The Bureau’s Pursuit of Fair Lending

By now it is a known fact that one of the most important features of an examination conducted by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) is a rigorous review of fair lending compliance. So, given its importance, it behooves us to learn about what the CFPB has found out about fair lending and what actions are needed to ensure its compliance. In this article, I provide an analysis of the CFPB’s most recent findings in the mortgage space as well as practical actions to be taken that help to build a vibrant fair lending initiative, gleaned from both the Bureau’s own issuances and actions, as well as my firm’s experience in assisting institutions with their CFPB fair lending examinations.

On April 30, 2014, the Bureau issued an Annual Report, entitled “Fair lending Report of the Consumer Financial Protection Bureau” (“Report”).[i] Richard Cordray, Director of the CFPB, stated in the Report’s preamble:

“Far too many consumers still must navigate a financial marketplace laden with deceptive marketing, debt traps, dead ends, and discrimination. At the Consumer Bureau, we are fierce advocates for a consumer financial marketplace that allows all Americans to pursue a path to greater opportunity. To that end, we are working to remove the unnecessary obstacles too many Americans face in the consumer financial marketplace. This includes ferreting out discrimination in credit markets, including the markets for home mortgages and auto lending.”[ii]

The Report generally covers the period from July 21, 2012 through December 31, 2013. In addition, there is Interagency Reporting on ECOA and HMDA contained therein, which conveys information on the Bureau’s and other administrative agencies’ functions under ECOA and HMDA, as required by those statutes, for the period of January 1, 2012 to December 31, 2013.

Patrice Alexander Ficklin, the Bureau’s Director of Fair Lending and Equal Opportunity, offered this overview of the Report:

“In this report we describe our steady focus on ensuring that consumers have fair, equitable, and nondiscriminatory access to credit by using all of the tools at our disposal – including research, supervision, enforcement, consumer education and outreach, rulemaking, and interagency engagement.”[iii]

The Bureau issued the Report to Congress “in fulfillment of its statutory obligation and continued commitment to accountability and transparency.”[iv] In this regard, the Bureau is relying on its claimed efforts to fulfill its fair lending monitoring mandate, and provides additional reporting required by the Equal Credit Opportunity Act (ECOA) and the Home Mortgage Disclosure Act (HMDA).[v]

Dodd-Frank established the Office of Fair Lending and Equal Opportunity (the “Office of Fair Lending”) within the CFPB, and charged it with “providing oversight and enforcement of Federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities that are enforced by the Bureau,” including ECOA and HMDA.[vi] The Office of Fair Lending is required to coordinate “fair lending efforts of the Bureau with other Federal agencies and State regulators, as appropriate, to promote consistent, efficient, and effective enforcement of federal fair lending laws,” and works “with private industry, fair lending, civil rights, consumer and community advocates on the promotion of fair lending compliance and education.”[vii]

Since the Bureau’s last report to Congress in December 2012, the Bureau has built fair lending tools and materials and engaged in public dialogue in order to educate, inform, and learn from consumers, advocates, and industry. It introduced a Home Mortgage Disclosure Act Database, which allows the public to study trends in the mortgage market across the nation and in their own communities. Additionally, the Bureau has published a bulletin on lending discrimination to help consumers and industry stakeholders recognize fair lending and access to credit risks in the home mortgage and auto lending markets.[viii] 

REPORT’S CONCLUSIONS 

We can derive certain salient observations about the Report’s findings.

In the first place, the Bureau has noted increasing efficiencies in fair lending activity. Thus, they have “created, refined, and implemented a risk-based fair lending prioritization process” to ensure that their supervisory procedures focus on the “areas presenting the greatest fair lending risk to consumers.” The approach, dubbed “risk-based prioritization” by the Bureau, uses the collection of both quantitative and qualitative data to assess fair lending risk to consumers as well as assessments of risk in order to prioritize enforcement actions.[ix]

Importantly, with respect to providing guidance on its examinations, the Bureau publicly released information about the three methods its examiners use in fair lending supervisory reviews: (1) ECOA Baseline Reviews, (2) ECOA Targeted Reviews, and (3) HMDA Data Integrity Reviews. In the period subject to the Report, the CFPB has completed dozens of examinations on ECOA and HMDA compliance.[x] Through these examinations the Bureau detected some violations of ECOA and HMDA. However, it also found that many lenders have instituted and maintained strong fair lending Compliance Management Systems (“CMS”) and had no violations of ECOA or HMDA. With respect to self-assessments, the Bureau has issued guidance describing how to conduct them, so as to be in compliance with ECOA and HMDA. Guidance has been provided through the Bureau’s Supervisory Highlights and Bulletins discussing fair lending topics.

The Bureau has used the collection of data to analyze its supervision and enforcement priorities and determine two key priorities: mortgage lending and auto finance. With respect to mortgage lending, the CFPB conducted fair lending supervisory reviews of a number of mortgage lenders, finding that many lenders have strong fair lending compliance management systems and no violations of ECOA or HMDA. However, the Bureau did allege some instances of fair lending non-compliance. Consequently, it took enforcement action against two mortgage lenders for violating HMDA, which resulted in assessments of civil monetary penalties and other relief. It is important to note that, in addition to jointly investigating certain matters with the United States Department of Justice (DOJ), the CFPB also made several referrals to the Department of Justice for violations of ECOA, one of which actually resulted in a recent enforcement action.

