Supervisory Highlights: Spring 2017, 22119-22126 [2017-09658]

Agencies

• BUREAU OF CONSUMER FINANCIAL PROTECTION

[Federal Register Volume 82, Number 91 (Friday, May 12, 2017)]
[Notices]
[Pages 22119-22126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09658]


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BUREAU OF CONSUMER FINANCIAL PROTECTION


Supervisory Highlights: Spring 2017

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Supervisory Highlights; notice.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau or CFPB) 
is issuing its fifteenth edition of its Supervisory Highlights. In this 
issue of Supervisory Highlights, we report examination findings in the 
areas of mortgage servicing, student loan servicing, mortgage 
origination, and fair lending. As in past editions, this report 
includes information about a recent public enforcement action that was 
a result, at least in part, of our supervisory work. The report also 
includes information on recently released examination procedures and 
Bureau guidance.

DATES: The Bureau released this edition of the Supervisory Highlights 
on its Web site on April 26, 2017.

FOR FURTHER INFORMATION CONTACT: Adetola Adenuga, Consumer Financial 
Protection Analyst, Office of Supervision Policy, 1700 G Street NW., 
20552, (202) 435-9373.

SUPPLEMENTARY INFORMATION: 

1. Introduction

    The Consumer Financial Protection Bureau is committed to a consumer 
financial marketplace that is fair, transparent, and competitive, and 
that works for all consumers. The Bureau supervises both bank and 
nonbank institutions to help meet this goal. In this fifteenth edition 
of Supervisory Highlights, the CFPB shares recent supervisory 
observations in the areas of mortgage servicing, student loan 
servicing, mortgage origination, and fair lending. In particular, we 
describe key new developments around spike and trend monitoring, 
service provider examinations, and production incentives. The findings 
reported here reflect information obtained from supervisory activities 
that were generally completed between September 2016 and December 2016 
(unless otherwise stated). Corrective actions regarding certain matters 
may remain in process at the time of this report's publication.
    CFPB supervisory reviews and examinations typically involve 
assessing a supervised entity's compliance management system and 
compliance with Federal consumer financial laws. When Supervision 
examinations determine that a supervised entity has violated a statute 
or regulation, Supervision directs the entity to implement appropriate 
corrective measures, such as implementing new policies, changing 
written communications, improving training or monitoring, or otherwise 
changing conduct to ensure the illegal practices cease. Supervision 
also directs the entity to send consumers refunds, pay restitution, 
credit borrower accounts, or take other remedial actions. Recent 
supervisory resolutions have resulted in total restitution payments of 
approximately $6.1 million to more than 16,000 consumers during the 
review period. Additionally, CFPB's recent supervisory activities have 
either led to or supported five recent public enforcement actions, 
resulting in over $39 million in consumer remediation and an additional 
$19 million in civil money penalties.
    Please submit any questions or comments to 
CFPB_Supervision@cfpb.gov.

2. Supervisory Observations

    Recent supervisory observations are reported in the areas of 
mortgage origination, mortgage servicing, student loan servicing, and 
fair lending.

2.1 Mortgage Origination

2.1.1 Observations and Approach to Compliance With the Ability To Repay 
(ATR) Rule Requirements

    Prior to the mortgage crisis, some creditors offered consumers 
mortgages without considering the consumer's ability to repay the loan, 
at times engaging in the loose underwriting practice of failing to 
verify the consumer's debts or income. The Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act) amended the Truth 
in Lending Act (TILA) to provide that no creditor may make a 
residential mortgage loan unless the creditor makes a reasonable and 
good faith determination based on verified and documented information 
that, at the time the loan is consummated, the consumer has a 
reasonable ability to repay the loan according to its terms, as well as 
all applicable taxes, insurance (including mortgage guarantee 
insurance), and assessments.\1\ The Dodd-Frank Act also amended TILA by 
creating a presumption of compliance with these ability-to-repay (ATR) 
requirements for creditors originating a specific category

[[Page 22120]]

of loans called ``qualified mortgage'' (QM) loans.\2\
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    \1\ Section 1411 of the Dodd-Frank Act, Public Law 111-203, 
adding section 129C(a) to TILA, codified at 15 U.S.C. 1639c(a)).
    \2\ Section 1412 of the Dodd-Frank Act, adding section 129C(b) 
to TILA, codified at 15 U.S.C. 1639c(b).
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    To implement these statutory provisions, the Bureau amended 
Regulation Z to require that a creditor shall not make a loan that is a 
covered transaction (i.e., in general, a closed-end, dwelling-secured 
consumer credit transaction) unless the creditor makes a reasonable and 
good faith determination at or before consummation that the consumer 
will have a reasonable ability to repay the loan according to its terms 
(ATR rule).\3\ For a QM loan, the rule provides a safe harbor for 
compliance with the ATR requirement for loans that are not higher-
priced covered transactions and a presumption of such ATR compliance 
for higher-priced covered transactions.\4\ The Bureau's ATR rule has 
been in effect since January 10, 2014. Since the effective date of the 
ATR rule, Supervision has observed that most entities examined by the 
Bureau are generally complying with the ATR rule.
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    \3\ 12 CFR 1026.43(c).
    \4\ 12 CFR 1026.43(e).
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    This section focuses on recent supervisory examination observations 
and Supervision's approach to determining compliance with the ATR rule, 
including general requirements associated with the ATR rule for non-QM 
loans and verification requirements for information relied upon in 
making determinations of ability to repay. Specifically, this section 
discusses how Supervision assesses a creditor's ATR determination that 
includes reliance on verified assets and not income. It also explains 
whether a creditor can make a reasonable and good faith determination 
of ability to repay based on down payment size for a consumer with no 
verified income or assets.

