CFPB prioritizes small dollar loans
Fall Surveillance Highlights are released this month and report the Bureau’s findings on reviews conducted between January 2021 and June 2021. The CFPB publishes Surveillance Highlights to help institutions better understand how the CFPB reviews and monitors compliance with federal consumer finance laws. CFPB examiners often find issues during supervisory checks that are resolved without enforcement action and the findings provide insight to other financial institutions. Among other things, the Fall Surveillance Highlights clarified the Bureau’s concerns regarding payday loans (small loans). Earlier this year, the CFPB signaled its intention to focus on small-dollar lending business and expressed concern about “any lender’s business model that depends on consumers being unable to repay their loans.”
The latest CFPB oversight highlights revealed UDAAP and EFTA violations in small dollar lending. In particular, he took issue with lenders’ mismanagement of consumer loan extensions. The CFPB found that lenders improperly debited consumers’ bank accounts and engaged in deceptive acts or practices by debiting or attempting to debit consumers’ accounts with the remaining balance of their loans as of the date of original due date, rather than simply the extension fee, even after the consumer had been granted a period of payment. The Bureau found that the practice caused significant harm to consumers by causing unexpected debits on the total loan balance and possible bank charges. Additionally, the CFPB concluded that the practice was misrepresentation to consumers and would therefore cause additional substantial harm to consumers, as the ability to debit the full amount of the loan would likely affect a consumer’s payment decisions. The Office is currently reviewing these actions and promises to take corrective and remedial action regarding these violations.
The CFPB noted another UDAAP issue related to the mismanagement of consumer payments. Lenders erred in debiting or attempting unauthorized or identical debits from consumers’ bank accounts due to a coding error or after consumers called to authorize a debit card loan payment and the lenders’ systems incorrectly indicated that the payments had not been processed. Again, the CFPB found that both practices caused substantial harm to consumers as they deprived them of access to funds and exposed them to possible bank charges. Importantly, the CFPB found that the cost of fixing the problem would not outweigh the harm to consumers.
Finally, the CFPB found that the lenders breached EFTA by failing to retain evidence of compliance with the rule’s requirements for the appropriate period (two years). The Bureau has stated that it will take corrective and remedial action regarding these violations. A good records retention policy is essential to ensure that lenders meet all federal record retention deadlines, as well as informing all management and staff of this important issue.
A robust compliance management system is necessary to avoid the above pitfalls related to consumer payment management, record retention, and related violations of federal laws. Consistent monitoring and auditing of your compliance management system and payment policies is essential to prevent future UDAAPs or other violations of law. Third-party legal audits can also help lenders see what they are sometimes missing.
© 2022 Bradley Arant Boult Cummings LLPNational Law Review, Volume XI, Number 356