CFPB Fall Supervisory Highlights Shed Light on Agency Priorities – Small Dollar Lending
The Fall Supervisory Highlights came out this month and reports the Bureau’s findings of examinations completed between January 2021 and June 2021. The CFPB publishes the Supervisory Highlights to help institutions better understand how the CFPB examines and monitors compliance with federal consumer financial laws. CFPB examiners often find problems during supervisory examinations that are resolved without an enforcement action and findings provide insight to other financial institutions. Among other things, the Fall Supervisory Highlights elucidate the Bureau’s concerns regarding payday lending (small-dollar lending). Earlier this year, the CFPB indicated its intention to focus on small-dollar lending activity and expressed a concern for “any lender’s business model that is dependent on consumers’ inability to repay their loans.”
The latest CFPB’s Supervisory Highlights found violations of UDAAP and EFTA in small-dollar lending. In particular, it took issue with lenders’ improper handling of consumer loan extensions. The CFPB found lenders had improperly debited consumer bank accounts and engaged in deceptive acts or practices by debiting, or attempting to debit, from consumers’ accounts the remaining balance on their loans on the original due date, instead of just the extension fee, even after the consumer had been granted a payment extension. The Bureau considered the practice to cause substantial injury to consumers by causing unexpected debits to the full loan balance and possible bank fees. Moreover, the CFPB found that the practice was a misrepresentation to consumers and thus would cause further substantial injury to consumers because the possibility of debiting the full loan amount would likely affect a consumer’s payment decisions. The Bureau is now reviewing these actions and promises to take remedial and corrective actions regarding these violations.
The CFPB found another UDAAP issue related to poor management of consumer payments. Lenders erred by debiting or attempting unauthorized or identical debits from consumers’ bank accounts due to a coding error or after consumers called to authorize a loan payment by debit card and the lenders’ systems erroneously indicated that the payments had not processed. Here too, the CFPB found that both practices caused substantial injury to consumers because it deprived consumers of access to funds and exposed them to possible bank fees. Importantly, the CFPB found that the cost of solving the problem would not outweigh injury to consumers.
Finally, the CFPB found lenders in violation of the EFTA for failure to retain for the adequate amount of time (two years) evidence of compliance with the requirements of the rule. The Bureau stated it will take remedial and corrective actions pertaining these violations. A good record retention policy is key to ensure lenders are complying with all federal record retention time limits, as well as to notify all management and staff of this important issue.
A robust compliance management system is needed to avoid the above pitfalls related to management of consumer payments, record retention and related violations of federal laws. Consistent monitoring and auditing of your compliance management system and your policies related to payments are key to avoiding future UDAAP or other law violations. Third-party legal audits can also help lenders see what they sometimes miss.