The interagency coordination and collaboration is a critical feature of the Bureau’s pursuit of violations. The CFPB continues to coordinate with the Federal Financial Institutions Examination Council (FFIEC) agencies, as well as the DOJ, the Federal Trade Commission (FTC), and the Department of Housing and Urban Development (HUD), in enforcing fair lending statutes. In fact, in 2012, the CFPB formalized its fair lending enforcement relationship with the DOJ via a Memorandum of Understanding (MOU).[xi] 

Complaints and Whistleblowers and Priorities

The CFPB uses input from a variety of external and internal stakeholders to inform its fair lending prioritization process. Thus, it considers fair lending complaints received by its Office of Consumer Response or brought to the Office of Fair Lending’s attention by advocacy groups, whistleblowers, and other government agencies (at the local, state, and federal levels). As part of the prioritization process, the Office of Fair Lending also considers public and private litigation.

Creating a Culture of Compliance

Everywhere we turn, there is compliance, compliance,
and more compliance required across the board.[i]
Donald J. Frommeyer, CRMS
President of NAMB

The ancient Greek philosophers knew the fundamental distinction between theory and practice. For them “theory” (or theoria) differed from “practice” (or praxis) in that the former meant examining things and the latter meant doing things! In other words, theory was a sort of spectators’ sport, while practice was playing the sport itself. Advanced mathematics is somewhat similar: there is pure (or theoretical) mathematics and then there is applied mathematics. Some theories remain theories forever, and others are extrapolated into practice. So, as it happens, some cogent theories simply do not need to have applied applications to be cohesive theories. Practical applications, however, must be experimentally valid all of the time.

The requirements of implementing a theory can be daunting, especially when the consequences of its practical applications are not sufficiently understood. To put a fine point on this observation: what may seem perfectly acceptable in theory can be entirely unacceptable in practice. Thus, some things are possible theoretically and other things are not possible practically. In compliance, I have learned to approach the notion of something being ‘theoretically possible’ with extreme caution!

So, given the challenges of regulations (theories) and compliance requirements (practices), (1) how should a financial institution accomplish evaluations of its loan origination risks and, most importantly, (2) how to go about embedding such assessments into a culture of compliance? In this article, I am going to provide ways and means by which the management of a financial institution will be able to create a culture of compliance that serves as the foundation upon which to manage risk associated with mortgage loan originations. I will provide an extensive set of questions, the answers to which should call forth the ways and means to establish compliance solutions.*

If you have ten thousand regulations,
you destroy all respect for the law.
Winston Churchill

So, how to create a culture of compliance?

Begin at the beginning!

When was the last time that a risk assessment was performed to identify all the loan products, which departments were affected in originating them, and what staff are responsible to effectuate the origination? That is where to begin. Residential mortgage lenders and originators may offer some, or all, of the loan products subject to the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rule promulgated by the Consumer Financial Protection Bureau (Bureau). But originating those loan products starts with identifying the loan flow process itself.

Furthermore, any new origination requirements will affect a number of parts of business systems and processes. For instance, a very short list of affected areas are the forms and processes used to communicate internally and externally that are subject to verification requirements; systems and processes used to underwrite loans must be considered; secondary marketing and servicing processes and systems need risk evaluation metrics, especially with respect to ATR provisions related to the refinancing of non-standard loans into a standard loans.

Specifically, are the various integrated processes and procedures set up to identify loans on the transaction systems with their definitional status under such regulations as the ATR and QM rule, which may involve creating new data element(s) within those very processing systems? Likewise, if the loan is a QM, is a formal consideration undertaken to determine levels of liability exposure and liability protection that a loan is receiving as it moves through the origination process?

To insure peace of mind
ignore the rules and regulations.  

George Ade

The American humorist, George Ade, may have found a way to peace of mind by ignoring rules and regulations. Perhaps he intuitively knew something about the stress involved in originating residential mortgage loans! If you have problems with rules and regulations, I suggest you choose another line of work, for happiness will forever elude you.

Consider this: the ATR and QM rule is just one component of the Bureau’s Dodd-Frank Act Title XIV rulemakings! Here are a few other rules that are now the law of the land:

• 2013 HOEPA Rule
• ECOA Valuations Rule
• TILA Higher-Priced Mortgage Loans Appraisal Rule
• Loan Originator Rule
• RESPA and TILA Mortgage Servicing Rules
• TILA Higher-Priced Mortgage Loans Escrow Rule

Some of these rules are directly and indirectly intersected, interlocked, overlapped, interfaced, and cross-tabulated; they are correlated, tabularized and re-tabularized, re-ordered, enumerated and re-enumerated, re-codified, and, generally, comprehensively systematized.[ii] Each of these rules affects one or more aspects of the loan origination process, organizational structure, and risk exposure. So maybe the great American humorist was on to something!

Nevertheless, if we are going to play, we will have to play within the rules. This means not only considering the compliance implications internally but also the interaction between the financial institution and third-parties upon which the institution relies for verifications, credit and other borrower information, disclosures, underwriting software, compliance and quality-control systems and processes, records management. Notwithstanding the foregoing third-parties, also to be considered are software providers, various vendors, and business partners. Training may also be necessary for these service providers and agents!

