CFPB Sues Bank Over Overdraft Sales Pitch

The CFPB’s concern with incentives and overdrafts continues and has resulted  in a lawsuit filed against a Minnesota based TCF National Bank.  In the lawsuit, the CFPB alleges that TCF National Bank violated the UDAAP provisions of the Consumer Financial Protection Act and the Electronic Funds Transfers Act (“EFTA”).  In 2010, EFTA was amended to require consumers “opt in” to overdraft coverage for ATM and one-time debit card transactions. 

The complaint which appears to be based upon statements taken from former employees (rather than from customer complaints) is filed in the United States District Court for the District of Minnesota.  See generally, Consumer Financial Protection Bureau v. TCF National Bank, 17-cv-00166, Dkt No. 1 (D. Minn. Jan. 19, 2017).  According to the complaint, TCF utilized consumer testing to determine the best strategy for gaining maximum opt in consent from account holders.  The bank  then designed its opt in program in a manner that did not provide consumers with the ability to provide informed consent.  According to the complaint, employees were provided scripts and strategies which were designed to achieve opt in by the customer.  According to the CFPB, TCF’s explanation was so short that “consumers tended not to pay attention to the decision” and were left with the impression that opting in was mandatory.  Moreover, the CFPB alleged that the script characterized opting in as a choice to allow the Bank to provide a benefit.  The complaint further alleges that the bank incentivized its employees through 2010 by offering “substantial financial incentives” of up to $7,000.00/year for managers of large branches for achieving performance goals related to opt ins.  After incentives were phased out, the CFPB alleges the bank set performance goals which required branch employees to maintain an opt-in rate of 80% or higher on all new accounts they opened.  The complaint additionally alleges that TCF’s opt in rates were significantly higher than those of other similarly situated banks. 

TCF’s press release indicates that it intends to defend the lawsuit and “rejects the claims made by the CFPB”.  “We believe we have strong, principled defenses to the CFPB’s complaint.  We also believe the CFPB’s claims are based on data not representative of TCF’s customers and mischaracterizes our opt-in practices and disclosures, which we believe clearly informed customers about their choice before, during, and after their opt-in decision.”  TCF further asserts that the complaint is contradicted by two key facts.  “First, TCF customers who opened accounts online between 2010 and 2016, with no face-to-face interaction with TCF employees, opted in to TCF’s overdraft protection at a consistent rate of over 60%.  Second, there were virtually no complaints from customers stating that they did not understand they had opted in to overdraft protection.  From 2010 to 2015, there were a total of only 341 complaints from our 2.6 million customers related to their decision to opt-in.”

 The law suit bears watching for several reasons.  First, it raises the issue as to what constitutes informed consent.  Regulation E requires that financial institutions provide consumers with a written statutory notice which contains specific disclosures and that consumers be given a reasonable opportunity to opt in.  See 12 CFR 1005.17.  The Complaint does not appear to take issue with the form or content of the notice but rather takes issue with the sales pitch. Secondly, the complaint once again takes up the issue of the relationship between consumer protection and sales, focusing on incentivizing employees and the establishment of aggressive performance goals.  Thirdly, it appears the CFPB takes issue with the fact TCF was obtaining a 66% opt in rate – “a rate more than triple the average opt-in rate at other banks.”  CFPB Prepared Remarks of Richard Cordray (January 19, 2017).  This is likely one of the reasons the CFPB has focused on TCF’s opt-in procedures.

Financial institutions should continue to follow this matter and examine their own opt-in provisions as this has been a point of discussion in multiple CFPB enforcement actions and reports over the past two years.  Additionally, the complaint re-emphasizes the CFPB’s concerns with employee incentives and the importance of insuring performance goals are aligned  carefully with compliance with consumer protection statutes.

Deposit Accounts Remain in the CFPB Crosshairs

The CFPB issued its monthly report on consumer complaints this week making it clear that consumers’ access to depository accounts remains a focal point for the CFPB. The monthly report is a high level snapshot of trends in consumer complaints and spotlights a different product type each month on a rotating basis. The Report provides a summary of the volume of complaints by product category, by company and by state.   

 

This month’s report highlights "bank account and service" complaints and echoes a recurring concern for the CFPB: that it believes that banks are under serving a portion of the banking population who are being rejected from the banking system because they have a poor depository account history. We have previously published posts on a number of occasions concerning the CFPB’s focus on deposit accounts and credit reporting and this month’s complaint report confirms the CFPB’s continued concerns. In its press release, CFPB Director Richard Cordray is quoted as saying: “Deposit accounts are an essential component of millions of consumers’ financial lives…We are concerned that consumers continue to face difficulties accessing and managing this cornerstone financial tool. Consumers who are eligible for a deposit account should be able to get one and use it effectively.”  

