Kareem Saleh’s Post

Insightful thoughts below on CFPB’s annual fair lending report

CFPB dropped a bombshell, and the key takeaway is that if you’re not already searching for fairer variants of your underwriting and pricing models, now is the time to start. Thanks Kareem Saleh. #underwriting #pricing models

“The key takeaway from all this is that if you’re not already searching for fairer variants of your underwriting and pricing models, now is the time to start.” Documenting fairness in account closure actions related to AML/BSA & fraud are also under scrutiny. Legacy SOP for many banks goes like this: “Hey, this customer has deposited $9,900 into their account 3 times - let’s make a note in the system to have the branch hand them the FinCEN cash structuring ‘knock it off’ pamphlet -or- trigger a note to our mail center to ship out the pamphlet to their mailing address.” <cash structuring continues> Account gets escalated to the risk committee to review for closing, account gets closed. CFPB examine begins: “I’d like a pull of all the accounts you’ve closed over the past 6 months with demographic data….. I see here more than a quarter of your account closures are related to protected classes. I need to see a pull of your customer account communications on these.” The challenge: Even if you can pull this info, you have no digital audit trail with chain of custody proving your attempts at educating the customer. The notes you have show “spoke to customer” and “mailed to customer” only to realize you can’t prove the customer actually received the communication, not to mention if the outreach was by phone -- Did your financial institution call the client in their native language & at a time in which they had a fair chance of responding? (This customer's 1st language is not English & they work in a 9-5, yet you outreached in English at 10 a.m.?) Relying on 2nd and 3rd hand notes input across various teams and branches with zero customer acknowledgment during exams is not a setup for success. Not to mention the negative efficiency ratio impacts across these broken, siloed, disparate workflows leading to elevated regulatory action risks. The solution: Digitizing the FinCEN pamphlet and delivering it to the account holder via text, email, and mobile banking app with a digital acknowledgment embedded. Even if they don’t acknowledge the pamphlet, your team is empowered with a digital fingerprint they received the information, how long they looked at it, how many times, and from what device + geo location. Conversations around delivering compliance decisions fairly are not going to go away - this is a scalable, cost neutral approach.

🌊🌊🌊 Addressing structural discriminatory gaps in banking, financing & lending It is clear that when banks fall well short of their legal obligations to fairly serve the communities they operate in, the CFPB (Consumer Financial Protection Bureau) is a critical line of defense. The Greenlining Institute commends the CFPB for: ✨continuing to hold banks accountable, 🍃and we stress the need to defend the agency to ensure our communities are shielded from harmful and predatory practices like these recent violations that deepen economic injustice and widen the racial wealth gap.

💲Combating Junk Fees💲| Ensuring Fair and Competitive Markets I find the recent actions by the Consumer Financial Protection Bureau (CFPB) critical in fostering fair, transparent, and competitive financial markets. The CFPB's commitment to eliminating junk fees that hinder competition and consumer protection is a significant step forward. 🔑👇🏼Key Points: 1. Elimination of Junk Fees: The CFPB is actively working to remove illegal junk fees across various financial markets, including bank accounts, credit cards, and mortgages. These fees often prevent consumers from shopping around for better rates and add unnecessary costs. 2. Protection Against Unlawful Charges: The CFPB enforces the Fair Debt Collection Practices Act (FDCPA) to ensure debt collectors and mortgage servicers do not impose unauthorized fees. This includes fees like “pay to pay” charges, which are not explicitly agreed upon in mortgage contracts or allowed by law. 3. Ensuring Consumer Accountability: The CFPB is dedicated to upholding consumer rights, ensuring that companies cannot use fine print to escape accountability. This includes actions to protect servicemembers and efforts to require nonbank companies to disclose unfair contractual terms. ⚖️ Implications for Companies and Banks: 1. Enhanced Compliance Requirements: Financial institutions must review and update their fee structures and contractual terms to ensure compliance with CFPB regulations. This helps avoid legal repercussions and maintains consumer trust. 2. Consumer Trust and Transparency: By eliminating hidden fees and ensuring transparent practices, companies can build stronger relationships with consumers. Transparency fosters trust, which is crucial for long-term success in the financial industry. 3. Competitive Advantage: Companies that prioritize fair practices and transparency can differentiate themselves in the market. Consumers are more likely to choose institutions that are committed to their protection and offer clear, fair terms. In an ever-evolving landscape, transparency and fairness are not just regulatory requirements—they are foundational pillars of consumer trust and competitive advantage. 💪🏼 When we take a role in Compliance or Risk Management we are commited to fostering fair and transparent financial practices, ensuring that consumer rights are protected, and paving the way for a more competitive and trustworthy marketplace. #RiskManagement #Compliance #FinancialServices #ConsumerProtection #CFPB #ThoughtLeadership #Transparency #Fairness #BankingIndustry https://lnkd.in/gGqqZyYw