2.1.2 Reasonable and Good Faith Determination Requirement and Basis for 
Determination

    The ATR rule outlines minimum requirements for making 
determinations of ability to repay. Specifically, the rule enumerates 
factors a creditor must consider when making an ATR determination,\5\ 
but beyond the requirements set forth in the rule, the ATR rule does 
not establish underwriting standards to which creditors must adhere. 
Creditors have flexibility in creating their own underwriting standards 
when making ATR determinations, as long as those standards incorporate 
the minimum requirements set forth in the rule. Therefore, Supervision 
evaluates whether a creditor's ATR determination is reasonable and in 
good faith by reviewing relevant lending policies and procedures and a 
sample of loan files and assessing the facts and circumstances of each 
extension of credit in the sample.
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    \5\ 12 CFR 1026.43(c)(2). A creditor must consider: (i) The 
consumer's current or reasonably expected income or assets, other 
than the value of the dwelling, including any real property attached 
to the dwelling, that secures the loan; (ii) if the creditor relies 
on income from the consumer's employment in determining repayment 
ability, the consumer's current employment status; (iii) the 
consumer's monthly payment on the covered transaction, calculated in 
accordance with paragraph (c)(5) of the ATR rule; (iv) the 
consumer's monthly payment on any simultaneous loan that the 
creditor knows or has reason to know will be made, calculated in 
accordance with paragraph (c)(6); (v) the consumer's monthly payment 
for mortgage-related obligations; (vi) the consumer's current debt 
obligations, alimony, and child support; (vii) the consumer's 
monthly debt-to-income (DTI) ratio or residual income, calculated in 
accordance with paragraph (c)(7); and (viii) the consumer's credit 
history.
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2.1.3 Verification Using Third-Party Records and Verification of Income 
or Assets

    The ATR rule generally requires that creditors verify the 
information that they will rely upon to determine the consumer's 
repayment ability, using reasonably reliable third-party records.\6\ A 
creditor must verify the amounts of income or assets the creditor 
relies on to determine a consumer's ability to repay the loan using 
third-party records that provide reasonably reliable evidence of the 
consumer's income or assets.\7\ The ATR rule does not require that 
creditors adhere to a prescribed method of verifying income or assets. 
Creditors may refer to the non-exhaustive list of records set forth in 
the ATR rule in verifying the consumer's income or assets.\8\
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    \6\ 12 CFR 1026.43(c)(3).
    \7\ 12 CFR 1026.43(c)(4).
    \8\ 12 CFR 1026.43(c)(4). Creditors may verify the consumer's 
income by using a tax-return transcript issued by the Internal 
Revenue Service (IRS). Examples of other records the creditor may 
use to verify the consumer's income or assets include: (i) Copies of 
tax returns the consumer filed with the IRS or a State taxing 
authority; (ii) IRS Form W-2s or similar IRS forms used for 
reporting wages or tax withholding; (iii) payroll statements, 
including military leave and earnings statements; (iv) financial 
institution records; (v) records from the consumer's employer or a 
third party that obtained information from the employer; (vi) 
records from a Federal, State, or local government agency stating 
the consumer's income from benefits or entitlements; (vii) receipts 
from the consumer's use of check cashing services; and (viii) 
receipts from the consumer's use of a funds transfer service.
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    When assessing a creditor's compliance with ATR rule requirements, 
Supervision determines whether the creditor considered the required 
underwriting factors in determining the ability to repay. Then 
examiners determine whether the creditor properly verified the 
information it relied upon in making that determination. Records a 
creditor uses for verification, including to verify income or assets, 
must be specific to the individual consumer.\9\ For example, as 
discussed in the October 2016 issue of Supervisory Highlights, a 
creditor violated the ATR requirements by failing to properly verify 
income relied upon when considering the consumer's monthly debt-to-
income ratio and determining the consumer's ability to repay.\10\
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    \9\ Comment 43(c)(3)-1.
    \10\ 12 CFR 1026.43(c)(2)(vii), (c)(4), and (c)(7).
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2.1.4 Reliance on the Consumer's Verified Assets and Not Income When 
Making an ATR Determination

    The ATR rule provides that a creditor may base its determination of 
ability to repay on current or reasonably expected income from 
employment or other sources, assets other than the dwelling (and any 
attached real property) that secures the covered transaction, or 
both.\11\ The income and/or assets relied upon must be verified. In 
situations where a creditor makes an ATR determination that relies on 
assets and not income, CFPB examiners would evaluate whether the 
creditor reasonably and in good faith determined that the consumer's 
verified assets suffice to establish the consumer's ability to repay 
the loan according to its terms, in light of the creditor's 
consideration of other required ATR factors, including: the consumer's 
mortgage payment(s) on the covered transaction, monthly payments on any 
simultaneous loan that the creditor knows or has reason to know will be 
made, monthly mortgage-related obligations, other monthly debt 
obligations, alimony and child support, monthly DTI ratio or residual 
income, and credit history. In considering these factors, a creditor 
relying on assets and not income could, for example, assume income is 
zero and properly determine that no income is necessary to make a 
reasonable determination of the consumer's ability to repay the loan in 
light of the consumer's verified assets.\12\
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    \11\ Comment 43(c)(2)(i)-1.
    \12\ For example, if a creditor considers monthly residual 
income to determine repayment ability for a consumer with no 
verified income, it might allocate the consumer's verified assets to 
offset what would be a negative monthly residual income (given that 
the ATR rule requires a creditor considering residual monthly income 
to do so by considering remaining income after subtracting total 
monthly debt obligations from total monthly income).

