September 12, 2018
Authored by: Douglas Thompson
KISS. An acronym first utilized in military equipment design in the 1960’s, “Keep it Simple Stupid.” Litigators rely on KISS in formulating trial themes and presentations to juries. Simple messages resonate. In that vein, I offer three KISS takeaways from the Bureau of Consumer Financial Protection’s Supervisory Highlights, Issue 17, Summer 2018.
KISS #1: Details Matter.
On two key levels: (a) your business compliance operations and consumer interactions, and (b) in the Bureau’s supervision and examination conclusions. Taking these in reverse order, the Bureau’s Introduction (p. 2) provides important guardrails:
[L]egal violations described in this and previous issues of Supervisory Highlights are based on the particular facts and circumstances reviewed by the Bureau as part of its examinations. A conclusion that a legal violation exists on the facts and circumstances described here may not lead to such a finding under different facts and circumstances.
This is critical to your supervision and examination preparedness and your interactions with the Bureau. If the Bureau spots a concern, consider providing a fulsome explanation of the analysis that went into the policy formulation, how your organization believed it was operating in good faith under applicable laws and believed that the practice would not harm or mislead consumers, what steps your organization has done in monitoring and addressing any consumer concerns regarding the policy or practice. This may sound basic, but the Bureau’s statement matters and can be referenced. The Bureau should, in my view, consider such information in assessing whether any violation has occurred, whether any consumers actually were harmed and whether any remediation is necessary. Sometimes the conclusion may be that the practice presents a risk of potential confusion or harm and simply should be modified going forward. Present your best case; the Bureau appears to be open to considering all the facts and circumstances.
Payment Application. Data coding. Periodic Analysis. The Bureau made findings as to each of these, concluding the institution did not pay sufficient attention to detail to ensure accurate business practices. In automobile loan servicing, the Bureau concluded one or more institutions failed to apply insurance proceeds properly under the loan terms and as a result issued inaccurate and misleading billing statements. (pp. 3-4) Similarly, the Bureau concluded that improper coding of certain borrowers’ accounts resulted in repossessions or other improper collection actions. Data errors caused improper account over charges and delays in implementing loan modifications in mortgage servicing as well. (pp. 7-8) In credit card account management, the Bureau concluded that certain institutions failed to properly re-evaluate eligible accounts for potential interest rate reductions. Where analysis was conducted, certain institutions did not include consideration of all applicable factors. (p.5)
KISS #2: Clear & Direct Communications.
ETF Pre-authorizations. Debt Collection Letters. The Bureau highlights the importance of consumer communication clarity, including specific purposes for which authorizations are provided. In the FDCPA debt collection, the Bureau found that one or more institutions failed to obtain proper debt verification from creditors and failed to provide the verification to consumers. (p.6) The Bureau noted payday lending activities involving misleading collection letters and instances where the Bureau concluded lenders improperly relied on limited consumer ETF pre-authorizations for other purposes in violation of Reg E. (pp. 10-11) The Bureau found misleading and deceptive, certain collection letters which suggested collateral repossession was impending where the institutions actually did not generally do so. (p.10 ) The Bureau was focused on consumers’ understanding of the communications and what actions or reliance consumers would put in the communications.
KISS #3: Analyze the Data.
Fair Lending. ECOA Small Business Analysis. Underwriting. Pricing. Redlining. The Bureau noted a variety of best practices in ECOA risk management and compliance, which were in place at a number of institutions. However, the Bureau concluded that at certain institutions data collection and monitoring may not be sufficient. (p.13) Specifically, the Bureau flagged “Limited availability of data could impede an institution’s ability to monitor and test for the risks of ECOA violations through statistical analyses.” Assessing the potential need for and implementing any enhancements to monitoring and data analysis now may prove beneficial, especially if additional budget and resources may be required for 2019.
Clearly, this is not an exhaustive summary of the entire document. Other topics addressed include remedial actions taken; supervision rules and guidance; and fair lending developments and HMDA rules implementation. But, I would be violating KISS if I tried to cover all of it here.
One last thing, in case you did not notice, the Introduction (p.2) contains clarifying language regarding the purposes for/ impact of Supervisory Highlights:
It is important to keep in mind that institutions are subject only to the requirements of relevant laws and regulations. The information contained in Supervisory Highlights is disseminated to help institutions better understand how the Bureau examines institutions for compliance with those requirements. This document does not impose any new or different legal requirements.
While very helpful in avoiding the potential for “legislation by supervision,” that does not mean now you can ignore Supervisory Highlights. Indeed you should actively review them. You should continuously improve your processes. Leveraging the lessons of the Supervisory Highlights and applying KISS principles to ensure (1) clear core values and strategy, (2) clear policies and compliance requirements, and (3) clear and direct consumer communications will reduce litigation and regulatory risk for your organization. And even better, it will improve business performance and customer loyalty as well.