In the March 2023 issue of Consumer Compliance Supervisory Highlights, the FDIC discusses consumer compliance issues identified by its examiners during supervisory activities conducted in 2022 involving referral arrangements, trigger leads, servicemember protections, and fair lending compliance.  The issue also looks at complaint trends.

Compliance Issues.   Key findings include:

Real Estate Settlement Procedures Act Section 8: Referral Arrangements.  The FDIC identified RESPA Section 8(a) violations in two scenarios.  One scenario involved so-called “warm transfers” in which a bank arranges to have a third party call identified consumers and directly connect and introduce them to a specific mortgage representative on the phone.  The other scenario involved a digital platform that purported to rank lender options based on neutral criteria but where the participating lenders merely rotated in the top spot.  While noting that each case is fact specific, the FDIC identified the following activities performed by a third party that serve as indicators of risk in these arrangements:

• Initiating calls directly to consumers to steer them to a particular lender;
• Offering consumers only one lender or only transferring the consumer to one lender;
• Describing the lender in non-neutral terms such as preferred, skilled, or possessing specialized expertise;
• Receiving payment from the lender only if a “warm transfer” occurs; or
• On a consumer-facing digital platform that purports to rank settlement service providers based on objective factors, including providers that pay to take turns appearing in the top spot in a round robin format.

The FDIC also noted that payment for activities that go beyond the simple provision of a “lead” may be improper payment for referrals when the activity affirmatively influences the consumer towards the selection of a particular lender.  The FDIC listed the following examples of risk-mitigating activities:

• Training staff on RESPA Section 8, including the differences between a permitted lead and an illegal referral (including a warm transfer);
• Understanding the programs that lenders are involved with, how the programs function, and how the cost structure works;
• Developing policies and procedures that provide guidance to comply with regulatory requirements and management’s expectations with regard to lead generation programs;
• Requiring loan officers to annually certify applicable relationships to ensure that the bank is aware of the arrangements used by loan officers to generate loans and that these arrangements have been vetted and controls put in place for associated risks; and
• Monitoring lead generation activities regularly to ensure compliance with the bank’s policies and procedures, and regulatory requirements.

Fair Credit Reporting Act: Trigger Leads.  A “trigger lead” is a kind of prescreening that involves a lender paying credit reporting agencies to produce a report on certain consumers’ credit activity.  The lender provides credit criteria, either directly or through third parties, to the credit reporting agencies, which then provide the lender with a list of consumers who both match the lender’s criteria and had a “trigger” activity, such as recently applying for a mortgage loan.  FDIC examiners noted issues involving financial institutions that purchased “trigger leads” but failed to provide consumers with “firm offers of credit.”  By listening to recorded phone calls, reviewing scripts and consumer complaints, and interviewing loan officers, examiners identified instances where financial institution representatives were contacting consumers during sales calls, but did provide required FCRA prescreening disclosures during the calls.  The FDIC stated that “FCRA does not state that a firm offer of credit must be in writing and does not explicitly prohibit verbal offers.  However, these disclosure requirements of FCRA must still be met.” .

The FDIC listed the following examples of risk-mitigating activities:

• Developing and implementing comprehensive oversight of marketing materials, including content approval and ongoing monitoring, to ensure compliance with applicable rules and regulations;
• Implementing an effective compliance management system for FCRA and the use of prescreen credit report information to ensure bank staff comply with regulatory requirements;
• Developing scripts that comply with FCRA prescreening requirements to use when calling consumers identified through the trigger lead process; and
• Developing and implementing offer letters meeting all regulatory requirements to send to all consumers meeting prescreening criteria.  The letters should provide firm offers of credit that are clear and accurate, avoid misleading representations, and include the opt-out language found in Section 615(d) of FCRA.

Servicemembers Civil Relief Act: Automatically Applying Excess Interest Payments to Principal Loan Balance.  FDIC examiners identified SCRA violations when banks unilaterally applied excess interest to a servicemember’s principal loan balance without giving the servicemember an option of how to receive the funds.  The FDIC indicated that although the SCRA does not require a specific method for reimbursing the excess interest, and does not prohibit a creditor from providing it to the servicemember as a cash refund or timely applying it to current or future monthly payments, or applying it to past-due amounts, the SCRA prohibits accelerating principal (i.e. applying accrued interest savings or excess interest directly to principal), for both open-end and closed-end credit.  As a result, a bank is permitted to apply the excess interest to the principal balance of the loan only if the servicemember affirmatively chooses that method after being offered other options (such as cash refund and/or timely application to current or future payments).  The FDIC observed that in these situations, it would be beneficial for banks to have procedures in place that document the options provided to the servicemember and the choice selected by the servicemember for handling reimbursement of the forgiven excess interest.

The FDIC listed the following examples of risk-mitigating activities:

• Developing and implementing formal policies and procedures that comply with the provisions of SCRA;
• Reviewing, monitoring, and auditing SCRA loans to ensure policies and procedures are implemented and followed; and
• Providing servicemembers with the option of how to receive the excess interest, or at a minimum, providing the excess interest in a cash payment.

Fair Lending.  In 2022, the FDIC referred 12 fair lending matters to the DOJ.  According to the FDIC, these matters involved redlining, pricing for indirect automobile financing, and policies for pricing or underwriting credit.  It described the redlining matters as generally involving instances where the banks’ levels of lending did not penetrate geographies consisting of more than 50 percent minority populations (majority-minority census tracts) consistent with other lenders operating in the same markets.  The FDIC attributed these lending issues to a combination of issues involving branching activity that did not penetrate majority-minority areas, a lack of marketing and outreach in those areas, or the delineation of a market area that reflected illegal credit discrimination.  The FDIC described the indirect automobile pricing matters as generally involving issues where as a result of the banks incentivizing dealer discretion in credit pricing, borrowers were priced differently on a prohibited basis.  The FDIC described the pricing or underwriting policy matters as involving the use of third parties in the credit process to underwrite or price credit, with some of these third parties operating online lending platforms that included various policies or application screening methods that violated anti-discrimination rules by including prohibited bases (such as the applicant’s marital status or the exercising of a right under a consumer credit protection act) in the credit decision process.

The FDIC listed the following examples of risk-mitigating activities:

• Evaluating written credit policies and procedures, including those of any third party with which the bank has a relationship, to ensure decision criteria and pricing methodologies do not reflect illegal credit discrimination;
• Reviewing any requirements or other criteria used to screen potential applicants to ensure there is no discriminatory impact;
• Conducting monitoring efforts or audits to ensure credit is not being priced in a discriminatory manner;
• Understanding the bank’s reasonably expected market area and the demographics of the geographies within that area;
• Evaluating the methods by which the bank obtains loan applications, including through branches or any marketing or outreach efforts; and
• Assessing the bank’s lending performance within its reasonably expected market area.

Consumer complaint trends.  Key items include:

• The volume of third-party providers associated with complaints increased from 4,678 in 2021 to 5,093 in 2022, or 9 percent.
• Credit card complaints increased to 3,822 or 26 percent, to become the top product complained about in 2022.
• Checking account complaints dropped to the second top product in 2022, reflecting a decrease since it peaked in 2019.  (The FDIC suggests the decrease may be attributable to the availability of alternative banking products.)