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[[Page 22121]]

2.1.5 Reliance on Down Payment Size To Support Repayment Ability for a 
Consumer With No Verified Income or Assets

    As an initial matter, a down payment cannot be treated as an asset 
for purposes of considering the consumer's income or assets under the 
ATR rule. As described above, the ATR rule requires creditors to 
consider a consumer's reasonably expected income or assets, ``other 
than the value of the dwelling, including any real property attached to 
the dwelling that secures the loan.'' \13\ Additionally, while the size 
of a down payment generally affects the loan amount, the ATR rule 
already accounts for this by focusing the relevant inquiry on a 
consumer's ability to repay the loan according to its terms. All else 
being equal, a larger down payment will lower the loan size and monthly 
payment and will in this way improve a consumer's repayment ability. 
However, the size of a down payment does not directly indicate a 
consumer's ability to repay the loan according to its terms on a going-
forward basis because a down payment is not an asset available for this 
purpose. Therefore, standing alone, down payments will not support a 
reasonable and good faith determination of the ability to repay. 
Supervision cannot anticipate circumstances where a creditor could 
demonstrate that it reasonably and in good faith determined ATR for a 
consumer with no verified income or assets based solely on the down 
payment size. This would be the case even where the loan program as a 
whole has a history of strong performance.
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    \13\ 12 CFR 1026.43(c)(2)(i) (emphasis added).
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    For every mortgage origination examination of Bureau supervised 
entities where Bureau examiners are assessing compliance with the ATR 
rule, Supervision will evaluate whether the creditor made a reasonable 
and good faith determination of the consumer's ability to repay in 
light of the facts and circumstances specific to each individual 
extension of credit. For further information on Supervision's approach 
to the ATR rule, Supervision encourages supervised entities to review 
the Bureau's Mortgage Origination Examination Procedures \14\ and TILA 
Examination Procedures.\15\ For summaries of the ATR rule, creditors 
can review the Bureau's Readiness Guide \16\ and Small Entity 
Compliance Guide.\17\ However, only the regulation and its accompanying 
commentary can provide complete and definitive information about the 
requirements.
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    \14\ Mortgage Origination Examination Procedures, available at 
https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/mortgage-origination-examination-procedures/.
    \15\ TILA Examination procedures, available at https://files.consumerfinance.gov/f/201509_cfpb_truth-in-lending-act-exam-procedures.pdf.
    \16\ Readiness guide, available at https://files.consumerfinance.gov/f/201509_cfpb_readiness-guide_mortgage-implementation.pdf.
    \17\ See Ability-to-Repay and Qualified Mortgage Rule--Small 
Entity Compliance Guide, available at https://files.consumerfinance.gov/f/201603_cfpb_atr-qm_small-entity-compliance-guide.pdf.
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2.2 Mortgage Servicing

    The June 2016 edition of Supervisory Highlights discussed how 
outdated mortgage servicing technology and lapses in auditing and staff 
training have led to persistent compliance deficiencies with loss 
mitigation acknowledgement notices, loan modification denial notices, 
servicing transfers, and in other areas.\18\ Supervision continues to 
observe serious problems with the loss mitigation process at certain 
servicers, including at one or more servicers that failed to request 
from borrowers the additional documents and information they needed to 
obtain complete loss mitigation applications, only to deny the 
applications for missing those documents.\19\ Supervision directed 
these servicers to enhance policies, procedures, and monitoring to 
ensure that they promptly address the specific deficiencies found in 
each exam. Other issues reviewed during Supervision's most recent 
mortgage servicing examinations include dual tracking, problems with 
the maintenance of escrow accounts, and deficient periodic statements.
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    \18\ See Supervisory Highlights Mortgage Servicing Special 
Edition, available at https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-mortgage-servicing-special-edition-issue-11/.
    \19\ 12 CFR 1024.41(c)(2)(iv).
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2.2.1 Dual Tracking

    Regulation X generally \20\ prohibits a servicer from making the 
first notice or filing required by applicable law for any judicial or 
nonjudicial foreclosure process (``first notice or filing'') if a 
consumer timely submits a complete loss mitigation application, unless 
certain circumstances are met.\21\ This prohibition on foreclosure 
filing also extends to certain situations where a consumer timely 
submits all the missing documents and information as stated in a 
servicer's loss mitigation acknowledgment notice--that is, it applies 
to ``facially complete'' applications.\22\
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    \20\ Pursuant to 12 CFR 1024.41(f)(1), the prohibition does not 
apply in three scenarios: (1) The borrower's mortgage loan 
obligation is more than 120 days delinquent, (2) the foreclosure is 
based on a borrower's violation of a due-on-sale clause, or (3) the 
servicer is joining the foreclosure action of a subordinate 
lienholder.
    \21\ Pursuant to 12 CFR 1024.41(f)(2), the servicer may make the 
first notice or filing, stated generally, if the borrower's 
application is properly denied and the borrower has no further right 
to appeal, the borrower rejects all the options offered, or the 
borrower fails to perform under an agreement on a loss mitigation 
option.
    \22\ 12 CFR 1024.41(c)(2)(iv); 12 CFR 1024.41(f)(2) and comments 
41(c)(2)(iv)-1 and -2.
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    Examiners found that one or more servicers did not properly 
classify loss mitigation applications as facially complete after 
receiving the documents and information requested in the loss 
mitigation acknowledgment notice and failed to afford these eligible 
consumers with foreclosure protections for facially complete 
applications as required by Regulation X. The servicer(s) made the 
first notice or filing even though the consumers had timely submitted 
facially complete applications and were entitled to Regulation X's 
foreclosure protections. Supervision also determined that the 
servicer(s) violated Regulation X by failing to maintain policies and 
procedures reasonably designed to properly evaluate a borrower who 
submits a loss mitigation application for all loss mitigation options 
for which the borrower may be eligible.\23\ Supervision directed the 
servicer(s) to improve policies, procedures, and practices related to 
facially complete loss mitigation applications to ensure that the 
servicer(s) will not make a first notice or filing after receiving 
documents and information from a borrower until the servicer reviews 
the documents and information and determines that they do not comprise 
a facially complete application.\24\ The servicer(s) remediated 
consumers affected by the improper first notice or filing for fees 
charged to the consumer in these circumstances, for other economic 
harms, and non-economic harms such as emotional distress.
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    \23\ See 112 CFR 1024.38(b)(2)(v) (setting forth the requirement 
that servicers shall maintain policies and procedures reasonably 
designed to properly evaluate a borrower who submits an application 
for a loss mitigation option for all loss mitigation options for 
which the borrower may be eligible pursuant to any requirements 
established by the owner or assignee of the borrower's mortgage loan 
and, where applicable, in accordance with the requirements of 
section 1024.41).
    \24\ This excludes circumstances where Regulation X permits a 
servicer(s) to make a first notice or filing.
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2.2.2 Paying the Wrong Consumer's Insurance Premiums With Escrow Funds