All the starting-point reviews in the world will lead to little or no action throughout an organization where certain training needs are not being met. Therefore, from the outset, it is critical to consider what training will be necessary for loan officers, secondary marketing, processing, compliance, and quality control personnel. Any staff involved at critical junctures in the loan flow process should receive training, certainly anyone who approves, processes, or monitors credit transactions.

For the remainder of this article, I will outline the key questions that should be asked, the answers to which will determine the extent, depth, and integrity of a culture of compliance. I am going to take you through a set of questions that will form the basis of a self-assessment. This type of internal review should be undertaken in order to set a baseline and determine progress towards compliance with mortgage acts and practices, and certainly the new mortgage rules.[iii] During any such evaluation, keep in mind that this is a due diligence process which is subject to an institution’s size, products offered, risk mitigation, complexity, and overall strength of the existing compliance management system.

Fair Lending Compliance, Ability-to-Repay and Qualified Mortgages

On October 22, 2013, the Consumer Financial Protection Bureau (Bureau), Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA) (collectively, the Agencies) issued a statement in response to inquiries from creditors about whether they would be liable under the disparate impact doctrine of the Equal Credit Opportunity Act (ECOA) [15 U.S.C. 1691 et seq., and its implementing regulation, Regulation B, 12 C.F.R. Part 1002] by originating only Qualified Mortgages as defined under the Bureau's recent Ability-to-Repay and Qualified Mortgage Standards Rule (ATR Rule). The ATR Rule implements provisions of the Truth in Lending Act (TILA).[1]

The Agencies' general approach and expectations regarding fair lending, including the disparate impact doctrine, are summarized in prior issuances.[2]

The Agencies state that they are issuing this statement to describe some general principles that will guide supervisory and enforcement activities with respect to entities within their jurisdiction as the Ability-to-Repay Rule takes effect in January 2014. Per the Agencies, the requirements of the Ability-to-Repay Rule and ECOA are compatible. ECOA and Regulation B promote creditors acting on the basis of their legitimate business needs.[3]

Therefore, the Agencies do not anticipate that a creditor's decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution's fair lending risk.

The Bureau's Ability-to-Repay Rule implements provisions of the Dodd-Frank Act that require creditors to make a reasonable, good faith determination that a consumer has the ability to repay a mortgage loan before extending the consumer credit.[4] TILA and the Ability-to-Repay Rule create a presumption of compliance with the ability-to-repay requirements for certain "Qualified Mortgages," which are subject to certain restrictions as to risky features, limitations on upfront points and fees, and specialized underwriting requirements.

Consistent with the statutory framework, there are several ways to satisfy the Ability-to-Repay Rule, including, according to the Agencies, making responsibly underwritten loans that are not Qualified Mortgages.

The Bureau does not believe that it is possible to define by rule every instance in which a mortgage is affordable for the borrower. Nonetheless, the Agencies are recognizing that some creditors might be inclined to originate all or predominantly Qualified Mortgages, particularly when the Ability-to-Repay Rule first takes effect. The Rule includes transition mechanisms that encourage preservation of access to credit during this transition period.

Furthermore, according to the issuance, the Agencies expect that creditors, in selecting their business models and product offerings, would consider “demonstrable factors” that may include credit risk, secondary market opportunities, capital requirements, and liability risk. The Ability-to-Repay Rule does not dictate precisely how creditors should balance such factors, nor do either TILA or ECOA. Consequently, as creditors assess their business models, the Agencies are clearly stating they understand that implementation of the Ability-to-Repay Rule, other Dodd-Frank Act regulations, and other changes in economic and mortgage market conditions have real world impacts and that creditors may have a legitimate business need to fine tune their product offerings over the next few years in response.

Importantly, the Agencies seem to be recognizing that some creditors' existing business models are such that all of the loans they originate will already satisfy the requirements for Qualified Mortgages. An example given is where a creditor has decided to restrict its mortgage lending only to loans that are purchasable on the secondary market might find that - in the current market - are Qualified Mortgages under the transition provision. Thereby giving Qualified Mortgage status to most loans that are eligible for purchase, guarantee, or insurance by Fannie Mae, Freddie Mac, or certain federal agency programs.

With respect to any fair lending risk, the Agencies claim that situation here is not substantially different from what creditors have historically faced in developing product offerings or responding to regulatory or market changes. The decisions creditors will make about their product offerings in response to the Ability-to-Repay Rule are similar to the decisions that creditors have made in the past with regard to other significant regulatory changes affecting particular types of loans.

An example provided is where some creditors may have decided not to offer "higher-priced mortgage loans" after July 2008 (viz., following the adoption of various rules regulating these loans or previously decided not to offer loans subject to the Home Ownership and Equity Protection Act after regulations to implement that statute were first adopted in 1995). There were no ECOA or Regulation B challenges to those decisions.

Inevitably, creditors should continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring their policies and practices and implementing effective compliance management systems. As with any other compliance matter, individual cases will be evaluated on their own merits.

