CFPB and consumer protection hot topics. September 27, 2017

CFPB and consumer protection hot topics September 27, 2017

Today's speakers Tariq Mirza Principal and National Leader Compliance Risk Grant Thornton, LLP Tariq.Mirza@us.gt.com Thomas Vartanian Partner, Dechert LLP Thomas.Vartanian@dechert.com Robert Ledig Partner, Dechert LLP Robert.Ledig@dechert.com Paul Carlisle Director, Compliance Risk Grant Thornton, LLP Paul.Carlisle@us.gt.com Kat Sanchez Director, Compliance Risk Grant Thornton, LLP Kat.AbuegSanchez@us.gt.com Grant Thornton LLP. All rights reserved. 2

Learning objectives 1 Analyze public enforcement action activity since 2016 to identify trends and CFPB expectations 2 Identify and apply CFPB guidance to business activities 3 Discuss compliance best practices which reduce regulatory compliance risk Grant Thornton LLP. All rights reserved. 3

Agenda CFPB update Debt collection Enforcement actions and supervision cases Consumer reporting Fair lending Student loan servicing Small business Overdraft payment programs Mortgage servicing Upcoming CFPB initiatives Q&A Grant Thornton LLP. All rights reserved. 4

CFPB update

The CFPB, the administration and consumer protection in the future Finding a new Director Will the CFPB be reconstructed as a commission? New strategic approach to enforcement Emphasis on increasing financial literacy Role in this Administration Grant Thornton LLP. All rights reserved. 6

Consumer protection under the CFPB rulemaking authority The CFPB has rulemaking authority for the following consumer protection regulations: Regulation Regulation B Regulation C Regulation D Regulation E Regulation F Regulation G Regulation H Regulation I Regulation Name Equal Credit Opportunity Act (ECOA) Home Mortgage Disclosure Act (HMDA) Alternative Mortgage Parity Act Electronic Fund Transfers Act (EFTA) Fair Debt Collection Practices Act (FDCPA) S.A.F.E. Mortgage Licensing Act Federal Registration of Residential Mortgage Loan Originators S.A.F.E. Mortgage Licensing Act State Compliance and Bureau Registration System Disclosure Requirements for Depository Institutions Lacking Federal Deposit Insurance Regulation Regulation K Regulation L Regulation M Regulation N Regulation O Regulation P Regulation V Regulation X Regulation Z Regulation Name Purchasers' Revocation Rights, Sales Practices and Standards Special Rules of Practice Consumer Leasing Act Mortgage Acts and Practices Advertising Mortgage Assistance Relief Services Privacy of Consumer Financial Information Fair Credit Reporting Act (FCRA) Real Estate Settlement Procedures Act (RESPA) Truth in Lending Act (TILA) Regulation J Land Registration Regulation DD Truth in Savings Act (TISA) Grant Thornton LLP. All rights reserved. 7

CFPB overview 147 banks and credit unions are under the CFPB's supervisory authority The CFPB has handled over 1.24 million complaints Over the past year, the CFPB has focused its attention on the following areas: Mortgage origination and servicing Fair lending Debt collection Student loan servicing Auto loan origination and servicing Consumer reporting Small dollar lending Grant Thornton LLP. All rights reserved. 8

CFPB overview The CFPB has filed more than 190 enforcement matters as of July 31, 2017, including more than 50 in 2016 CFPB supervisory and enforcement activities have resulted in approximately $12 billion in consumer relief, including: Approximately $7.7 billion in principal reductions, cancelled debts, and other consumer relief as a result of enforcement activity; Approximately $3.8 billion in monetary compensation to consumers as a result of enforcement activity; More than $600 million in civil money penalties from enforcement activity; and $398 million in consumer relief as a result of supervisory activity Approximately 29 million consumers will receive relief as a result of the CFPB's supervisory and enforcement work Grant Thornton LLP. All rights reserved. 9

CFPB Enforcement actions

CFPB Enforcement Actions January 1, 2016 July 31, 2017 50 40 42 Enforcement actions by statute 20 15 Enforcement actions by product 17 13 15 30 20 10 15 9 7 4 9 10 5 0 6 3 3 3 0 UDAAP TILA FDCPA FCRA RESPA Other Source: consumerfinance.gov/policy-compliance/enforcement/ Grant Thornton LLP. All rights reserved. 11