    One or more servicers disbursed funds from some borrowers' escrow 
accounts to pay insurance premiums owed by other borrowers. The 
practice

[[Page 22122]]

created escrow shortages and increased monthly payments that consumers 
with affected escrow accounts could not avoid. Supervision cited this 
practice as unfair and directed that in addition to remediating 
affected consumers, the servicer(s) adopt policies and procedures to 
ensure that insurance payments are made properly from escrow 
accounts.\25\
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    \25\ 12 U.S.C. 5536(a)(1)(B).
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2.2.3 Vague Periodic Statements

    In connection with periodic statements required under Regulation Z, 
examiners found one or more servicers used the phrases ``Misc. 
Expenses'' and ``Charge for Service'' when describing transaction 
activity that caused a credit or debit to the amount currently due as 
displayed on periodic statements. Supervision cited the servicer(s) for 
violating Regulation Z requirements that the transaction activity 
listed on periodic statements include a brief description of the 
transactions because the phrases ``Misc. Expenses'' and ``Charge for 
Service'' were not adequate or specific enough to comply with the 
rule's requirement.\26\ Supervision directed the servicer(s) to provide 
more specific descriptions in order to facilitate consumer 
understanding of the fees and charges imposed.
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    \26\ 12 CFR 1026.41(d)(4).
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2.3 Student Loan Servicing

    The Bureau continues to examine Federal and private student loan 
servicing activities, primarily assessing whether entities have engaged 
in unfair, deceptive, or abusive acts or practices prohibited by the 
Dodd-Frank Act. Examiners identified an unfair act or practice and a 
deceptive act or practice relating to payment deferments in the 
Bureau's recent student loan servicing examinations.

2.3.1 Failing To Reverse Adverse Consequences of Erroneous Deferment 
Terminations

    Many student loan lenders offer deferments during periods in which 
a borrower is attending school. To manage that benefit, student loan 
servicers rely on enrollment data supplied by schools via a third-party 
enrollment reporting company, National Student Clearinghouse. In 
general, schools regularly provide updated data files on their 
students' enrollment status to an enrollment reporting company, which 
in turn, facilitates the updating of enrollment data files that are 
sent to student loan servicers.\27\ Each year, data about tens of 
millions of current and former students pass through this data exchange 
service. The servicers' automated systems will then trigger changes in 
a borrower's loan status. For Federal loans, a third-party enrollment 
reporting company often reports information through the Department of 
Education.
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    \27\ For more information on this process, see the Bureau's 
recent report on the topic. CFPB, Student Data & Student Debt: How 
student enrollment status problems can make student loans more 
expensive, Feb. 2017, available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201702_cfpb_Enrollment-Status-Student-Loan-Report.pdf.
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    During one or more exams of student loan servicers, examiners found 
that incorrect information received from a third-party enrollment 
reporting service provider caused the servicer to automatically 
terminate deferments prematurely, while borrowers were still enrolled 
at least half-time in school. Based on subsequent reporting, the 
servicers corrected the premature termination and retroactively placed 
the borrowers back in deferment. However, examiners found that the 
servicers engaged in an unfair practice because they did not reverse 
the adverse financial consequences of the erroneous deferment 
termination, including late fees charged for non-payment during periods 
when the borrower should have been in deferment, and interest 
capitalization that occurred because the borrower's deferment was 
erroneously terminated. This practice was especially harmful to 
borrowers where the enrollment reporting data resulted in multiple 
premature deferment terminations, because interest capitalized multiple 
times, increasing principal balances by thousands of dollars in some 
instances.
    Supervision determined these servicers engaged in the unfair 
practice of failing to reverse late fees and interest capitalization 
events after determining that they had erroneously terminated 
borrowers' in-school deferment based on enrollment reporting data. 
Supervision directed one or more servicers to engage an independent 
audit to find accounts that were adversely affected and remediate the 
resulting harm.

