CFPB Compliance: Connecting the Dots

The CFPB has been widely criticized for regulating by enforcement actions, rather than embarking on rulemaking proceedings, to delineate the regulatory rules of the road for the financial services industry. In a March 9,2016 speech, Director Richard Cordray endeavored to explain the method to the CFPB's enforcement madness. While understanding the director's perspective is helpful, that speech failed to connect all the dots for the compliance world.

So, what did Director Cordray say? The bureau's supervisory work is largely confidential between the company being examined and the CFPB. However, the CFPB publishes a quarterly report called “Supervisory Highlights” to bring transparency to the CFPB's oversight program. The CFPB expects the industry to take note of the major issues addressed in its examination work and to immediately respond to the remedial actions noted in those reports. As to enforcement actions, Director Cordray said, “It would be compliance malpractice for executives not to take careful bearings from the contents of these orders about how to comply with the law and treat consumers fairly.” He also suggested that the CFPB consent orders are meant to expose a pattern of actions for the industry to decipher.

Let's try applying these statements to the No. 1 consumer complaint category for the CFPB: Debt collection. In 2015, the CFPB had 15 consent orders related to debt collection practices. From those orders, it's easy to identify what the CFPB doesn't like, but it's not readily apparent what the right way to handle debt collection is – at least in the CFPB's eyes.

Pulling out the Dec. 16, 2015 consent order for EZCORP, in-person debt collection tactics were criticized, including wearing company name tags and stating the company name when going to borrowers' homes or places of work. The CFPB even issued a bulletin titled “In-person Collection of Consumer Debt” along with the EZCORP consent order, where it stressed the heightened risk associated with committing unfair acts or practices when conducting in-person debt collection efforts. Yet, in neither the EZCORP consent order nor the bulletin can the industry find how to handle those activities in a compliant manner. The industry was warned, yet given zero guidance.

For the financial services industry to connect the dots, we need to look more broadly. For example, when companies sell add-on products, a good place to start is the CFPB's Examination Manual for Credit Cards, Module 6: Marketing, Sale and Servicing of Credit Card Add-on Products. No, it doesn't matter if you aren't working for a credit card company. That portion of the manual lays out seven practices that the CFPB has found to be deceptive. The fifth deceptive practice listed is representing that the products would improve the consumer's credit score. It would take considerable effort to find where that practice was found deceptive in a consent order since the CFPB has issued more than 100 consent orders, but the bureau made it easier to find by adding it to the 1000-plus page manual.

Sometimes, the industry needs to look beyond the CFPB's actions. Redlining refers to the practice of denying services to consumers based on race or ethnicity. As an example, last fall the CFPB found that a New Jersey bank was engaged in redlining in the following ways:

The bank avoided locating branches and loan officers in majority Hispanic and/or African-American communities.
The bank avoided using mortgage brokers in these communities.
The bank even excluded majority Hispanic and/or African-American communities from its marketing strategy and credit assessment.

For compliance-focused executives, it might be easy to check this one off and say this is a mortgage-related issue and not our concern. Yet, by following Department of Justice press releases, you would discover that reverse redlining was a legal theory applied to “buy here, pay here” auto dealers. Two auto dealers were found to be intentionally targeting African-American customers for the extension and servicing of credit on unfair and predatory terms such as:

Locating dealerships in areas where residents were majority African-American; and
Offering sale prices, down payments and interest rates disproportionately higher than other subprime used car dealers.

These practices resulted in default and repossession rates higher than other subprime used car dealers. To develop a comprehensive picture of the compliance landscape, enforcement actions by the DOJ, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and even Federal Trade Commission have to be monitored to put the CFPB's actions into perspective. Here, it's clear that redlining and reverse redlining are ECOA compliance considerations for any brick and mortar lender.

So yes, it was helpful for Director Cordray to explain the method to the CFPB's enforcement approach and for him to encourage the industry to connect the dots to receive his compliance messages. But keep your eye on a broader set of data points than just Supervisory Highlights and enforcement orders! Know the language of the CFPB and keep your credit union poised for financial growth and stability.

John Short is chief compliance officer for Fortegra. He can be reached at 904-421-5977 or [email protected].

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