National Association of Federal Credit Unions Fair Lending Training (Part II)

Transcription

1 National Association of Federal Credit Unions Fair Lending Training (Part II) April 23, 2014 Jeremiah S. Buckley, Partner Lori J. Sommerfield, Counsel

2 Order of Presentation Key Players in Fair Lending Supervision, Examination and Enforcement CFPB and NCUA: Fair Lending Supervision & Examination Process and Trends 10 Lessons Learned in the Examination Process Q&A 2

3 3 Key Players in Fair Lending Supervision, Examination and Enforcement

4 Key Players National Credit Union Administration ( NCUA ) supervises and examines federal credit unions with assets of less than $10 billion The Consumer Financial Protection Bureau ( CFPB or Bureau ) supervises and examines credit unions with assets of $10 billion or more The CFPB has primary responsibility for enforcing ECOA and HMDA, as well as rulemaking authority Laws are enforced through the CFPB s Office of Supervision and Enforcement and Office of Fair Lending & Equal Opportunity U.S. Dept. of Housing & Urban Development ( HUD ) continues to retain primary responsibility for enforcing the Fair Housing Act Any pattern or practice of lending discrimination must be referred to U.S. Department of Justice ( DOJ ) 4

5 5 CFPB and NCUA: Fair Lending Supervision & Examination Process and Trends

6 CFPB: Fair Lending Supervisory Guidance CFPB Fair Lending Guidance Bulletin , Lending Discrimination (April 18, 2012) Bulletin , Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act (March 21, 2013) Bulletin , Home Mortgage Disclosure Act (HMDA) and Regulation C Compliance Management; HMDA Resubmission Schedule and Guidelines; and HMDA Enforcement (Oct. 9, 2013) Updates to CFPB Supervision & Examination Manual ECOA baseline review procedures (July 2013) HMDA resubmission schedule and guidelines (Oct. 2013) ECOA appraisal and valuation requirements (June 2013 and Jan. 2014) Mortgage origination and servicing procedures (Jan. 2014) 6

7 CFPB: Fair Lending Examinations Fair lending is a component of every CFPB examination Types of fair lending exams: ECOA baseline review ECOA targeted review HMDA review Bureau has its own set of examination procedures, but also temporarily adopt[s] Interagency Fair Lending Examination Procedures Risk-based prioritization process. Factors include: Fair lending complaints Public/private litigation Information from prior fair lending exams or enforcement actions Adequacy and quality of fair lending CMS Program Data analyses Institution-specific and horizontal Insights, information & research (CFPB Markets group) 7

8 CFPB: Fair Lending Examinations Changes to CFPB s examination process during 2013 Enforcement attorneys no longer part of on-site exam team Announced Oct. 9, 2013 Will continue to closely coordinate with examiners off-site Roll-up exams in progress; examination teams transferring to other institutions Responsible Conduct Guidelines Supervision/pre-enforcement Exam focus is both process- and product-oriented Compliance Management Systems ( CMS ) focus Board and management oversight Adequacy of written policies and procedures Complaint management Vendor management Products (risk-focused) 8

9 CFPB: CMS Program Expectations CFPB expectations for Fair Lending CMS: Fair lending policy statement; Regular fair lending training for all employees, officers and board; Ongoing monitoring for compliance with fair lending and other policies and procedures that are intended to reduce fair lending risk; Review of lending policies for potential disparate impact; Regular analysis of pricing and underwriting data for potential disparities on a prohibited basis; Regular assessment of the marketing of products; and Meaningful oversight of fair lending compliance by management and, where appropriate, the board of directors 9

10 CFPB: Product Focus Areas for 2014 Product focus areas for CFPB fair lending examinations during 2014: Mortgage origination and servicing Auto finance Credit cards Student loan servicing Access to credit generally 10

11 CFPB: Products - Mortgage Mortgage origination Discretionary exceptions to underwriting and pricing policies Redlining and CRA assessment areas Assessment of fees (including amount, timeline for collection, and circumstances for refunding) Policies and procedures governing, and communications to borrowers concerning, potential increases in payment obligations Cancellation of HELOCs, particularly in loss mitigation context Maternity and disability benefits discrimination HMDA data integrity Mortgage servicing Non-default servicing (payment processing, account maintenance, insurance) Default servicing (collections, loss mitigation, foreclosure) Foreclosure practices (vendor oversight, pre-referral review, sufficient workout efforts) Fair servicing, including discretion in loss mitigation 11

12 CFPB: Products Auto Finance Underwriting and pricing of auto loans Discretionary dealer mark-up of buy rate Dealer compensation (participation) Sales and marketing of auto loans Deceptive marketing and sales of add-on products Sale of extended warranties, extra insurance, and other ancillary products Disclosure and benefit of terms/prices for add-on products Evolving CFPB expectations include: Portfolio-level fair lending statistical analysis Strong push for flat fee dealer compensation Recommendations for dealer fair lending training Robust plan for dealer price monitoring program Consumer remediation, if appropriate 12