 

Here are the highlights of this month’s report:

 Complaint Volume by Product

•  The four products which yield the highest volume of complaints on a three month average remain debt collection, credit reporting, mortgage and bank account or service;
•  A trend worth noting is that the number of debt collection and mortgage complaints showed a significant decrease in volume over the same three month period in 2015;
• For the three month period, student loans and bank account or service indicated the highest increase in change – 64% (student loan) and 26% (bank account or service) when compared to 2015; and
• On a monthly basis, debt collection and mortgage complaints were both down in July compared to June.

 Highlighted Product: Bank Account or Service

•  The CFPB notes that, the overwhelming majority of complaints regarding bank accounts or service revolve around checking accounts (64% of all bank account or service complaints);
• The CFPB report indicates that complaints “about the use of consumer and credit reporting data for account screening are increasingly common”;
• The CFPB report also emphasizes that complaints related to overdrafts, particularly as to transaction ordering are also common;
• Consumers also complain regularly about the disparity between the size of overdraft fees when compared to the relatively small purchase that triggers the fee;
• Consumers remain frustrated concerning bank holding policies as they pertain to deposits and the delay in crediting funds;
• The report also notes complaints about error resolution procedures for their deposit accounts; and
•  As expected, the national banks are the targets of the majority of complaints, but several regional banks also appear on the “most complained about companies” list.

 As the CFPB continues to focus on consumer access to depository accounts and overdrafts, banks and credit unions of all sizes should expect their compliance management systems regarding the same to face further scrutiny by regulators and should expect to see additional guidance issued by regulators regarding the use of overdraft fees.

 

 

 

 

CFPB Rulemaking Agenda Confirms Pay Day Rulemaking is Imminent and Plays its Cards Close as to Debt Collection

The CFPB published an aggressive Spring 2016Rulemaking Agenda this week.  Two big takeaways:  The proposed pay day rules will be published within the next few weeks and the Bureau is not providing much of an update on its debt collection rulemaking.  While no definitive dates were provided, the Agenda does give some insight as to an expected time frame for several hot button issues:

 Payday Lending:   The CFPB has confirmed in its press release related to the agenda that it expects to release the proposed rule in the "next several weeks."  The press release suggests that the proposed rule is likely to require all short term loans take into account the consumer's ability to repay without default or re-borrowing.  The proposed rule is also likely to limit the number of rollovers for a loan, prohibit auto title loans, and place limitations on repayment by bank account draft. 

 

Mortgage Servicing:  The CFPB expects to amend certain aspects of the mortgage servicing rules this summer including enhanced loss mitigation requirements and compliance requirements when a borrower is in bankruptcy. 

 

TRID:  Also consistent with recent statements, the Spring Agenda indicates that the CFPB expects to issue a Notice of Proposed Rulemaking clarifying certain aspects of TRID.  Since it took effect, the mortgage industry has raised a number of concerns with ambiguities in the Loan Estimate and Closing Disclosure.  The NPR is likely to address at least some of those issues.

Prepaid Financial Products:  Last fall, the CFPB indicated it expected to issue its final rule on prepaid financial products in early 2016.  The latest press release indicates that the final rule will be released some time this summer.

 Overdrafts:  In the spring of 2015, the CFPB indicated that they were continuing to conduct additional research to assess whether rulemaking is warranted and did not issue a time table for rulemaking.  Since then, the CFPB does not appear to have made much public headway.  The Spring 2016 Agenda indicates the Bureau is still engaged in pre rule making activities.

Debt Collection:  One of the biggest stories that remains is when a proposed rule as to debt collection will be issued.  The CFPB has not committed to a time line. Prerule activities continue and the industry should be on the lookout for the convening of a SBREFA Panel as the next likely step.  The CFPB indicates that they are engaged in consumer testing initiatives to “determine what information would be useful to consumers to have about debt collection and their debts and how that information should be provided to them.” 

Women owned, Minority owned and Small Business Data Collection: The CFPB is in the early stages of developing rules to require financial institutions to report information about their lending to women-owned, minority owned and small businesses.  The CFPB has indicated a desire to model any data collection after their recently released HMDA Rules.  Prerule activities are in the initial stage and expected to continue through the third quarter of 2016.