CFPB enforcement highlights PHH Case D.C. Circuit decision October 2016 Finds CFPB to be unconstitutionally structured Remedy is to make Director removable at will Finds CFPB $110 million RESPA enforcement action to have violated PHH's due process rights Currently pending en banc appeal at the D.C. Circuit DOJ supports the original decision in opposition to the CFPB Grant Thornton LLP. All rights reserved. 12

CFPB enforcement highlights CFPB continues to pursue high profile enforcement actions Top 5 U.S. Bank - September 2016 Alleged unauthorized accounts UDAAP claims $100 million CFPB CMP Coordinated with Los Angeles and OCC Largest Federal and private student loan servicer January 2017 Alleges deficiencies in all stages of the servicing process Grant Thornton LLP. All rights reserved. 13

CFPB enforcement highlights One of the largest nonbank mortgage servicers April 2017 Alleges deficiencies in all stages of the serving process Private student loan purchaser August 2017 Proposed settlement of claims for its role in funding or purchasing loans made by one of the largest for profit colleges that was allegedly engaged in a predatory lending scheme $183 million in loan forgiveness and loan reductions Grant Thornton LLP. All rights reserved. 14

CFPB enforcement highlights Administrative Law Judge (ALJ) proceedings vs lawsuits Two recent major cases brought in federal court Controversy involving SEC use of ALJ Operation chokepoint DOJ announces that it is no longer pursuing this initiative CFPB brought a chokepoint type case in federal court in 2016 that was dismissed in March 2017 Data security Online payment platform March 2016 settlement CFPB asserted deceptive acts and practices claims regarding alleged false representations regarding alleged false representations regarding the company's data security practices Grant Thornton LLP. All rights reserved. 15

Fair lending

Fair lending Redlining and overt discrimination CFPB and DOJ took joint action against a regional bank for illegally redlining in Memphis The banks also overtly required employees to deny application from minorities more quickly and not to provide credit assistance to borderline applicants Ordered to pay at least $10.5 million in penalties, loan subsidies, and community programs, advertising, outreach and credit repair Discrimination based on race and national origin The CFPB took action against a large global provider of credit and charge cards offering terms to consumers in the U.S. Virgin Islands, and other U.S. territories that were inferior to those available in the 50 states. Consumer financial protections are not limited to states Ordered to pay $95 million in remediation Disparate impact discrimination claims Supreme Court ruled in Texas Department of Housing and Community Affairs (2015) that Fair Housing Act liability could be established based on disparate impact rather than intentional conduct Not clear whether DOJ would be inclined to pursue disparate impact claims Potential that CFPB would try to use disparate impact in an ECOA action Grant Thornton LLP. All rights reserved. 17

Fair lending The CFPB continues to ensure that consumers are not excluded from or made to pay more for mortgages, auto loans, or credit cards because they are a protected class. The CFPB's work thus far has resulted in over $400 million in payments and credits to over 500,000 consumers who experienced discrimination, and greater effort by lenders to monitor their own lending practices for possible discrimination. While the CFPB has taken important strides to protect consumers from credit discrimination and broaden access to credit, they continue to identify new and emerging fair lending risks and will monitor institutions for compliance Redlining [Icon here] CFPB will continue to evaluate whether lenders have intentionally avoided lending in minority neighborhoods Mortgage and student loan servicing Small business lending CFPB will determine whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a new solution with the servicer because of their race or ethnicity Congress expressed concern that women-owned and minority-owned businesses may experience discrimination when applying for credit, and has required the CFPB to take steps to ensure fair access to credit Grant Thornton LLP. All rights reserved. 18

Small business

Small business The CFPB is beginning work on Dodd-Frank's requirement to develop rules for financial institutions to report information about lending to small businesses, including women-owned and minority-owned small businesses. Business lenders should complete self-tests or self-evaluations of their compliance with the ECOA and fair lending laws. Self-Tests Self-evaluations Any program, practice or study designed and used specifically to determine the extent or effectiveness of a creditor's compliance with the ECOA or Regulation B; and creates information that is not available and cannot be derived from files/records related to credit transactions Corrective action must be taken The report or results of a self-test are privileged, as long as the self-test meets the requirements set forth in 12 C.F.R. 1002.15 Examples include: mystery shopping and surveys of loan applicants after decision Any process that an institution establishes to assess its fair lending posture The report results of a self evaluation are not privileged Examples include: second review of denied applications, comparative file reviews, and monitoring of lending policy exceptions Grant Thornton LLP. All rights reserved. 20

