CFPB Short-Term, Examination Procedures Small-Dollar ..., Schemes and Mind Maps of Marketing

Download CFPB Short-Term, Examination Procedures Small-Dollar ... and more Schemes and Mind Maps Marketing in PDF only on Docsity! CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 1 Short-Term, Small-Dollar Lending Commonly Known as Payday Lending These examination procedures apply to the short-term, small-dollar credit market, commonly known as payday lending. The procedures are comprised of modules covering a payday loan’s lifecycle, and each module identifies relevant matters for review. Prior to using the procedures, however, examiners should complete a risk assessment and examination scope memorandum. Depending on the scope, and in conjunction with the compliance management system and consumer complaint response review procedures, each examination will cover one or more of the following modules: 1. Marketing 2. Application and Origination 3. Payment Processing and Sustained Use 4. Collections, Accounts in Default, and Consumer Reporting 5. Service Provider Relationships Examination Objectives In consultation with headquarters: 1. To assess the quality of the regulated entity’s compliance risk management systems, including its internal controls and policies, for its payday lending business. 2. To identify acts or practices that materially increase the risk of violations of federal consumer financial laws in connection with payday lending and other risks to consumers. 3. To gather facts that help to determine whether a regulated entity engages in acts or practices that violate the requirements of federal consumer financial laws. 4. To determine if a violation of a federal consumer financial law has occurred and whether supervisory or enforcement actions are appropriate. Exam Date: [Click&type] Prepared By: [Click&type] Reviewer: [Click&type] Docket #: [Click&type] Entity Name: [Click&type] CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 2 Background Lenders typically market payday loans to consumers as a means of bridging a cash-flow shortage between pay or benefits checks. Payday loans generally have three features: the loans are small- dollar; borrowers must repay loan proceeds quickly (i.e., they are short-term); and they require that a borrower give lenders access to repayment through a claim on the borrower’s deposit account. Other loan features vary. Although often structured to pay off in one balloon payment, installment payments and interest-only payments are not unusual. Loans may be open-end or closed-end, and although loans are commonly issued for terms under one month, others may have terms for as long as six months. Loans may be disbursed in cash, on a prepaid card, through the Automated Clearing House (“ACH”) network, or by check. Most loans are for several hundred dollars and have finance charges of $15 to $20 per each $100 borrowed. For the two-week term typical of a payday loan, these fees equate to an Annual Percentage Rate (“APR”) ranging from 391 percent to 521 percent. Loan amounts and finance charges can vary due to factors including differences in state law. Although lenders sometimes access third-party data about their customers, lenders generally do not underwrite their applicants using traditional credit criteria. Because consumers provide lenders with access to their bank accounts in advance — through, for example, a personal check in the amount of the outstanding balance (i.e., loan amount and finance charge) owed — consumers typically need only a regular source of income and a checking account in good standing to qualify. If the consumer does not repay the loan in full by the due date, the loan agreement typically permits the lender to deposit the consumer’s check to obtain payment. In the case of a web- originated loan, the loan agreement typically preauthorizes repayment through an electronic debit transaction (such as an ACH transaction). Store-front lenders may use ACH transactions as well. Some banks market a payday loan variant they call an “advance” — a direct deposit advance, an early access advance, a ready advance, or a checking account advance 1 . A typical credit line is $500 and costs $10 per $100 borrowed. To qualify for an advance, a consumer must have a deposit account with the bank or credit union offering the advance and a recurring direct deposit of funds into that deposit account. The loan and accompanying fee generally must be repaid 1 For clarity, this product is neither an overdraft line of credit nor an overdraft service. An overdraft service means a service under which a financial institution assesses a fee or charge on a consumer's account held by the institution for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account. CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 5 (2) takes unreasonable advantage of –  a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;  the inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or  the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. Refer to the examination procedures regarding UDAAPs for more information about the legal standards and the CFPB’s approach to examining for UDAAPs. The particular facts and circumstances in a case are crucial to the determination of UDAAPs. Examiners should consult with headquarters to determine whether the applicable legal standards have been met before a UDAAP violation is cited. General Considerations Completing the following examination modules will allow examiners to develop a thorough understanding of lenders’ practices and operations. To complete the modules, examiners should obtain and review the following as applicable: organizational charts and process flowcharts; board minutes, annual reports, or the equivalent to the extent available; relevant management reporting, including aggregate loan data to the extent available; policies and procedures; price structure; loan applications, loan account documentation, telephone recordings, notes, and disclosures; operating checklists, worksheets, and review documents; relevant computer program and system details; historical examination information; audit and compliance reports; training programs and materials; service provider contracts; advertisements, marketing research, and website information; and complaints. Depending on the scope of the examination, examiners should perform transaction testing using approved sampling procedures, which may require use of a judgmental or statistical sample. Examiners should also conduct interviews with management and staff to determine whether they understand and consistently follow the policies, procedures, and regulatory requirements applicable to payday lending; manage change appropriately; and implement effective controls. In consultation with headquarters, examiners may also consider using customer surveys. For nonbank payday lenders, examiners should consider expanding the scope of payday examinations to cover any other consumer financial products or services offered by the lenders that warrant supervisory attention. Such items would include products and services commonly offered by nonbank payday lenders, such as title, installment or other loans, as well as money services, including remittance transfers, bill pay, prepaid cards, money order sales, and check cashing. Where an examination is expanded to cover these areas, examiners should refer to the relevant sections of this manual for guidance and consult the Office of Supervision Policy. CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 6 Module 1 – Marketing Examiners should develop a detailed understanding of the lender’s marketing program to determine whether its marketing policies, procedures, and practices are consistent with the requirements of applicable federal consumer financial laws and regulations.  Identify a lender’s marketing targets and its methods for reaching those targets.  Evaluate the lender’s advertising materials and disclosures across all media, including: print, television, radio, telephone solicitation scripts, and electronic media including the Internet, email, and text messages. The evaluation should include a review of advertising materials provided in languages other than English, the media used to distribute those materials, and a comparison to English language materials and media.  Identify the practices and product features that are rewarded by any incentive compensation programs.  Determine whether a lender employs or acts as a lead generator and the extent of any relationships that the lender has with affiliated or other third parties (e.g., as a broker or agent) to advertise, offer, or provide loans or other products and services. Advertising Requirements Truth in Lending Act/Regulation Z 1. Determine whether the loans being offered are closed end or open end. 2. Determine whether the lender’s advertisements are consistent with the requirements of Regulation Z. Examiners should conduct the advertising review by following the open-end and closed-end advertising procedures in the TILA examination procedures, as applicable, focusing carefully on whether advertisements contain triggering terms and include required statements, information, and disclosures. Equal Credit Opportunity Act/Regulation B 1. Assess how the lender reaches its potential customers through its statements, advertising, or other marketing representations. Examiners should review: a. Marketing and advertising materials, including signs or other displays and prescreened solicitations; b. The criteria used to determine the potential recipients of the particular solicitation; c. Any scripts and interview forms used for sales and taking applications; and CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 7 d. Product information used in discussing available types of credit with applicants. Other Risks to Consumers 1. Assess whether the lender clearly and prominently discloses the material terms of the payday loan. 2. Determine whether the promotional materials clearly and prominently disclose any material limitations, conditions, or restrictions on the offer. This is of particular importance when the lender uses terms such as “rewards,” “discounts,” or “free.” 3. Assess (i) whether the lender clearly and prominently discloses the costs and any other material terms for any additional products marketed to the consumer (e.g., pre-paid debit card or credit insurance) in connection with the payday loan; and, (ii) whether the lender clearly and prominently discloses that the additional products are or are not required to obtain credit and are or are not considered in decisions to grant credit. If the cross-marketed product is mandatory, under the TILA, it may need to be disclosed in the APR. Refer to the TILA examination procedures for additional detail. 4. Determine whether the lender reviews or monitors recorded telephone calls, transcripts of online communication, and websites to ensure that advertising and solicitations comply with applicable federal consumer financial laws. Compensation Practices Evaluate compensation practices and programs. If the lender offers an incentive compensation program, identify the products, product features, services, referrals, and sales goals or behaviors that qualify for rewards under the program. Evaluate the quality and impact of controls on the compensation program. Finally, in consultation with headquarters, assess whether the program incentivizes behaviors or practices that result in heightened risk to consumers. Lead Generation Lenders both employ and are employed as lead generators, which are businesses that identify potential borrowers for lenders. A lead generator typically charges