Susan Bean’s Post

Insightful thoughts below on CFPB’s annual fair lending report

The Consumer Financial Protection Bureau just dropped a fair lending bombshell. Here’s what you should know: Yesterday, the CFPB issued its annual report to Congress about its fair lending enforcement, supervision and areas of focus. The CFPB reported that 189 institutions were cited for fair lending violations in 2023 (up from 174 in 2022). 33 institutions were referred to the Department of Justice for suspected violations of fair lending laws – a 175 percent increase over 2020 levels. But the main thing about this report is that it signals the CFPB’s heightened focus on Less Discriminatory Alternatives (LDA). LDAs (lending algorithms or policies that achieve the same legitimate business objectives as current practices but with less discriminatory impact on protected groups) have been a focal point of research and development for several years, including by me and my colleagues at FairPlay. Despite this, the CFPB's report to Congress last year did not mention the search for LDAs even once. This year, the CFPB mentions searching for and implementing LDAs three times. What’s more, the CFPB said in 2023 it issued “several” fair lending-related Matters Requiring Attention directing financial institutions to “develop a process for the consideration of a range of less discriminatory models.” Additionally, the CFPB advised Congress that a primary focus of its supervisory activities in the future will involve “reviewing the fair lending testing regimes of financial institutions to ensure they regularly test for both disparate treatment and disparate impact, including searches for and implementation of LDAs.” And if that wasn’t enough to convince you that 2024 is the year of the Less Discriminatory Alternative, just hours after the CFPB report's release, two of America's leading consumer groups – the Consumer Federation of America and Consumer Reports – issued an open letter calling for guidance on how lenders should search for and implement LDAs These consumer groups want the CFPB to issue guidance on: 🔹 Techniques for searching for LDAs 🔹 Metrics and thresholds for assessing the fairness of LDAs 🔹 The frequency with which lenders should search for LDAs 🔹 The level of effort that lenders should expend to search for LDAs; and 🔹 How lenders should evaluate the viability of LDAs. 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. Some resources you might find helpful on your LDA journey include: ➡ A paper we published with the National Fair Housing Alliance showing that LDAs can increase approval rates for Black and Hispanic mortgage applicants 5-13% with no increase in risk; and ➡ A guide to stress-testing your LDAs to evaluate whether they're likely to perform within your risk tolerance and be fairer. Or if reading isn’t your thing and you need a Sherpa to navigate this minefield just call me – I’m friendly! (Links👇)

“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.

💲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.

Last week, California’s AG issued a letter to banks and credit unions in the state that “surprise” overdraft fees and return deposited item fees are “likely…unfair business practice(s) that violate() the CA Unfair Competition Law and the Consumer Financial Protection Act.” There is a bit to unpack there, but a key is that the AG is aiming to fill a gap left open by the CFPB. Many of us have lamented how the Consumer Financial Protection Bureau’s proposed overdraft rule addresses practices by only certain institutions (those with assets $10B or more) and thus would provide uneven protections to consumers. Perhaps there is an unstated expectation that large bank restrictions would put competitive pressures on smaller institutions to comply—or other states, like California, would step in. More broadly, perhaps some institutions are betting on legal challenges and/or an administration change to invalidate an ultimate rule, and as a result, not planning for any change. This would be a mistake. Regardless of whether the rule sticks in any form, financial services providers that serve the mass market would be wise to start thinking about how the culmination of instant payments, push credit payments, verticalization and specialized credit services, and all of the technologies that enable these developments can create a better, more transparent, and more efficient business model. What does that look like? Elements are likely to include: ·       Adoption of alternative liquidity products. These include the lines of credit suggested in the proposal but also evolved forms of earned wage access, BNPL/POS lending, deposit advance, and others that enable providers to understand risk and use cases better to serve consumers cost effectively. ·       Restructured deposit offerings that provide accountholders visibility (think open banking) of transactions and balances and ability to manage spending with up front vs back-ended (penalty) pricing. ·       Migration to real-time payment systems and posting/settlement capabilities that enable both account providers and holders to make more informed decisions about status and source of funds. ·       Use of AI/ML to help depositors anticipate future shortfalls and plan accordingly (with appropriate safety features for accountholders in the event the unexpected occurs). These are not easy lifts, especially when technology and product roadmaps offer no openings. So the temptation may be to eke out a bit longer on the current fee income strategies. But others have started and will continue to adopt these capabilities, so the status quo will diminish regardless. So I think luck favors the prepared! But please tell me what you think! #cfpb #overdraft #deposits https://lnkd.in/etNc-jcP