The OCC, the Board, the FDIC, and the NCUA believe that the same principles described above apply in supervising institutions for compliance with the Fair Housing Act (FHA), 42 U.S.C. § 3601 et seq., and its implementing regulation, 24 C.F.R. Part 100.[5]

---

[1] See http://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z/. Disparate impact is one of the methods of proving lending discrimination under ECOA. See 12 C.F.R. pt. 1002 & Supp. I.
[2] For instance, in 1994, eight federal agencies published the Policy Statement on Discrimination in Lending, 59 Fed. Reg. 18,266 (Apr. 15, 1994), and last year the Bureau issued a bulletin on lending discrimination, CFPB Bulletin 2012-04 (Fair Lending) (Apr. 18, 2012). In addition, the OCC, Board, FDIC, NCUA, and Bureau each have fair lending examination procedures.
[3] Even where a facially neutral practice results in a disproportionately negative impact on a protected class, a creditor is not liable provided the practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. See 12 C.F.R. §1002.6; 12 C.F.R. pt. 1002, Supp. I, § 1002.6, ¶ 6(a)-2.
[4] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1411, 124 Stat. 1376, 2142 (2010) (codified at 15 U.S.C. § 1639c).
[5] The OCC, Board, FDIC, and the NCUA have supervisory authority as to the FHA.

CFPB’s Mortgage Rules for Readiness

The just released 2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide (Guide) from the Consumer Financial Protection Bureau (CFPB) provides, finally, a set of criteria and preparation procedures for residential mortgage lenders and originators. It is Version 1.0 and, like previously issued guides and manuals, the CFPB will update the Guide periodically, using the results from its field examinations to further enhance the audit methodologies.

Note that it is called a “Readiness Guide.” Such documents are not meant to be, and are not, conclusive. Such guides are expected to be sign posts leading the way, a means by which a company may learn of the priorities and exigencies of a regulator’s oversight functions. In other words, as the Guide itself declaims: “The Guide summarizes the mortgage rules finalized by the CFPB in January 2013, but it is not a substitute for the rules.”

To put a finer point on the use of the Guide, please always remember that only the rules and their official interpretations can provide complete and definitive information regarding their requirements.*

These rules can be found at http://www.consumerfinance.gov/regulatory-implementation/.

Each rule in the Guide also includes a hyperlink with additional information, which includes Small Entity Compliance Guides that may make the rule easier to digest. There are links to videos outlining the main elements of the rule. Furthermore, a convenient hyperlink compendium structure is embedded in the Guide, so that the rule headings are themselves hyperlinks directing the reader to the rule-specific CFPB website page.

_____________________________________________________________________________

IN THIS ARTICLE

Sections of the Guide

Summary of the Rules

Questionnaire

Library

_____________________________________________________________________________

SECTIONS OF THE GUIDE

The Guide consists of the following sections:

Part I: Summary of the Rules
Part II: Readiness Questionnaire
Part III: Frequently Asked Questions
Part IV: Tools

Part I (Summary of the Rules) contains an outline of the eight final rules issued in January 2013 concerning mortgage markets in the United States pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) Public Law 111-203, 124 Stat. 1376 (2010) (2013 Title XIV Final Rules).

The rules amend several existing regulations, including Regulation Z, X, and B. Throughout the year, CFPB expects to provide updates to the rules where necessary. Updates will be posted, along with summaries of the changes, on the regulatory implementation CFPB webpage.

The questionnaire in Part II (Readiness Questionnaire) is '”not intended” to encompass all details of a comprehensive compliance program. This should not be interpreted to mean that the questionnaire is a replacement for the examination procedures or regulations. It is intended to serve as a guide in preparing for implementation of the mortgage rules and in performing a self-assessment. Thus, the questionnaire should be used as a self-assessment in determining a company’s progress towards compliance with the new mortgage rules. The questionnaire contains twenty-nine self-assessment questions and numerous subsections. Do not confuse the questionnaire with a proxy examination tool: it will not be added to the Examination Manual. The CFPB views the questionnaire as a “voluntary guide” for preparation. I have no doubt that it will be used by management in their discussions with examiners. The extent of those discussions may be determined by the institution’s size, products offered, risk mitigation, risk profiles, and other factors, such as the overall strength of the compliance management system.

Social Media Compliance: Frequently Asked Questions

Last month, I discussed some of the salient compliance requirements associated with using Social Media.* Then, a few days later, I offered to you my article, entitled Social Media and Networking Compliance. This month, on March 6th, I was one of three presenters who gave a webinar for American Banker on Social Media, with special reference to the new rules of the Federal Financial Institutions Examination Council (FFIEC). The proposed rule, issued January 23rd, is entitled "Social Media: Consumer Compliance Risk Management Guidance."

My webinar topic: Social Media – Employee Manual. 

The webinar was very well attended by a diverse cross-section of financial institutions. I found it quite interesting that, when polled during the webinar, by a factor of two to one these companies did not have an Employee Manual, even if about a third of them have policies and procedures relating to Social Media.

I have harped on a certain point regarding policy statements, so here it goes again: policies and procedures are a rather abstract concept to employees; employee manuals, however, for certain rules and regulations, are the most effective means to ensure compliance. Training is an important and an ancillary tool, but employees do not always mentally retain training information. Keep this in mind: an employee manual is a constant reminder of a company's expectations and policies.

One aspect of social media that deserves considerable attention is trolling, using anonymity, and general blogging guidelines. Everybody knows that, for the most part, blogging is electronically available to the public. However, with regard to an individual's employment with a financial institution, what restrictions should be placed on an employee who blogs? From my own research and experience, it would seem that many employees actually have no idea of the implications, requirements, and, in some cases, the potential to easily cross over into violations of federal law or state law.

