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Promontory Sightlines: Consumer Financial Protection Developments

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March 21, 2014

Dear clients and friends,

Intense regulatory focus on consumer loan data has resulted in two major rulemakings that will likely expand disclosure and reporting requirements in debt collection and mortgage lending. But for financial institutions that annually submit data under the Home Mortgage Disclosure Act and the Community Reinvestment Act, the significance of the focus on data is far more immediate. Providing accurate and complete transaction-level data has always been challenging, but it has never been more important.

The Consumer Financial Protection Bureau and other regulators in recent months have stepped up supervision of accurate HMDA reporting, issuing enforcement actions against depositories and nonbanks and requiring companies with high error rates to resubmit their reports. The CFPB last fall issued guidance and resubmission guidelines that narrowed error tolerances for HMDA reporters, particularly those with large lending volumes.

Regulators have also begun treating HMDA data-integrity problems like any other consumer protection violations. Enforcement actions have required enhancements to overall compliance-management programs, imposed fines in the most serious cases, and subjected firms to ongoing scrutiny of their data management and reporting.

Incomplete and inaccurate reporting hampers firms' ability to monitor their own fair-lending performance and to assess whether they are adequately serving housing and development needs in their communities. Regulators, public officials, and advocacy organizations rely heavily on this data for the same reasons, as well as to assess broader market trends.

Just as the CFPB is pushing for better HMDA submissions, prudential regulators appear to be stepping up scrutiny of CRA reporting. During pre-exam data-integrity reviews, examiners have signaled expectations of perfect submissions and less tolerance of incomplete or error-filled ones.

Error-prone CRA reporting may not lead to enforcement actions and fines, but it puts firms' compliance ratings and ability to engage in important business activities at risk. Severe data-integrity issues can undermine regulators' confidence in firms' compliance controls and CRA performance, which can defer scheduled CRA exams and raise processing and approval issues for mergers, acquisitions, and branching.

However, firms that apply lessons learned in improving HMDA reporting to their CRA operations are likely to catch larger regulatory issues and variances from firm policies before their regulators do. Data-integrity issues may arise from:

  • Manual entry of loan-level data
  • Deficient step controls that allow originations to proceed without necessary data elements
  • Data aggregated from multiple origination systems
  • Inadvertent or intentional data manipulation
  • Data transfers with vendors
  • Failure to capture data from all reportable applications across the enterprise

Replacing manual processes with automated workflows is a proven strategy for reducing data-entry errors and the risk of data manipulation. Automated processes and controls, though, may require prolonged collaboration with vendors and may not be practical for many required data elements, such as the identification of a clear community-development purpose for community-development loans. And it can never fully alleviate the challenge of training loan officers to request and collect necessary data, whether in person or otherwise.

Where alternatives to manual data entry are impractical, firms should communicate their expectations clearly, including defining data ownership and accountability for data quality, as well as processes for verification at the business level. Clear definitions of critical data elements are essential. For example, failure to establish when an application is complete can result in untimely or incomplete capture of application status, counteroffers, or withdrawals, and can result in the failure to provide required disclosures and adverse-action notices.

Ongoing processes for data-quality control are also essential. These are best performed routinely across all reportable fields and not just in the weeks before submission deadlines — when it is often too late to correct identified errors. Periodic audits and routine transaction testing, including in more automated environments, are expected components of an oversight infrastructure designed to monitor compliance with data-integrity expectations.

Investing today in appropriate systems controls — from revised policies and procedures to a program of periodic transaction testing — will prepare filers not just for the challenges of their next HMDA or CRA data review, but also for smoother implementation of the coming expansion of HMDA reporting requirements.

Yours truly,

Chris Lewis
Director
clewis@promontory.com
+1 415 626 4929

Chris Lewis
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District Court Rejects Tribal-Affiliation Exemption for Payday Lender

The Federal Trade Commission announced March 19 that U.S. District Judge Gloria Navarro affirmed a lower-court ruling from last July that found payday lender AMG Services to be within the reach of federal laws despite its affiliation with a Native American tribe. The lender had been accused of piling on undisclosed and inflated fees while illegally threatening borrowers with arrests and lawsuits. "This ruling makes it crystal clear that the FTC's consumer protection laws apply to businesses that are affiliated with tribes," said Jessica Rich, director of the agency's bureau of consumer protection. "It's a strong signal to deceptive payday lenders that their days of hiding behind a tribal affiliation are over."

CFPB Testing Prepaid Disclosures; Proposal to Follow

A March 18 CFPB blog post unveiled the two standardized model disclosures for prepaid cards that the bureau is currently testing in Los Angeles. The first round of testing in Baltimore concluded last month, and the CFPB said it expects to complete testing in April. The post also solicited customer feedback on the prototypes. The bureau said it expects to issue a proposal on prepaid disclosures this spring.

OCC Adopts Revised Exam Procedures for Mortgage Rules

On March 14, the Office of the Comptroller of the Currency announced its adoption of interagency examination procedures reflecting changes to the Truth in Lending Act and the Real Estate Settlement Procedures Act. Until the procedures are incorporated into the Comptroller's Handbook, the documents have been posted to the OCC's website (TILA/Regulation Z examination procedures; RESPA/Regulation X examination procedures).

FTC Halts Debt-Collection Operation

The FTC announced on March 13 that the U.S. District Court for the Western District of New York has halted a Buffalo, N.Y.-based debt-collection operation whose employees the agency has charged with violating the Federal Trade Commission Act and the Fair Debt Collection Practices Act "by misrepresenting that they were with the government, falsely accusing consumers of committing check fraud, and then threatening consumers with arrest." The full court order is here.