2.3.2 Deceptive Statements About Interest Capitalization During 
Successive Deferments

    Student loan lenders usually offer a variety of deferment and 
forbearance options that allow borrowers to cease payments for a brief 
period of time. Often, when a forbearance or deferment ends, the 
interest that has accrued during the forbearance or deferment period is 
capitalized, meaning that the interest is added to the principal amount 
that accrues interest.
    At one or more servicers, examiners found that servicers were 
placing borrowers into successive periods of forbearance or deferment 
where a new period immediately followed the previous period. When that 
happened, the servicers would capitalize interest after each period of 
deferment or forbearance, instead of capitalizing once when the 
borrower eventually reentered repayment. Since capitalized interest is 
added to the borrower's loan balance, capitalizing interest multiple 
times rather than once increases the amount the borrower ultimately 
must repay.
    Supervision determined that one or more servicers had engaged in 
deceptive practices by stating that interest would capitalize at the 
end of the deferment period. Reasonable consumers likely understood 
this to mean interest would capitalize once, when the borrower 
ultimately exited deferment and entered repayment. These misleading 
statements were material because, given the significant financial 
consequences of interest capitalization, the borrower may have decided 
to take a different action. Supervision directed one or more servicers 
to engage an independent audit to find accounts that were adversely 
affected and remediate the resulting harm. One or more servicers 
started capitalizing interest only after the final forbearance or 
deferment in a series, and reversed past capitalization events based on 
successive deferments or forbearances.

2.4 Fair Lending

2.4.1 Update to Proxy Methodology

    In the Summer 2014 edition of Supervisory Highlights,\28\ the 
Bureau reported that examination teams use a Bayesian Improved Surname 
Geocoding (BISG) proxy methodology for race and ethnicity in their fair 
lending analysis of non-mortgage credit products. The BISG methodology 
relies on the distribution of race and ethnicity based on place-of-
residence and surname, which are publicly available information from 
Census. The method involves constructing a probability of assignment to 
race and ethnicity based on demographic information associated with 
surname and then updating this probability using the demographic 
characteristics of the census block group associated with place of 
residence. The updating is performed through the application of a 
Bayesian algorithm,

[[Page 22123]]

which yields an integrated probability that can be used to proxy for an 
individual's race and ethnicity.\29\
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    \28\ See Supervisory Highlights (Summer 2014), available at 
https://files.consumerfinance.gov/f/201409_cfpb_supervisory-highlights_auto-lending_summer-2014.pdf.
    \29\ For more information on the methodology, see Consumer 
Financial Protection Bureau, Using publicly available information to 
proxy for unidentified race and ethnicity (Sept. 2014), available at 
https://files.consumerfinance.gov/f/201409_cfpb_report_proxy-methodology.pdf.
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    In December, the U.S. Census Bureau released a list of the most 
frequently occurring surnames based on the most recent census, which 
includes values for total counts and race and ethnicity shares 
associated with each surname. In total, the list provides information 
on the 162,253 surnames that appear at least 100 times in the most 
recent census, covering approximately 90% of the population.\30\ As of 
April 2017, examination teams are relying on an updated proxy 
methodology that reflects the newly available surname data from the 
Census Bureau. The new surname list; statistical software code, written 
in Stata; and other publicly available data used to build the BISG 
proxy are available at: https://github.com/cfpb/proxy-methodology.
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    \30\ The surname data are available on the Census Bureau's Web 
site, see Frequently Occurring Surnames from the 2010 Census (last 
revised Dec. 27, 2016), https://www.census.gov/topics/population/genealogy/data/2010_surnames.html.
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3. Remedial Actions

3.1.1 Public Enforcement Actions

    The Bureau's supervisory activities resulted in or supported the 
following public enforcement actions.

3.1.1 Experian

    On March 23, 2017, the Bureau announced an enforcement action 
against Experian and its subsidiaries for deceiving consumers about the 
use of credit scores it sold to consumers.\31\ In its advertising, 
Experian falsely represented that the credit scores it marketed and 
provided to consumers were the same scores lenders use to make credit 
decisions. In fact, lenders did not use the scores Experian sold to 
consumers. In some instances, there were significant differences 
between the scores that Experian provided to consumers and the various 
credit scores lenders actually use. As a result, Experian's credit 
scores in these instances presented an inaccurate picture of how 
lenders assessed consumer creditworthiness.
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    \31\ See CFPB Fines Experian $3 Million for Deceiving Consumers 
in Marketing Credit Scores, available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-fines-experian-3-million-deceiving-consumers-marketing-credit-scores/.
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    Experian also violated the Fair Credit Reporting Act (FCRA), which 
requires a credit reporting company to provide a free credit report 
once every twelve months and to operate a central source--
AnnualCreditReport.com--where consumers can obtain their report. Until 
March 2014, consumers getting their report through Experian had to view 
Experian advertisements before they got to the report. This violates 
the FCRA prohibition of such advertising tactics.
    The CFPB ordered Experian to truthfully represent how its credit 
scores are used and pay a $3 million civil money penalty.