lenders for its services and, in some cases, may charge borrowers as well. Some lenders operate as lead generators when they are unable to originate a particular loan — when, for example, they are not licensed to originate loans in a particular state. In these instances, the lead generator will contract with another lender that is able to make the loan. When examining lenders, examiners should: 1. Identify whether the lender is, or uses, a lead generator and, as applicable, review the advertising materials of: CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 10 Electronic Fund Transfer Act/Regulation E Depending on how the lender transfers funds to and from consumers, the lender may be required to comply with the requirements of the EFTA. If the lender has established electronic fund transfers from the borrower’s account, examiners should use the CFPB’s EFTA examination procedures to review the extent to which the lender is complying with the EFTA. 1. Determine if the agreement contemplates or involves initiating an electronic fund transfer subject to EFTA/Regulation E (“EFT”). Consider if the lender is using methods subject to EFTA or using remotely-created checks or other non-EFT methods, which are not subject to EFTA. 2. Determine whether the EFT is a single or a recurring EFT that is a preauthorized electronic transfer. To qualify as a preauthorized electronic fund transfer, the transfer is one that is authorized in advance to recur at substantially regular intervals. 3. If the lender initiates preauthorized EFTs, assess the lender’s or financial institution’s compliance with the applicable advance authorization, disclosures, and other requirements relating to preauthorized electronic fund transfers under the EFTA and Regulation E. a. Does the lender obtain proper written authorization for preauthorized electronic fund transfers from a consumer’s account and provide a copy of the authorization to the consumer? b. Does the lender require compulsory use of EFTs and condition the extension of credit to consumers on the repayment of loans by preauthorized electronic debits? i. Examine the agreement for terms requiring that the borrower agree to electronic payment. Such terms may violate the EFTA’s prohibition on requiring repayment by means of preauthorized electronic fund transfers as a condition of the extension of credit, except as authorized. ii. Determine if the lender offers the borrower an option to pay using a non-EFT method of payment. c. Will the preauthorized transfers vary in amount? If so, does the payee or financial institution, prior to each transfer, provide reasonable advance notice to the consumer, in accordance with applicable regulations, of the amount to be transferred and the scheduled date of transfer? 4. If the loan agreement provides for a single or one-time EFT, assess whether the lender obtained authorization from the consumer to initiate an EFT. CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 11 Military Lending Act If the lender makes loans to service members or their dependents, it may be subject to the MLA and its implementing regulations at 32 CFR part 232. Examiners should review for MLA violations, which evidence risks to consumers and may require supervisory or enforcement action. Application of the MLA:  The MLA only applies to “covered borrowers.” Covered borrowers are active-duty military members and their dependents. According to DoD regulations, creditors may rely on a person’s self-certification (Borrower Declaration) that he or she is not a covered borrower, unless the creditor obtains documentation as part of the transaction that the borrower is a covered borrower.  The MLA only applies to “consumer credit” as that term is defined by the DoD. Under DoD rules, “consumer credit” is a closed-end loan that is: ○ a payday loan with a term of 91 days or fewer with an amount financed of $2,000 or less and that includes a creditor’s access to a consumer’s deposit account or the consumers’ provision of a check or payment instrument with the creditor’s agreement that it will not deposit the check for more than one day; ○ a vehicle title loan with a term of 181 days or fewer that is secured by the title of a motor vehicle; or ○ a tax refund anticipation loan where the consumer grants the creditor the right to receive the consumer’s income tax refund or expressly agrees to use the refund in order to repay the loan. If the MLA applies: 1. Determine whether the lender appropriately evaluates whether a consumer is a covered borrower. Note that evidence of a borrower’s military status that conflicts with a Borrower Declaration may override the safe-harbor provided by DoD regulations, as described above. Evidence may include, but is not limited to, current military leave and earning statements, and military identification cards. 2. If the lender makes loans to covered borrowers, determine that the institution, for the purposes of consumer credit extended to covered borrowers: a. expresses total charges as a dollar amount and as an annualized rate referred to as the “Military annual percentage rate” (MAPR). CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 12 b. caps MAPR for consumer credit to covered borrowers at 36 percent, including all fees and charges, credit insurance premiums, and other credit-related ancillary charges. c. provides written and oral disclosure of MAPR, the standardized federal notice, and payment obligations before a loan is issued. d. does not hold a post-dated personal check, debit authorization or title to a vehicle for repayment or security. e. does not require covered borrowers to submit to mandatory arbitration or to satisfy unreasonable notice provisions in the event of a dispute with the creditor, or as a condition to legal action. f. does not require covered borrowers to waive their right to legal recourse under the Servicemembers Civil Relief Act or any other state or federal law. g. prohibits rollovers, or same-creditor refinances, renewals or consolidations, unless the new transaction results in more favorable terms to the covered borrower, or the consumer was not a covered borrower at the time of the original transaction. h. does not require a wage allotment as a condition of extending consumer credit. i. does not include a prepayment penalty. Other Risks to Consumers 1. Determine whether, in the application and origination process, the lender makes statements, representations, or claims, or provides information to consumers that may mislead the consumer regarding the cost, value, availability, cost savings, benefits, or terms of the product or service. 