Consumer Credit Bill Poses a Threat to Microlenders: The proposed consumer credit bill in Namibia aims to bring about comprehensive changes to the regulatory landscape governing credit provision and agreements. Its objectives include the consolidation, harmonisation and reform of existing laws, establishing consumer credit regulators, and the regulation of entities such as credit providers, credit bureaus and debt collectors. In addition, the bill seeks to enhance consumer protection, promote responsible lending and borrowing practices, and ensure transparent market conduct. While the necessity for such legislation is recognised, its introduction has evoked mixed sentiments among the business community. Microlenders in particular perceive the impending amendments to the consumer protection framework as a significant threat to their operations. This stems from the potential impact of the bill on their business models and transactions. The Namibia Financial Institutions Supervisory Authority (Namfisa) undertook extensive stakeholder engagements in 2023, reaching out to various regions countrywide. These engagements underscored the imminent implementation of the bill in 2024, prompting microlenders to brace themselves for the upcoming changes. Microlenders, who play a key role in providing access to credit to underserved segments of the population, are concerned about how the bill will affect their ability to continue effectively serving their clientele. The proposed regulations, particularly those related to interest rates, costs, fees, and other charges, pose challenges to the sustainability of microlending operations. Moreover, the impending repeal of the Microlending Act of 2018 has exacerbated uncertainties within the sector. UNIQUE NEEDS The Microlending Act, which was tailored to address the unique needs and circumstances of microlenders, provided a regulatory framework conducive to their operations. Its replacement by a broader consumer credit bill raises questions about the future regulatory environment and its alignment with the specific requirements of microlenders. In response to these challenges, stakeholders within the microlending industry are advocating a balanced approach that preserves the interests of both consumers and microlenders. They emphasise the importance of regulatory measures that foster financial inclusion, while also ensuring the sustainability and viability of microlending institutions. As the implementation of the consumer credit bill draws closer, Namibia’s microlenders find themselves at a crossroads, navigating the complexities of regulatory compliance, while striving to uphold their mission of facilitating access to credit for marginalised communities. The coming months will undoubtedly witness intensified dialogue and deliberation as stakeholders seek to shape the regulatory landscape in a way that supports the…

The Consumer Financial Protection Bureau (CFPB) today proposed a rule  to rein in excessive overdraft fees charged by the nation’s biggest financial institutions. The proposal would close an outdated loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws. For decades, very large financial institutions have been able to issue highly profitable overdraft loans, which have garnered them billions of dollars in revenue annually. Under the proposal, large banks would be free to extend overdraft loans if they complied with longstanding lending laws, including disclosing any applicable interest rate. Alternatively, banks could charge a fee to recoup their costs at an established benchmark – as low as $3, or at a cost they calculate, if they show their cost data. "Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail," said CFPB Director Rohit Chopra. "Today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine." The proposed rule would apply to insured financial institutions with more than $10 billion in assets, which covers approximately the 175 largest depository institutions in the country. These institutions typically charge $35 for an overdraft loan, even though the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days. Approximately 23 million households pay overdraft fees in any given year. The CFPB estimates that this rule may save consumers $3.5 billion or more in fees per year. The potential savings would translate to $150 for households that pay overdraft fees.

More big news out of the CFPB! While the details of the case aren't particularly exciting (company was hit with an enforcement action in 2019 and failed to comply with the consent order, so they are getting hit again), the remedy the CFPB fashioned is extremely interesting. First, the company is flat out barred from offering short-term closed-end consumer loans that must be repaid within 45 days (aka payday loans). Second, and this is where it gets really interesting, the company must tie its Executive compensation to the quality of its compliance. Both are strong remedies, but the Executive compensation piece really gets my attention. I recall Raj Date saying something to this effect at one of the early CFPB leadership meetings regarding the mortgage industry and the need for new regulations: "Most people are good, but most people will also do what they are compensated to do." It's essentially a version of "follow the money," and maybe because I've made a career out of "following the money" and its downstream impacts, that statement, and way Raj said it, has always stayed with me. I doubt the CFPB thought about that specific statement when they crafted this consent order, but it was the first thing that came to my mind. By directly tying compensation to compliance, they will likely get what they want. They've crafted an incredibly powerful compliance incentive. That said, Financial Services is fundamentally the business of Risk Management, and that inherently means some risk must be taken. Creating the structure, systems, and staffing to support robust, fundamentally sound decisions and risk mitigation is where the competitive advantage lies, and how good legal, compliance, and risk leaders can differentiate themselves!

The CFPB’s recent assertion of risk-based supervisory authority is perhaps the most significant supervision development since the Bureau’s inception. We at Sidley have prepared a write-up on what the Bureau’s first published risk-based supervisory designation order means for the consumer financial markets. Not to bury the lede, it’s a big deal. Here is the teaser - hope you find it useful: On February 23, 2024, the Consumer Financial Protection Bureau announced that it was asserting supervisory jurisdiction over World Acceptance Corp., one of the nation’s largest nonbank consumer small-dollar lenders. The CFPB’s decision and order state that supervision is warranted because the Bureau has reasonable cause to find that World Acceptance’s activities constitute a risk to consumers. This marks the first time the CFPB has publicly invoked its previously dormant risk-based supervision authority, and it offers clues about how the CFPB plans to apply this authority to consumer lenders, financial-technology companies, payment-service providers, and other nonbank consumer-financial-services companies. Sidley Austin LLP

Very insightful and meaning in the fintech domain.