The Federal Deposit Insurance Corporation recently issued the first edition of its “Consumer Compliance Supervisory Highlights” report, intended to enhance transparency around consumer compliance supervisory activities. It also helpfully provides some best practices for mitigating consumer compliance risks.

The report, published June 13, provides a high-level overview of consumer compliance issues identified in approximately 1,200 consumer compliance examinations conducted by the FDIC in 2018. “Overall, supervised institutions demonstrated strong and effective management of consumer compliance responsibilities,” the FDIC said.

That said, however, the FDIC issued 21 consumer compliance-related formal enforcement actions where civil penalties were issued against institutions totaling approximately $3.5 million, with restitution paid to consumers totaled approximately $18.1 million.

In its report, the FDIC identifies five common consumer compliance issues identified in 2018:

1. Overdraft programs

Concerning overdraft programs, FDIC examiners said they observed potentially “unfair or deceptive” practices when institutions using an available balance method “assessed more overdraft fees than were appropriate,” based on the consumer’s actual spending or when institutions did not adequately describe how the available balance method works in connection with overdrafts.

Some institutions that use an “available balance” method to assess overdraft fees on any point-of-sale (POS) signature-based transaction that settles against a negative available balance, even though the institution might have previously authorized the transaction based on sufficient funds available in the account at the time of authorization. “This creates the possibility of an institution assessing overdraft fees in connection with transactions that did not overdraw the consumer’s account,” the FDIC said.

Financial institutions can mitigate this risk, however, by “providing clear and conspicuous disclosures related to the possible imposition of an overdraft fee in connection with use of the available balance method, so that consumers can understand the circumstances under which overdraft fees will be assessed and make informed decisions to avoid the assessment of such fees,” the FDIC said.

Another way to mitigate this risk is, “when using an available balance method, ensuring that any transaction authorized against a positive available balance does not incur an overdraft fee, even if the transaction later settles against a negative available balance.”

2. RESPA anti-kickback violations

The FDIC identified Real Estate Settlement Procedures Act (RESPA) violations at financial institutions involving payment of illegal kickbacks, disguised as above-market payments for lead generation, marketing services, and office space or desk rentals. RESPA permits bona fide payments for goods that are actually furnished and services actually performed.

Lenders may enter into bona fide agreements for the rental of office space. However, such rental arrangements must be based on general market value of the rented space and cannot be used to conceal the payment of illegal referral fees. The FDIC found that certain arrangements, structured as purported payments for rental facilities, were used to disguise illegal payments for referrals of mortgage business.

According to the FDIC, financial institutions might find the following risk-mitigating activities useful:

  • Providing training to executives, senior management, as well as staff responsible for and involved in mortgage lending operations;
  • Performing due diligence when considering new third-party relationships entered into by the bank, or any individuals employed at or under contract to the bank, that generate leads or identify prospective mortgage borrowers;
  • Reviewing applicable law, guidance, and statements from regulatory agencies and authorities on RESPA Section 8; and
  • Staying abreast of RESPA Section 8 regulatory requirements through training resources.

3. Regulation E mistakes

Regulation E implements the Electronic Fund Transfer Act, which gives consumers certain rights when engaging in electronic fund transfers (EFTs). EFTs include transfers through ATMs, point-of-sale terminals, and automated clearinghouse systems. Regulation E outlines procedures financial institutions must follow for investigating and resolving EFT errors alleged by consumers.

The FDIC said it has identified instances where some financial institutions have either misapplied the regulation or failed to comply with requirements of Regulation E, resulting in violations cited in examination. Such compliance failures have included “misapplying timing requirements to determine consumer’s liability regarding unauthorized transactions not involving an access device (e.g., electronic debits through the ACH system)” and “not beginning the investigation promptly when notified of a potential error; and discouraging the filing of error resolution requests.”

To mitigate the risks of noncompliance with Regulation E, the FDIC recommends financial institutions maintain tracking logs covering the various timing requirements to ensure compliance with Regulation E’s requirements from the time an error is alleged to the time an investigation is completed. The FDIC also suggests training new staff and conducting periodic refresher training for existing staff to ensure understanding of Regulation E’s requirements.

4. Skip-a-payment

Several issues were identified by the FDIC regarding skip-a-payment programs where institutions failed to provide consumers with adequate disclosures about essential terms of the programs and their impact on consumers’ loans in violation of Section 5 of the Federal Trade Commission Act.

Among issues identified at institutions include:

  • Failure to adequately disclose that enrollment in a skip-a-payment program would lead to paying additional interest over the life of the loan and a larger final payment;
  • Failure to disclose that the skip-a-payment offer does not affect real estate borrowers’ escrow payment obligations, resulting in some consumers incurring escrow shortages or deficiencies; and
  • Assessing late fees for the month that the customer’s payment was skipped.

According to the FDIC, financial institutions can mitigate potential risks related to their skip-a-payment programs by providing consumers with clear and adequate disclosures that detail how the program will work and the potential impact of the program on a consumer’s loan; clearly defining customer eligibility criteria; providing training to staff in advance of launching the program; and setting monitoring protocols for adherence to institutions’ policies.

5. Lines of credit

Regarding lines of credit, the FDIC said it has identified instances in which institutions did not accurately calculate or properly disclose finance charges or APRs on periodic statements, resulting in understated finance charges and APRs for loans that exceeded the permitted tolerances under Regulation Z.

The FDIC noted it provides resources and information for financial institutions to support their efforts to manage consumer compliance responsibilities effectively. Many of these resources in electronic form can be found on the FDIC’s Director’s Resource Center.