Cordray Confirms Activity in Rulemaking

In his prepared remarks to the Consumer Bankers Association last week, Richard Cordray provided a laundry list of regulatory and rulemaking activities currently being undertaken by the CFPB.  For those keeping track:

• Cordray's remarks suggest that a final proposed rule regarding prepaid accounts in imminent;
• Likewise, a notice of proposed rule concerning pay day loans and other small dollar loans will be published in the coming moths;
• Likewise, the CFPB is preparing to issue a notice of proposed rulemaking on the use of arbitration clauses in consumer finance contracts;
• Cordray's remarks also confirmed activity regarding the incidence and transparency of overdraft fees;
• Cordray acknowledged that the CFPB is focused on debt collection but his remarks were oddly silent as to the status of the CFPB's efforts in that regard;
• Cordray also acknowledged that the CFPB has begun working to establish a rule governing the collection and publication of data on small business lending;
• Cordray's remarks also confirmed the CFPB is actively engaged in working to improve the credit reporting market and more specifically, is focused on the accuracy of screening processes used  by depository institutions; and
• Finally, Cordray confirmed the CFPB's continued partnership with the Department of Justice to "identify and stamp out discrimination in auto lending practices."

While providing no hard timelines, Cordray at least confirmed the current priorities of the CFPB regulatory agenda.  For those keeping track, the CFPB's fall rulemaking agenda had anticipated a Notice of Proposed Rulemaking concerning payday lending in early 2016 with a target date of February. 

CFPB Takes Aim at Deposit Accounts and Credit Reporting

In last fall’s SupervisoryHighlights, the CFPB expressed concerns with depository institutions who furnish information on deposit accounts, noting that while they had policies and procedures in place to insure accuracy of their reporting on credit accounts, many did not have similar policies and procedures in place to address furnishing information on deposit accounts.  This week it became clear that this issue is part of a more global concern of the CFPB – the millions of households that the CFPB contends are currently “unbanked.”  In a three pronged attack, the CFPB has made clear that it believes that banks are underserving a portion of the banking population who either do not want accounts that provide overdraft protection or are being rejected from the banking system because they have a poor depository account history. In his prepared remarks, Cordray was critical of the use of overdraft protection, stating that “overdraft programs have become a significant source of industry revenues, and a significant reason why may consumers incur negative balances.”  Cordray’s comments went on to make clear that the Bureau believes credit reporting inaccuracies and a lack of nonoverdraft products are at the root of the problem.

LETTER TO FINANCIAL INSTITUTIONS

Cordray announced that as part of the CFPB initiative to attack this problem he sent a letter to leading retail banks imploring them to: (a) create depository products that are “lower risk” (b) to the extent they already have such products, that they better market them by featuring them among their standard offerings. While the letter is “not being sent in reference to any sort of regulatory requirement”, it is a strongly worded “suggestion.”

 CFPB COMPLIANCE BULLETIN 2016-01

At the same time, the CFPB issued a Bulletin warning “banks and credit unions that they must have systems in place regarding accuracy when they pass on information, such as negative accounts histories, to checking account reporting or other credit reporting companies.”  See ConsumerFinancial Protection Bureau Takes Steps to Improve Checking Account Access. Echoing the issues identified in the fall Supervisory Highlights, the Bulletin reminds banks and credit unions that as furnishers of information under the FCRA:

• They are required to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of information relating to consumers that they furnish to consumer reporting agencies, including specialized consumer reporting agencies;
• The policies and procedures should be appropriate to the nature, size, complexity and scope of the furnisher’s activities;
• The policies and procedures should insure the accuracy and integrity of all furnished information; and
• This obligation applies to all furnishings, including the furnishing of deposit account information.

In his prepared remarks, Cordray also made it clear that the CFPB intended to scrutinize the consumer reporting agencies, including those that track deposit accounts, to insure they are accurately reporting information and dealing effectively with consumer disputes.

CONSUMER GUIDES

Finally, the CFPB issued three consumer guides: (a) “Consumer Guide to Being Denied a Checking Account”; (b) “Consumer Guide to Managing Your CheckingAccount”; and (c) “Consumer Guide toSelecting a Lower-Risk Account”.  Significantly, the first is focused on consumer’s rights under the FCRA and reminds consumers that if they are denied an account, they should make sure the bank or credit union provides the name of the consumer reporting agency who provided the information.  The Guide additionally provides consumers with information as to how to dispute any inaccurate information.

TAKE AWAYS FOR BANKS AND CREDIT UNIONS

Banks and credit unions should take this opportunity to review their policies and procedures regarding both overdraft products and their credit reporting as to depository accounts.  The CFPB has made very clear that they do not like overdraft products and it is likely that they will continue to receive regulatory scrutiny for the foreseeable future.  Secondly, the regulators are now focused on credit reporting policies and procedures across all products.  A one size fits all policy is likely to receive particular scrutiny from regulators.  Banks and credit unions should review their credit reporting and credit denial policies to insure they are appropriate based upon each product they are credit reporting and tailor them accordingly.