3.1.2 Prospect Mortgage, Planet Home Lending, Re/Max Gold Coast, and 
Keller Williams Mid-Willamette

    The Bureau entered consent orders against Prospect Mortgage, Keller 
Williams Mid Willamette (KW Mid-Willamette), Re/Max Gold Coast (RGC), 
and Planet Home Lending (Planet) on January 31, 2017.\32\ The Bureau 
found that Prospect gave, and KW Mid-Willamette, RGC, and Planet 
received, a thing of value in exchange for mortgage loan referrals. 
This arrangement violated Section 8 of the Real Estate Settlement 
Procedures Act, which prohibits kickbacks for the referral of 
settlement service business.
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    \32\ See CFPB Orders Prospect Mortgage to Pay $3.5 Million Fine 
for Illegal Kickback Scheme, available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-prospect-mortgage-pay-35-million-fine-illegal-kickback-scheme/.
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    Among other things, the Bureau found that KW Mid-Willamette paid a 
cash equivalent to its agents in return for referrals to Prospect. In 
addition, as part of its agreement to refer settlement service business 
to Prospect, RGC required hundreds of consumers to prequalify with 
Prospect before accepting an offer to buy a property where RGC 
represented the seller. The Bureau also found that Planet, a mortgage 
servicer, called consumers in an attempt to steer them to Prospect. 
Planet provided a `warm transfer' to a Prospect loan agent to 
facilitate Prospect receiving the consumers' refinance business. Planet 
and Prospect split the net proceeds from these refinances.
    The Bureau also found that Planet violated the Fair Credit 
Reporting Act by obtaining consumer reports without a permissible 
purpose. Finally, as described in the consent order, the Bureau found 
that Prospect paid hundreds of counterparties for referrals using desk 
license agreements, marketing services agreements, and lead agreements. 
These actions illustrate the legal risks associated with these types of 
agreements--as described in the Bureau's Compliance Bulletin 2015-05--
for both the parties making and the parties receiving payments for 
referrals of real estate settlement services. Prospect was ordered to 
pay a $3.5 million civil penalty, and the real estate brokers and 
servicer were ordered to pay a combined $495,000 in consumer relief.

3.1.3 CitiFinancial Servicing and CitiMortgage

    On January 23, 2017, the Bureau took separate actions against 
CitiFinancial Servicing and CitiMortgage, Inc. for giving the runaround 
to struggling homeowners seeking options to save their homes.\33\ Among 
other things, the Bureau found that CitiFinancial kept consumers in the 
dark about foreclosure relief options. When borrowers applied to have 
their payments deferred, CitiFinancial failed to consider it as a 
request for foreclosure relief options. Such requests for foreclosure 
relief trigger protections required by CFPB mortgage servicing rules, 
which include helping borrowers complete their applications and 
considering them for all available foreclosure relief alternatives. As 
a result, CitiFinancial violated the Real Estate Settlement Procedures 
Act and borrowers may have missed out on foreclosure relief options 
that may have been more appropriate for them.
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    \33\ See CFPB Orders Citi Subsidiaries to Pay $28.8 Million for 
Giving the Runaround to Borrowers Trying to Save Their Homes, 
available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-citi-subsidiaries-pay-288-million-giving-runaround-borrowers-trying-save-their-homes/.
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    The Bureau also found that some borrowers who asked CitiMortgage 
for assistance were sent a letter demanding dozens of documents and 
forms that had no bearing on the application or that the consumer had 
already provided. Many of these documents had nothing to do with a 
borrower's financial circumstances and were actually not needed to 
complete the application. Letters sent to borrowers in 2014 requested 
documents with descriptions such as ``teacher contract,'' and ``Social 
Security award letter.'' CitiMortgage sent such letters to about 41,000 
consumers. In doing so, CitiMortgage violated the Real Estate 
Settlement Procedures Act, and the Dodd-Frank Act's prohibition against 
deceptive acts or practices.
    The CFPB order requires CitiMortgage to pay an estimated $17 
million in remediation to consumers, and pay a civil penalty of $3 
million; and requires CitiFinancial Services to refund approximately 
$4.4 million to consumers, and pay a civil penalty of $4.4 million.

[[Page 22124]]

3.1.4 Equifax and TransUnion

    On January 3, 2017, the Bureau took action against Equifax, and 
against TransUnion, and their subsidiaries for deceiving consumers 
about the usefulness and actual cost of credit scores they sold to 
consumers.\34\ In their advertising, TransUnion and Equifax falsely 
represented that the credit scores they marketed and provided to 
consumers were the same scores lenders typically use to make credit 
decisions. The companies also claimed that their credit scores and 
credit-related products were free, or in the case of TransUnion, cost 
only ``$1.'' In fact, the scores sold by TransUnion and Equifax were 
not typically used by lenders to make those decisions. Moreover, 
consumers who signed up for credit scores or credit-related products 
received a free trial of seven or 30 days, after which they were 
automatically enrolled in a subscription program. Unless they cancelled 
during the trial period, consumers were charged a recurring fee--
usually $16 or more per month.
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    \34\ See CFPB Orders TransUnion and Equifax to Pay for Deceiving 
Consumers in Marketing Credit Scores and Credit Products, available 
at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-transunion-and-equifax-pay-deceiving-consumers-marketing-credit-scores-and-credit-products/.
_____________________________________-

    Equifax also violated the FCRA, which requires a credit reporting 
agency to provide a free credit report once every 12 months and to 
operate a central source_AnnualCreditReport.com--where consumers can 
get their report. Until January 2014, consumers getting their report 
through Equifax first had to view Equifax advertisements. This violates 
the FCRA, which prohibits such advertising until after consumers 
receive their report.
    The CFPB ordered TransUnion and Equifax to truthfully represent the 
value of the credit scores they provide and the cost of obtaining those 
credit scores and other services. Between them, TransUnion and Equifax 
must pay a total of more than $17.6 million in restitution to 
consumers, and a $5.5 million civil money penalty.

