direct dial: 248.723.0521 Steve Van Beek Attorney and Counselor email: svb@h2law.com Risk Alert Navy FCU Consent Order Re: CFPB Consent Order for Collection Practices and Account Restrictions On October 11, 2016, the Consumer Financial Protection Bureau (CFPB) entered into a consent order with Navy Federal Credit Union (Navy FCU). The consent order included a mandate to provide $23 million to impacted consumers and pay a $5.5 million civil money penalty. The CFPB s enforcement action focused on Navy FCU s debt collection practices including representations made in debt collection letters and account and service restrictions for delinquent borrowers. The CFPB indicated Navy FCU s debt collection practices were unfair or deceptive. In light of the consent order, all financial institutions should review their practices to examine whether they are currently engaging in similar practices and determine appropriate actions to reduce risks. Effective Date There is not a specific effective date related to the CFPB s enforcement action. Rather, the enforcement order demonstrates the CFPB s continued emphasis on preventing unfair, deceptive or abusive acts of practices (UDAAP). Scope The Consumer Financial Protection Bureau entered into the consent order with Navy FCU pursuant to its powers under the Dodd-Frank Act. While Navy FCU is subject to direct supervision by the CFPB, the consent order is informative for financial institutions that may be regulated by other federal or state regulators. Agency The Consumer Financial Protection Bureau entered into the consent order and enforcement action with Navy FCU pursuant to its examination authority. The CFPB did not adopt new regulations or guidance related to UDAAP practices. However, the consent order does outline areas where the CFPB identified unfair or deceptive acts or practices which should prompt other financial institutions to review their own practices and procedures. 1
Executive Summary The CFPB s enforcement action against Navy FCU is further evidence of the CFPB s commitment to supervision by enforcement rather than via regulatory rulemaking. All financial institutions should review the enforcement action and determine whether they should adjust their practices, procedures and disclosures in order to reduce UDAAP risks. Rather than focus on the actions or inactions of Navy FCU, this Risk Alert will address areas where the enforcement action has increased risks for all other financial institutions. The two largest areas of concern following the CFPB consent order are: (1) debt collection letters; and (2) actions taken to restrict accounts and services due to delinquency or negative account balances. Regarding debt collection letters, the CFPB made its opinion clear that language used in debt collection letters cannot be misleading or deceptive and, importantly, should reflect the borrower s actual situation and the institution s intended actions. And, while financial institutions have traditionally taken appropriate actions to restrict accounts and services to delinquent borrowers, the CFPB s enforcement action serves as a reminder to review how and when borrowers are informed of those potential restrictions. Ultimately, the CFPB s enforcement action increased risk for all financial institutions. This is true regardless of the institution s primary regulator, asset size or charter type. As often happens, other regulators, examiners and auditors monitor the CFPB s actions closely and deficiencies identified by the CFPB quickly spread to future non-cfpb examinations and audits. Impacted Areas The CFPB s enforcement action impacts multiple areas throughout the institution. The collection, operations and asset protection departments are impacted as well as compliance, audit and risk management. Ultimately, each department should review and analyze its practices and procedures given the CFPB s position in the Navy FCU enforcement action. Action Items Financial institutions should review their practices, procedures and disclosures in the following areas in order to properly analyze and manage their UDAAP risks. Review Debt Collection Letters The consent order took a strong stance against representations made in debt collection letters. To reduce risks, financial institutions should analyze their debt collection and charge-off letters to ensure they reflect the institution s practices and do not threaten action that will not be taken and do not misrepresent the institution s ability to take specific actions. Page 2 of 4 This Regulatory Update is provided for informational purposes only and is not intended as legal advice. This Regulatory Update does not establish an attorney-client relationship.
Analyze Current Process for Recommending Legal Action The CFPB criticized template letters that it alleged were likely to mislead reasonable consumers. Many letters indicated that legal action had been recommended or that the CU had no alternative but to recommend [the account] for legal action. The CFPB s investigation found that only 5,000 of the 193,000 consumers that received those letters were actually sued and, thus, it concluded that there was not a sufficient process to determine when to send letters to consumers threatening legal action. Financial institutions should review their current process for determining when letters threatening legal action are sent and whether the message sent in those letters matches the institution s actual collection practices. Review References to Credit Scores or Credit Reports The CFPB s consent order also criticized references to the consequences of failing to pay a loan or negative account balance. Specifically, the CFPB analyzed references to the possible inability to obtain future loans due to the impact on a consumer s credit score as well as mentions of improving the consumer s credit score or rating by working with the financial institution. Given the broad criticisms from the CFPB, financial institutions should review their letters to ensure they do not make misleading or inaccurate claims about the possible impact on a consumer s credit. Even accurate representations face increased risk following the consent order. Review Account and Service Restrictions Despite long-standing opinion letters and policy positions by the National Credit Union Administration regarding denying and suspending services to delinquent borrowers, the CFPB criticized the practice especially regarding freezing electronic access to a consumer s accounts. Navy FCU had practices to restrict debit/atm cards, online and mobile banking, and other electronic services and those restrictions were not lifted until after a consumer made arrangements to repay or settle their debt. The CFPB indicated these practices were unfair because consumers could not reasonably avoid the restrictions due to the lack of disclosure. Following this consent order, financial institutions should review their account and service restriction practices and analyze when and how consumers are informed of the possible restrictions. Analyze Current Denial/Suspension of Services Policy Many institutions maintain a Denial of Services Policy, Suspension of Service Policy, Good Standing Policy, or other similar policy that outlines when a consumer is ineligible for certain accounts and services. Page 3 of 4 This Regulatory Update is provided for informational purposes only and is not intended as legal advice. This Regulatory Update does not establish an attorney-client relationship.