13 CFPB: Products Credit Cards Initial CFPB enforcement actions were against credit card companies for deceptive sales and marketing of products CFPB is now conducting targeted add-on products exams and credit card fair lending examinations Marketing and sales of products Disclosures and notices to borrowers regarding the products Handling of claims for applicable products, including rates for paying claims and reports for monitoring claims status Handling of cancellation and/or refund requests Compliance management, quality control, and product training Also focused on prepaid cards, GPRs, and affinity card relationships 13

14 CFPB: Student Loan Servicing Several initiatives in late 2013/early 2014 to address CFPB s significant concerns with student loan servicing. Examples: Annual Report of Student Loan Ombudsman (October 2013) Focus on payment allocation policies of private student lenders and loan servicers and sample letters to servicers and debt collectors Enforcement action against ITT Educational Services, Inc. for predatory lending tactics (Feb. 2014) Mid-year report on student loan complaints (April 2014) 2,300 private student loan complaints and more than 1,300 debt collection complaints related to student loans between Oct. 1, 2013 and March 31, 2014 Surprise defaults Revisions to education loan examination procedures (December 2013) Guidance on examination of student loan servicers who are already subject to CFPB supervision or servicers who are now subject to CFPB supervision as larger participants effective March 1, 2014 CFPB likely to begin immediately examining entities that qualify as larger participants 14

15 NCUA: Fair Lending Supervisory Guidance Renewed focus on fair lending by NCUA Fair Lending guidance issued last spring, beginning with NCUA Letter to Federal Credit Unions (13-FCU-02) dated March 2013 Fair Lending Examination Program (March 2013) Fair Lending Guide (March 2013) Fair Lending Compliance Best Practices overview (April 2013) Fair Lending Compliance FAQ (May 2013) NCUA is in the process of implementing guidance 15

16 NCUA: Fair Lending Supervisory Guidance Fair Lending Guide Useful in developing/evaluating fair lending compliance program Guide includes: Overview of fair lending laws and regulations Credit union operational requirements Issues to consider when developing a fair lending compliance program Checklists for testing compliance with laws and regulations or developing a fair lending policy Fair Lending Best Practices Develop written fair lending policies and procedures Identify risks by conducting periodic fair lending risk assessments Develop fair lending program based on results of risk assessment Stay current on fair lending developments Fair Lending FAQ Answers to commonly asked questions 16

17 NCUA: Fair Lending Examinations NCUA conducts fair lending exams separately from compliance exams Most federal credit unions are not selected for a fair lending examination Those federal credit unions that are selected for a fair lending exam must demonstrate the potential for higher fair lending risk through: HMDA data outliers; Call report data (e.g., rapid loan growth); Fair lending violations; General compliance risks; or Other factors Federal credit unions selected generally experienced fair lending baseline exams during

18 NCUA: Fair Lending Examinations NCUA conducted 24 fair lending exams during 2013; now conducting 2014 exams Goal is 25 exams and 50 off-site supervision contacts per year Limited resources to conduct more Federal credit unions generally notified by NCUA s Office of Consumer Protection ( OCP ) days in advance of examination Letter includes an items needed list, loan officer questionnaire, and request for information about products/services offered At conclusion of exam, federal credit union will receive a written exam report If federal credit union disagrees with exam report, may request review by OCP Director Cannot appeal findings because not considered a material supervisory determination 18

19 NCUA: Fair Lending Examinations In recent years, no public enforcement actions and no referrals to DOJ by NCUA NCUA is attempting to shift exam focus to look at fewer focal points in future to allow more time for deeper dive into discrete issues and comparative file analyses May result in more exam findings, enforcement actions and/or referrals to DOJ 19

20 NCUA: Off-Site Supervision Contacts Alternative to fair lending examination is risk-based offsite supervision contacts ( OSC ) New in 2013; also risk-based in approach Conducted off-site by NCUA analysts using CMS Program elements without transactional testing NCUA budgets 24 hours/3 days to complete an OSC Credit union receives items needed list in advance NCUA reviews HMDA LAR accuracy, policies and procedures, compliance assessments, resources, and budget for fair lending risk management OSC results in written and oral reports containing recommendations 20

21 NCUA: CMS Program Expectations NCUA generally uses same CMS Program elements as CFPB NCUA fair lending program expectations: Dedicated fair lending officer for large credit unions Fair lending policy (either stand-alone or integrated with lending policies) that addresses ECOA and Fair Housing Act requirements Regular fair lending training for employees, officers and board Periodic fair lending risk assessments Fair lending monitoring efforts, including, for example: Fair lending statistical analyses expected for large credit unions Second level review process for denied applications (preferably monthly) Monitoring of underwriting and pricing exception reports (preferably monthly) Compliance audits conducted independently from business (preferably quarterly) Board/management engagement in fair lending compliance oversight 21

