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CFPB Issues Supervisory Report Addressing ‘Unfair’ Coding Errors, Other Issues

The federal Consumer Financial Protection Bureau (CFPB) recently issued its “Supervisory Highlights – Issue 12, Summer 2016” report, focusing attention on automobile origination, debt collection, mortgage origination, small dollar lending, fair lending, and remedial actions, reflecting supervisory activity generally completed between January 2016 and April 2016.

The CFPB reported deficiencies in Compliance Management Systems and other software-related systems in various industries.  The Bureau also emphasized the ECOA “special purpose credit programs” found at various lenders, noting that it “generally takes a favorable view of conscientious efforts that institutions may undertake to develop special purpose credit programs to promote extensions of credit to any class of persons who would otherwise be denied credit or would receive it on less favorable terms.”

A copy of the report is available at:  Link to Report.

Automobile Origination

Add-On Gap Coverage Products:  The CFPB reports that “one or more auto lenders deceptively advertised the benefits of their gap coverage products, leaving the impression that these products would fully cover the remaining balance of a consumer’s loan in the event of vehicle loss,” when in fact “the product only covered amounts below a certain loan to value ratio.”

Disclosure of Payment Deferral Terms:  The CFPB also reports that “one or more auto lenders engaged in a deceptive practice by using a telephone script that created the false overall net impression that the only effects of taking advantage of a loan deferral would be to extend the maturity of the loan and to accrue interest during the deferral, but omitted informing consumers that the subsequent payment would be applied to the interest earned on the unpaid amount financed from the date of the last payment received from the consumer,” which “could result in the consumer paying more finance charges than originally disclosed.”

Debt Collection

Widespread Coding Errors:  The CFPB reports finding numerous instances in which debt sellers “sold thousands of debts that did not properly reflect that: (1) the accounts were in bankruptcy, (2) the debt sellers had concluded the debts were products of fraud, or (3) the accounts had been settled in full.”  In the CFPB’s view, this is an “unfair” practice.

Misleading Statements Regarding Payment Options:  The CFPB also reports finding numerous instances of representations regarding payment options that conflicted with the collectors’ own policies.  For example, the CFPB found instances in which “collectors falsely represented to consumers that a down payment was necessary in order to establish a repayment arrangement, when the collectors’ policies and procedures included no such requirement,” or “falsely represented that the only option for repayment was using a checking account, when the debt collectors’ policies and procedures did not limit repayment to checking accounts.”

Mortgage Loan Origination

Effect of Discount Credits:  The CFPB reports that “[o]ne or more institutions incorrectly calculated the amount financed on loans with discount credits, and subsequently incorrectly calculated the finance charge on the same loans,” resulting in “a negative finance charge and an amount financed that exceeded the stated loan amount.”

AfBAs:  The CFPB reports finding “affiliated business arrangements” that did not fully meet the requirements of RESPA, such as providing a referral and requiring the use of an affiliated provider of flood determination and tax services.  The CFPB noted that “[t]he majority of consumers who received the incorrect ABA disclosure did not pay the fees charged by the affiliated service provider as these fees were lender paid.”

FCRA Adverse Action Notices:  The CFPB reports finding that “[o]ne or more institutions took adverse action based on information in consumer reports but failed to make the required disclosures.”

Interest Disclosures for Interest-Only Loans:  The CFPB reports finding that “[o]ne or more institutions offering interest-only bridge loans failed to accurately disclose the interest payment because it erroneously included a portion of the monthly payment amount that was to be applied to fees financed into the principal balance.”

Small Dollar Lending

Pre-Authorized EFT Disclosures:  The CFPB reports finding installment loan agreements that “failed to set out an acceptable range of amounts to be debited, in lieu of providing individual notice of transfers of varying amounts.”

Fair Lending

HMDA Coding:  The CFPB reports finding instances where “after issuing a conditional approval subject to underwriting conditions, the institutions did not accurately report the action taken on the loans or applications.”

Providing an example, the CFPB notes finding instances in which the lenders “issued a conditional approval subject to the applicants meeting underwriting conditions, and then the applicants withdrew their applications before the institutions made a credit decision, the institutions incorrectly coded the action taken as ‘Application denied’ (Code 3) or ‘File closed for incompleteness’ (Code 5) instead of ‘Application withdrawn’ (Code 4).

As another example, the CFPB notes finding instances in which the lenders “incorrectly coded the action taken as ‘Application approved but not accepted’ (Code 2) instead of ‘Application denied’ (Code 3) after the applicants failed to respond to a conditional approval subject to the applicants meeting underwriting conditions,” and the lenders “did not send the applicants either a written notice of incompleteness or an adverse action notice as required by Regulation B.”

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Ralph Wutscher's practice focuses primarily on representing consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. He represents the lending and financial services industry as a litigator, and as regulatory compliance counsel. For more information, see