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Are you in compliance ?

Steve Cornell, Senior Manager. Are you in compliance ?. Key topics for today’s meeting. Key Regulatory Compliance Issues. Fair Lending. Fair Lending Program Focus Areas Timely and accurate notification of results of credit decisions (decline notices)

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Are you in compliance ?

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  1. Steve Cornell, Senior Manager Are you in compliance?

  2. Key topics for today’s meeting

  3. Key Regulatory Compliance Issues

  4. Fair Lending • Fair Lending Program Focus Areas • Timely and accurate notification of results of credit decisions (decline notices) • Decision models (underwriting software) which appears to include unfair criteria (for example: arbitrary minimum loan limits, criteria related to age) • Higher pricing for approved loans made to protected classes (minorities, women), particularly 1-4 family secured loans • Practices which appear to discourage application (often verbal, policy)

  5. Fair Lending • The act and regulation may prohibit a creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.

  6. Sun Trust Bank – Fair Lending Enforcement Action

  7. Sun Trust – Fair Lending • Alleged more than 20,000 African-American and Hispanic borrowers were charged more than similarly-situated and qualified non-Hispanic white borrowers, between 2005 and 2009 [Disparate Treatment]. • The suit alleged that minority borrowers in 75 geographic markets from Virginia Beach, VA to San Francisco, CA, paid more in loan fees, or were charged higher interest rates based solely on race or national origin.

  8. Sun Trust – Fair Lending • SunTrust set prices based on objective credit-related criteria but allowed its own loan officers as well as its national network of brokers to adjust those prices without regard to borrower risk, often resulting in black and Latino customers paying more than white borrowers.

  9. Sun Trust – Fair Lending • SunTrust "incentivized discrimination" by sharing the inflated charges with those loan officers and brokers, Perez [Thomas E. Perez, assistant attorney general for the Civil Rights Division] said. • “Those minority borrowers had no idea white customers with similar credit would pay less ...

  10. Sun Trust – Fair Lending “That is discrimination with a smile.“ [Thomas E. Perez]

  11. Unfair, Deceptive and Abusive Acts and Practices Act (UDAAP) • Unfair, Deceptive and Abusive Acts and Practices (UDAAP) • Deceptive advertising (“free”, “no-cost”, hidden costs) • Abusive collection practices (coercion, practices contrary to FDCPA rules) • Inaccurate customer disclosures (fees, costs, product features) • Lack of required verbal disclosures (costs, including APR, APY, specific product features) • Charging customers when not authorized (overdraft programs, regular account fees)

  12. Unfair, Deceptive and Abusive Acts and Practices Act (UDAAP) • Overdraft Protection Programs • Inadequate disclosure of fees and costs to consumers (“Free Checking”) • Lack of “opt-in” for overdraft protection programs for everyday ACH and Point of Sale Transactions (“A-9” forms) • Posting patterns which encourage overdrafts (largest to smallest items posting)

  13. WoodForest Bank - Overdraft Protection Program Case

  14. WoodForest Bank - UDAAP Unfair Practice - Fees • Until approximately December 31, 2009, customers were automatically enrolled in PrivilegePay thirty (30) days after account opening. • Customers enrolled in PrivilegePay were charged a per transaction fee each time a transaction causes a customer’s account to become overdrawn. • Prior to September 2009, the Bank had no daily, monthly, or other limit on the amount of overdraft fees a customer could incur.

  15. WoodForest Bank - Overdraft Unfair Practice - Fees • The Bank imposed limits on the amount by which an account may be overdrawn at any time although some customers are allowed to exceed the overdraft limit for their accounts. • The Bank also did not monitor customer accounts for excessive usage of PrivilegePay. • Prior to approximately May 15, 2010, accounts that were not brought to a positive balance within seven days were charged a “continuous overdraft fee.”

  16. WoodForest Bank - Overdraft Assertion – Unfair Practice: • This practice was considered unfair because, once continuous overdraft fees began, many Bank customers were unable to avoid the assessment of continuous overdraft fees.

  17. WoodForest Bank - UDAAP Deceptive Practice - Marketing • The Bank marketed or promoted its deposit account products through a brochure that highlighted: • Free or low cost features of certain accounts while omitting information about costly features of the account, such as overdraft protection; • Certain accounts represented as “well-suited for customers who had previous difficulty in managing their Bank accounts” while omitting information about the costs of overdraft protection

  18. WoodForest Bank - UDAAP Assertion – Deceptive Practice • The brochure was deceptive because it omitted information about high-cost features of accounts at the Bank, such as PrivilegePay.