3.1.5 Moneytree, Inc.

    On December 16, 2016, the Bureau took action against Moneytree for 
misleading consumers with deceptive online advertisements and 
collections letters, and for making unauthorized electronic transfers 
from consumers' bank accounts.\35\ Specifically, the CFPB found that 
Moneytree deceived consumers about the price of check-cashing services, 
made false threats of vehicle repossession when collecting overdue 
unsecured loans, and withdrew funds from consumers' accounts without 
proper written authorization. The CFPB ordered the company to cease its 
illegal conduct, provide $255,000 in refunds to consumers, and pay a 
civil penalty of $250,000.
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    \35\ See CFPB Takes Action Against Moneytree for Deceptive 
Advertising and Collection Practices, available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-moneytree-deceptive-advertising-and-collection-practices/.
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    Prior to taking enforcement action, the Bureau identified 
significant weaknesses in Moneytree's compliance management system 
through multiple supervisory examinations of Moneytree's lending, 
marketing, and collections activities. At the time of the violations 
described in the order, Moneytree had not adequately addressed these 
issues. Moneytree's failure to adequately address CFPB's supervisory 
concerns was a factor in the Bureau's determination to pursue this 
matter through a public enforcement action.

3.2 Non-Public Supervisory Actions

    In addition to the public enforcement actions above, recent 
supervisory activities have resulted in approximately $6.1 million in 
restitution to more than 16,000 consumers. These non-public supervisory 
actions generally have been the product of CFPB supervision and 
examinations, often involving either examiner findings or self-reported 
violations of Federal consumer financial law during the course of an 
examination. Recent non-public resolutions were reached in auto finance 
origination matters.

4. Supervision Program Developments

4.1 Examination Procedures

4.1.1 Overview and Examination Chapters

    The CFPB has updated sections of its Supervision and Examination 
Manual. These updates include revisions to certain sections of Part I--
Compliance Supervision and Examination (Overview and Examination 
Process).\36\ The corresponding Scope Summary template has also been 
updated.\37\ These revisions were necessitated by the updated Federal 
Financial Institutions Examination Council (FFIEC) Uniform Interagency 
Consumer Compliance Rating System, which became effective on March 31, 
2017. The revisions also reflect changes in our supervisory program, 
such as the refinement to our examination prioritization process.
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    \36\ See the Overview and Examination Process updates, available 
at https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/updated-portions-overview-and-examination-process/.
    \37\ See Scope Summary template, available at https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/scope-summary-template/.
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4.1.2 Changes to Reporting Templates

    New reporting templates for Supervisory Letters and Examination 
Reports (collectively referred to as Reports) are now available on the 
CFPB Web site.\38\ These changes aim to simplify Reports and facilitate 
follow-up reporting by supervised entities about actions they are 
taking to address compliance management weaknesses or legal violations 
found during Bureau examinations.
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    \38\ Report templates are available at https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/supervisory-report-and-letter-templates/.
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4.2 Service Provider Examination Program

    In bulletins and past issues of Supervisory Highlights, the CFPB 
has emphasized that effective service provider oversight is a crucial 
component of any compliance management system (CMS).\39\ The CFPB 
expects its supervised entities to have an effective process for 
identifying and managing the risks to consumers created by the choices 
made to outsource certain activities to service providers.\40\ The CFPB 
has and will continue to evaluate the oversight of service providers in 
its compliance management reviews according to these expectations.
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    \39\ See e.g., Supervisory Highlights (Fall 2016), available at 
https://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_13_Final_10.31.16.pdf; Supervisory 
Highlights (Summer 2016), available at https://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_12.pdf; and Supervisory Highlights 
(Spring 2014), available at https://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf. For Bulletins, 
see Compliance Bulletin and Policy Guidance; 2016-03, Detecting and 
Preventing Consumer Harm from Production Incentives available at 
https://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/cfpb-compliance-bulletin-2016-03-detecting-and-preventing-consumer-harm-from-production-incentives/; and 
Compliance Bulletin and Policy Guidance; 2016-02, Service Providers 
(amends and reissues CFPB Bulletin 2012-03), available at https://www.consumerfinance.gov/documents/1385/102016_cfpb_OfficialGuidanceServiceProviderBulletin.pdf.
    \40\ Compliance Bulletin and Policy Guidance; 2016-02, Service 
Providers (amends and reissues CFPB Bulletin 2012-03), available at 
https://www.consumerfinance.gov/documents/1385/102016_cfpb_OfficialGuidanceServiceProviderBulletin.pdf.
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    At the same time, the CFPB recognizes the potential risks to 
consumers posed by large service

[[Page 22125]]

providers,\41\ which provide technological support to facilitate 
compliance with Federal consumer financial law, including software 
packages, electronic system platforms, and other types of technological 
tools. These compliance tools are often provided to thousands of 
participants in a particular market. As such, compliance risks in an 
entire market may be heightened when regulatory compliance is not 
considered and integrated throughout the development lifecycle, change, 
and configuration of these compliance systems.
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    \41\ Compliance information systems are information systems and 
processes used by financial institutions to produce consumer 
financial products and services.
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    Because a single service provider might affect consumer risk at 
many institutions, the CFPB has begun to develop and implement a 
program to supervise these service providers directly.\42\ Direct 
examination of key service providers will provide the CFPB the 
opportunity to monitor and potentially reduce risks to consumers at 
their source.
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    \42\ The Dodd-Frank Act grants the Bureau the authority to 
examine ``service providers'' to certain entities. More 
specifically, under Dodd-Frank Act subsections 1024(e) and 1025(d), 
the Bureau has the authority to examine, in coordination with the 
appropriate prudential regulator(s), service providers to entities 
described in Dodd-Frank Act subsections 1024(a)(1) or 1025(a), to 
the same extent as if the Bureau were an appropriate Federal banking 
agency under section 7(c) of the Bank Service Company Act. And, 
under Dodd-Frank Act section 1026(e), the Bureau has the authority 
to examine, in coordination with the appropriate prudential 
regulator(s), service providers to a substantial number of entities 
described in Dodd-Frank Act subsection 1026(a), to the same extent 
as if the Bureau were an appropriate Federal banking agency under 
section 7(c) of the Bank Service Company Act. See Dodd-Frank Act 
Sections 1024-1026, codified at 12 U.S.C. 5514-5516.
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    In its initial work, the CFPB is conducting baseline reviews of 
some service providers to learn about the structure of these companies, 
their operations, their compliance systems, and their CMS. In more 
targeted work, the CFPB is focusing on service providers that directly 
affect the mortgage origination and servicing markets. The CFPB will 
shape its future service provider supervisory activities based on what 
it learns through its initial work. As with all new examination 
programs, service provider supervision is folded into the Bureau's 
overall risk-based prioritization process.\43\
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    \43\ See Section 3.2.3, Risk-Based Approach to Examinations, 
Supervisory Highlights: Summer 2013, available at https://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf.
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4.3 Spike and Trend Monitoring