Here are the risks at stake in social media networking and blogging - though by no means less so for forms of advertising through and use of social media: financial risk, regulatory risk, sales risk, reputation risk, legal risk, strategic risk, and operational risk, such as adverse consequences to business plans, projects, Internet Technology and Information Security protections, and many core departmental functions.

In this article, I will offer a high level FAQs about the use of Social Media (SM), with some additional emphasis on blogging. I will also provide bulleted guidelines to give to employees.

________________________________________________

What is Social Media?

SM is a form of interactive online communication in which users can generate and share content through text, images, audio and/or video.

________________________________________________

Do companies use Social Media?

HubSpot found that by November 2012 companies that blog incurred an average of 55% more visitors to their sites than companies that did not blog. Statistically, blogging companies may generate 97% more external website links and 434% more indexed pages, both of which are critical to a company’s search rank. And a global survey by McKinsey of approximately 1,700 corporate executives finds that 69% of respondents claim measurable advantages from social media, including a lower cost of doing business, better access to knowledge, increased marketing effectiveness, insight for developing more innovative products and services, and higher revenues.

________________________________________________

Does SM cover micro-blogging?

SM includes, but is not limited to, micro-blogging sites (i.e., Facebook, Google Plus, MySpace, and Twitter); forums, blogs, customer review websites and bulletin boards (i.e., Yelp); photo and video sites (i.e., Flickr and YouTube); sites that enable professional networking (i.e., LinkedIn); virtual worlds (i.e., Second Life); and social games (i.e., FarmVille and CityVille).

________________________________________________

How do some financial institutions use SM?

SM has been used to receive and respond to complaints, provide loan pricing, and offer generic information about products and services.

________________________________________________

Social Media and Networking Compliance

When you think of advertising, do you include social media? These days, most of you do!

However, social media compliance - which I shall call "SMC" - is a considerable undertaking, far more involved than just issuing a policy and procedure. Often, implementing SMC includes working with internet technology and information security professionals, collaborating with sales, compliance, legal, marketing, and human resources personnel, and ensuring that virtually all employees understand their own obligations with respect to using internet communications.

We have drafted SMC policy statements that call for constant vigilance by management and appointed staff to monitor for and find the appropriate remedies to transgressions relating to use of a company's name, logo, products, and services, in casual and even formal social media interactions.

Recently, Federal Financial Institutions Examination Council (FFIEC) issued a request for comments, entitled Social Media: Consumer Compliance Risk Management Guidance ("Notice"). FFIEC issued this notice on behalf of its six members, Office of the Comptroller of the Currency (OCC); the Board of Governors of the Federal Reserve System (Board); the Federal Deposit Insurance Corporation (FDIC); the National Credit Union Administration (NCUA); the CFPB (collectively, the "Agencies"); and the State Liaison Committee (SLC). Succinctly put, whatever the federal agencies eventually adopt, the states will issue the final guidance as a supervisory guidance not only to the institutions that are, by extension, under its supervision but also through the State Liaison Committee, thereby encouraging state regulators to adopt the guidance.

This means that institutions will be expected to use the forthcoming guidance in their efforts to ensure that their policies and procedures provide oversight and controls commensurate with the risks posed by their social media activities. State agencies that adopt the guidance will expect the entities that they regulate to use the guidance in their efforts to ensure that their risk management and consumer protection practices adequately address the compliance and reputation risks raised by activities conducted via social media.

In this article, I will consider certain features of FFIEC's social media Notice as well as some important subjects to be addressed in constructing an SMC policy and procedure.*

_______________________________________________________

IN THIS ARTICLE

Defining Social Media

Use of Social Media

Risks of Social Media

Risk Management

Risk Areas

Laws and Regulations

Major Risks

Policy and Procedures

_______________________________________________________

Defining Social Media

Social media has been defined in a number of ways. For purposes of the proposed guidance, the Agencies consider social media to be a form of interactive online communication in which users can generate and share content through text, images, audio, and/or video.

Social media can take many forms, including, but not limited to, micro-blogging sites (i.e., Facebook, Google Plus, MySpace, and Twitter); forums, blogs, customer review Websites and bulletin boards (i.e., Yelp); photo and video sites (i.e., Flickr and YouTube); sites that enable professional networking (i.e., LinkedIn); virtual worlds (i.e., Second Life); and social games (i.e., FarmVille and CityVille).

A simple test to distinguish social media from other online media in that the social media communication tends to be more interactive.

_______________________________________________________

Use of Social Media

Financial institutions use social media in a variety of ways, including marketing, providing incentives, facilitating applications for new accounts, inviting feedback from the public, and engaging with existing and potential customers.

For instance, social media has been used to receive and respond to complaints. They have been used to provide loan pricing. Since this form of customer interaction tends to be informal and occurs in a less secure environment, it presents some unique challenges to financial institutions.

CFPB: Compliance Management System

On October 31, 2012, the CFPB issued its first issue of Supervisory Highlights: Fall 2012, a newsletter to the public and the financial services industry about its examination program, including the concerns that it finds during the course of its completed work, and the remedies that it has obtained for consumers who have suffered financial or other harm.

It is written as an Executive Summary, and it will not refer to any specific institution. But it will "signal to all institutions the kinds of activities that should be carefully scrutinized for compliance with the law."

