. In any successful action by a defendant under this section, if the court finds the action was brought in bad faith and for the purpose of harassment, the plaintiff is liable for the attorney fees of the defendant as determined by the court to be reasonable in relation to the work expended and costs incurred.

(4) Defenses. A person may not be held liable for civil liability under paragraph (e) of this section if the person shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include clerical, calculation, computer malfunction and programming, and printing errors, except that an error of legal judgment with respect to a person’s obligations under 10 U.S.C. 987 as implemented by this part is not a bona fide error.

(5) Jurisdiction, venue, and statute of limitations. An action for civil liability under paragraph (e) of this section may be brought in any appropriate United States district court, without regard to the amount in controversy, or in any other court of competent jurisdiction, not later than the earlier of:

(i) Two years after the date of discovery by the plaintiff of the violation that is the basis for such liability; or

(ii) Five years after the date on which the violation that is the basis for such liability occurs.

So, if a lender misinterprets the requirements of the MLA, especially if this has been done for an extended period (these major changes to the MLA were effective in October 2016). and if that lender was active, that simple misinterpretation can have huge consequences.

What does it mean to void the contract? This could require a lender to refund all the fees and interest paid by the borrower and hopefully walk away with a recovery of the principal. But do not forget the other damages the covered borrower may collect. If the borrower is successful in court, the lender could also be liable for the court costs and attorney’s fees. Plus, this was an active lender and there may be hundreds, even thousands of loans that could be voided and included in a class action suit.

The penalties that can be enforced by regulators likely depend on the size of the lender, the severity of the violations, the lender’s initial attempts to comply with the MLA and its prior history of compliance. At the end of the day, these are not issues management wants to address. It is far simpler to stay abreast of the laws, regulations, interpretive guidance and to put in place audit controls which provide prompt corrective actions.

Convenience fees on loan payments

By Pauli Loeffler

Oklahoma Senate Bill 1151 was enacted in 2017 to permit supervised lenders (federal regulated financial institutions and lenders licensed by the Oklahoma Department of Consumer Credit that make loans with APRs exceeding 10%) to charge consumer borrowers convenience fees for electronic loan payments effective November 1, 2018. The statute is found in Title 14A O.S. § 3-508C. You can read the statute here.

The statute allows supervised lenders to charge a fee for convenience payments made by debit card, electronic funds transfer, electronic check or other electronic means for loans subject to §§ 3-508A and 3-508B. Section 3-508A provides the maximum interest rate at consummation for most consumer loans. It does not apply to the vast majority of real estate secured loans, loans for education, and consumer loans exceeding the threshold amount which is the same for both the U3C and Reg Z. It also does not apply to agricultural, commercial, or loans to other than natural persons, e.g. trusts. Section 3-508B provides an alternative method of imposing a finance charge to that provided for § 3-508A loans, but until the enactment of § 3-508C prohibited all fees other than late fees and deferral fees.

So, what does § 3-508C allow? The bank can impose and collect a convenience fee on an electronic payment transaction as long as the fee does not exceed the actual cost incurred by the lender or four percent (4%) of the electronic payment transaction, whichever is less. “Actual costs” is defined as the actual third-party costs incurred for the processing of payments made by electronic means. Note that if the bank is a subsidiary of the entity processing the payment, the parent entity is considered a third-party. If the installment payment being made is $25.00, the bank will only be able to charge the borrower $1 and isn’t a real money maker if the actual cost exceeds that amount.

The bank must provide the consumer the option to make payments on a loan by check, cash, or money order directly to the lender in order to avoid the imposition of a convenience fee. If the bank wants to charge the consumer a convenience fee for various types of electronic payment transactions, it must fully disclose the fee either in the loan disclosures or at the time of the specific electronic payment transaction. Even if the bank discloses the fee in the loan documents, before the bank can charge a convenience fee, it must notify the customer of the amount of the fee prior to completing the electronic payment transaction as well as provide the customer an opportunity to cancel the transaction without incurring a fee. This applies regardless of whether the request is made via telephone (train your employees) or online (“A convenience fee in the amount of $x.xx will be assessed… Click “cancel” if you do not wish to proceed with payment”). Finally, the convenience fee is NOT refundable if the customer elects to proceed with payment. It is advisable to notify the customer of this fact as well.