- CFPB Issues Fall 2012 Supervisory Highlights Report
- December 26, 2012 | Authors: David N. Anthony; Virginia Bell Flynn; Jarrod F. Loadholt; Ashley L. Taylor
- Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Washington Office ; Troutman Sanders LLP - Richmond Office
On October 31, 2012, the CFPB released its first report highlighting its supervisory activity between July 2011 and September 30, 2012. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB is authorized to supervise depository institutions with over $10 billion in assets, non-depository financial institutions and “larger participants” in the credit reporting and debt collection markets. Given Director Cordray’s public statements expressing a preference for the CFPB’s exercise of its supervisory authority as the primary means through which the Bureau will compel compliance with federal consumer protection law, the Supervisory Highlights (“Highlights” or “report”) provide covered entities with a useful guide for understanding the CFPB’s supervisory expectations and for developing compliance management systems to comply with federal consumer protection law.
The objective of the CFPB’s supervisory activities is to ensure the existence and operation of an effective compliance management system. The report dedicates the bulk of its analysis to deficiencies found in covered entities’ compliance management systems (“CMS”). According to the report, “assessing the quality of the compliance management system employed by financial institutions under the CFPB’s jurisdiction” is “the most important responsibility[y] of the CFPB supervisory program.” CFPB CMS supervision requires that entities demonstrate the application of the financial institutions’ compliance management program to each of its product lines, marketing practices and third-party affiliates and/or service providers.
Fair lending compliance remains a top priority for the CFPB. Reports of the CFPB’s commitment to enforcing the Equal Credit Opportunity Act (“ECOA”) were confirmed in the report as deficient fair lending compliance was a separate section in the Highlights. The Highlights referenced covered entities “lack[ing] any formal fair lending compliance system”, and in some cases, establishing fair lending compliance policies for some product lines and not other lending products. Fortunately, the report includes eight common features of “well developed fair lending programs” that should inform the fair lending dimensions of any lender’s CMS.
CFPB supervision uncovered a number of CARD Act violations. The Highlights also singled out CARD Act violations concerning credit line increases to co-applicants under the age of 21 and failure to comply with the Act’s rate reevaluation requirements under 12 C.F.R. § 1026.59. As with any product line or practice that disproportionately impacts a potentially vulnerable segment of the consumer market, credit card issuers should anticipate that CFPB supervision of credit card products will include a special focus on products and practices that target younger cardholders. In cases of violations concerning co-applicant credit line increases, the Highlights recommend that financial institutions obtain written authorization from co-applicants to accounts issued to persons under the age of 21.
Entities furnishing credit information to credit rating agencies should ensure that their practices comply with Regulation V of the Fair Credit Reporting Act. Ensuring the accuracy and integrity of financial information furnished to credit reporting agencies (“CRAs”) also was identified in the Highlights as a recurring violation discovered during CFPB supervision. Regulation V of the Fair Credit Reporting Act establishes the parameters for policies designed to ensure that CRAs receive accurate information from financial institution furnishers. According to the report, violating financial institutions lacked sufficient training and familiarity with Regulation V’s requirements. Financial institutions should ensure that their CMS includes policies confirming the accuracy of data reported to the CRAs and for resolving borrower disputes and correcting errors reported directly to covered entities.
RESPA, TILA and HMDA compliance are the focus of the CFPB’s supervisory activities for mortgage lenders. Noting significant mortgage lender non-compliance with RESPA, TILA’s Regulation Z and HMDA, the Highlights underscore two central themes of the CFPB’s mortgage lending activity to date - ensuring adequate disclosure of material mortgage terms required under RESPA and TILA and providing the data necessary for the CFPB’s Office of Fair Lending and Equal Opportunity to determine if lenders are complying with federal fair lending law. According to the report, a robust CMS will ensure proper disclosure under RESPA and TILA, adequate data collection and reporting to comply with HMDA and oversight of mortgage brokers - particularly broker compensation practices in order to ensure compliance with TILA’s anti-steering provisions.