[Federal Register Volume 86, Number 16 (Wednesday, January 27, 2021)]
[Notices]
[Pages 7271-7280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01601]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
Supervisory Highlights, Covid-19 Prioritized Assessments Special
Edition, Issue 23 (Winter 2021)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Supervisory Highlights.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
issuing its twenty-third edition of Supervisory Highlights. This is a
special edition of Supervisory Highlights that details the Bureau's
Prioritized Assessment (PA) work. PA observations are described in the
areas of mortgage, auto and student loan servicing, credit card account
management, consumer reporting-furnishing, debt collection, deposits,
prepaid cards, and small business lending. The report does not impose
any new or different legal requirements, and all observations described
in the report are based only on those specific facts and circumstances
noted during those PAs.
DATES: The Bureau released this edition of the Supervisory Highlights
on its website on January 19, 2021.
FOR FURTHER INFORMATION CONTACT: Jaclyn Sellers, Counsel, at (202) 435-
7449. If you require this document in an alternative electronic format,
please contact CFPB_Accessibility@cfpb.gov.
SUPPLEMENTARY INFORMATION:
[[Page 7272]]
1. Introduction
The Bureau is publishing this Special Edition of Supervisory
Highlights to inform the public of observations in its prioritized
assessment (PA) supervisory work conducted last year after the sudden
onset of the COVID-19 pandemic. PAs focused on assessing risks to
consumers resulting from the pandemic.
1.1 Background
The COVID-19 pandemic had immediate and broad implications for
Bureau-supervised entities. In a very short period of time, entities
needed to adapt to a number of operational challenges, which included
State stay-at-home orders, staffing shortages, transition to partial or
total remote work, and business closures.
COVID-19 also deeply impacted consumers. Within three months of the
pandemic's start, the unemployment rate jumped to over 11 percent \1\
and a significant number of consumers sought unemployment benefits.
With large income losses, many households struggled to meet their
credit obligations. In the early days of the pandemic, consumer
requests for accommodations skyrocketed.
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\1\ U.S. Department of Labor. July 17, 2020. Economics News
Release: Employment Situation Summary, available at: https://www.bls.gov/news.release/archives/laus_07172020.pdf.
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On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and
Economic Security Act (the CARES Act),\2\ which included a temporary
small business lending program known as the Paycheck Protection Program
(PPP). It also amended certain provisions of the Fair Credit Reporting
Act (FCRA) and established protections for consumers including
homeowners and student loan borrowers. Institutions had to quickly
implement the applicable CARES Act provisions.
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\2\ Coronavirus Aid, Relief, and Economic Security Act, Public
Law 116-136, 134 stat. 281 (March 27, 2020).
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The Bureau recognized the challenges posed by the pandemic and
encouraged supervised entities to focus on assisting consumers. The
Bureau issued a number of statements that provided entities with
temporary regulatory relief. The Bureau also announced that, in certain
instances, the Bureau would take a flexible supervisory and enforcement
approach during the pandemic. For more information about these
statements please visit the Bureau's website at https://www.consumerfinance.gov/compliance/supervisory-guidance/.
1.2 Prioritized Assessments
In May of 2020, the Bureau rescheduled about half of its planned
examination work and instead conducted PAs in response to the pandemic.
PAs were higher-level inquiries than traditional examinations. They
were designed to obtain real-time information from a broad group of
supervised entities that operate in markets posing elevated risk of
consumer harm due to pandemic-related issues.
The Bureau, through its supervision program, analyzed pandemic-
related market developments to determine where issues were most likely
to pose risk to consumers. The Bureau also prioritized markets where
Congress provided special provisions in the CARES Act to help
consumers.
The Bureau sent targeted information requests to a significant
number of entities to obtain information necessary to assess risk of
consumer harm and violation of Federal consumer financial law. Each
targeted information request was specific to the product market, that
market's attendant risks to consumers, and the institution. The
targeted information requests focused on a short period of time,
generally from early May 2020 through September 2020.
Typically, targeted information requests sought, as applicable:
Information on how the institution was assisting
consumers;
challenges the institution was facing as a result of the
COVID-19 pandemic;
changes the institution made to its compliance management
system (CMS) in response to the pandemic;
information about the institution's relevant
communications with consumers;
basic data regarding the institution's response to the
COVID-19 pandemic; and
information about service providers.
PAs were not designed to identify violations of Federal consumer
financial law, but rather to spot and assess risks and communicate
these risks to supervised entities so that they could be addressed to
prevent consumer harm. The Bureau sent close-out letters to entities
that detailed any observed risks and contained supervisory
recommendations, if applicable. The Bureau will be following up on
risks identified while conducting PAs in the normal course of the
Bureau's supervisory work.