According to the CFPB, it has already taken non-public supervisory actions against financial institutions participating in the credit card, credit reporting, and mortgage markets, confirming "remedial relief" to 1.4 million consumers, and causing the affected financial institutions to correct illegal practices. Importantly, and in consequence to the CFPB's examinations and actions, financial institutions were required to adopt effective policies and procedures to ensure that violations do not recur and, especially, mandating that they implement a robust Compliance Management System (CMS). 

The CFPB maintains that an effective CMS is a "critical component of a well-run financial institution."

After a brief discussion about the CMS concept, I should like to outline these three significant findings derived from the CFPB's examinations:

- Comprehensive CMS Deficiencies Found Through CFPB Supervisory Activities

- Deficiencies Related to Failure to Oversee Affiliate and Third-party Service Providers

- Deficient Fair Lending Compliance Programs

___________________________________________________

IN THIS ARTICLE

Compliance Management System

Comprehensive CMS Deficiencies

Failure to Oversee Affiliate and Third-party Service Providers

Deficient Fair Lending Compliance Programs

Library

___________________________________________________

Compliance Management Systems

I consider the term Compliance Management System to be a proxy for the term mortgage risk management. Our firm was founded on the premise that such risk management was the best way to ensure a financial institution's safety and soundness with respect to mortgage banking. At the time, there was only the term "risk management", a catch-all term that was overly broad. So I coined the term "mortgage risk management" to bring mortgage compliance into greater focus, expertise, and application.

Over the years, the prudential regulators and state banking departments have included much guidance in preparedness for their mortgage banking examinations. And now the CFPB has further elaborated the crucial and central importance of managing risk and examination readiness. As recently as July 2012, I published a magazine article about The Rules of Operational Risk, in order to bring into strong relief the practical matters and unique circumstances of mortgage risk management.

The CFPB's conception of a well-conceived CMS is certainly consistent with the foundational features of mortgage risk management.

Both the CFPB and mortgage risk management require effective internal controls and oversight, training, internal monitoring, consumer complaint response, independent testing and audit, third-party service provider oversight, recordkeeping, product development and business acquisition, and marketing practices.

Mortgage risk management and the CMS both expect the development, maintenance, and integration of mortgage compliance practices across a financial institution's framework and applied to its entire loan product and service lifecycle.

As the CFPB states:

"Without such a system, serious and systemic violations of Federal consumer financial law are likely to occur. Further, a financial institution with a deficient CMS may be unable to detect its own violations. As a result, it will be unaware of resulting harm to consumers, and will be unable to adequately address consumer complaints."

__________________________

Comprehensive CMS Deficiencies

The CFPB has issued findings for financial institutions lacking an effective CMS across the entire consumer financial portfolio, or in which the company failed to adopt and follow comprehensive internal policies and procedures. In these instances, the finding held that this condition resulted in "a significant breakdown in compliance and numerous violations of Federal consumer financial law."

The corrective action required an adopting of appropriate policies and procedures, and establishing an effective CMS to ensure legal compliance, which had to include the "enhancement" of financial institutional regulatory knowledge and expertise to help ensure proper monitoring of business activities and prompt identification of potential risks to consumers.

In this regards, educating about and training employees in a company's policies and procedures should be fully implemented and routinely followed. I suggest a schedule of on-going education and training modules, given to both new hires and all active, affected personnel.

Keep in mind that the CFPB will exam not only the policies and procedures and their communication to employees but also management's inclination to be proactive or passive, preemptive or complacent, knowledgeable or disinterested. According to the CFPB, a financial institution’s CMS is “inadequate” where appropriate policies have been adopted, but management fails to take measures to ensure compliance with those policies.

In a typical CMS examination, the CFPB evaluates both the understanding and application of the financial institutions’ compliance management program by its managers and employees. The CFPB has stated that it has found "one or more situations in which the financial institution had articulated many elements of an appropriate compliance policy, but the policy was not followed."

Fair Lending Compliance - Some Red Flags

The Consumer Financial Protection Bureau (CFPB) will make Fair Lending a focus of its examinations.

I have written extensively on these examinations.*

Our firm is committed to providing comprehensive audit and due diligence reviews in preparation for the CFPB's Nonbank and Bank Supervision and Examination. 

And my firm has offered, freely, a CFPB Compendium of all parts and each section of the Examination Manual.

Our Compendium provides:

• Directory: All Sections
• Contents: Links to Compendium Text
• Contents: Links to CFPB Website Text

CLICK HERE TO REQUEST THE CFPB COMPENDIUM!

In preparing our Audit and Due Diligence procedures for our clients, we have combined all three parts into a single Directory with links to each section's CFPB Compendium texts and CFPB's website texts. There are over 700 pages in this CFPB Compendium.

A central feature of the CFPB exam is the review of a company's Fair Lending compliance.

In preparing your firm for a CFPB examination, it is important to explore how Fair Lending is practiced by your firm.

The term "Fair Lending" has been around for many years and is used as a catch-all phrase for several regulatory compliance requirements.

Let's consider four areas affecting Fair Lending compliance - areas to which financial institutions sometimes do not give sufficient consideration.

I will provide a brief list, grouped by category, and suggest some potential risks that should be considered.

The list is not meant to be comprehensive - I have chosen just four categories - but this exercise should guide you toward expanding the scope of your Fair Lending initiatives.

Please keep in mind that state banking department examiners and federal prudential regulators will also look for these potential infractions when conducting examinations.