Small business The CFPB has indicated that it envisions a small business lending market where fair lending laws are enforced and where communities, governmental entities, and creditors have access to the data needed to identify the business and community development needs and opportunities of small businesses, including women-owned and minority-owned small businesses Small business lenders should complete self-tests or self-evaluations of their compliance with the ECOA and other fair lending laws The CFPB's consumer response team is working to assess the feasibility of building the infrastructure to intake and analyze small business lending complaints Grant Thornton LLP. All rights reserved. 21

Mortgage servicing

Mortgage servicing Most of the CFPB's updated mortgage servicing rules become effective October 19, 2017. The bankruptcy periodic statement exemptions, bankruptcy modified periodic statement, and successor-in-interest provisions take effect April 19, 2018 The new rules add protections for borrowers in bankruptcy and for successors-in-interest, improve the clarity and effectiveness of the rules, and give a concrete definition of delinquency Concurrently, with the issuance of the mortgage servicing rules, the CFPB issued an interpretative rule under the FDCPA, concerning servicers' compliance with certain provisions as amended by the rule Grant Thornton LLP. All rights reserved. 23

Mortgage servicing Summary of Key Changes Successors-in-interest Servicers must respond to written requests from persons indicating that they may be a successor-in-interest A confirmed successor-in-interest is a borrower for the purposes of Regulation X's mortgage servicing provisions Periodic statements Servicers must provide bankrupt consumers modified periodic statements or written notices to consumers who have filed bankruptcy Loss mitigation Servicers will be required to meet the loss mitigation requirements more than once in the life of a loan for borrowers who become current on payments Additional statements must be included in notification of loss mitigation application letters Definition of delinquency The CFPB has clarified that, "a borrower and a borrower's mortgage obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow becomes due and unpaid, until such time as no periodic payment is due and unpaid" Additional requirements apply Grant Thornton LLP. All rights reserved. 24

Mortgage servicing Servicers should train employees, finalize policies and procedures, and update systems prior to the applicable Mortgage Servicing Rule effective dates. Policies and Procedures Extend protections to confirmed successors-in-interest Align with new definition of delinquency Update responses for ownership information of the securitization trust Resume compliance with early intervention requirements once a bankruptcy case is closed, dismissed, or the borrower has reaffirmed Training Ensure personnel: Understand live contact requirements Understand how to obtain documents or information not in the borrowers control, and can evaluate loss mitigation applications while waiting for third party information Can identify and confirm successorsin-interest Systems Sends updated and timely disclosures and model forms Correctly tracks delinquency for early intervention letters and live contact requirements Collects and retains information needed for periodic statements for consumers in bankruptcy Properly credits payments made by consumers performing under a loss mitigation or loan modification plan Grant Thornton LLP. All rights reserved. 25

Debt collection

Debt collection The CFPB's supervisory work has identified prohibited practices such as: Charging unlawful convenience fees Making several false representations to consumers Unlawfully communicating with third parties in connection with the collection of a debt [Icon here] Additionally, CFPB examiners have identified several violations of the FCRA, including failing to investigate indirect disputes and having inadequate furnishing policies and procedures. Grant Thornton LLP. All rights reserved. 27

Debt collection Financial institutions and debt collectors should ensure systems are capable of providing all data needed to comply with forthcoming debt collection rules. Proposed rulemaking Proposed rulemaking furthers the CFPB's objective of bringing about better accuracy and accountability to debt collection In July 2016, the CFPB outlined proposals to overhaul the debt collection market by capping collector contact attempts and helping to ensure that companies collect the correct debt These requirements and restrictions would follow the debt if it were sold or transferred The CFPB intends to require debt collectors to obtain certain information about the debt before they collect, collect in a manner that is based on accurate information, and collect in a manner that is less likely to cause consumer confusion or harm The CFPB also intends to follow up separately at a later date about concerns regarding information sharing between creditors and FDCPA collectors and potential rules to govern creditors that collect their own debts (i.e., first party) Debt collectors and financial institutions should enhance debt collection programs and activities Grant Thornton LLP. All rights reserved. 28

