At the American Bankers Association’s annual regulatory compliance convention last week, the approximately 1,800 attendees were offered a host of topics covering regulatory trouble spots, from Bank Secrecy Act issues to ebanking and technology tools. But a large portion of the convention focused on consumer compliance regulations, and unsurprisingly, the Consumer Financial Protection Bureau: its expectations, examinations, and enforcement actions.
Transitioning to CFPB. The ABA provided a new session this year intended to assist banks transitioning from their current regulators to the CFPB because acquisitions, mergers, or organic growth pushed them to the $10 billion mark that triggers bureau jurisdiction. The panel for this session included Edwin Chow, the CFPB Regional Director for the Western region. Chow noted that the bureau is very much aware of it when an institution is about to cross the jurisdictional line into CFPB territory. The CFPB works with its sister regulators with the intention of smoothing the transition and gaining an understanding of the institution’s business.
The panel stressed that institutions about to enter CFPB jurisdiction must:
- understand the unique perspective of the CFPB. The bureau "walks in the shoes" of the consumer, and that perspective affects compliance examinations. Institutions must be aware of the effects their actions have on consumers—from first contact with an institution to marketing and sales documents that must be clear and free of misleading or deceptive statements;
- recognize the significance of UDAAP in regulatory compliance. It is no longer sufficient to comply with the regulation, UDAAP issues must be a consideration. And unfortunately, there still is no definitive answer to the question of what "abusive" actually means;.
- develop a strong periodic monitoring of compliance systems coupled with independent audits. The CFPB found that weakness in these areas as the most common deficiency;
- add complaint management to compliance systems. Customer complaints no longer start and end with a bank’s frontline personnel. They must be documented, tracked, and reported as with every other compliance management components; and
- learn from studying CFPB enforcement actions. The CFPB often has stated that the bureau intends its consent orders to be used as teaching tools for institutions.
The ABA offered dedicated sessions on building and monitoring a CFPB-sufficient compliance management system, marketing compliance risks, UDAAP issues in lending and deposits, and the use of enforcement actions in compliance, among others, intended to benefit both transitioning institutions and those already ensconced within the CFPB jurisdiction.
Enforcement actions. This year, the ABA presented a dedicated session on CFPB enforcement actions and the lessons learned from recent activity. To emphasize the importance of CFPB consent orders to institutions, various panel members speaking on bureau enforcement actions referred to a March 2016 quote by CFPB Director Richard Cordray on the use of consent orders: "Indeed, 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."
The panel discussed steps taken by the bureau in a typical enforcement action and examined recent cases, in particular PHH Corporation v. CFPB, considered a critical test case on CFPB authority. Discussion included a review of the substantive issues of the case, and the potential consequences if the CFPB or PHH prevails.
The session provided a list of CFPB guidance for attendees to review with the note that official bureau guidance is indeed supplemented by lessons found in its enforcement actions.
Beyond the dedicated session, discussions on the use of CFPB enforcement actions took place in the individual consumer compliance regulatory sessions on debt collection, fair lending, mortgage servicing, Home Mortgage Disclosure Act, and others.
Fair lending. Fair lending was a hot topic this year, with many panelists predicting increased CFPB focus on the area in late 2016 and 2017, accompanied by possible enforcement activity. The link between UDAAP and fair lending was examined, including issues arising when minorities suffer from unfair lending practices. Experts predict this link will be examined not only in indirect auto loans and mortgages as has been the case but also in the areas of credit cards, student loans, and small businesses. The focus will be applied first in exams, then in enforcement actions.
A central component of fair lending is "redlining." Redlining is the discriminatory practice by which banks or other financial institutions deny or avoid providing credit services to a consumer because of the racial demographics of the neighborhood in which the consumer lives.
The CFPB has begun to work more effectively with the Department of Justice on redlining issues. The session targeted a textbook redlining case: the CFPB/DOJ case against Hudson City Savings Bank for discriminatory redlining practices that denied residents in majority-Black-and-Hispanic neighborhoods fair access to mortgage loans. Interestingly, one of the panelists had a bird’s eye view of the case. He was the chief compliance officer of Hudson City at the time.
Underscoring the CFPB’s focus on fair lending, Peggy Twohig Assistant Director of Supervision, Office of Fair Lending and Equal Opportunity, and Eric Wong, an enforcement officer of the same office, were on the CFPB Town Hall panel. Wong spoke at length about Hudson as a strong redlining case. He also stated that he had heard a few "misconceptions" about the CFPB and fair lending that he wanted to correct, notably a tweet claiming, "The CFPB does not consider Asians to be minorities." Wong responded that this was "news to him."
Additional topics. The convention also presented sessions on a number of relevant compliance areas, including: the new HMDA rule; TRID compliance complications; the intersection of HMDA, Community Reinvestment Act, and fair lending; managing compliance examinations; mortgage servicing trouble spots; debt collection; the Fair Credit Reporting Act; and more.
The future of banking. Finally, the challenges that lie ahead for the banking industry were addressed in the keynote speech by ABA President and CEO Rob Nichols. Two areas of note: the rise of the millennials and the impact of FinTEch.
The largest demographic in the United States at this time is the millennials. These would be future banking customers, but according to research cited by Nichols, "Seven out of 10 would rather go to the dentist than the bank." One of the three see no need for traditional banking. The millennials are at the front end of the greatest wealth transfer in history: $30 trillion will be transferred from the baby boomers to the millennials in this generation. Yet, this generation is one of the least financially literate groups in the country. When polled, the vast majority of respondents indicated that not only will they refrain from entering a branch bank, online banking holds no interest. Their interest lies only with mobile banking, not just for transactions but for any service, including customer service, generally offered in branches and online.
Second is the obvious challenge of financial technology, or FinTech, an economic industry composed of companies that use technology intended to make financial services more efficient. FinTech involves digital payments ("wallets"), investments, financing, and similar services, all in opposition to traditional banking operations. The banking industry will need to answer this technology with financial innovations of its own, Nichols said.
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