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FDIC highlights NSF/overdraft fees, fair lending in 2022 Consumer Compliance Supervisory Highlights
On March 31, the FDIC released the spring 2022 edition of the Consumer Compliance Supervisory Highlights to provide information and observations related to the FDIC’s consumer compliance supervision of state non-member banks and thrifts in 2021. Topics include:
- A summary of the FDIC’s supervisory approach in response to the Covid-19 pandemic, including efforts made by banks to meet the needs of consumers and communities.
- An overview of the most frequently cited violations (approximately 78 percent of total violations involved TILA, the Flood Disaster Protection Act (FDPA), EFTA, Truth in Savings Act, and RESPA). During 2021, the FDIC initiated 20 formal enforcement actions and 24 informal enforcement actions addressing consumer compliance examination observations, and issued civil money penalties totaling $2.7 million against institutions to address violations of the FDPA and Section 5 of the FTC Act.
- Information on the charging of multiple non-sufficient funds fees (NSF) for re-presented items, and risk-mitigating activities taken by banks to avoid potential violations. According to the FDIC, “failure to disclose material information to customers about re-presentment practices and fees” may be deceptive. The failure to disclose material information to customers “may also be unfair if there is the likelihood of substantial injury for customers, if the injury is not reasonably avoidable, and if there is no countervailing benefit to customers or competition. For example, there is risk of unfairness if multiple fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for consumers to bring their account to a positive balance.” Recommendations on addressing overdraft issues are discussed in the report.
- An overview of fair lending concerns highlighting ways to mitigate risk, including “[m]aintaining written policies and procedures that include information for lending staff to reference when applying credit decision criteria and determining whether borrowers are creditworthy” and reviewing requirements used to screen potential applicants to make sure there is no “discriminatory impact.”
- Information on regulatory developments, such as (i) rulemaking related to the Community Reinvestment Act, flood insurance, false advertising/misuse of the FDIC’s name or logo rulemaking, deposit insurance, and LIBOR; and (ii) guidance on fintech due diligence, artificial intelligence/machine learning, and third-party risk management.
- A summary of consumer compliance resources available to financial institutions.
- An overview of consumer complaint trends.
FTC imposes “record-setting” fine on auto dealer alleging discriminatory junk fees
On April 1, the FTC and the Illinois Attorney General announced a proposed settlement with an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. Under the terms of the proposed settlement, the defendants are ordered to pay a $10 million penalty, of which $9.95 million will be used to provide monetary relief to consumers. According to the FTC, this is the highest penalty ever obtained against an auto dealer. The remaining balance of the penalty will be paid to the Illinois Attorney General Court Ordered and Voluntary Compliance Payment Projects Fund.
According to the complaint, which brings claims under the FTC Act, TILA, ECOA, and comparable Illinois laws, eight of the defendant’s dealerships, along with the general manager of two of the Illinois dealerships, allegedly tacked on junk fees for unwanted “add-on” products such as service contracts, GAP insurance, and paint protection to consumers’ purchase contracts at the end of the negotiation process, often without consumers’ consent. In other instances, consumers were told that the add-ons were free or were required to purchase or finance their vehicle. The complaint further alleges that defendants discriminated against Black consumers by charging them higher interest rates or more for add-on products than similarly situated non-Latino white consumers. As result, Black consumers allegedly paid, on average, $190 more in interest and $99 more for add-on products.
FTC Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter issued a joint statement noting that they “would have also supported a count alleging a violation of the FTC Act’s prohibition on unfair acts or practices.” Khan and Slaughter elaborated on reasons why the FTC “should evaluate under its unfairness authority any discrimination that is found to be based on disparate treatment or have a disparate impact,” pointing out that (i) discrimination based on protected status can cause substantial injury to consumers; (ii) “injuries stemming from disparate treatment or impact are unavoidable because affected consumers cannot change their status or otherwise influence the unfair practices”; and (iii) “injuries stemming from disparate treatment or impact are not outweighed by countervailing benefits to consumers or competition.”
CFPB handled nearly 1 million consumer complaints in 2021
On March 31, the CFPB published its Consumer Response Annual Report for 2021, providing an overview of consumer complaints received by the agency between January 1 and December 31, 2021. According to the report, the Bureau handled approximately 994,000 consumer complaints last year. Among other trends, the agency found that complaints about credit or consumer reporting continue to increase, accounting for more than 70 percent of all complaints received last year. Debt collection complaints are also increasing, accounting for more than 10 percent of all complaints. Consumers also reported difficulties with financial institutions failing to adequately address consumer complaints, giving consumers the runaround, and described issues with reaching companies to raise concerns about digital assets, mobile wallets, and buy-now-pay-later credit. The Bureau noted that during the second year of the Covid-19 pandemic, complaint data showed that the volume of complaints from consumers struggling to pay their mortgages is increasing as borrower protections have expired. While complaints related to vehicle loans have also increased, the Bureau reported that student loan complaints remain lower than pre-Covid levels due to the implementation of temporary relief programs. The top products and services—representing approximately 94 percent of all complaints—were credit or consumer reporting, debt collection, credit cards, checking or savings accounts, and mortgages. The Bureau also received complaints related to money transfers and virtual currency; vehicle finance; prepaid cards; student, personal, and payday loans; credit repair; and title loans.
House subcommittee discusses eliminating overdraft fees
On March 31, the House Financial Services Committee’s Subcommittee on Consumer Protection and Financial Institutions held a hearing titled, The End of Overdraft Fees? Examining the Movement to Eliminate the Fees Costing Consumers Billions, to discuss efforts to reduce or eliminate overdraft fees. Subcommittee Chair Ed Perlmutter (D-CO) opened the hearing by noting that “consumers in the United States pay around $10 to $12 billion in overdraft fees and nonsufficient fund fees,” with just 9 percent of consumers representing up to 80 percent of these fees. He also noted that these “types of fees impact people of color at a disproportionate rate,” and that “[s]tudies have found banks with branches in predominantly black neighborhoods charge more for overdraft on average, and black customers are overrepresented in those who report paying more than $100 in fees in the past year.” Some subcommittee Democrats appeared supportive of measures to address the alleged growing reliance by banks and credit unions on revenues from overdraft fees to make up for interest lost in the current low-rate environment. In contrast, certain subcommittee Republicans appeared skeptical of government efforts to limit financial institutions’ ability to provide overdraft services, questioning the impact such efforts would have on smaller financial institutions like community banks and credit unions. The committee memorandum and hearing focused on the evolving trends related to overdraft programs and fees and their impact on consumers, including the following:
- Overdraft and Non-Sufficient Funds (NSF) Fee Data and Trends. The subcommittee quoted a study that found that “federal regulators have required banks and credit unions with more than $1 billion in assets to report revenue collected specifically from overdraft and NSF fees, totaling between $11 billion and $12 billion annually,” since 2015. According to the subcommittee, “the true fee total is likely higher since smaller depository institutions are exempt from the reporting requirement.”
- Impact on Consumers. The subcommittee quoted a report that said “consumers face challenges with unclear or confusing overdraft policies or are charged fees simply because of a delay in when their paycheck deposits are made available or when other transactions are settled in their account.” According to the report, consumers “incur overdraft fees despite carefully attempting to avoid them and often believing they have. One practice, in particular, has garnered increased attention recently: charging overdraft fees on debit card transactions that were authorized when the consumer had sufficient funds in the account but then settled, often a few days later, when the account no longer had sufficient funds.”
- Proposals and Challenges to Improving Consumer Protections when Consumers Overdraft. The subcommittee pointed out that initiatives to improve overdraft fees and NSF fees would “focus on enhancing disclosures and information about overdraft provided to consumers; capping the number of fees a consumer may be charged in a defined period of time; reducing the cost of each fee, or encouraging or incentivizing financial institutions to offer small-dollar loans with streamlined underwriting and affordable interest rates or repayment plans to provide an alternative for consumers who typically rely on overdraft.” The subcommittee also said another possible improvement in the market would result from adopting a faster payments network, such as the FedNow Service. As previously covered by InfoBytes, the Fed announced in August 2020 its intention to implement the FedNow Service—a “round-the-clock real-time payment and settlement service”—through a phased approach with a target launch date sometime in 2023 or 2024.
One witness, a senior policy analyst from a Latino civil rights and advocacy organization, expressed his support for reducing or eliminating overdraft fees, stating that “[o]verdraft fees, by their nature, impact consumers when they can least afford an additional [c]ost.” The witness quoted a study that found “[l]ow- to moderate-income households are nearly twice as likely as higher-income households to overdraw an account.” Calling overdrafts “a penalty for being poor or financially insecure,” another witness, a consumer policy counsel at a civil rights nonprofit, expressed that “overdraft fees are a penalty for being poor or financially insecure.” Quoting a study finding that approximately “80 percent of overdraft fee revenue to banks comes from 9 percent of accounts,” the witness stated that the “median account balance of this group is less than $350.” In contrast, another witness, a law professor at George Mason University, stated in the hearing that “exasperation is not a substitute for sound economic analysis," He stressed that “this is an area in which unintended consequences of bans on overdraft protection, substantive limits, price controls and the like could have some serious unintended consequences.” He further warned of possible negative consequences should policymakers eliminate overdraft programs, cautioning that new restrictions on overdrafts may have many negative implications for consumers, including “higher bank fees, higher minimum monthly deposits . . . and a loss of access to free checking.”