2. General Observations
Many entities offered accommodations to consumers that experienced
pandemic-related hardships. The CARES Act mandated forbearance options
on federally backed mortgages and placed most student loans owned by
the Department of Education into forbearance, and mandated zero
interest accrual for all federally owned student loans. Even where not
legally required, many entities also offered accommodations, including
expanded payment assistance programs and fee waivers. For example, many
auto servicers offered six-month payment deferrals to any consumer with
a COVID-19 hardship, and many credit card issuers also offered
deferrals that ranged from one to six months.
Some Bureau-supervised entities struggled to adjust to the rapid
changes brought on by the pandemic. Many institutions experienced
increased call volumes from consumers requesting relief or disputing
charges, with corresponding increases in hold times for many consumers.
For some entities, the combination of rapid program implementation and
operational challenges resulted in elevated risk of consumer harm. For
example, several entities experienced a backlog of accommodation
requests or provided inaccurate information to consumers about the
accommodations they offered.
Other risks observed by Bureau examiners ranged from inaccurate
credit reporting to failure to send out timely disclosures. In many
cases, staffing shortages or inaccurate training materials led to these
issues.
Many institutions created COVID-19 response teams to identify and
address consumer and industry challenges caused by the pandemic. Many
entities engaged in robust monitoring of key processes, leading them to
self-identify issues and implement corrective actions where needed.
Other entities made changes in response to risks that Bureau examiners
observed. Commonly seen changes made by institutions included:
Providing consumer remediation;
reversing fees;
updating scripts to provide accurate information to
consumers;
transitioning from manual to automated processes;
correcting inaccurate credit reporting; and
correcting account histories.
Some entities also increased staffing to clear backlogs and to
address increased demand for accommodations.
3. Supervisory Observations
Specific PA observations are described in this report in the areas
of mortgage, auto and student loan servicing, credit card account
management, consumer reporting-
[[Page 7273]]
furnishing, debt collection, deposits, prepaid cards, and small
business lending.\3\
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\3\ This document does not impose any new or different legal
requirements. In addition, the risks described in this issue of
Supervisory Highlights are based on the particular facts and
circumstances reviewed by the Bureau as part of its PA work. A
conclusion that elevated risk to consumers exists is based on the
facts and circumstances described here and may not lead to such a
finding under different facts and circumstances.
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3.1 Mortgage Servicing
Market Response to Consumers & Industry Challenges
The CARES Act established certain protections for homeowners. For
example, for borrowers with federally backed mortgages, borrowers have
the right to request and obtain forbearance for up to 180 days and to
request and obtain an extension for another 180 days (for a total of
360 days). Since March 2020, millions of borrowers have sought payment
relief options and enrolled in CARES Act forbearances.\4\
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\4\ According to the Mortgage Bankers Association, an estimated
2.7 million borrowers were in forbearance plans as of December 2020.
Mortgage Bankers Association. December 21, 2020. MBA: Share of
Mortgage Loans in Forbearance Increases to 5.49 Percent, available
at: https://www.mba.org/2020-press-releases/december/share-of-mortgage-loans-in-forbearance-increases-to-549-percent.
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Servicers faced a number of significant challenges. Beginning in
March 2020, they had to quickly implement the CARES Act and make other
operational changes in light of evolving investor guidance. Servicers
reported taking a variety of steps to address issues related to the
pandemic and enroll borrowers into CARES Act forbearances. Many
servicers reported operational constraints, resource burdens, and
service interruptions. Many servicers also moved employees from other
duties to respond to forbearance requests. Some servicers reported
disruptions to normal CMS and monitoring processes.
Consumer Risk
Examiners' review of mortgage servicers' PA responses indicated
several issues that raise the risk of consumer harm. Some categories of
issues are described below.
Providing Incomplete or Inaccurate Information to Consumers About
Forbearance
Several servicers provided incomplete or inaccurate information to
consumers regarding CARES Act forbearances. These issues present a
range of potential risks of consumer harm, such as dissuading borrowers
from requesting a forbearance and causing borrowers to pursue other
options that may be less favorable to them than forbearance. Examiners
observed instances of the following:
Customer service representatives provided inaccurate
information regarding forbearances, including the available period for
CARES Act forbearances and the interest accrued or amounts owed.
Servicers told some borrowers that ``lump sum'' payment of all missed
monthly payments would be required at the end of the forbearance
period, when in fact that was not correct.
