CFPB Supervisory Highlights: Auto Loan Servicers Should Re-Examine their Repossession Fee Policies

Auto loan servicers need to pay careful attention to their repossession practices and particularly, their policies concerning repossession fees. The clear message from the CFPB’s Supervisory Highlights is that examiners are focused on repossession activities, “including whether property is being improperly withheld from consumers, what fees are charged, how they are charged, and the context of how consumers are being treated to determine whether the practices are lawful.” Supervisory Highlights, p. 6 (Issue 13, Fall 2016).

The Report makes clear that the CFPB’s position is that it is an unfair practice to detain or refuse to return personal property found in a repossessed vehicle where the consumer requests return of the property.  Similarly, it is an unfair practice to detain or refuse to return personal property until the consumer pays a fee. According to the CFPB, even when the consumer agreements and state law may support the imposition of a fee, there are no circumstances in which it is “lawful to refuse to return the property until after the fee…[is] paid, instead of simply adding the fee to the borrower’s balance as companies do with other repossession fees.” Id.    The Report also noted that in one or more examination, companies engaged in an unfair practice by charging a borrower for a storage fee for personal property found in the repossessed vehicle when the consumer agreement disclosed that the property would be stored, but not that a fee would be imposes for doing so.

Auto loan servicers need to examine their policies and procedures regarding their repossession practices to insure they are in line with the CFPB expectations.  Additionally, auto loan servicers should monitor their third party vendors’ practices for compliance with the CFPB examinations and make any adjustments necessary as to repossession fees.

CFPB Supervisory Highlights: It’s all about the Compliance Management System

The CFPB published its Fall Supervisory Highlights last week, highlighting its examination observations across various financial products for examinations conducted between May and August 2016.  The Report highlights key findings made by the CFPB and provides insight into the current focus of the examiners.  The current edition of Highlights reveals a heavy focus on compliance management systems across product types. Because of the volume of information in the Report, we will break down the Report over several blog posts in the coming week. 

There’s a country song that says “it’s all about that bass”.  In the case of regulatory compliance, it’s all about that compliance management system.   Nowhere is that more evident than in this issue of the CFPB’s Supervisory Highlights.  Throughout the report, the CFPB highlights and defines what constitutes a strong compliance management system (“CMS”) and what does not.  It is clear that the CFPB is honing in on a theme which has become prevalent throughout many of its enforcement actions: “beneficial practices centered on good compliance management systems” go a long way.

To that end, the Report provides insight into what constitutes a strong CMS. Particularly, the Reports singles out the qualities of strong compliance management systems in automobile finance, debt collection, mortgage and fair lending.  Generally, what constitutes a compliance management system is dependent upon the size of the business, its risk profile and its operational complexity.   The Report noted, however, that that a strong compliance management system generally reflects:

• Strong and active boards and management oversight.  The Report set forth the expectation that boards and management:
  • Demonstrate clear expectations about compliance;
  • Have an adequate compliance audit program;
  • Adopt clear policy statements regarding consumer compliance; and
  • Ensure that compliance-related issues are raised to the board of directors or management.
• Policies and procedures to address compliance with all applicable consumer financial laws relating to the product;
• Current and complete compliance training designed to reinforce policies and procedures that is tailored to job functions and updated as needed;
• Adaptive internal controls and monitoring processes which provide for timely corrective actions where appropriate;
• Policies and procedures setting forth clear expectations for timely handling and resolution of complaints;
• Processes for appropriately escalating and resolving consumer complaints including analysis for root causes, patterns or trends;
• Processes for escalating identified violation trends to management for proposed changes to policies and procedures;
• Comprehensive audit programs that are independent of the compliance program and business functions; and
• Strong oversight of service providers commensurate with the risk and complexity of the processes or services provided.

Institutions need to view their compliance management system as part of an eco-system that is always changing.  Compliance management systems should be reviewed on an ongoing basis and remain adaptive.  While a strong compliance management system may not prevent violations and regulatory irregularities, it certainly can mitigate the damage and the most recent Supervisory Highlights makes clear that the CFPB continues to make them a point of emphasis.

CFPB Amends its Vendor Management Guidance

The CFPB has amended its guidance on vendor management. According to the CFPB, the amendment was necessary to “clarify that the depth and formality of the risk management program for service vendors may vary depending upon the service being performed – its size, scope, complexity, importance and potential for consumer harm.”  CFPB Bulletin 2016-02.  The Bulletin, like its 2012 predecessor, makes clear that the supervised entities are responsible with their service providers for their service providers’ compliance with federal consumer financial laws. “While due diligence does not provide a shield against liability for actions by the service provider, it could help reduce the risk that the service provider will commit violations for which the supervised bank or nonbank may be liable...”  

 

The Bulletin set forth a number of nonexclusive steps it expects covered institutions to take in managing their service providers:

 

• Doing due diligence to insure their service providers understand and are capable of complying with applicable consumer financial laws;
• Requesting and reviewing their service providers’ policies, procedures, internal controls, and training materials to insure their service providers are providing adequate training and oversight to insure compliance with applicable consumer financial laws;
• Providing contractual provisions in their vendor agreements that provide clear expectations of compliance, as well as appropriate and enforceable consequences for any failure to comply;
• Insuring that service providers are prohibited from unfair, deceptive or abusive acts or practices, as well as violations of specific federal consumer financial laws;
• Establishing internal controls and on-going audits and examinations of service providers to insure their continued compliance; and
• Taking prompt action to address problems identified through the monitoring process, including termination of relationships, if appropriate.