FTC Amicus Brief Opposes Court Finding on Time-Barred Debt

The FTC announced on March 12 that it filed an amicus brief in the U.S. Court of Appeals for the 6th Circuit opposing a lower court's dismissal of a consumer class-action complaint. The complaint alleges that a debt collector's letter violated the Fair Debt Collection Practices Act by implying that customers can be sued to collect the debt even past the statute of limitations on filing a collection lawsuit. The FTC's brief argues "that the debt collector's offer to 'settle' and other representations could plausibly cause an unsophisticated consumer to believe that the debt could be enforced through litigation, and that the complaint therefore should not have been dismissed."

CFPB Appoints Three Senior Staff

On March 12, the CFPB announced three appointments to senior positions at the bureau. Christopher Carroll, professor of economics at Johns Hopkins University becomes assistant director and chief economist for the office of research in the research, markets, and regulations division. Daniel Dodd-Ramirez — previously education project director and community organizer for People Acting for Community Together — is the new assistant director of financial empowerment in the consumer education and engagement division. Jeffrey Langer joins as the assistant director of installment and liquidity lending markets in the research, markets, and regulations division. He was previously senior counsel at Macy's Inc.

FTC Announces Rules It Will Begin to Review in 2014

On March 7, the FTC announced that the commission in 2014 will begin a review of several rules, pursuant to its 10-year regulatory review schedule. The review will include Standards for Safeguarding Customer Information, 16 CFR Part 314, and the Telemarketing Sales Rule, 16 CFR Part 310.

CFPB Announces $1 Million Recovered for Service Members

On March 6, the CFPB issued a press release announcing more than $1 million recovered for service members and veterans and their families who complained to the bureau about financial services products since July 2011 (the figure comes from the office of servicemember affairs' March snapshot of complaints from the military community). The bureau highlighted four areas of particular concern for which "servicemembers are not seeing the unique protections accorded to them by federal laws:" debt collection, student loans, payday loans, and mortgages.

FTC Approves Order in LPS Acquisition

The FTC on March 5 approved a final consent order that settled charges that mortgage firm Fidelity National Financial's acquisition of Lender Processing Services lessened competition and violated antitrust laws. "To preserve competition, the final settlement order requires Fidelity to sell a copy of LPS's title plants in six Oregon counties and an ownership interest equivalent to LPS's share of a jointly owned title plant in the Portland, Oregon, metropolitan area," the FTC's press release said.

FTC Steps Up Enforcement of FDCPA

On March 5, the FTC issued a statement describing its increased enforcement over the last year of the Fair Debt Collection Practices Act. In addition to filing three debt-collection-related amicus briefs in the last year, the FTC "obtained court orders stopping illegal debt collection activities in seven cases, and referred two other debt collection cases to the Department of Justice for civil penalties."

Debt Collection Accounts for "Largest Source" of CFPB Complaints

CFPB Deputy Director Steve Antonakes said at a March 3 FTC Common Ground Conference that in the month of February, the bureau received more than 30,000 calls and handled more than 20,000 complaints, with debt collection being the largest single source. The CFPB receives about 5,900 debt-collection complaints per month, he said.

CFPB Calls on Card Companies to Provide Free Credit Scores

On Feb. 27, the CFPB said it recently sent letters to major credit card companies calling for them to make credit scores freely available to their customers. The announcement came on the heels of the release of the bureau's latest report on credit-reporting complaints, which highlighted the top three complaint categories: incorrect information on credit reports, frustration with the credit-reporting company's investigation of disputes, and difficulty obtaining credit reports or scores. The CFPB also published a supervisory bulletin "warning companies that provide information to credit reporting agencies not to avoid investigating consumer disputes," a result of the bureau's observation that "data furnishers sometimes respond to a dispute by simply deleting the disputed accounts from the information they pass along to the credit reporting company."

FTC Announces 2013's Top Complaint Categories

The FTC put out a Feb. 27 press release announcing the top 10 consumer complaint categories for 2013, according to its annual Consumer Sentinel Network Data Book. The top complaint category was identity theft at 14% of all complaints, followed by debt collection (10%) and banks/lenders (7%). Impostor scams (6%) and telephone/mobile services (6%) rounded out the top five.

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Promontory's Consumer Protection Team includes:

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Konrad Alt

Konrad Alt
Managing Director
kalt@promontory.com
+1 415 986 4160

Michael Dawson

Michael Dawson
Managing Director
mdawson@promontory.com
+1 202 384 1080

Linda Gallagher

Linda Gallagher
Managing Director and Global Head
of the Consumer Protection Practice

lgallagher@promontory.com
+1 202 370 0411

Stuart King

Stuart King
Managing Director
sking@promontory.com
+44 207 997 3402

Simon McDougall

Simon McDougall
Managing Director
smcdougall@promontory.com
+44 207 377 2367

BJ Sanford

BJ Sanford
Managing Director
bsanford@promontory.com
+1 202 384 1020

Julie Williams Julie Williams
Managing Director and
Director of Domestic Advisory Practice

juwilliams@promontory.com
+1 202 384 1087
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Promontory Sightlines Consumer Financial Protection Developments

EDITOR IN CHIEF

P-R Stark

GLOBAL HEAD OF THE
CONSUMER PROTECTION PRACTICE

Linda Gallagher

FOUNDER AND CEO

Eugene A. Ludwig

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