Representatives indicated that only delinquent borrowers
could qualify for a forbearance, contrary to the CARES Act.\5\ As a
result, representatives instructed some current borrowers to call back
to request forbearance only after they had failed to make an on-time
monthly payment.
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\5\ The CARES Act states that borrowers may request forbearance
``regardless of delinquency status.'' See CARES Act, section
4022(b)(1).
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Written materials, such as forbearance approval letters
and customer service websites, included inaccurate or potentially
misleading information regarding CARES Act forbearance. For example,
one servicer suggested that consumers had to pay a fee to receive a
forbearance and another provided incorrect due dates for the borrower's
next payment.
A servicer sent borrowers requesting CARES Act
forbearances written agreements purporting to require a signature as a
condition of enrollment and stating that payments would be due later
that month, when in fact they would not be due for 90 or 180 days. The
CARES Act requires only that borrowers request a forbearance and attest
to a financial hardship due to the pandemic to qualify.
Sending Collections and Default Notices, Assessing Late Fees, and
Initiating Foreclosures for Borrowers Enrolled in Forbearance
Several servicers took actions on borrowers' accounts that were
erroneous or inconsistent with the fact that borrowers were enrolled in
CARES Act forbearances. These issues present risks of direct financial
harm and significant confusion for borrowers who were enrolled in
forbearances. For example, some servicers sent automated collection
notices to borrowers in CARES Act forbearances indicating that their
accounts were past due, and that negative reporting and late fees could
result. While collection notices may be required for FHA loans by
regulation under some circumstances, they are not required for other
loans and may result in confusion for consumers enrolled in CARES Act
forbearances. In other cases, system issues resulted in erroneous late
fees and default notices for borrowers enrolled in forbearances.
Examiners also identified one servicer that erroneously initiated
foreclosure actions in violation of the CARES Act's moratorium on
foreclosures and assessed related fees on borrowers in the early weeks
of the pandemic.\6\
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\6\ The CARES Act placed a moratorium on certain foreclosures.
See CARES Act, section 4022.
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Cancelling or Providing Inaccurate Information About Borrowers'
Preauthorized Electronic Funds Transfers
Several servicers provided inaccurate information or took actions
concerning borrowers' preauthorized electronic funds transfers without
their knowledge or consent. These issues can result in inadvertent
missed payments and other negative consequences for consumers.
Due to manual data entry errors, representatives at one servicer
cancelled borrowers' preauthorized electronic funds transfers when they
inquired about forbearance options over the phone. In addition, at
other servicers, representatives provided inaccurate information to
borrowers by stating that they did not need to take steps to cancel
their preauthorized electronic fund transfers when they enrolled in
forbearance, when in fact they did.
Failing To Timely Process Forbearance Requests
Many servicers experienced delays in processing forbearance
requests in the early months of the pandemic. These delays were
generally brief. However, a few servicers experienced more serious
delays or failed to process forbearance requests. As a result, this
issue presents a risk to consumers who do not timely receive the
benefit of a requested forbearance and experience negative
consequences, such as missed payments and negative credit reporting.
For example, representatives processing borrower requests for
forbearance incorrectly used a code indicating only that the borrowers
inquired about forbearance, and no forbearance was processed.
Enrolling Borrowers in Automatic or Unwanted Forbearances
Many servicers enrolled borrowers in automatic or unwanted
forbearances. Examiners observed the following:
Certain servicers did not effectively communicate to
borrowers that they were applying for a forbearance. In some cases,
borrowers believed that they were
[[Page 7274]]
simply reviewing information regarding forbearance on the servicers'
website or discussing a financial hardship with representatives on the
phone. Those borrowers did not understand that they had applied for, or
that the servicer would process, a forbearance.
Certain representatives used incorrect system codes that
placed borrowers' accounts into forbearances that they did not request.
Certain servicers automatically placed borrowers' accounts
into forbearance without their knowledge or approval. When borrowers
with multiple loan accounts applied for forbearance on one account,
some servicers automatically applied the forbearance to some or all of
the borrowers' other accounts. One servicer automatically converted in-
process loan modification applications into forbearances without
borrowers' consent.\7\
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\7\ One servicer informed examiners that automatic forbearances
were intended to allow borrowers to avoid the need to separately
request forbearance on other loan accounts. However, examiners
observed that a significant number of consumers enrolled in
automatic forbearances called or submitted complaints seeking
removal from forbearance.
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Several servicers acknowledged that, when accounts were
placed in forbearance without borrowers' request or approval, the
servicers then furnished information to consumer reporting companies
(CRCs) \8\ indicating that the accounts had been placed in forbearance.