  19. WoodForest Bank - UDAAP Deceptive Practice – Written Disclosures • Bank provided a written disclosure at account opening that described the features of PrivilegePay, but did not mention that consumers could be automatically reinstated into PrivilegePay after their use of the program was suspended or terminated.

  20. WoodForest Bank - UDAAP Assertion – Deceptive Practice • The omission of this information was deceptive because it led customers to believe that they would not be automatically reinstated into PrivilegePay.

  21. WoodForest Bank - UDAAP • Restitution of fees charged in specific circumstances estimated at $32,000,000 for a period of 5 years (2005 through 2010) • Civil money penalty in the amount of $1,000,000

  22. Third Party Vendor Management - Compliance • Third Party Vendor Management • Assessment of risk related to third party relationships • Focus on product branding, ownership of third party processes impacting consumers • Monitoring of controls at third party, including call and correspondence monitoring

  23. Complaint Management • Consideration of Complaints in Exams(CFPB Examination Manual - UDAAP 9) • Consumer complaints play a key role in detection of UDAAP • Absence of complaints does not ensure an absence of UDAAP • Specific focus is placed on how institutions receive, monitor, and respond to complaints received

  24. Complaint Management • What is a Complaint (UDAAP Perspective)? • Assertion features of products or services are not delivered as advertised • Assertion the consumer did not understand product or service would be delivered in the manner received • Assertion information regarding the product was not delivered when the product or service was accepted • Dissatisfaction with product or service in general

  25. Complaint Management • Expectation Regarding Management of UDAAP and Complaints • Institutions must have clear policies and procedures for collection and response to consumer complaints • Employees must be trained to observe institutional policies and procedures • Response to complaints should be timely and fair (may include restitution, or making consumer whole) • Management should monitor trending of complaints for identifiable issues related to products and services provided to consumers

  26. Complaint Management • Expectation Regarding Management of UDAAP and Complaints • Trends regarding complaints should be reported periodically to Executive Management and Board of Directors for appropriate action • Complaints should be monitored by 1) product or service; 2) regulation, with focus on those which may require financial restitution and are subject to additional fines or Civil Monetary Penalties; 3) regulations which may expose the institution to reputational damage

  27. Complaint Management • How Examiners Test Complaint Management • Identify all sources of complaints: • CFPB Databases • Internet Sources (www.ripoffreport; www.complaints.com; • Better Business Bureau • Other Regulatory Agencies (NCUA, State, FTC, SEC) • Institutional records (written complaint records) • The following also may be considered for red flags for potential consumer damage: • Return rates (ACH) • Charge back rates (card services)

  28. Complaint Management • How Examiners Test Complaint Management • Evaluate for Trends (concentration on specific products and services) • Review Institutional response to trends • Option to conduct further detailed testing an analysis if evidence of consumer complaints regarding compliance areas considered higher risk or suspicion of UDAAP is present

  29. Upcoming Compliance Implementations and Emerging Compliance Issues

  30. Truth in Lending – Ability to Repay • Effective January 2014 • Applies to all closed end loans secured by 1-4 family dwellings (including attached land) • Excludes open end credit, 12 month or less term loans • Eight factors must be considered in underwriting (Income; employment; projected monthly payment; simultaneous loan payments; monthly payment of taxes and insurance; other debts; monthly debt-to-income ratios; credit history).

  31. Truth in Lending – Ability to Repay • Information relied upon must be verified • Standards must be developed for institution and evenly applied • Must be reasonable and in good faith (equitable and effective) • Records must be retained for 36 months following consummation

  32. Truth in Lending – Qualifying Mortgage Standards • Applies specific standards for “safe harbor” • Otherwise, may be challenged in court by debtor in default as “unfair” • Freddie Mac and Fannie Mae will make separate determinations regarding if they will purchase loans that do not meet the Qualifying Mortgage (QM) Standards

  33. Fair Lending – Indirect Auto Lending • Indirect Auto Lending Programs - CFPB Bulletin 2013-2 (March 2013) • Dealer Mark-Up (differential between dealer finance rate and lender “buy” rate) • Dealer Reserves/Participation Compensation (differential between lender “buy” rate and note rate executed by the dealer) • Use of either may result in potential disparate treatment or disparate impact may result

  34. Questions Steve Cornell, Senior Manager Moss Adams LLP 503-471-1295 Steve.Cornell@mossadams.com

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