Additionally, some House Republicans were critical of recent efforts taken by the CFPB in this space and the elimination of overdrafts by several banks. During the hearing, Rep. Blaine Luetkemeyer (R-MO) criticized the CFPB’s inquiry into junk fees (covered by InfoBytes here), arguing that, “t[h]ere is no legal authority for the CFPB to define the term ‘junk fee’ . . . and even less authority for the CFPB to act as a price setter in the consumer financial market.” Luetkemeyer added that “the CFPB is manufacturing a crisis about hidden fees for financial products and services when they are the very people that made up the disclosure regime,” and called the effort “another attempt by the CFPB to denigrate legally operating businesses by any means possible.”
FTC sues company over “free” tax filing campaign
On March 29, the FTC issued an administrative complaint against a company that produces tax filing software for allegedly engaging in deceptive business practices when advertising, marketing, distributing, and selling their purportedly “free” tax filing services. The FTC also filed a complaint for a temporary restraining order and an emergency motion for a temporary restraining order (TRO) and preliminary injunction against the company in the U.S. District Court for the Northern District of California, stating that unless the court steps in, the company will “be free to continue disseminating the deceptive claim that consumers can file their taxes for free using [the software] when, in truth, in numerous instances, defendant does not permit consumers to file their taxes for free using [the software].” The FTC stated in its announcement that millions of consumers are unable to take advantage of the tax filing software’s allegedly “free” service (including those who get a 1099 form for work in the gig economy or those who earn farm income), noting that roughly two-thirds of tax filers were unable to file their taxes for free in 2020. According to the complaint, these consumers are often informed they need to upgrade to a paid version to complete and file their taxes. The FTC specifically pointed to the company’s “Absolute Zero” ad campaign, in which the company informed consumers that its “offering was truly free.” The agency said company’s campaign included the words “Free Guaranteed” to “bolster and emphasize the claim that the offer was truly free.” While many of the company’s ads do contain a fine print disclaimer clarifying that the offer is limited to consumers with “simple tax returns,” the FTC said this is inadequate to cure the misrepresentation that consumers can file their taxes for free because the disclaimers are “disproportionately small compared to the prominent text emphasizing that the service is free,” appear for just seconds, and are in writing only and not read by a voiceover.
Senate Banking Committee members ask CFPB to address medical debt
On March 29, several Democratic U.S. senators sent a letter to CFPB Director Rohit Chopra asking the Bureau to use its authority to take measures to address the growing medical debt burden facing consumers. The letter, led by Senator Sherrod Brown (D-OH), follows a report issued by the Bureau earlier in the month that outlined the negative consequences of medical debt and announced the agency’s intention to review whether data on unpaid medical bills should be included in consumer credit reports (covered by InfoBytes here). The Bureau also stated it would hold consumer reporting agencies accountable for inaccurate reports. Shortly after the Bureau released the report, the three major credit bureaus announced they were eliminating nearly 70 percent of medical collection debt tradelines from consumer credit reports. As previously covered by InfoBytes, Brown issued a statement supporting the credit bureaus’ announcement, but also stressed his intention to collaborate with the Bureau on “address[ing] the growing burden of medical debt, protect[ing] working families, and hold[ing] bad actors accountable.”
In their letter, the senators highlighted the disproportionate impact of medical debt on low-income individuals, minorities, veterans, younger and older Americans, and other vulnerable populations. The senators also expressed concerns regarding the recent trend of private equity firms investing in the healthcare market, especially as private equity-owned health providers are reportedly charging higher rates but delivering lower quality care. According to the senators, these concerns heighten the need for the Bureau to take further action. The senators asked the Bureau to create an ombudsman position to handle medical debt issues (similar to the ombudsman position that oversees student loan servicers’ compliance with federal and state law), and pressed the need for additional research focusing on, among other things, medical debt collection practices and the debt selling market for medical bills.
FinCEN fines company for willfully failing to comply with GTO
On April 1, FinCEN announced its first enforcement action for failing to comply with the reporting and recordkeeping requirements of a Geographic Targeting Order (GTO). The 2014 GTO in question was designed to combat what FinCEN and the Department of Justice viewed as widespread trade-based money laundering in the Los Angeles Fashion District, in which businesses accepted bulk cash from Mexican drug trafficking organizations as part the black market peso exchange. The GTO required that a wide range of non-financial businesses within the Los Angeles Fashion District, including perfume stores, travel agencies, and electronics stores, report and keep records related to whether they “received currency in excess of $3,000 in one transaction or two or more related transactions in a 24-hour period.” FinCEN imposed a $275,000 penalty on a perfume company in the Los Angeles Fashion District for failure to report more than 114 covered transactions worth more than $2.3 million. According to FinCEN, these failures were first identified in a 2015 examination by the IRS. Later attempts made by the company to submit reports for the 114 transactions were declared “substantially incomplete,” as the reports, among other things, failed to include customer information or any indication that the cash payments were made on behalf of another person or business. The IRS rejected the reports and referred the matter to FinCEN, who conducted an investigation and determined that the company failed to comply with the reporting and recordkeeping requirements until long after it became aware of the GTO.