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\8\ The term ``consumer reporting company'' means the same as
``consumer reporting agency,'' as defined in the Fair Credit
Reporting Act, 15 U.S.C. 1681a(f), including nationwide consumer
reporting agencies as defined in 15 U.S.C. 1681a(p) and nationwide
specialty consumer reporting agencies as defined in 15 U.S.C.
1681a(x).
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Loss Mitigation Process Deficiencies
Some servicers did not take appropriate steps relating to loss
mitigation for borrowers in CARES Act forbearances. The risks to
consumers from these issues include missed opportunities to pursue and
enroll in appropriate repayment options or plans. Issues observed
include:
One servicer enrolled borrowers who submitted incomplete
loss mitigation applications in CARES Act forbearances and
appropriately sent acknowledgement letters to these borrowers but
failed to include a statement that the consumer will be evaluated for
all options upon submitting a completed loss mitigation application, as
required by Regulation X.
One servicer had no process in place to evaluate whether
borrowers who submitted complete loss mitigation applications qualified
for CARES Act forbearances because they were experiencing a pandemic-
related hardship. Some borrowers were instead enrolled in forbearances
that lacked CARES Act protections--such as a term up to 360 days and
credit reporting protections. The servicer received complaints from
borrowers who missed payments while in a loss mitigation process, when
they likely could have been offered the protections of the CARES Act.
3.2 Auto Servicing
Market Response to Consumers & Industry Challenges
Auto servicers reported large numbers of pandemic-related payment
assistance requests beginning in early March 2020. Many servicers
expanded existing payment assistance programs to help borrowers who
were having trouble making payments. The changes included waiving late
fees, permitting non-delinquent as well as delinquent borrower
enrollments, and providing longer payment deferrals.
The payment assistance programs generally offered loan payment
deferment on a case-by-case basis, with most borrowers receiving a
payment deferral period of three or more months. In the majority of
cases, the payment deferments extended the loan term by the same number
of months. Most servicers continued to charge interest during the
deferral period.
Servicers generally suspended repossessions between mid-March and
early-May 2020, because State stay-at-home orders halted repossession
efforts. While some states may have imposed repossession moratoria,
there was no Federal moratorium.
Consumer Risk
Examiners' review of auto loan servicers' PA responses indicated
several issues that present risk of consumer harm, including the
following:
Many servicers provided information to consumers about the impact
of interest accrual during deferment periods on the final loan payment
amount that might not have been sufficiently precise for consumers to
understand how much their payments would increase. For example,
consumers who would face final payments that were more than double
their regular payments may not have reasonably anticipated this result
when servicers described the final payment as ``substantially larger
than your regular monthly payment.'' More specific information about
the final payment may allow consumers to budget and plan for future
large payments and mitigate the risks that consumer could not make that
payment. Servicers have various options to better disclose the long-
term payment obligations, such as estimating final payment amounts.
Some servicers continued to withdraw funds for monthly payments
after servicers had agreed to deferments. And some servicers failed to
process certain payment assistance requests.
One servicer sent borrowers notices warning them of possible
repossession when, in fact, the servicers had suspended repossession
operations during the relevant time period. This practice likely
affected whether some borrowers, threatened by repossession, spent
discretionary money on their car payments instead of other financial
necessities during the pandemic.
3.3 Student Loan Servicing
Market Response to Consumers & Industry Challenges
The CARES Act provided certain student loan borrowers with a range
of protections. It temporarily reduced interest rates to zero for all
federal loans owned by the U.S. Department of Education (ED) and
suspended monthly payments for most of these loans. To facilitate the
suspension, servicers placed most loans in repayment status into an
administrative forbearance. In addition, the suspended monthly payments
are considered eligible payments toward the total number of qualifying
payments necessary for forgiveness under the Public Service Loan
Forgiveness program and various income-driven repayment plans.
Servicers reported that between March and May 2020 the number of
delinquent accounts in the William D. Ford Federal Direct Loan Program
(Direct loans) decreased from 1.9 million to fewer than 150 accounts.
Many loan holders of commercial Federal Family Education Loan
Program (FFELP) loans directed servicers to use the natural disaster
forbearance provisions to provide payment relief for consumers impacted
by the pandemic. These provisions did not provide the forgiveness or
interest rate features of the CARES Act relief afforded to borrowers
with Direct loans and ED-held FFELP loans.
Private student loan holders and lenders managed the early response
to the pandemic with a variety of different payment relief options.