    As a data-driven agency, the Bureau has prioritized detecting 
issues in the market that could result in risk to consumers. The Bureau 
has historically incorporated this information about market trends into 
the risk-based prioritization of examinations.\44\ To this end, the 
Bureau now continuously monitors spikes and trends in complaints. Our 
automated capability monitors the volume of consumer complaints for all 
companies named by consumers in complaint submissions. Our active 
monitoring algorithms identify short, medium, and long-term changes in 
complaint volumes in daily, weekly, and quarterly windows. Importantly, 
the tool works regardless of company size, random variation, general 
complaint growth, and seasonality.
---------------------------------------------------------------------------

    \44\ See Section 3.2.3, Supervisory Highlights (Summer 2013), 
available at https://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf.
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    The tool is intended to be an effective early warning system, 
helping the Bureau to identify consumer issues quickly and engage with 
companies earlier. For example, in one instance, the regional exam 
team, after reviewing complaints associated with a spike in complaint 
volume, immediately reached out to the company to inform senior 
management and discuss consumers' concerns. The Bureau was able to 
engage senior management before they were aware of the matter through 
their own internal processes. The company quickly developed and 
implemented a plan to correct the issues, provided accurate information 
to customer service representatives, and developed a refund policy and 
process for affected consumers, minimizing potential harm to consumers 
and further risk of exposure for the company.

4.4 Recent CFPB Guidance

    The CFPB is committed to providing guidance on its supervisory 
priorities to industry and members of the public.

4.4.1 Compliance and Regulatory Implementation Resources

    The Bureau is continuously working to facilitate compliance and 
empower stakeholders to understand and apply Federal consumer financial 
laws. In addition to official guidance provided by the Bureau, there 
are a variety of tools and resources for industry and other 
stakeholders. These resources include plain-language guides, rules 
summaries, reference charts, sample forms, interactive Web pages, and 
webinars. The Bureau refers to this ongoing work as ``regulatory 
implementation.'' The implementation and guidance Web page \45\ 
includes links to dedicated Web pages for HMDA, the Know Before You Owe 
mortgage disclosure rule, Prepaid Rule, Title XIV (which includes both 
mortgage origination and mortgage servicing), remittance transfers, and 
the rural and underserved counties list. There are also instructions on 
how to provide feedback on the material and sign up to receive notices 
on new regulatory implementation efforts and materials.
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    \45\ These resources are available at https://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/.
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    Another tool provided by the Bureau to support compliance and 
implementation is eRegulations,\46\ a web-based, open source platform 
that makes regulations easier to find, read, and use. It brings 
official interpretations, regulatory history, and other information to 
the forefront to clarify regulations. The eRegulations tool has been 
updated to include Regulations B, C, D, E, J, K, L, M, X, Z and DD. 
User feedback consistently indicates that many users have found this 
platform to be very useful for navigating Bureau regulations.
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    \46\ The eRegulations tool is available at https://www.consumerfinance.gov/eregulations/.
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4.5 Production Incentives

    On November 28, 2016, CFPB published Compliance Bulletin 2016-03, 
``Detecting and Preventing Consumer Harm from Production Incentives.'' 
The Bureau recognizes that many supervised entities may choose to 
implement incentive programs to achieve business objectives. These 
production incentives can lead to significant consumer harm if not 
properly managed. However, when properly implemented and monitored, 
reasonable incentives can benefit consumers and the financial 
marketplace as a whole.
    This bulletin compiles guidance that has previously been given by 
the CFPB in other contexts and highlights examples from the CFPB's 
supervisory and enforcement experience where incentives contributed to 
substantial consumer harm. It also describes compliance management 
steps that supervised entities should take to mitigate risks posed by 
incentives.
    The CFPB anticipates that careful and thoughtful implementation of 
the guidance contained in this bulletin will yield substantial benefits 
for both bank and nonbank financial institutions, as well as for 
consumers. In particular, it should help institutions prevent, 
identify, and mitigate issues that could pose significant legal, 
regulatory, and

[[Page 22126]]

reputational risks that could also cause harm for consumers.

5. Conclusion

    The Bureau recognizes the value of communicating our program 
findings to CFPB supervised entities to help them in their efforts to 
comply with Federal consumer financial law, and to other stakeholders 
to foster a better understanding of the CFPB's work.
    To this end, the Bureau remains committed to publishing its 
Supervisory Highlights report periodically to share information about 
general supervisory and examination findings (without identifying 
specific institutions, except in the case of public enforcement 
actions), to communicate operational changes to the program, and to 
provide a convenient and easily accessible resource for information on 
the Bureau's guidance documents.

    Dated: April 22, 2017.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2017-09658 Filed 5-11-17; 8:45 am]
 BILLING CODE 4810-AM-P