Community banks have been concerned that, although they might be exempt from direct supervision and enforcement by the CFPB, they would be recipients of a "trickle down" effect that would result when their primary federal bank regulator would attempt to demonstrate that it could stay abreast, or even ahead, of the CFPB when it comes to cracking down on unfair, deceptive, and "abusive" practices. Fraud, small banks understand, but they tend to fear zealots who may not be able to define an "abusive" practice with precision, but sure as shooting know it when they see it.
An article in the most recent issue of Bank Safety & Soundness Advisor (paid subscription required) indicates that community bankers' fears are not without some foundation.
In a recent Webcast, officials from the Fed along with the Federal Reserve Bank of San Francisco showcased a broadbased enforcement approach to UDAP rules and regulations, and some high expectations for how banks should be identifying and resolving complaints involving abusive or deceptive practices.
While some of the examples cited, including inflating borrower income on loan applications and charging "bogus points and origination fees" are clearly fraudulent, the net appears to be cast widely by the Fed.
Officials indicated they view as a kind of red flag banks pushing new or modified products and services to generate new revenue, especially if done in conjunction with third-party vendors where fees are shared.
“While searching for revenue is part of what a bank needs to do, there is also a need to make sure
there is compliance with UDAP and consideration of UDAP risk,” said Maureen Yap, the Federal
Reserve’s special counsel for fair lending.
And the officials underscored the idea that an act or practice does not have to violate another law to be unfair or deceptive. A potentially tell-tale sign of that: cases where revenue growth depends on consumers making what regulators and examiners feel are poor financial choices.
There you go: what an examiner "feels is a poor financial choice" by a consumer is the acid test. That gives a whole boatload of precision and certainty to the determination of what is and is not "abusive." Every bank will have to have a Potter Stewart on staff to make the call, I guess.
The potential burden is not going to be light.
For individual institutions, the potential coverage is huge, including not only all products and services, but every phase of the life cycle, including development, marketing, and loss mitigation activities.
One bank's "bogus points" scam, perpetrated by rogue loan originators, led to a determination that it had a "disparate impact" on minorities, and earned that bank a referral to the Justice Department. So, there's that potential liability to look forward to, as well.
What's a small community bank to do? Fed officials tried to be helpful.
Officials declined to address specific fact situations bankers posed during the March 5 webcast. They suggested that banks use the same sort of analysis that regulators do in assessing potential misconduct.
Yap said the Fed tells examiners to focus on the “INN” in determining whether conduct is unfair under the law. There must be “injury” to the consumer or group of consumers, the injury is “not reasonably avoidable,” and there are “no countervailing benefits.”
She said Fed examiners focus on the “MRM” to judge whether behavior is deceptive. Does the representation or omission “mislead” the consumer? Is the consumer response “reasonable”
given the representation or omission? Is the misrepresentation or omission “material”?
“The act or practice does not have to violate another law to be unfair or deceptive,” she said.
“If the prongs of the analysis are satisfi ed a UDAAP violation can be cited.” She said CA Letter 07-08 — a joint Federal Reserve/FDIC statement on consumer compliance exam procedures for UDAP — was “very instructive” in the types of questions bank should expect.
There's your heading on a course through the fog-bound waters of "abuse": think like an examiner.
And after you take that journey down a rabbit "warren" (pun intended), you can resurface and start walking like an Egyptian.
You've got your marching orders, folks. You can get with the program or you can get out of the business. Welcome to this brave new world.