with Allan Fried
According to recent reporting, Lenders are struggling to manage simple processes that the CFPB has outlined in their ongoing guidance. In this summer’s CFPB Highlight report, they found numerous problems that lenders are not appropriately addressing. In this article we’ve compiled a list of important CFPB findings that we believe affect our lenders. This is not an exhaustive list but only a small portion of issues raised in the CFPB’s Summer Highlight report. We want to present some of the biggest problems we believe affect the lenders in our industry. If you’d like to learn more about any of the topics discussed below, check out the full CFPB examination at the bottom of the article.
Within the auto finance industry, the CFPB found several exceptions, but a majority of lenders were found to practice unfair deceptive acts or practices related to payment application. They specifically identified unfair acts or practices related to payoff amounts where consumers had ancillary product rebates due.
First, it’s helpful for us to know the context and define an “unfair” practice according to the CFPB. Under the prohibition on unfair acts or practices in Sections 1031 and 1036 of the CFPA, an act or practice is unfair when: (1) it causes or is likely to cause substantial injury; (2) the injury is not reasonably avoidable by consumers; and (3) the substantial injury is not outweighed by countervailing benefits to consumers or to competition.
Within the auto loan industry, auto finance contracts generally require consumers to maintain comprehensive and collision insurance that covers physical damage to the vehicle to protect the value of the collateral. If the consumer fails to maintain appropriate coverage, some contracts provide that servicers can purchase insurance for the vehicle, often called collateral protection insurance (CPI). CPI policies only cover damage to the vehicle. Charges for CPI policies are added to consumers’ accounts and paid monthly.
Typically, Servicers use electronic databases to monitor whether consumers are maintaining adequate insurance coverage. If the database suggests that a consumer is not maintaining adequate coverage, the servicer will send a notice requesting proof of insurance and stating that if the borrower does not provide proof of insurance, then a CPI policy will be purchased at the consumer’s expense. When the CPI policy is purchased, the servicer sends the consumer another notice with information about the policy. If the consumer later proves that they had adequate insurance during any portion of the CPI policy period, the servicer will generally remove any CPI charges for that period.
With this standard practice in mind, the CFPB found that servicers caused consumers substantial injury by adding and maintaining charges for CPI premiums because of deficient processes when consumers had adequate insurance in place under their contracts. If a consumer has an adequate insurance policy that covers the vehicle, the CPI policy provides no benefit to the servicer or consumer. Placing or maintaining charges for CPI when consumers have adequate insurance causes consumers injury because consumers must either pay for the duplicative insurance or incur late fees or other consequences of delinquency. Additionally, some servicers caused additional injury because they applied any refunds of paid CPI charges to principal instead of returning those amounts directly to the consumer.
Examiners also found:
- Charging for CPI after repossession
- Inaccurate payment posting
- Failure to follow disclosed payment application order
Examiners found that servicers engaged in deceptive acts or practices by representing on their websites a specific payment application order, and subsequently applying payments in a different order. Specifically, servicers represented on their websites that payments would be applied to interest, then principal, then past due payments, before being applied to other charges, such as late fees. Instead, the servicers applied partial payments to late fees first, in contravention of the methodology disclosed on the website. As the result of applying payments to late fees first, servicers repossessed some consumers’ vehicles.
- Inaccurate payoff amounts
Consumers financed the purchase of optional products by adding it to the loan amount of a vehicle purchase. The contracts provided that consumers or servicers could cancel the product at any time and receive a “pro-rata” refund less a cancellation fee. Servicers prepared payoff statements in response to consumers’ requests that included a line listing credits for refunds from optional products and a total “payoff amount.” Servicers calculated this refund based on the actuarial value of the policies, instead of using the pro-rata calculation specified in the contract. In some instances, this resulted in payoff statements that listed a total amount due that was larger than the amount the consumer owed.
This is simply negligence from some lenders. We’ve seen lenders struggle to maintain these regulations because of their inability to effectively track data. For whatever the reason may be, businesses have struggled to maintain their data which has led to the errors mentioned above. One simple way to solve errors like these is to upgrade your processes and workflow. Processing payments and tracking loan data should be an automated system with little room for error. That’s why we suggest in investing into loan management software that can house this data appropriately. Eliminate the room for error by streamlining this process using software that tracks data for you.