Debt collection Financial institutions and debt collectors should ensure systems are capable of providing all data needed to comply with forthcoming debt collection rules Debt collectors Scrub their files and substantiate the debt before contacting customers Limit communication attempts to six per week before they have reached the consumer, and implement adequate tracking controls to accurately capture communications attempts Include more specific information about the debt in the initial collection notices sent to consumers Provide a debt report to a consumer who disputes a debt within 30 days of the initial collection notice If a consumer disputes in any way the validity of the debt, stop collections until the necessary documentation is checked If transferring the debt without responding to a dispute, the next collector cannot try to collect until the dispute is resolved Financial institutions Develop or enhance debt servicing controls to ensure that files accurately reflect the status of each consumer's debt obligations throughout the servicing and debt collection phases, regardless of whether debts are collected inhouse, or outsourced, or the debt is sold Given the proposed additional data and reporting requirements on debt collectors, financial institutions should expect debt buyers and collectors to visit this burden of data collection and accuracy on the financial institution Be prepared to provide debt report information and data to debt collectors in case the situation arises that a consumer disputes a debt Grant Thornton LLP. All rights reserved. 29

Debt collection System and data requirements and enhancements Systems must allow the financial institution to accurately store and export fundamental debt information along with the details of the debt, such as each charge for interest or fees imposed after default A robust complaints management system that allows the financial institutions and debt collector to receive, track, address, and analyze disputes to ensure that, if a debt is under dispute, collections attempts are suspended until the dispute is resolved Financial institutions and debt collectors should analyze portfolios for warning signs, such as complaints or high dispute rates Grant Thornton LLP. All rights reserved. 30

Consumer reporting

Consumer reporting Pitfalls: data accuracy requirements for furnishers Reporting inaccurate information with knowledge of errors Reporting consumers as delinquent Reporting consumers as having no payment history Reporting consumers as having a $0 actual payment amount Reporting consumers as having an unpaid charged-off balance after settling the account in full Reporting amounts past due and bankruptcy status Date of first delinquency Reporting inaccurate dates of first delinquency or missing dates of first delinquency on incoming loan servicing data transfers Updating the date of delinquency when already delinquent consumers file for bankruptcy to the date of the bankruptcy filing Updating and correcting inaccurate information Failing to promptly update payment information for charged-off accounts when consumers made payments under payment plans Lack of oversight of service providers responsible for updating incomplete or inaccurate information Failing to update reports to reflect delinquencies that have been cured for consumers with a qualified deferment Grant Thornton LLP. All rights reserved. 32

Consumer reporting Pitfalls: dispute resolution procedures Consumer notice that dispute is frivolous or irrelevant Failing to provide consumers with notice within five business days of making the determination that a dispute is frivolous or irrelevant Reporting the results of direct dispute investigations to consumers Providing dispute response letters that do not adequately address the actual substance of the dispute Failing to provide the results of direct dispute investigations to consumers in bankruptcy Indirect dispute handling resolutions Failing to conduct or complete investigations within the time periods required by the FCRA In order to meet the timing requirements, responding to the Credit Reporting Agency that the information is correct before investigations are complete Maintaining records Documentation that fails to memorialize what the agent reviewed or the logic of the agent's investigation Failing to retain copies of attachments submitted by consumers on indirect dispute investigations Grant Thornton LLP. All rights reserved. 33

Consumer reporting Financial institutions should review credit reporting practices, as well as dispute resolution procedures and trends to ensure the accuracy and integrity of information furnished to credit reporting agencies. Oversight of service providers Feedback from consumer reporting agencies Quality control and testing Training of staff Accuracy of information Policies and procedures Data and trend analysis CMS Reasonable investigations of disputes Grant Thornton LLP. All rights reserved. 34

Student loan servicing

Student loan servicing Supervision and enforcement activity One of the largest student loan services Provided bad information to consumers Processed payments incorrectly Failed to act when borrowers complained A top five U.S. financial institution Failed to provide important payment information to consumers Charged illegal fees Failed to update inaccurate credit report information A top 30 U.S. financial institution Overstated the minimum amount due on billing statements Misrepresented on its website the amount of student loan interest paid Illegally and excessively called consumers early in the morning and late at night Engaged in illegal debt collection activities Grant Thornton LLP. All rights reserved. 36