Certain private student loan holders relied on options provided in the
terms of the original note like economic hardship or natural disaster
forbearances. Still others
[[Page 7275]]
created new short-term payment relief options for consumers. Private
loan forbearance options and implementation of FFELP disaster
forbearance programs often evolved as the extent of the economic
impacts from the pandemic became more apparent. In general, servicers
did not require any documentation to enroll borrowers into COVID-19
related forbearances. Between March and May 2020, servicers reported
that the number of delinquent commercial FFELP and private student
loans across all servicers reviewed fell from 270,000 to 146,000.
Servicers faced a number of significant challenges. In March and
April 2020, they quickly implemented the CARES Act for federally owned
loans, identified and made available a variety of private and
commercial FFELP payment relief options, and complied with local
shelter-in-place or stay-at-home orders. Many servicers reported
operational constraints and service interruptions, consistent with
other servicing sectors. Finally, examiners observed that a large
percentage of calls from commercial FFELP and private student loan
borrowers related to the CARES Act even though they were not eligible
for the benefits. For example, consumers often expressed confusion and
frustration after receiving bills when they believed their loans should
have been automatically placed into CARES Act forbearances. Other
consumers inquired about how to enroll in the forbearances they heard
about in the news.
Consumer Risk
Examiners' review of student loan servicers' PA responses, which
related to federal and private student loans, indicated several issues
that raise the risk of consumer harm, described below.
One servicer provided incorrect or incomplete information about
available payment relief options in written communications to numerous
consumers. For example, some borrowers received inaccurate notices
indicating that interest would capitalize at the conclusion of the
natural disaster forbearances when, in fact, it would not. In another
instance, private student loan borrowers received notices suggesting
that they were eligible for natural disaster forbearances with certain
terms when, in fact, the borrowers receiving these notices were
ineligible. In both of these situations the servicer sent written
communications informing affected borrowers of the error.
Multiple servicers failed to routinely discuss all available
repayment options with borrowers requesting payment assistance. While
borrowers were eligible to enroll in various forbearances in the wake
of the COVID-19 pandemic, they have other options as well. For example,
commercial FFELP borrowers are eligible for income-based repayment,
which may be a better option for many borrowers. Additionally, private
loan borrowers may also be eligible for non-standard repayment plans
that can provide long-term payment relief. In these cases, consumers
were never informed about alternative repayment options when they
requested payment assistance.
Operational challenges resulted in one servicer failing to maintain
regular call center hours. While operational disruptions were common
across the industry, during this period most call centers stayed open
at least part of the time. The complete or partial closure of call
centers created a range of problems for consumers who were unable to
talk with representatives, particularly in connection with payment
relief-specific guidance.
One private loan holder was not responding to consumers'
forbearance extension requests. Many loan holders authorize servicers
to grant initial forbearances for consumers that call to request
payment assistance. However, some loan holders require that servicers
seek their approval for any forbearance extension. Examiners observed
that thousands of extension requests were delayed and ultimately denied
because the loan holder never responded. This challenge needlessly
hinders consumers' abilities to make broader financial decisions and
may cause certain consumers to believe the loan holder will evaluate
the applications and that extensions are likely.
One servicer provided inaccurate information related to the number
of payments eligible for repayment, rehabilitation, or forgiveness
programs. Unlike under most forbearances, months that federally owned
loans are enrolled in the forbearance authorized by the CARES Act are
considered eligible under a variety of programs. However, when
providing information to consumers about the total number of eligible
payments, one servicer failed to include these months in the count.
Examiners observed some payment allocation errors when servicers
applied voluntary payments to accounts enrolled in CARES Act
forbearances. The servicers allow consumers to direct payments to
individual loans within their accounts through individual instructions
or standing orders. Many consumers use standing orders to establish a
payment methodology that directs payments to loans with the highest
interest rates. When consumers do not provide allocation instructions,
servicers use their own default methodologies. Some servicers' default
methodologies allocate payments based on the interest rates of the
loans. The CARES Act stopped all interest accrual on loans owned by ED,
and in these loans, some servicers failed to comply with allocation
methodologies or instructions that relied on loan-level interest rates.
In one situation, a servicer did not comply with consumers' standing
payment instructions to allocate payments towards the highest interest
rate loan first. Rather, representatives incorrectly used the CARES Act
temporary interest rates and split payments evenly across the
consumers' loans despite underlying differences in interest rates.
While the error was not systematic in that case, if uncorrected,
consumers' highest interest rate loans will not be paid down as much as
they would be if servicers applied payments based on the permanent
interest rate, so when payments and interest accrual resume, these
borrowers would end up paying more over time.
Some servicers failed to prevent preauthorized electronic funds
transfers following forbearance approval for loans that are not
federally owned. For example, due to manual errors, one servicer failed
to timely enroll consumers in forbearances that they approved over
phone calls and failed to cancel the relevant preauthorized fund
transfers as well. In other examples, servicers failed to cancel
preauthorized electronic funds transfers when consumers requested and
were granted forbearances that halted all required payments.