The $275,000 civil money penalty was assessed based on a number of factors, including the company’s allegedly willful violations of the Bank Secrecy Act and the nature and seriousness of the violations, including the extent of possible public harm and the amounts involved. FinCEN noted that “[w]hile there is no direct evidence indicating that the unreported transactions involved illegal activity or the proceeds of illegal activity, the company’s failures were significant and led to the loss of valuable financial intelligence that could assist law enforcement efforts against significant money laundering activity on behalf of international drug trafficking organizations.” FinCEN also stated that the company’s actions impacted the agency’s mission to safeguard the financial system and target specific illicit financial threats, and that the company’s systemic failure to take any action in response to the GTO enabled them to continue.
“FinCEN’s enforcement action puts nonfinancial trades and businesses on notice that they must comply with Geographic Targeting Orders,” FinCEN’s acting Director Himamauli Das stated. “This action also illustrates FinCEN’s long-standing efforts to partner with other government agencies to combat money laundering schemes designed to launder the proceeds of criminal activity through nonfinancial trades and businesses in the United States.”
FDIC issues draft principles on climate risk management
On March 30, the FDIC announced a request for comment on draft principles, which provide a high-level framework for the safe and sound management of exposures to climate-related financial risks. The principles are intended for the largest financial institutions (those with over $100 billion in total consolidated assets), though the announcement notes that all financial institutions, regardless of size, can have material exposures to climate-related financial risks. The topics covered by the principles include: (i) governance; (ii) policies, procedures, and limits; (iii) strategic planning; (iv) risk management; (v) data, risk measurement, and reporting; and (vi) scenario analysis. The draft principles also highlight management of risk areas. Comments close 60 days after publication in the Federal Register. In a statement, acting FDIC Chairman Martin Gruenberg said the key principles are “an initial step toward the promotion of a consistent understanding of the effective management of climate-related financial risks.”
Agencies provide points of contact for computer security incident notifications
On March 29, the FDIC, OCC, and Federal Reserve Board issued guidance related to a final rule issued last November by the agencies along with the Federal Reserve Board, which requires a banking organization to timely notify its primary federal regulator in the event of a significant computer-security incident within 36 hours after the banking organization determines that a cyber incident has taken place. As previously covered by InfoBytes, the “Computer-Security Incident Notification Requirements for Banking Organizations and Their Bank Service Providers” final rule states that notification is required in certain circumstances for incidents that have affected: (i) the viability of a banking organization’s operations; (ii) its ability to deliver banking products and services; or (iii) the stability of the financial sector. Additionally, the final rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, a banking organization’s operations for four or more hours. Compliance with the final rule begins May 1.
FDIC FIL-12-2022 states that supervised banks can comply with the final rule by notifying their case manager of an incident, notifying any member of an FDIC examination team if the event occurs during an examination, or by notifying the FDIC by email if it is unable to access its supervisory team contacts.
OCC Bulletin 2022-8 provides points of contact for national banks, federal savings associations, covered savings associations, and federal branches and agencies of foreign banking organizations for satisfying the final rule’s notification requirement. Banks may contact their supervisory office or submit a notification through the BankNet website or contact the BankNet Help Desk.
Fed SR 22-4/CA 22-3 states that regulated banking organizations should contact their designated point of contact about a notification incident, and may submit notice via email or phone. Banking organizations are also encouraged to contact the FRB through the same means if there is doubt as to whether a notification incident was experienced. Bank service providers are encouraged to contact the affected banking organization customer or its own legal advisor should there be doubt as to whether a material disruption or degradation in services has occurred that may impact the banking organization customer.
OCC updates commercial real estate lending booklet of Comptroller’s Handbook
On March 29, the OCC issued Bulletin 2022-7 version 2.0 of the “Commercial Real Estate Lending” booklet of the Comptroller's Handbook. The booklet rescinds version 1.1 of the booklet of the same title issued in January 2017 and Bulletin 2013-19, “Commercial Real Estate Lending: Comptroller's Handbook Revisions and Rescissions.” Among other things, the revised booklet: (i) indicates changes to laws and regulations since the booklet was last updated; (ii) reflects the agency’s issuances published and rescinded since the booklet was last updated; (iii) provides clarifying edits regarding supervisory guidance, sound risk management practices, and legal language; and (vi) resends certain content for clarifying purposes.