Institutions should review any existing policies and determine if they need to be updated or revised based on the institution s current practices as well as the CFPB s consent order. Additionally, institutions should analyze when and how consumers are informed of any policies. Review Disclosures, Agreement and Notices In addition to having a policy outlining when a consumer s accounts and services may be restricted or denied, institutions will want to ensure that their disclosures and agreements outline their ability to take action as the institution deems necessary. Additionally, institutions should analyze whether the placement of any disclosures or notices are prominent or whether they are buried in the fine print. Review Pre-Restriction Warnings or Notices A key criticism of the account and services restriction was that consumers were not informed of the possible restrictions prior to Navy FCU taking the action. Institutions can reduce this risk by ensuring their policies are disclosed and available to consumers. Further, institutions should analyze whether it is appropriate to place more specific mentions of possible restrictions in communications sent to delinquent borrowers or consumers with negative account balances. This pre-restriction notice will help demonstrate the institution took proactive steps to notify consumers in advance. *** If you have any questions or need more information please feel free to contact me. Very truly yours, Steve Van Beek HOWARD & HOWARD ATTORNEYS PLLC Direct: 248.723.0521 Email: svb@h2law.com Additional Resources CFPB Press Release on Enforcement Action Administrative Proceeding File No. 2016-CFPB-0024: Navy FCU Consent Order Page 4 of 4 This Regulatory Update is provided for informational purposes only and is not intended as legal advice. This Regulatory Update does not establish an attorney-client relationship.
Steve Van Beek, Esq., NCCO, Attorney and Counselor svb@h2law.com (248) 723-0521 Account & Service Restrictions following the Navy FCU Consent Order March 2017 Disclaimer: This presentation does not constitute legal advice or a legal opinion on any matter discussed. This presentation is for educational purposes only. If you have a specific legal question, please consult with an attorney of your own choice.
2 Today s Presenter Steven Van Beek Steve Van Beek is an attorney at Howard & Howard Attorneys PLLC where he concentrates his practice in the area of financial regulations. He has intimate knowledge of the operational issues facing financial institutions and the best practices they can follow to reduce compliance, strategic, and reputation risks. Prior to joining Howard & Howard, he served as the Vice President of Regulatory Compliance at the National Association of Federal Credit Unions (NAFCU). He received his Bachelor s from Hope College and his J.D. from George Mason University School of Law and is a member of the American Bar Association.
Overview 3 CFPB Consent Order Navy Federal Credit Union Supervision by Enforcement Increased Risk for ALL Credit Unions Debt Collection Letters Credit Score and Credit Rating Account & Service Restrictions Disclosures, Agreement and Notices
CFPB Consent Order 4 October 11, 2016 CFPB and Navy FCU NCUA not involved Order required $23 million in redress to consumers and a $5.5 million penalty Issues identified during examinations Complaints in CFPB Database were similar Underlying regulatory issue was UDAAP
Initial Thoughts 5 CFPB Examination NCUA and/or state regulator not involved NCUA opinion letters allow denial of services No new rulemaking Consent order was specific to Navy FCU No specific guidance from CFPB on account and service restrictions
Criticized Actions 6 False threats during collection practices Letters threatened legal action ( pay or be sued ) Threatened to contact commanding officers Account agreement indicated members gave consent Letters stated failure to repay may make it difficult, if not impossible to obtain other credit Restricted electronic access for delinquencies
Collection Threats 7 CFPB: The CU s pay or be sued message was inaccurate about 97 percent of the time Even for borrowers who did not make a payment in response to the letters In certain cases, CU orally mentioned legal action CFPB: The CU s debt collection letter templates contained several material misrepresentations that were likely to mislead consumers
Collection Threats 8 Consent Order: The process for evaluating accounts for potential legal action was not sufficiently connected to or coordinated with the separate process for determining when to send letters to consumers threatening legal action. Consent Order: Rather than engage in any accountspecific review prior to sending such a letter, [Navy FCU] treated all charged-off accounts recommended for litigation for debt collection letter purposes
Collection Threats - Deceptive 9 CFPB: Practices were deceptive because the representation from the letters was that the CU intended to take legal action when in most cases the CU did not intend to take such action Action Items: Review Debt Collection and Charge-Off Letters Analyze Current Process for Recommending Legal Action Are there situations where the CU will not pursue legal action?