One servicer provided inaccurate information to consumers regarding
the information required to evaluate forbearance applications for loans
that are not federally owned. The servicer advised consumers that
providing the date range related to the COVID-19 impact was acceptable.
In fact, the servicer denied forbearance requests for consumers who
provided date ranges rather than precise dates of COVID-19 impact.
Certain servicers allow commercial FFELP consumers to enroll in
natural disaster forbearances through their websites or automated phone
systems. Examiners observed that one servicer failed to prevent certain
ineligible borrowers in technical default (more than 270 days
delinquent) from enrolling in forbearances. This resulted in the
servicer confirming enrollment in forbearances that were not actually
provided to consumers. Consumers may
[[Page 7276]]
have believed that they did not need to take any actions until the
forbearance periods ended. However, these consumers in fact needed to
make payments or, at a minimum, talk with representatives to resolve
the issues.
3.4 Credit Card Account Management
Market Response to Consumers & Industry Challenges
Credit card issuers generally provided some form of relief to
consumers experiencing hardships as a result of the COVID-19 pandemic.
The most common relief was allowing consumers to skip a payment or to
defer payments for one to six months. While some issuers waived
interest along with payment deferrals, interest continued to accrue on
accounts at most issuers. Other relief options included lowered
interest rates, waivers of annual and other fees, and extended deferred
interest periods for credit card accounts that already had deferred
interest on certain purchases. A few issuers made changes to manage
credit risk. Some issuers tightened underwriting standards, stopped
proactive score-based credit limit increases, reduced credit limits, or
closed some accounts. Some issuers also halted marketing campaigns to
acquire new accounts and paused direct marketing campaigns due to
uncertainty in the market.
Issuers generally experienced some operational challenges as a
result of the COVID-19 pandemic, such as increased call volume. The
compliance-related challenges included:
Difficulty in meeting written disclosure timing
requirements; or obtaining necessary consumer consent for electronic
disclosures (e.g., for change-in-terms letters and statement
messaging);
Meeting regulatory requirements to address customer
disputes, sometimes resulting from business partner and merchant
closures; and
Adjustments in regular monitoring and testing schedules
for credit card operations.
In responding to challenges, some issuers deployed their existing
disaster preparedness and business continuity management plans to
address some of the operational challenges related to the COVID-19
pandemic. However, several issuers had to modify existing programs and
business line processes, and revise policies and procedures to respond
to the unique operational challenges posed by the COVID-19 pandemic.
Consumer Risk
Examiners' review of issuers' PA responses indicated several issues
that raise the risk of consumer harm. These issues are described below.
Implementation and System Deficiencies
Certain issuers reported problems implementing relief programs, and
these problems may have caused consumer harm. These issuers relied on
manual processes to handle high volumes of requests for relief and did
not provide adequate employee training about relief programs.
Some issuers that used manual processes to handle the high volumes
of requests for relief reported significant backlogs in processing such
requests. Due to these backlogs, accounts became delinquent between the
time of consumers' requests for relief and the actual processing of
requests, exposing consumers' accounts to potential negative credit
reporting, charge-offs, or account closures.
In some instances, consumers who requested relief were erroneously
told that they would receive immediate relief as of the date of their
request. In fact, these consumers would not receive relief until the
consumer's request was manually entered into the issuer's system, which
occurred days, or even weeks, later. In some cases, consumers were
never manually enrolled in relief programs. Consequently, fees and
interest that were supposed to be waived, along with the payment
deferrals, were not waived.
Some issuers also reported that employees provided inaccurate
information to consumers in order to collect payments from them. For
instance, representatives told consumers that they had to pay their
past due amount to enroll in the payment deferment program when in
fact, paying the past due amount was not a requirement for enrollment.
Auto Pay Process Deficiencies
Several issuers advised consumers who requested to skip or defer
credit card payments pursuant to a pandemic relief program that they
must adjust or separately cancel any preauthorized credit card payments
(including preauthorized transfers from an external financial
institution) that were set up to make their periodic credit card
payments. Examiners observed that the instructions given to consumers
in certain cases, including going through additional steps to cancel or
defer payments after completing the pandemic relief request process,
posed a risk of consumer harm.
Some issuers did not immediately suspend preauthorized transfers
upon enrolling consumers in pandemic relief programs, despite making
representations to consumers that payments would be suspended as of the
date the consumer enrolled. Rather, the issuers' systems were
programmed to suspend preauthorized transfers as of the date that the
consumer's request for relief was manually processed by the issuer.
