Covid created a need for the Bureau to measure and monitor real-time activity in a rapidly changing marketplace. The Bureau filled that need by initiating a new supervisory approach for gathering real-time information called Prioritized Assessments, which are “higher-level,” targeted inquires to companies perceived to have a greater potential for exposing consumers to risk due to the pandemic. Prioritized Assessments enabled the Bureau to obtain a lot of information from a wide range of entities quickly.
The Bureau recently published a special edition Supervisory Highlights report revealing the results of its 2020 Prioritized Assessment inquiries. Despite the 9 different market verticals highlighted, the report reveals some common themes of market behavior and consumer risk throughout the financial services sector. These themes contain value takeaways to enhance our own operations.
Although the CARES Act and many State laws mandated certain relief to consumers, the Bureau observed additional voluntary accommodations and consumer relief throughout the financial services marketplace. Expanded payment assistance, fee waivers, payment deferrals, remediation of negative consequences, and cessation of bank garnishments, levies, and auto repossessions are examples of voluntary accommodations by entities in response to consumer distress. The Bureau also observed increased monitoring of business practices enabling entities to self-identify potential consumer risk and take proactive steps to avoid it such as updating scripts, automating processes, correcting credit reports and account histories, and reversing fees. Entities increased staff to meet the demands of increased inbound consumer inquiries and work backlogs of consumer requests. Generally speaking, the Bureau observed the financial services markets respond to the needs of consumers in distress. But, according to the Bureau, the response was not perfect and the report identifies key areas where entities fell short of meeting consumer needs.
Incomplete or Inaccurate Information Provided To Consumers
The CARES Act is a long and complex statute. Digesting its requirements and training markets on its new obligations was difficult. The Bureau reports several examples where entities provided inaccurate or incomplete information on the mechanics of the CARES Act and the consumer relief it provides. For example, the Bureau observed lending institutions providing inaccurate information about loan forbearance, interest rate reductions, and loan relief eligibility. Fees and due dates were not disclosed correctly and the impact of forbearance on interest accrual was not properly explained to consumers. Entities also failed to fully inform consumers of available alternatives to forbearance or loan deferral such as income-based repayment plans for certain student loans. Some entities fell short of explaining to consumers the consequences of forbearance or deferral on their loan term or payoff amount. Others provided consumers with false information about how interest would accrue on their accounts during a deferment or forbearance period.
Takeaway: The solution to these shortcomings is training. Complete and accurate training disseminated quickly throughout these organizations could have avoided much of the misinformation delivered to consumers. Consider whether your compliance management system is capable of rapidly deploying new training content throughout your organization in response to sudden and unexpected changes in business operations or the market.
Inadequate Staffing To Address Consumer Needs
Financial services markets were not immune to the impact of shelter-in-place orders which impeded the ability to serve consumer needs. In retrospect, the shift to a work-from-home workforce occurred at breakneck speed. Fairly expected; however, the transition left gaps in processes and consumers underserved. The Bureau observed call centers suddenly unable to meet inbound demand. New relief programs required the cessation of automated processes in favor of manual processes, increasing the need for more (unavailable) staff. Many accommodations offered by financial institutions required new disclosures to be provided to consumers who may not have previously consented to electronic disclosures. Increased volumes of outbound paper disclosures resulted in delayed processing time for timely notifying consumers of important rights and responsibilities. These new demands strained staffing and technology resources in ways that increased consumer risk.
Takeaway: Reviewing and re-reviewing business continuity plans is the key to avoiding these staffing issues. We plan for technology to fail. We plan for systems to break. But, do we plan for nobody to show up for work tomorrow? Or for your workplace to be . . . gone? (We do now!) Revising business continuity plans to address sudden labor shortages and business location “unavailability” should be on every compliance management system agenda in 2021.
Credit Reporting Errors
The CARES Act amended the Fair Credit Report Act to protect certain consumers from certain negative credit consequences. Reprograming existing systems to prevent negative credit reporting proved difficult for many furnishers. The Bureau observed inaccurate credit reporting including the reporting of current consumers as delinquent and advancing the delinquency status of accounts properly enrolled in deferment, forbearance, or other accommodation programs. The failure of furnishers to timely investigate and respond to consumer credit disputes, though understandable, also exposed consumers to increased risk. Finally, the Bureau notes inadequate policies and procedures in response to Covid accommodations. Changes implemented by furnishers to accommodate consumers and establish hardship programs were not properly reflected in the company’s policies and procedures, which the Bureau notes are a requirement of the Fair Credit Reporting Act.
Takeaway: These credit reporting issues offer a lesson in auditing. When changes are made to the system of record to accommodate new legal requirements, furnishers must consider the impact those changes have on credit reporting. Programing for those changes is important, but auditing to ensure the programing functions as designed is paramount. Every process (and every change) needs a control and an audit mechanism.
Payment Processing Errors
The Bureau observed several defects in payment processing across the market. For example, one entity automatically canceled preauthorized electronic funds transfer payments when consumers called-in to inquire about loan forbearance options. This caused those consumers to miss payments they would otherwise have made. Other entities had problems ceasing automated electronic payments when consumers took advantage of deferment or forbearance programs, causing them to make payments they were not required to make. Some entities lacked adequate staffing to process accommodations and so their automated payments kept processing between the time their accommodation was approved and the time the creditor actually processed the accommodation. Posting payments received from inbound mail also created consumer risk because of delays associated with insufficient staffing to obtain and process inbound mail payments.
Takeaway: The issues here are twofold – “disconnected” technology and labor shortage. Most systems are properly programmed to stop automatic payments when the consumer files bankruptcy in the 3rd month of a 6-month payment plan. So too should those systems be programmed to stop automatic payments when consumer accounts are placed in a deferred or forbearance status. The problems identified by the Bureau were avoidable had the system of record been “connected” to the payment processing system to stop automatic payments under certain circumstances. In terms of the labor shortage, a mature compliance management system might consider cross-training staff to perform inbound servicing tasks in response to sudden and unexpected spikes in demand for certain operational functions.
Post Accommodation Errors
Many consumers impacted by Covid received a myriad of financial accommodations. For some entities, however, processing these accommodations and adjusting internal processes to service those accommodations proved difficult and ultimately led to consumer harm. Many consumers still received default notices and were assessed late fees notwithstanding that their obligations were in a deferred or forbearance status. Other entities failed to halt regular collection processes, like auto repossession and property foreclosure, even though consumer obligations were temporarily suspended. Some creditors automatically enrolled consumers in forbearance without a consumer request. Some student loan lenders failed to stop interest accrual on certain federal student loans and others failed to suspend administrative wage garnishments on eligible loans.
Financial institutions also had difficulty protecting government benefit funds from internal and external collections. Some banks failed to cease internal collection processes such as setting off bank balances (containing government benefits) against fees owed, overdrawn accounts, and delinquent loan balances. Other institutions had inadequate procedures to protect government benefit funds from external collection process such as garnishment.
Finally, the Bureau notes fair lending risks associated with financial institution policies for making Paycheck Protection Program money available to small businesses. Many institutions accepted applications only from existing consumers, opening the door to discrimination risk. The Bureau encouraged lenders to consider the impact of its policies and their resulting risks to fair lending compliance.
In many ways, the compliance and risk-related shortcomings observed by the Bureau were not unexpected. The pandemic shut down the country. The report remains valuable, however, to those reviewing their disaster recovery procedures and business continuity plans for future enhancement. Each Supervisory Highlights report offers “takeaways” to guide operations. This special Covid edition is no exception.