IN THIS ARTICLE

Redlining
Pricing
Underwriting
Maternity Leave

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Redlining

Some Potential Risks

• Community Reinvestment Act (CRA) assessment areas do not comply with Regulation BB and/or exclude minority areas.
• Branches and expansion plans disfavor minority neighborhoods.
• Marketing strategies exclude minority geographies.
• Complaints about redlining by consumers or community advocates.

Pricing

Some Potential Risks

• Overages, fees, yield spread premiums, and pricing exceptions.

• Lack of specific guidelines for pricing (including exceptions).

• Use of risk-based pricing that is not based on objective criteria or applied consistently.

• Broad pricing discretion, such as through overages, underages, or yield spread premiums.

• Lack of clear documentation of reasons for pricing decisions (including exceptions).

• Lack of monitoring for pricing disparities.

• Financial incentives for loan originators to charge higher prices.

• Pricing policies or practices that treat applicants differently on a prohibited basis or have a disparate impact.

• Loan programs that contain only borrowers from a prohibited basis group.Complaints about pricing by consumers or community advocates.

Underwriting

Some Potential Risks

• Stricter underwriting policies, such as tighter credit standards in certain specific geographic markets.
• Lack of specific underwriting policies for Fair Lending risk, including both disparate treatment and disparate impact discrimination.
• Lack of monitoring and/or policies to manage disparate impact risks caused by varying origination channels or geographic areas.

Maternity Leave

Regulation B, the implementing regulation of the Equal Credit Opportunity Act (ECOA), prohibits using assumptions related to the likelihood that any group of persons will rear children or will, for that reason, receive diminished or interrupted income in the future.

Some Potential Risks

• Assuming that a woman will not return to work after childbirth.
• Not implementing underwriting policies that treat applicants on maternity or parental leave and applicants on other types of leave similarly.
• Failing to consider the requirements for verifying the income of an applicant on maternity or parental leave.
• Failing to review and respond to complaints by consumers who were on maternity or parental leave at the time of the loan application.
• Not incorporating remedies into a policy statement regarding maternity or parental leave.

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Consumer Financial Protection Bureau

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* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

CFPB Issues Supervision and Examination Manual

On October 13, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Supervision and Examination Manual - Version 1.0 (Manual). This is the first edition of a guide devoted to how the CFPB will supervise and examine consumer financial service providers under its jurisdiction for compliance with Federal consumer financial law.

The Manual is divided into three parts:

Part 1: Describes the supervision and examination process.

Part 2: Contains examination procedures, including both the general instructions and the procedures for determining compliance with specific regulations.

Part 3: Provides templates for documenting information related to supervised entities and the examination process, including examination reports.

Unfortunately, at this time Part 1 and Part 2 are only available as website pages. Part 3 is available in PDF.

However, we have created a Directory and Compendium.

At this time, Part 1 and Part 2 are only available as website pages.

Part 3 is available in PDF.

In preparing our Audit and Due Diligence procedures for our clients, we have combined all three parts into a single Directory with links to each section's text and website links. There are over 700 pages in this compendium.

Our compendium provides:

• Directory: All Sections
• Contents: Links to Compendium Text
• Contents: Links to CFPB Website Text

We are pleased to share this compilation with you for free.

Due to the huge size of the compendium - over 13 MBs - it must be downloaded from our secure Extranet. If you are interested in obtaining this compendium, please request it and we'll send you the download instructions.

Supervision and Examination Manual - Version 1.0

OUTLINE

Part I - Compliance Supervision and Examination

Supervision and Examination Process
    Overview
    Examinations

Part II - Examinations Procedures
Compliance Management Review

Unfair, Deceptive or Abusive Acts or Practices
    Narrative
    Examination Procedures

Equal Credit Opportunity Act
    Narrative
    Examination Program
    Interagency Fair Lending Examination Procedures
    Interagency Fair Lending Examination Procedures – Appendix

Home Mortgage Disclosure Act
    Narrative
    Examination Procedures
    Home Mortgage Disclosure Act Checklist

Truth in Lending Act
    Narrative
    Examination Procedures
    Appendix A: High-Cost Mortgage (§ 226.32) Worksheet

Real Estate Settlement Procedures Act
    Narrative
    Examination Procedures
    Checklist

Homeowners Protection Act
    Narrative
    Examination Procedures

Consumer Leasing Act
    Narrative
    Consumer Leasing Act Examination Procedures
    Consumer Leasing Act Checklist

Fair Credit Reporting Act
    Narrative
    Examination Procedures

Fair Debt Collection Practices Act
    Narrative
    Examination Procedures

Electronic Fund Transfer Act
    Narrative
    Examination Procedures
    Checklist

Truth in Savings Act
    Narrative
    Examination Procedures
    Checklist

Privacy of Consumer Financial Information (GLBA)
    Narrative
    Examination Procedures
    Examination Procedures Attachment
    Checklist

Mortgage Servicing Examination Procedures

Part III - Examination Process Templates
    Templates
    Entity Profile
    Risk Assessment
    Supervision Plan
    Examination Scope Summary
    Examination Report
    Examination Report cover
    Examination Report cover letter

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Consumer Financial Protection Bureau

Supervision and Examination Manual
Version 1.0
Announcement

October 13, 2011

Adverse Action and Risk-Based Disclosures (Final Rules)

On July 6, 2011, the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) jointly issued final rules (Rules) to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Our previous notification relating to this rule was on 7/7/11, on 3-2-11, and 1-3-11.