Because of processing backlogs, suspension of transfers did not occur
until several days or weeks after the consumer's oral request. Due to
these processing backlogs, examiners observed that several consumers'
accounts were debited in error.
Timing of Delivery of Disclosures
At several issuers, some consumers who had not previously opted to
receive electronic disclosures requested COVID-19 relief
telephonically. For these consumers, the issuers had no practical way
to provide written disclosures without delaying relief or obtaining the
consumer's consent to electronic disclosure. Rather than delay relief,
the issuers provided immediate relief to cardholders and delivered
written disclosures by letter or statement notice.\9\
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\9\ CFPB. May 13, 2020. Open-End (not Home-Secured) Rules FAQs
related to the Covid-19 Pandemic, available at: https://files.consumerfinance.gov/f/documents/cfpb_faqs_open-end-rules-covid-19_2020-05.pdf.
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Billing Disputes
Some issuers reported that they failed to resolve billing disputes
by the regulatory deadline. This failure was attributed to the
increased volume of error notices and merchant closures which increased
the amount of time to investigate and resolve such errors.
3.5 Consumer Reporting and Furnishing
Consumer reporting plays a critical role in consumers' financial
lives. CRCs assemble or evaluate consumer information for the purpose
of furnishing consumer reports to third parties. Such consumer reports
can determine a consumer's eligibility for credit cards, car loans, and
home mortgage loans--and they often affect how much a consumer is going
to pay for that loan. Furnishers of information provide information to
CRCs and thus play a crucial role in the accuracy and integrity of
consumer reports. Inaccurate information on consumer reports can lead
to market harm. For example, inaccurate information on a consumer
report can impact a consumer's ability to obtain credit or open a new
deposit or savings account. Moreover, furnishers have an important role
when consumers dispute the accuracy of information in
[[Page 7277]]
their consumer reports. Consumers may dispute information that appears
on their consumer report directly with furnishers (``direct disputes'')
or indirectly through CRCs (``indirect disputes''). When CRCs and
furnishers receive disputes, they are required to investigate the
disputes to verify the accuracy of the information furnished.\10\ A
timely and responsive reply to a consumer dispute may reduce the impact
that inaccurate negative information in a consumer report may have on
the consumer.
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\10\ 15 U.S.C. 1681i(a), 15 U.S.C. 1681s-2(a)(8), 15 U.S.C.
1681s-2(b); 12 CFR 1022.43.
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Market Response to Consumers & Industry Challenges
The CARES Act amended Section 623(a)(1) of the FCRA (CARES Act FCRA
amendment). This amendment applies if a furnisher makes an
accommodation with respect to one or more payments on a credit
obligation or account of a consumer, and the consumer makes the
payments or is not required to make one or more payments pursuant to
the accommodation. For accounts where the CARES Act FCRA amendment
applies, if the credit obligation or account was current before the
accommodation, during the accommodation the furnisher must continue to
report the credit obligation or account as current. If the credit
obligation or account was delinquent before the accommodation, during
the accommodation the furnisher cannot advance the delinquent
status.\11\ For more examples regarding the applicability of the CARES
Act FCRA amendment, the Bureau has published detailed FAQs.\12\
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\11\ CARES Act, Public Law 116-136, sec. 4201 (2020) (amending
section 623(a)(1) of the FCRA subject to certain exceptions).
\12\ CFPB. June 16, 2020. Consumer Reporting FAQs Related to the
CARES Act and COVID-19 Pandemic, available at https://files.consumerfinance.gov/f/documents/cfpb_fcra_consumer-reporting-faqs-covid-19_2020-06.pdf.
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Furnishers and CRCs faced challenges in responding to the pandemic
and the new requirements of the CARES Act FCRA amendment. Several
furnishers and CRCs reported temporary staffing challenges that
affected the entities' ability to complete reasonable dispute
investigations within the time periods specified in the FCRA and
Regulation V. Many furnishers also adapted to consumer need by offering
new or expanded payment accommodations to consumers, which required
changes in staffing to handle request volume. In light of the new
statutory requirements for furnishing under the CARES Act FCRA
amendment, these new or expanded accommodations also required that
furnishers make changes in procedures to appropriately code accounts so
that they would be furnished correctly according to the statute's new
requirements. Notwithstanding these challenges, most CRCs and
furnishers provided information indicating that they have adapted to
meet their FCRA and Regulation V obligations. This is consistent with
the findings of the CFPB's Office of Research that, in several credit
markets including mortgage loans, auto loans, and student loans, the
reported rate of new delinquencies, as well as the reported share of
existing delinquencies that became more delinquent, decreased between
March and June 2020.\13\
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\13\ CFPB. August 31, 2020. The Early Effects of the COVID-19
Pandemic on Consumer Credit, available at https://files.consumerfinance.gov/f/documents/cfpb_early-effects-covid-19-consumer-credit_issue-brief.pdf.