Lenders are subject to several requirements under the Fair Credit Reporting Act (FCRA) and its implementing regulation, Regulation V. These include the requirement to furnish data subject to the relevant accuracy and dispute handling requirements. In recent reviews, examiners found deficiencies in furnisher compliance with FCRA and Regulation V with accuracy and dispute investigation requirements.
Furnisher duty to update and correct information
The FCRA requires that persons who regularly and in the ordinary course of business furnish information to CRCs about that person’s transactions or experiences with consumers must, upon determining that information furnished to CRCs is not complete or accurate, “promptly notify the consumer reporting agency of that determination.” The furnisher must then provide to the agency any corrections to that information, or any additional information, that is necessary to make the information provided by the person to the agency complete and accurate and shall not thereafter furnish to the agency any of the information that remains not complete or accurate.” 15 U.S.C. § 1681s-2(a)(2)(B).
Furnishers’ duty to conduct reasonable investigation of direct disputes
Regulation V requires that, after receiving a direct dispute notice from a consumer, a furnisher must “conduct a reasonable investigation with respect to the disputed information. 12 C.F.R. § 1022.43(e)(1). Further, Regulation V provides that a “furnisher is not required to investigate a direct dispute if the furnisher has reasonably determined that the dispute is frivolous or irrelevant.” 12 C.F.R. § 1022.43(f)(1).
However, if a furnisher determines that a dispute is frivolous or irrelevant, the furnisher must “notify the consumer of the determination not later than five business days after making the determination, by mail or, if authorized by the consumer for that purpose, by any other means available to the furnisher.” 12 C.F.R. § 1022.43(f)(2).
The notice must “include the reasons for such determination and identify any information required to investigate the disputed information, which notice may consist of a standardized form describing the general nature of such information.” 12 C.F.R. § 1022.43(f)(3).
With these examinations in mind, we suggest that lenders establish additional processes in order to manage these disputes more effectively. The FCRA has outlined rigid deadlines to reporting and it is very important for your business to be in compliance with them. The only way you can ensure your business can repeatedly meet these regulations is if you establish a consistent workflow for your employees to follow.
Within this report, we’ve seen a consistent problem of housing information. Similar to the examinations in the auto servicing industry, lenders have not been able to correct furnish data because of their lack of access to precise data. We’ve heard frequent stories of lenders tracking customer data by hand using a spreadsheet. Not only is this not efficient, but usually results in errors being made. Those errors within lender’s data management are exactly what the examiners have found. That’s why Vergent has simplified data collection and management. By housing your data on an end-to-end software, furnishing data is not only more efficient but more accurate.
Examiners observed that payday lenders engaged in a deceptive act or practice in violation of the CFPA with their marketing and advertisements. Many advertisements on storefronts or on websites were determined to be misleading. They frequently made promises that the lenders couldn’t keep or would hide crucial information in order to attract consumers. The two most common misrepresentations were:
Misrepresentations that no credit check will be conducted
It is against CFPA regulations to falsely claim on advertisements that your business would not check a consumer’s credit history. But throughout their investigation, the examiners found that many lenders used consumer reports from at least one consumer reporting agency in determining whether to extend credit to their customers. The examiners then determined that it was reasonable for a consumer to interpret the lender’s ads as meaning that the lenders would not check a consumer’s credit history when deciding whether to extend credit, and the representations were material because they were likely to affect consumers’ conduct with respect to applying for loans. Prospective customers may have had concerns about their credit histories and ability to obtain credit, and consequently made a different choice. Moreover, storefront advertising claims were express and presumed material.
In response to these findings, the lenders ceased making misleading representations on signage at branch locations and websites and implemented enhanced advertising oversight.
Deceptive presentation of repayment options to borrowers contractually eligible for no-cost repayment plans
When consumers indicated an inability to repay their payday loans, lenders engaged in a deceptive act or practice by presenting payment options to consumers in a manner that misled or was likely to mislead them. Examiners found that, as a result of the institutions’ process of presenting fee-based refinance options to struggling borrowers while withholding information about contractually available no-cost repayment plan options, many consumers entered into fee-based refinances despite being eligible for a no-cost repayment option.
For more information about the report and the CFPB, check out their website: