The CFPB Is Coming! The CFPB Is Coming!NCHER Knowledge Symposium November 7, 2012

John L. Culhane, Jr., PartnerConsumer Financial Services GroupHigher Education Group215.864.8535culhane@ballardspahr.com

An Eye on the Bureau – An Update from CFPB Monitor COHEAO Annual Conference January 28, 2013

2

A Busy Year for the CFPB

• Complaint Portal Extended to Private Student Loans – March 1, 2012

• Larger Participant Rule for Consumer Reporting Agencies – July 16, 2012

• The Private Student Loan Report – July 20, 2012• Financial Aid Shopping Sheet – July 23, 2012 • The Private Student Loan Report Updates – August

29, 2012

3

A Busy Year for the CFPB (cont.)

• Consumer Response: A Snapshot of Complaints Received – October 10, 2012

• Annual Report of the CFPB Student Loan Ombudsman – October 16, 2012

• The Next Front? Student Loan Servicing and the Cost to Our Men and Women in Uniform – October 18, 2012

• The Larger Participant Rule for Debt Collection Agencies – October 23, 2012

4

A Busy Year for the CFPB (cont.)

• The CFPB Debt Collection Examination Procedures – October 23, 2012

• The Fair Lending Report of the Consumer Financial Protection Bureau – December 6, 2012

• The “Paying for College” Web Tool – Beta Version – December 13, 2012

• The CFPB Education Loan Examination Procedures – December 17, 2012

5

Where They’ve Been – Private Student Loan Report

• Shows that borrowers (students and their families) desperately need the CFPB’s help because they can’t protect themselves

• Demonstrates the dysfunctional nature of the marketplace that necessitates “a cop on the beat”

• Stakes out the agenda for consumer financial protection (examination and enforcement implications)

• Shines the spotlight on fair lending issues (examination and enforcement implications)

6

Where They’ve Been –Ombudsman’s Report

• Broadly characterizes virtually all complaints as servicing related

• First category – complaints where responsible borrowers were “stymied” by servicing policies

• Second category – complaints where borrowers were “surprised” by servicing procedures

• Third category – complaints where struggling borrowers were “frustrated” by collection practices

• Fourth category – complaints where military borrowers were reportedly disadvantaged by non-compliant programs

7

Where They’ve Been – “Next Front” Report

• Broadly focuses on repayment issues and problems facing servicemembers with private and federal student loans and identifies two major problems

• First, many servicemembers are not taking advantage of the most favorable repayment plans available, and are incurring significant additional debt as a result

• Second, many servicemembers are not receiving the protections and benefits to which they are entitled, particularly in the case of SCRA protections

8

Where They’re Going – Examination Objectives

• Assess quality of compliance risk management systems for preventing violations of federal consumer financial laws

• Identify acts or practices that materially increase the risk of violations of such laws

• Gather facts to determine whether entity engages in acts or practices that are likely to violate such laws

• Determine whether such a violation has occurred and whether further supervisory or enforcement actions are appropriate

9

Documents and Information To Be Reviewed at Outset

• Organizational charts and process flowcharts• Board minutes, annual reports, or the equivalent to extent

available• Relevant management reporting• Policies and procedures; rate sheets• Fee sheets• Loan applications, loan account documentation, notes,

disclosures, and all other contents of loan underwriting and servicing of account files

• Operating checklists, worksheets, and review documents

10

Documents and Info. To Be Reviewed at Outset (cont.)

• Relevant computer program and system details• Service provider contracts, due diligence, and monitoring

procedures and lending procedures• Underwriting guidelines • Compensation policies• Historical examination information• Audit and compliance reports and management responses

to findings

11

Documents and Info. To Be Reviewed at Outset (cont.)

• Training programs and materials• Advertisements• Consumer complaints and disputes, including those

submitted to CFPB Consumer Response Center, Consumer Sentinel, the Better Business Bureau, or other sources as appropriate

12

Examination Modules – 6 Substantive; 1 Procedural• Module 1: Advertising, Marketing, and Lead Generation• Module 2: Application, Qualification, Loan Origination,

and Disbursement• Module 3: Loan Repayment, Account Maintenance,

Payoff Processing, and Payment Plans• Module 4: Customer Inquiries and Complaints• Module 5: Collections, Accounts in Default, and Credit

Reporting• Module 6: Information Sharing and Privacy• Module 7: Examination Conclusion and Wrap-up

13

Module 1 – Advertising

Truth in Lending Risks• Review general advertising requirements for closed-end

credit (clear/conspicuous, offered terms, trigger terms)• Review solicitation disclosures for private education loans

(application disclosures are part of Module 2)• Review compliance with co-branding and school

endorsement requirements (proper disclosures)• Review compliance with preferred lender requirements

(delivery of required information for each type of loan)

14

Module 1 – Advertising (cont.)

Service Provider Risks (Agents, Brokers, Lead Generators)• Assess lender review of service provider training• Assess lender review of interactions with consumers

(scripts, call recordings, transcripts of online chats, etc.)Other Risks (UDAAP)• Review use of certain “hot button” terms or phrases

(future employment, nature of loan, pre-approved, etc.)• Review employee compensation structure (looking for

rewards based on size or number of loans originated)

15

Module 1 – Advertising (cont.)

Fair Lending Risks• Review of marketing and advertising, with focus on

discrimination or “discouragement” • Review of solicitation methods looking for differences by

line of business, channel, loan product, etc.• Review of factors used to identify recipients of

solicitations and review of any prospect databases• Review of policies and procedures regarding

recommendations and referrals to different products or different lending channels (steering)

16

Module 2 – Origination

Truth in Lending Risks• Review application, approval, and final disclosures

(including general closed-end credit disclosure requirements)

• Review compliance with self-certification form requirements (verification of accuracy/completeness)

• Review procedures with regard to acceptance of offer, term change and re-disclosure, and right to cancel

• Assess compliance with E-SIGN (E-SIGN disclosures, affirmative consent, reasonable demonstration)

17

Module 2 – Origination (cont.)

Other Risks (UDAAP)• Assess process for approving and communicating approval• Determine whether prospective borrower gets full 30-day

firm offer period with private education loan• Review disclosures with optional or related products and

services (insurance, debt cancellation, credit protection, consumer report update services)

• Review procedures with regard to required cosigners (consequences to borrower) and cosigner disclosures (consequences to cosigner)

18

Module 2 – Origination (cont.)

Fair Lending Risk• Review for use of CDR, graduation rate, or other school

specific variables (eligibility, underwriting, and/or pricing)• Review to determine whether lender did any analysis to

support its business justification for use of any school specific variable (note assumption of disparate impact)

• Review of partnership, referral, and preferred lender arrangements and compensation terms for same

• Review of procedures related to school eligibility (adding school, monitoring school, and dropping school)

19

Module 2 – Origination (cont.)

Fair Lending Risk (cont.)• Review of underwriting/pricing policies for differences by

line of business, channel, division, geography, etc.• Review of variables used in any credit scoring system (zip

code is problematic) and documentation validating system• Review of variables used in any automated underwriting

system (AUS) and comparison of applicants underwritten with AUS with those underwritten without AUS

• Review of rate sheets for differences by line of business, channel, division, geography, school, or school type

20

Module 2 – Origination (cont.)

Fair Lending Risk (cont.)• Review of underwriting and pricing policies looking for

evidence of disparate treatment (for example, age)• Review of school-specific and school type-specific

underwriting and pricing criteria• Assessment of differences in underwriting and pricing of

products designed for specific schools or school types• Assessment of polices for overrides or exceptions to

underwriting or pricing, includes identification of any caps, exception reporting, and quality of review process

21

Module 2 – Origination (cont.)

Fair Lending Risk (cont.)• Review of policies for providing adverse action notices

(including policies for oral applications and requests for preapprovals)

• Review to determine how variables used in underwriting are reflected in adverse action reasons

• Review of circumstances under which a guarantor or cosigner is required

• Confirm lender is not collecting monitoring information unless it is for purposes of a “self-test”

22

Module 2 – Disbursement

Truth in Lending Risks• Review timing of disbursement (at least 3 business days

after receipt of final disclosure)Other Risks (UDAAP)• Assess cancellation policy (less or no need)• Assess disbursement of principal amount (lump sum or

based on school calendar and requirements)• Review limits on use of funds (tied to specific retailer?)• Review disbursements to prepaid cards (fees, disclosures)

23

Module 3 – Repayment

Electronic Fund Transfer Act Risk• Assess compliance for electronic payments and automatic

transfersOther Risks (UDAAP and Other Laws)• Review repayment status processing (disclosure of

options, default option, contractual obligations, etc.)• Review delivery of borrower benefits (adequate

documentation, personnel, controls, etc.) • Review impact of loan servicing transfers

24

Module 3 – Repayment (cont.)

Other Risks (UDAAP and Other Laws) (cont.)• Review payment processing (assessment of late fees,

prompt crediting of payments, failed transfers, access to information, and SCRA compliance)

• Order of application of payments (single loan, multiple loans, factors considered)

• Prepayment issues (improper fees, undue burden, credit to principal or “pay ahead” feature, etc.)

• Partial payment issues (use of suspense account, returned payments)

25

Module 3 – Repayment (cont.)

Other Risks UDAAP (cont.)• Periodic statement issues (clear and conspicuous, method

of delivery, use of additional media, rate changes, etc.)Legacy FFELP Loan Risks• Repayment status processing (deferments, IBR,

forbearance)• Borrower benefits (public service loan forgiveness, IBR

loan forgiveness)• Loan servicing transfers (disclosure)

26

Module 3 – Repayment (cont.)

Legacy FFELP Loan Risks (cont.)• Order of application of payments (different procedures for

non-IBR, IBR)• Prepayments (application to future installments)Truth in Lending Risks• Treatment of credit balances in excess of $1 (credit to

account, refund on written request, good faith effort to refund after 6 months)

27

Module 4 – Complaints

Micro Level: Customer Experience• Types of inquiries and complaints• Insights into weaknesses in lender’s complaint handlingMacro Level: Complaint Handling Infrastructure• Customer interface (channels, staffing, training)• Logging, categorizing, tracking, escalating• Response (remedy, timeliness, corrective action)• Oversight (trend reports, Board reports)

28

Module 5 - Collections

General• Examiners will be reviewing policies and procedures,

individual customer files, and complaints, and listening to recordings

FDCPA Risk• Incorporates FDCPA exam procedures from CFPB

Supervision and Examination Manual v. 2.0 for all servicers that qualify as “debt collectors” (looks to loan note to determine whether debt was in default when obtained – private – generally 15 or 30 days past due; federal – 270 days past due)

29

Module 5 – Collections (cont.)

Other Risks (UDAAP)• Telephone conduct – frequency, time, and contentService Provider Risk• Review of policies and procedures for monitoring service

providersWorkout Risk• Loss mitigation “waterfall” procedures: “whether the

servicer reviews defaulted borrowers for all repayment status options before sending the account to collections”

30

Module 5 – Collections (cont.)

ECOA Risk• ECOA considerations in loss mitigation: “whether the

lender is providing the options consistently to all borrowers in similar situations”

• Other possible ECOA considerations: “whether the lender is prioritizing workout options based on loan type (FFELP loans versus private loans)”

31

Module 5 – Collections – Hot Areas (cont.)

Litigation Risk• Collection documentation for litigation referrals:

“whether the lender has policies and controls in place to ensure the accuracy of information used to collect delinquent accounts through legal action”

FCRA Risk• Credit reporting issues, especially disputed accounts

32

Module 6 – Privacy

GLBA and Regulation P• Review based on the GLBA Modules in the CFPB

Supervision and Examination Manual v. 2.0• Covers privacy notice, disclosure to non-affiliated third

parties, honoring of opt-out, use or disclosure of information received from a non-affiliated financial institution, and disclosure of account numbers

FCRA and Regulation V (Affiliate Sharing)• Review based on FCRA Module 2 in the CFPB

Supervision and Examination Manual v. 2.0

33

Module 7 – Wrap-Up

• Examiners summarize findings, supervisory concerns, and regulatory violations

• Examiners identify cause of each violation and necessary corrective action

• Findings are discussed with management and commitment is obtained for any corrective action

• Violations are recorded in the Report of Examination or a Supervisory Letter and go in the “permanent record”

• Examiners recommend enforcement action where appropriate

34

The Next Step with Exams – Appeals

• Bulletin 2012-07 issued on October 31, 2012• Provides for appeal of a less-than-satisfactory rating, any

underlying adverse findings in an examination report, or any adverse findings in a supervisory letter

• Process requires written appeal submitted within 30 business days of the date of the e-mail transmission of the rating, report, or letter

• Appeal goes to an appellate committee, which submits its recommendations to the Associate Director, whose decision is final and cannot be appealed

35

Now What?

• All lenders and servicers should consider a third-party audit of their existing policies and procedures and substantive compliance

• Missing policies and procedures should be prepared and outdated policies and procedures should be revised

• Special attention should be placed on complaint handing and analysis and on fair lending compliance

• Substantive compliance issues should be addressed with counsel to preserve the ability to invoke the attorney-client privilege and any other applicable privilege

36

John L. Culhane, Jr.PartnerConsumer Financial Services GroupHigher Education Group 215.864.8535culhane@ballardspahr.com

Questions / Resources

If you have questions, please contact:

Visit our ABA award-winning blog at www.CFPBMonitor.com.Subscribe to our e-alerts at www.ballardspahr.com (click “subscribe”).

DMEAST #16265500 v1