 

Moreover, the Bulletin makes clear that the CFPB takes the position that it has supervisory and enforcement authority over bank and nonbank supervised service providers and “will exercise the full extent of its supervisory authority over supervised service providers, including its authority to examine for compliance with Title X’s prohibition on unfair, deceptive, or abusive acts or practices.”  Service providers and supervised entities alike can expect the CFPB to expand its enforcement net to include entities which are not otherwise covered by the CFPB. 

 

Supervised entities should review their vendor management policies and shore up any weaknesses in their compliance management systems with respect to their vendor management relationships.  Service providers, meanwhile, should be reviewing their own policies and procedures to insure compliance with all applicable consumer financial laws.  Both supervised entities and service providers should review the CFPB’s Supervision and Examination Manual: Compliance Management Review andUnfair, Deceptive and Abusive Acts or Practices.

 

Courts Continue to Draw Line on Standing

A New Jersey district court’s recent dismissal of a single count claim brought under the Fair and Accurate Transactions Act (“FACTA”) reinforces the need for consumers to carefully identify their injury in fact.  In Kamal v. J. Crew Group, Inc., 2016 U.S. Dist. LEXIS 145392 (D.N.J. Oct. 20, 2016), the consumer filed a  putative class action alleging that defendant violated FACTA by displaying the first six digits and last four digits of his credit card on the electronically printed receipt. FACTA, which was passed in part to curb credit card fraud and identity theft, prohibits printing more than five digits of a credit card number on a sales receipt.  The plaintiff alleged that he became more susceptible to fraud as a result of the defendant’s violation of FACTA.

In considering the defendant’s motion to dismiss for lack of standing, the court considered whether, “in light of Congress’ decision to authorize private suits under FACTA, printing ten rather than five credit card digits on a sales receipt elevates the risk of fraud enough to work a ‘concrete’ injury for the purpose of Article III standing.”  Kamal at *6. In determining that the motion to dismiss should be granted, the court found that the amended complaint did not provide facts sufficient to demonstrate a “risk sufficiently ‘actual or imminent’ to constitute a concrete injury.”  Specifically, the court noted that: (a) there was no evidence that anyone had accessed or attempted to access plaintiff’s credit card information; and (b) there was nothing to indicate anyone will actually obtain one of the plaintiff’s discarded receipts and identify the remaining six digits of the credit card number and then attempt to use the card.  Moreover, the court noted that “Congress’ role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirements whenever a statute gives a person a statutory right.” Id. at *10. 

The court’s decision joins a growing body of case law which has emerged since Spokeo v. Robins which refuses to give credence to technical statutory violations without some allegation or indicia of real harm.

CFPB Turns its Attention to Prepaid Products and North Carolina

The CFPB issued its Monthly Report this week. The report is a high level snapshot of trends in consumer complaints and provides a summary of the volume of complaints by product category, by company and by state. Additionally, each month it highlights a product type and a geographic area. This month’s report highlights prepaid card products and emphasizes the CFPB’s concern for the unbanked and underbanked population. Cordray noted that for the unbanked and underbanked, “prepaid products are a vital source of financial security.”  CFPB Monthly Complaint Snapshot Highlights Prepaid Product Complaints.

 

NATIONAL OUTLOOK. Each month, the Report breaks down complaint volume by product looking at a three month average and comparing the same to the prior year. Student loan complaints showed the greatest percentage increase when compared to the same period of 2015, increasing 96% over last year.  As has been the case in prior months, the Report continues to indicate that the three products yielding the highest volume of complaints on a month to month basis are debt collection, mortgage and credit reporting.  Together, they represent about 63% of all complaints submitted in September.

 

FEATURED PRODUCT OR SERVICE. This month’s report focuses on prepaid cards which, aside from “other financial service”, comprise the smallest percentage of complaints received by the CFPB for September and continue to remain toward the bottom of the list overall.  Put simply, prepaid product complaints make up less than 1% of all complaints received by the CFPB.

 

The most common issues identified by consumers are managing, opening or closing an account and unauthorized transactions or other transaction issues. Specifically, 

 

• According to the report, consumers complained of questionable transactions being posted to their prepaid cards and claimed their cards were cancelled without notification after they submitted a dispute;
   

• Consumers also reported difficulty using prepaid cards after purchase and being asked to submit validating documentation; and
   
• Consumers also complained about receiving prepaid cards as a refund, but being unable to activate the card, access the funds or both.  

NORTH CAROLINA. As it does every month, the Report spotlights a geographic area.  This month, the Report shined its bright light on North Carolina and the complaint trends for both the state and the Charlotte metropolitan area.  For perspective, only about 3% of all complaints received by the CFPB originate in North Carolina.  The most complained of products and services mirror the national picture with mortgage, debt collection and credit reporting comprising the vast majority of all complaints.  As noted by the CFPB, the rate of mortgage related complaints is slightly higher than the national average and it is the most frequently complained of product in North Carolina.

Cordray Provides Mortgage Industry with Insight on Examination Priorities

In his prepared remarks to the Mortgage Bankers Association, CFPB Director Richard Cordray offered some insight into his office’s examination priorities with respect to the mortgage industry.    Here are the key takeaways:

• TRID:  In his remarks, Cordray characterized the CFPB’s early examinations of TRID compliance to be “diagnostic and corrective, not punitive.”  According to Cordray, examiners are focused on the institution’s compliance management system and efforts to comply.  Cordray also indicated that examiners are engaged in transaction testing.
• Mortgage Servicing: Cordray confirmed that the complaint portal is being used as a partial basis for examinations as it provides a better understanding of trends.  Cordray also indicated that mortgage servicing remains a focal point of examinations and that examiners will continue to focus on the effectiveness of institutional information technology systems.
• Redlining:  Again, Cordray indicated that this is a “priority issue” in the Bureau’s supervisory work without much elaboration.