United States: Key Takeaways From The Fed's July 2018 Consumer Compliance Supervision Bulletin

On July 26, 2018, the Federal Reserve Board ("FRB") announced the launch of a new publication called the Consumer Compliance Supervision Bulletin. Similar to the Bureau of Consumer Financial Protection's ("BCFP") Supervisory Highlights, the new publication summarizes examiners' observations from recent supervisory activities and offers guidance on what supervised institutions can do to address consumer compliance risks. The first bulletin focuses on three areas: fair lending, unfair or deceptive acts or practices ("UDAP"), and recent regulatory and policy developments.

Fair Lending

The fair lending section addresses potential fair lending risks with respect to redlining, mortgage target pricing, small dollar loan pricing, disability discrimination, and maternity leave discrimination. Key takeaways include the following:

• Redlining: The bulletin reminds banks that redlining remains a concern to the FRB. Interestingly, the bulletin states that while banks can manage redlining risks by analyzing statistical disparities in applications and originations, "it is equally important for banks to focus on their business model." In particular, banks can manage potential redlining risks by regularly reviewing Community Reinvestment Act assessment areas (particularly after a merger or acquisition); branch and loan production office locations; potential risks in marketing and outreach, including whether those activities reach the entire assessment or credit market area; and consumer complaints. The bulletin also suggests that banks document the reasons for making certain business decisions.
• Mortgage Target Pricing: The bulletin notes that despite the Truth in Lending Act's Loan Originator Compensation Rule, which reduced some of the fair lending risk related to mortgage pricing, fair lending risks can arise in the mortgage context when banks allow mortgage loan originators to use different target prices and the originators charging higher target prices disproportionately serve minority areas. The bulletin outlines certain ways to manage these risks, including by adopting policies and procedures to control discretion and by mapping loans by target price.
• Small Dollar Loan Pricing: The bulletin encourages banks to offer small dollar loans to consumers and highlights observed fair lending risks that can arise from pricing discretion and the absence of rate sheets or pricing guidelines, documentation regarding pricing decisions and exceptions, or monitoring for potential pricing disparities. The bulletin notes that examiners have seen these practices result in minority borrowers and women paying higher interest rates for unsecured small dollar loans. The bulletin encourages banks to provide loan officers rate sheets, ensure that pricing exceptions are documented, and monitor the frequency and amount of exceptions for potential disparities.
• Disability Discrimination: The bulletin notes potential fair lending risks on the basis of disability, observing that some banks impose more onerous standards on loan applicants that receive disability income, including requesting a doctor's letter regarding the nature of the disability and whether the disability is expected to continue. This observation echoes the concerns raised by the BCFP in its 2014 bulletin on disability income and by the Department of Housing and Urban Development ("HUD") in its Fair Housing Act enforcement activities.
• Maternity Leave Discrimination: The bulletin notes potential fair lending risks where banks treat women on maternity leave as "unemployed" for underwriting purposes, and encourages institutions to review their policies, procedures, and training with respect to this issue. HUD also has raised this issue in Fair Housing Act enforcement matters.

UDAP

The bulletin highlights potential UDAPs in connection with student financial products and services, overdraft practices, and loan officer misrepresentations. Note that the new bulletin was released the same day that the FRB issued an enforcement action with a bank resolving allegations of UDAPs in connection with the sale and billing of certain consumer deposit account add-on products. The bank was ordered to pay $4.75 million in restitution to approximately 11,000 consumers.

• Student Financial Products and Services: The bulletin notes that banks face UDAP risks when using third-party service providers for student-oriented products such as student deposit accounts and student credit cards. The bulletin encourages institutions to vet service providers' financial condition and experience in offering the proposed service, monitor complaints even when a third party is being used, and actively monitor arrangements with third parties, including any consumer-facing content.
• Overdrafts: The bulletin encourages banks to review their overdraft practices to ensure that they correctly communicate the bank's overdraft processing methods to consumers, refrain from assessing overdraft fees on point-of-sale transactions after having authorized those transactions based on sufficient available funds, set limits on overdraft fees, and monitor for excessive overdrafts by consumers.
• Loan Officer Misrepresentations: The bulletin notes potential UDAPs in connection with loan officers misrepresenting consumers' eligibility or qualifications for certain loans, including misrepresenting that consumers have been approved for a loan where additional criteria must still be met. The bulletin suggests monitoring consumer complaints, reviewing policies regarding completed applications, prequalifications, and preapprovals, and providing training regarding how and when underwriting decisions, terms, and conditions are provided to applicants.

Regulatory and Policy Developments

Finally, the bulletin mentions the updated consumer compliance rating system that went into effect on March 31, 2017. View our previous coverage of this development here. The bulletin also notes changes to the Military Lending Act ("MLA") from July 2015, including expanded coverage of the MLA to certain products and services, and enhanced disclosure requirements. View our previous coverage of recent MLA interpretive guidance here.

The new Consumer Compliance Supervision Bulletin serves as yet another resource for financial institutions to understand the contours of consumer finance laws. Check back here for coverage of future editions.

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