The Rules amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements. 

If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).

The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.

REGULATION B (ECOA)

Adverse Action Notice

Section 701 of the Equal Credit Opportunity Act (ECOA) requires a creditor to notify a credit applicant when it has taken adverse action against the applicant. The ECOA adverse action requirements are implemented in the FRB's Regulation B.

Section 615(a) of the Fair Credit Reporting Act (FCRA) also requires a person to provide a notice when the person takes an adverse action against a consumer based in whole or in part on information in a consumer report.

Certain model notices in Regulation B include the content required by both the ECOA and the FCRA adverse action provisions, so that creditors can use the model notices to comply with the adverse action requirements of both statutes.

The FRB is amending these model notices in Regulation B to include the disclosure of credit scores and related information if a credit score is used in taking adverse action.

The revised model notices reflect the new content requirements in section 615(a) of the FCRA as amended by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Effective: August 15, 2011

REGULATION V (FCRA)

Fair Credit Reporting Risk-Based Pricing Regulations 

On January 15, 2010, the Board and the Commission published final rules to implement the risk-based pricing provisions in section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the Fair Credit Reporting Act (FCRA).

The final rules generally require a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor.

The FRB and the Commission are amending their respective risk-based pricing rules to require disclosure of credit scores and information relating to credit scores in risk-based pricing notices if a credit score of the consumer is used in setting the material terms of credit.

These final rules reflect the new requirements in section 615(h) of the FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Effective: August 15, 2011

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Equal Credit Opportunity
Regulation B
Adverse Action Notice
FRB: 12 CFR Part 202
Final Rule
July 15, 2011

Fair Credit Reporting
Regulation V
Fair Credit Reporting Risk-Based Pricing Regulations
FRB: 12 CFR Part 222
FTC: 16 CFR Parts 640 and 698
Final Rules
July 15, 2011

FRB and FTC: Credit Score Disclosure - Final Rules

On July 6, 2011, the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) jointly issued final rules (Rules) to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Our previous notifications relating to this rule were on 1-3-11, and 3-2-11.

If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).

The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.

The Rules also amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements.

The rules under Regulations V and B are effective 30 days after the date of publication in the Federal Register, which is expected soon.

Effective Date: July 21, 2011

 REGULATION V

The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.

Section 1100F of the Dodd-Frank Act (Dodd-Frank) amends section 615(h) of the FCRA to require that additional content be disclosed to consumers in risk-based pricing notices; specifically, if a credit score is used in making the credit decision, the creditor must disclose that score and certain information relating to the credit score.

Rulemaking authority for the risk-based pricing provisions of the FCRA, including the amendments prescribed by section 1100F of the Dodd-Frank, will not be vested in the Consumer Financial Protection Bureau until the date that the section 1100F amendments become effective.

 REGULATION B

The Rules also amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements.

Section 1100F of the Dodd-Frank Act amends section 615(a) of the FCRA to require creditors to disclose on FCRA adverse action notices a credit score used in taking any adverse action and information relating to that score.

The FRB is issuing revised model adverse action notices substantially as proposed, and revised to the extent necessary for the adverse action model notices in Regulation B to be consistent with the requirements of section 1100F of the Dodd-Frank.

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 FRB: 12 CFR Part 222, Regulation V and
FTC: 16 CFR Parts 640 and 698
Fair Credit Reporting Risk-Based Pricing Regulations
July 6, 2011

 FRB: 12 CFR Part 202, Regulation B
Equal Credit Opportunity
Final Rule
July 6, 2011

Risk-Based Pricing and Adverse Action Disclosures

On March 1, 2011, the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) proposed regulations regarding the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The statute requires creditors to disclose credit scores and related information to consumers in risk-based pricing and adverse action notices under the Fair Credit Reporting Act (FCRA), if a credit score was used in setting the credit terms or taking adverse action.

We recently notified you about the required implementation of risk-based pricing rules, effective January 1, 2011. Our Newsletter archive contains additional, related information.

Public comments on the proposed rules under Regulations V and B are due 30 days after publication in the Federal Register, which is expected shortly.

Regulation V

The FRB and FTC have proposed amending Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices and to add related model forms to reflect the new credit score disclosure requirements.

Specifically, the FRB and the FTC propose to amend their respective risk-based pricing rules to require disclosure of credit scores and information relating to credit scores in risk-based pricing notices if a credit score of the consumer is used in setting the material terms of credit. (These proposed amendments reflect the new requirements in section 615(h) of the FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.)

Regulation B

The FRB proposed amending certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for both Regulation B and the FCRA. The proposed amendments would revise the model notices to incorporate the new credit score disclosure requirements.

Specifically, certain model notices in Regulation B include the content required by both the ECOA and the FCRA adverse action provisions, so that creditors can use the model notices to comply with the adverse action requirements of both statutes. The FRB proposes to amend these model notices in Regulation B to include the disclosure of credit scores and information relating to credit scores if a credit score is used in taking adverse action. (These proposed amendments reflect the new content requirements in section 615(a) of the FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.)

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FRB and FTC: Fair Credit Reporting Risk-Based Pricing Regulations,
Notice of Proposed Rulemaking, March 1, 2011
FRB: Equal Credit Opportunity,
Notice of Proposed Rulemaking, March 1, 2011