Contacting Commanding Officer 10 Letter sent to 115 consumers: Your continued failure to forward the requested funds will leave us no alternative but to forward the Certificate of Compliance covering your loan to your commanding officer to request assistance in communicating with you. CFPB: CU did not follow through, thus, threat was false/deceptive CFPB: Even if the CU had intended to contact the officers, the consent was not valid: The provision in [Navy FCU s] account agreement was not consented to by consumers because the contract clause was buried in fine print, non-negotiable, and not bargained for by consumers. Action Item: What are key provisions of our account agreement?
Member s Credit Ratings 11 Letters (68,000): You will find it difficult, if not impossible, to obtain additional credit because of your present unsatisfactory rating with [Navy FCU]. Other letters said the borrower could repair his or her credit or credit reputation by calling the CU CFPB: CU did not review the member s particular credit situation before sending the letters and, thus, the representations were inaccurate for many consumers
Member s Credit Ratings - Deceptive 12 CFPB: CU was simply a furnisher and any claims about being able to impact the consumer s credit rating were inaccurate. Further, claims about the member being unable to obtain additional credit were deceptive. Action Items: Review letters and correspondence for discussions of the impact on a member s credit score or rating Ensure the CU is not claiming it will be impossible to obtain loans Even accurate representations face increased risk
Electronic Access Restrictions 13 CU froze members electronic account access and disabled certain electronic services following delinquency Restrictions were applied at the member level (rather than loan level) Debit cards and ATM cards were disabled Online and mobile banking were disabled (except to make payments) Other items: travel alerts not added; SSA verification requests impacted Quick Trigger 36,000 had restrictions at 1 5 days delinquent 480,000 had restrictions at 6 16 days delinquent 180,000 had restrictions at 17 or more days delinquent
14 Electronic Access Restrictions - Unfair CFPB: CU did not provide adequate notice to consumers of an impending electronic freeze CFPB: Lack of disclosure resulted in the CU unfairly restricting consumers electronic account access and account services Consumers were injured through inability to use debit or ATM cards, inability to use online services and inability to conduct transactions except for making payments on delinquent account/loan Injuries were not reasonably avoidable because the account and service restrictions were not adequately disclosed to consumers when they opened their deposit accounts, when they opened their credit accounts, or before they became delinquent on a credit account.
15 Electronic Access Restrictions - Unfair Action Items: Review Current Account and Services Restrictions Which services are members ineligible for when they have a delinquency, caused a loss, acted inappropriately, etc? Has the CU explained these account and service restrictions? How recently? Do members receive notice/disclosure when they open their accounts, when they open their credit accounts, or before they became delinquent on a credit account? Review CU s Denial of Services (Suspension of Services) Policy When was the last time this Policy was reviewed? When was it last provided to members? Is it part of the new member packet? Is it available online?
16 Electronic Access Restrictions - Unfair Action Items: Review Disclosures, Agreement and Notices Do the CU s disclosures and agreements inform members of the possible restriction of accounts or services? Is the CU authorized to take the specific action it intends to take? Does the product agreement (e.g., Courtesy Pay, Remote Deposit Capture, Online Banking, etc.) explain that certain members may not be eligible and may lose their ability to use the product in certain situations? Are those situations explained? Is the language prominent or buried in the fine print? Review Pre-Restriction Warnings or Notices Does the CU inform members of the possibility of restricted services in delinquency notices or other communications? Are the notifications provided pre-restriction?
Key Takeaways 17 Consent Order Increases Risk for All CUs Importance of reviewing template letters Impact of UDAAP on day-to-day practices Dust off your Member in Good Standing Policy Does it reflect your practices? Is it disclosed to members? Are members informed prior to restriction? Do Agreements and Disclosures explain that accounts and services can be restricted? Is the disclosure prominent?
Account & Service Restrictions Steve Van Beek, Esq., NCCO Attorney and Counselor svb@h2law.com (248) 723-0521 QUESTIONS? Disclaimer: This presentation does not constitute legal advice or a legal opinion on any matter discussed. This presentation is for educational purposes only. If you have a specific legal question, please consult with an attorney of your own choice.