Federal judge blocks implementation of Community Reinvestment Act overhaul New rules — now put on hold — redefine area in which banks 'do business' A federal judge in Texas has sided with a coalition of banking organizations and, for now, put the implementation of an overhaul of regulations with the purpose of curbing discriminatory lending on hold. Judge Matthew Kacsmaryk, a U.S. District Court judge in Amarillo, granted a preliminary injunction to seven groups, including the American Bankers Association, the U.S. Chamber of Commerce and the Independent Community Bankers of America. The injunction, in response to a suit filed by the groups in February, pauses the application of new final rules to the Community Reinvestment Act (CRA) that were issued by federal regulators last October. The CRA is a federal law aimed at encouraging banks to meet the needs of a full spectrum of borrowers, including those in low- and moderate-income areas. Among other things, the act, originally passed to curb discriminatory lending and redlining, mandated that institutions insured by the Federal Deposit Insurance Corp. (FDIC) receive evaluations from federal regulators on whether they offer nondiscriminatory credit services in all communities where they do business. Unsatisfactory evaluations may cause lenders to receive a poor CRA rating, which could bar them from certain corporate activities, including mergers and acquisitions. Currently, the CRA defines the area in which banks do business via their physical footprint, taking into account the locations of branches and deposit-taking facilities. But with the rise of online and mobile banking, the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency sought to update that definition. When the groups filed the suit, ICBA President and CEO Rebeca Romero Rainey said that the overhaul is “likely to have unintended consequences and fail to consider the long-term impact on the very communities they seek to protect. Rather than increasing lending in low or moderate-income communities, the new and unnecessarily complex evaluation could result in banks being forced to close branches or reduce product offerings. Kacsmaryk ruled that the new rules went beyond what the original CRA, which was enacted in 1977, authorized. The assessment of banks has since the CRA’s inception, been specifically limited “to areas surrounding deposit-taking facilities,” said Kacsmaryk. We welcome this decision pausing implementation of the Community Reinvestment Act Final Rules until the litigation we filed challenging the rules can be resolved, said the trade groups in a joint statement. While we strongly support the goals of CRA, the Final Rules exceeded the banking agencies’ regulatory authority and created disincentives for banks to lend in low- and moderate-income communities that need access to credit the most. We look forward to litigating this matter to a final judgment. #mortgage #mortgages #broker

ASIC's Landmark Victory Against Cigno: A Win for Consumers and Financial Counsellors The recent Federal Court ruling against Cigno Australia Pty Ltd and BSF Solutions Pty Ltd is a significant milestone in the fight against predatory lending practices. Handed down on May 24, 2024, this judgment underscores the persistent efforts of the Australian Securities and Investments Commission (ASIC) to protect vulnerable consumers from exploitative financial services. This victory not only sets a legal precedent but also reinforces the crucial role of financial counsellors in advocating for the rights of clients who have been subjected to dishonest dealings. Consumer Law: This case involved alleged contraventions of the National Consumer Credit Protection Act 2009, specifically regarding unsolicited credit advances and misrepresented fee structures. Liability: The court assessed whether the directors had actual knowledge of the contraventions. Remedies: The case considered declarations and injunctions to prevent the recurrence of these contraventions. Legislation Referenced: The Federal Court found that Cigno Australia and BSF Solutions engaged in credit activities without holding an Australian Credit licence. They were also found guilty of charging consumers prohibited fees. The directors of these companies were implicated in these unlicensed activities and breaches of the Credit Act. Specifically, the court highlighted the "No Upfront Charge Loan Model" used by these entities, which provided over $34 million in short-term loans while charging more than $70 million in fees to over 100,000 consumers within a six-month period. The court issued orders that prevent Cigno Australia and BSF Solutions from recovering any further fees, charges, or other amounts, including late payment fees and principal amounts. Additional hearings are scheduled to consider further penalties and adverse publicity orders. Community Reactions The response from the financial counselling community has been overwhelmingly positive. Fiona Pettiford and Alan Gray, prominent figures in the sector, expressed their support and relief at the outcome. The sentiment reflects a collective hope that this decision will put an end to the relentless exploitation by payday lenders like Cigno. Conclusion ASIC's win against Cigno Australia and BSF Solutions is a significant step in stopping unfair loan practices. It shows the importance of having strict rules and supports financial counselors in their work to protect consumers. This case will serve as a strong example for future actions against unethical financial practices, helping to create a fairer financial environment for everyone. This summary and detailed review of the Federal Court document aim to help everyone, especially students and young people, understand the importance of this ruling and its impact on protecting consumers from predatory lenders.

How the CFPB protects consumers from predatory lending practices The Consumer Financial Protection Bureau (CFPB) has emerged as a formidable force in the battle against predatory lending practices. Established in the aftermath of the 2008 financial crisis, the CFPB was tasked with safeguarding consumers from deceptive and abusive financial products and services. Through a combination of rulemaking, supervision, and enforcement, the CFPB has implemented robust measures to protect consumers. By establishing clear and enforceable standards for financial institutions, the bureau has curtailed predatory lending activities such as high-interest payday loans, deceptive mortgage lending, and abusive debt collection practices. The CFPB's supervisory authority empowers it to examine financial institutions for compliance with consumer protection laws. Through on-site examinations and data analysis, the bureau identifies potential violations and takes corrective actions. Additionally, the CFPB’s enforcement division investigates complaints and takes legal action against institutions that engage in unlawful practices. While challenges persist, the CFPB's impact on the consumer financial marketplace is undeniable. By acting as a vigilant watchdog, the bureau has empowered consumers to make informed financial decisions and has fostered a more equitable and transparent financial system.