22 Consumer Complaints Increased regulatory focus on consumer complaint management FHFA OIG Audit Report AUD (Mar. 21, 2013) CFPB examinations New CFPB RESPA Rules Expectations for consumer complaint management programs Written policies and procedures should Define complaint Capture complaints and inquiries at the first point of contact Complaints are addressed and resolved promptly Appropriate escalation of complaints involving potential consumer harm from discrimination or unfair treatment, or other regulatory compliance issues Complaint data rolled up for reporting purposes and analyzed for trends; should drive adjustments to business practices Vendor complaints must also be captured 22

23 Vendor Management Oversee vendors in a manner that ensures compliance with Federal consumer financial law, which is designed to protect the interests of consumers and avoid consumer harm Primary regulatory concern is vendors with customer contact First three CFPB enforcement actions involved failure to adequately oversee vendor performance Recent Federal Reserve Board and OCC guidance on assessing and managing risks related to third-party vendors, including: Adopting risk management processes for each vendor Comprehensive oversight/risk management for vendors engaged in critical activities Effective risk management throughout product life cycle Regulatory expectations for vendor management programs Risk assessment Initial due diligence Contracts Ongoing oversight 23

24 10 Lessons Learned in the Examination Process 24

25 No. 1: Large Credit Unions Will be Held to Big Bank Standards Credit unions with $10B or more in assets, or approaching that size, will be held to big bank fair lending standards in CFPB examination process But Bureau will provide grace period to grow into bank model Expectations by Bureau include: Dedicated fair lending officer Annual fair lending risk assessment Routine fair lending statistical analyses Evidence of board/management engagement in fair lending risk management (e.g., reports, minutes) Review CFPB examination procedures to understand expectations and process 25

26 No. 2: Organization is Critical CFPB informational, document and data requests are typically voluminous and business-line specific NCUA requests less so Maintain control over documents that will be disclosed to regulators Responses to the CFPB or NCUA should be centrally managed by legal, compliance or regulatory relationship manager ( RRM ) Ensure that all responses are internally consistent and also consistent with existing policies, procedures, and practices (insofar as those are up to date) 26

27 No. 3: Responses to First-Day/Items Needed Letter and Other Requests Manage CFPB and NCUA expectations regarding information and data requests before and during the examination Ensure that responses to first-day letter/items needed requests and all subsequent requests (either oral or written) made by regulators are as complete and accurate as possible Expect that Bureau may use information against the credit union to determine whether a fair lending violation has occurred Make best efforts to be responsive and timely 27

28 No. 4: Attorney-Client Privileged or Confidential Information The attorney-client privilege still applies in an examination context The CFPB should not ask credit union to turn over all attorney-client privileged materials in connection with examination CFPB rule (12 C.F.R ) indicates that submission of attorney-client privileged materials does not waive privilege But CFPB Bulletin (Jan. 4, 2012) states that Bureau will reserve such requests for situations where the information is material to the exam and cannot be practicably obtained from non-privileged sources Consult with legal counsel for advice before providing any privileged documents to CFPB 28

29 No. 5: Formal Presentations and Written Explanations Be prepared for the CFPB or NCUA examination team to request formal presentations on certain subjects May arise in connection with particular compliance risk issues or issues that are not easily explained through responses to the first-day letter Also expect to provide background on why certain policies or practices are legal, appropriate, fair or consistent with standard industry practices (e.g., UDAP/UDAAP concerns) 29

30 No. 6: Responding to Examiner Inquiries During or at the end of an examination, examiners may ask questions that may seem innocuous Take each question very seriously and answer them fully and accurately For CFPB, expect that answer may be shared with a broader audience within the Bureau and possibly in an enforcement context 30

31 No. 7: Notification of Potential Fair Lending Violations If a fair lending violation is suspected by the CFPB examination team, credit union may receive a Potential Action and Request for Response ( PARR ) letter If response to the PARR letter is unpersuasive, credit union will be referred to CFPB s Enforcement Division Depending on the nature and severity of the alleged violation, involvement by Enforcement Division tends to mean that an enforcement action or DOJ referral is imminent 31

32 No. 8: Coordination in Supervision & Enforcement Matters Remember that the DOJ, HUD and other agencies have MOUs to share information and cooperate in supervision and enforcement matters Coordination occurs behind the scenes Do not assume that, because another agency has not yet surfaced, it is not aware of what is happening in your exam 32

33 No. 9: Prior Exam, Audit, and Compliance Findings CFPB and NCUA examiners will review relevant exam, audit or compliance findings during the relevant review period Review prior findings to ensure that no repeat exam violations occur 33

34 No. 10: Customer Remediation Be proactive in identifying and addressing any fair lending violations Determine and provide customer monetary restitution using a reasonable method before CFPB asks credit union to do so Regulators tend to use mean or average method to determine restitution, but other methods are an option if legally and logically supportable Note: Consumer releases are not permitted by the Bureau 34

35 Questions? Jeremiah S. Buckley Partner (202) Lori J. Sommerfield Counsel (202)