2. Determine whether the lender accurately and non-deceptively represents the amount of potential, approved, or useable credit that the consumer will receive. 3. Determine whether the lender clearly and prominently discloses its funds disbursement practices, including: a. Whether the lender clearly and prominently discloses all fees that the borrower might incur to gain access to loan funds. For example: i. If the lender disburses funds by check, does the lender disclose its check cashing fee? ii. If the lender disburses funds by prepaid debit card, does it disclose its ATM access fee? CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 15 5. If a sequential transaction is considered a refinance, determine whether the lender provides loan disclosures as required by Regulation Z. 6. If a consumer’s request for new terms is an application as defined by Regulation B, determine whether the lender’s practices are consistent with the application and disclosure requirements of Regulation B. Refer to the ECOA examination procedures for additional information. 7. Determine whether the lender monitors or limits a borrower’s usage of payday loans on an ongoing basis. 8. Determine whether the lender assesses income or other financial information to determine an applicant’s ability to repay a loan without modifying or refinancing the loan. Other Risks to Consumers 1. Determine whether payments are applied properly. 2. Determine whether the lender informs consumers in a clear and timely manner about fees, penalties, or other charges that have been imposed and the reasons for their imposition. CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 16 Module 4 – Collections, Accounts in Default, and Consumer Reporting A lender may collect a payday loan in default by directly engaging in collection activities on its own behalf, by assigning collection activity to third parties for a fee; or, by selling defaulted debts to a third party. The FDCPA does not apply to a lender collecting debts on its own behalf and under its own name. Practices that would otherwise violate the FDCPA, however, may be unfair, deceptive, or abusive. In order to assess whether a lender’s collection activities are in compliance with Federal consumer financial laws, examiners should obtain a sample of both in-house collection calls and collection calls made by the lender’s debt collection service providers. Examiners should also closely review any complaints held in Sentinel, a database administered by Federal Trade Commission that is available to the Bureau. A thorough review of phone calls and Sentinel complaints is a critical part of any payday examination. For more information, examiners should refer to the debt collection examination procedures contained elsewhere in this manual. Fair Debt Collection Practices Act Assess compliance with the FDCPA when the lender is engaging in debt collection practices (e.g., they have purchased defaulted payday loans from another lender, or are using an assumed name). Refer to the FDCPA examination procedures for additional information. Fair Credit Reporting Act 1. Note that, although lenders typically do not obtain a consumer report at the application stage, they may obtain a report for collection purposes. If a lender obtains a consumer report in the collection process, assess the lender’s compliance with the FCRA. Refer to the FCRA examination procedures for additional information. 2. Lenders may choose to report information about a borrower to a consumer reporting agency. This may include providing information to a traditional credit bureau, but may also include providing information to another type of consumer reporting company (e.g., check verification firms). Reported information may include the number of outstanding loans, loan balances, and defaulted loan balances. Assess whether lenders maintain written policies and procedures regarding data accuracy, report information accurately, and have procedures in place to ensure that inquiries and complaints concerning reported data are appropriately resolved in accordance with FCRA requirements. 3. Assess compliance with the FCRA’s furnisher requirements. Refer to the FCRA examination procedures for more information. Other Risks to Consumers 1. Determine whether the lender contacts borrowers in an appropriate manner by assessing whether: CFPB Short-Term, Examination Procedures Small-Dollar Lending CFPB September 2013 Procedures 17 a. Employees and third-party contractors clearly disclose to consumers that they are contacting the consumer about the collection of a debt. b. Employees and third-party contractors do not disclose the existence of a consumer’s debt to members of the public without the consent of the consumer, except as permitted by law. c. The lender has policies on avoiding repeated telephone calls that abuse or harass any person at the number called. 2. Determine whether the lender makes misrepresentations or uses other deceptive means to collect debts. Determine whether the lender has appropriate controls to prevent such practices.