Student loan servicing Student loan servicers should benchmark existing practices against and consider implementing similar standards to the Department of Education's "Policy Direction on Federal Student Loan Servicing." Some highlights include: Accurate, high quality and high touch loan servicing Knowledgeable and specially-trained personnel who evaluate borrowers' specific circumstances Servicing staff reach out to borrowers who are at risk of default Rigorous and ongoing staff training related to repayment plans, loan forgiveness, and cancellation and discharge options Inform borrowers of forbearance of deferment options Staff incentives are aligned with consumers needs and interests Rigorous process to govern repayment plans Staff are accessible (hold times, hours, etc.) Consistent processing of payments, credit reporting, and access to clear and accurate payment and billing information Payments are credited as of the date they are received Multiple loans to a single borrower are grouped together in one account, as appropriate Overpayments are applied in a way that saves the consumer the most money Payments can be made free of charge Automatic payments are easily managed online Accurate information is furnished to credit reporting agencies Clear and accurate payment histories and billing statements Consumer friendly payoff process Servicing transfers are handled appropriately Grant Thornton LLP. All rights reserved. 37

Overdraft payment programs

Overdraft programs The CFPB is preparing for rulemaking concerning overdraft programs and checking accounts. Banks should review existing programs and practices for potential UDAAP and Consumer Protection concerns. CFPB Overdraft Program Concerns How consumers opt-in Coverage limits Transaction posting order Involuntary account closures Fee structures Grant Thornton LLP. All rights reserved. 39

Overdraft programs By the numbers: highlights from the CFPB's overdraft report and white paper For opted-in customers, overdraft and NSF fees accounted for 75% of total checking and account fees and average over $250 per year A mere 8% of customers incurred nearly 75% of all overdraft fees The median debit card transaction that led to an overdraft fee was only $24 and $50 for all types of debits Opted-in accounts have 7x as many overdrafts that result in fees than accounts that are not opted-in 6% of consumer checking accounts were involuntarily closed Grant Thornton LLP. All rights reserved. 40

Upcoming CFPB initiatives

Upcoming CFPB initiatives Home Mortgage Disclosure Act (HMDA) changes January 1, 2018 Effective date for most provisions related to institutional coverage and data collection, recording, reporting, and disclosure. Companies begin collecting 2018 data as required under the new rule January 1, 2019 Effective date for changes to enforcement provisions and additional amendments to reporting provisions January 1, 2020 Effective date for quarterly reporting provisions May 30, 2020 Quarterly reports due. Must report Q1, 2020 data to the CFPB as required under the new rule Prepaid card rule Effective April 1, 2018, final rule amends Regulation E and Regulation Z Includes provisions for Know Before You Owe disclosure requirements, periodic statements, protections for unauthorized charges or fraudulent charges, and credit protections for accounts with overdraft credit features Arbitration rule Bans companies from using mandatory arbitration clauses to deny groups of people their opportunity to sue in court for financial wrongdoings The new rule is intended to deter wrongdoing by restoring consumers' right to join together to pursue justice and relief through group lawsuits The rule also makes the individual arbitration process more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration with redacted versions published by the CFPB beginning in July 2019. Grant Thornton LLP. All rights reserved. 42

Today's speakers Tariq Mirza Principal and National Leader Compliance Risk Grant Thornton, LLP Tariq.Mirza@us.gt.com Thomas Vartanian Partner, Dechert LLP Thomas.Vartanian@dechert.com Robert Ledig Partner, Dechert LLP Robert.Ledig@dechert.com Paul Carlisle Director, Compliance Risk Grant Thornton, LLP Paul.Carlisle@us.gt.com Kat Sanchez Director, Compliance Risk Grant Thornton, LLP Kat.AbuegSanchez@us.gt.com Grant Thornton LLP. All rights reserved. 43

Questions?

Disclaimer This Grant Thornton, LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For additional information on matters covered in this presentation, contact your Grant Thornton, LLP adviser. Grant Thornton LLP. All rights reserved. 45

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