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Consumer Risk
Examiners' review of furnishers' and CRCs' PA responses indicated
several issues that present risk of consumer harm.
Inaccurate Reporting of Accommodations
Some entities furnished new and/or advancing delinquency
information to CRCs after making an accommodation. As noted above, if a
furnisher makes an accommodation, the furnisher must under certain
conditions report the credit obligation or account as current, or if
the credit obligation or account was delinquent before the
accommodation, not advance the delinquent status during the period of
the accommodation.\14\ Certain furnishers made accommodations, and
communicated to the consumer that the accommodation had been made
immediately after the consumer submitted the application. These
furnishers then delayed processing accommodations due to backlogs
created by the volume of accommodation requests. This resulted in: (i)
Reporting some consumers who were current as delinquent, and then
improperly advancing and reporting their incorrect delinquency status,
or (ii) improperly advancing the delinquency status of other consumers
who were delinquent at the time of the accommodation.
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\14\ CARES Act, Public Law 116-136, sec. 4201 (2020) (amending
section 623(a)(1) of the FCRA).
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Insufficient Furnishing Policies and Procedures
Examiners observed that insufficient furnishing policies and
procedures caused an entity to furnish inaccurate account information
to CRCs related to the practice of home pickups of leased vehicles.
Furnishers are required to ``establish and implement reasonable
written policies and procedures regarding the accuracy and integrity of
the information relating to consumers that it furnishes to a consumer
reporting agency. The policies and procedures must be appropriate to
the nature, size, complexity, and scope of each furnisher's
activities.'' \15\
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\15\ Regulation V, 12 CFR 1022.42(a).
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An auto furnisher failed to update furnishing policies and
procedures to address the furnisher's changed leased vehicle return
practices. This caused the furnisher to erroneously report consumers as
delinquent for leased vehicles that had, in fact, been returned. As a
result of the pandemic, many auto dealerships were closed, so vehicles
were picked up from consumers' homes. This created delays or errors in
the processing of lease termination, causing auto furnishers to report
accounts as delinquent even though consumers had returned their
vehicles on time.
After making changes to accommodation programs offered to consumers
during the pandemic, a number of furnishers did not update their
written policies and procedures regarding the accuracy and integrity of
the information related to consumers that they furnish to CRCs.
Accommodation programs offered by furnishers may affect how the
furnishers report information about its accounts to CRCs. Accordingly,
there is a risk of furnishing inconsistent with the CARES Act FCRA
Amendment if furnishers have made changes to accommodation programs
without updating related furnishing policies and procedures.
Untimely Dispute Investigations
CRCs and furnishers are required to conduct an investigation with
respect to the disputed information, review all relevant information
provided by the consumers with the dispute, and respond with the
results of the dispute investigation.\16\
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\16\ 15 U.S.C. 1681i(a), 15 U.S.C. 1681s-2(b)(1).
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In the second quarter of 2020, staffing challenges due to the
pandemic impacted dispute investigation capacity at one or more
furnishers and CRCs. As a result of these staffing challenges, some
furnishers and CRCs were unable to timely conduct investigations of
[[Page 7278]]
disputed tradelines in the months of April and May. However, examiners
observed data indicating that, by the end of June 2020, the average
time to resolve disputes by furnishers had returned to the average time
from prior years.
Some CRCs and furnishers that experienced this problem in the
Spring of 2020 took steps to reduce the risk of inaccurate consumer
information caused by these staffing challenges. Specifically, these
CRCs and furnishers continued to investigate the disputes and
subsequently furnished updated or corrected information about such
disputed items after completing their dispute investigations. CFPB
Supervision is continuing to monitor dispute timeliness at CRCs and
furnishers.
3.6 Debt Collection
Market Response to Consumers & Industry Challenges
During the review period, some participants in the debt collection
industry reported an increase in consumer contacts and payments, which
several attributed to more consumers being at home, reduced spending,
and the resources provided by pandemic assistance programs.
Debt collectors altered their work practices in response to the
pandemic to comply with State orders and reduce their employees' risk
of infection. In general, collectors responding to the PAs indicated
that they transitioned partially or entirely to remote work during the
review period. Other workplace changes were reported, including the
implementation of remote call-monitoring tools and modifications to
telework policies.
Some states instituted pandemic measures that impacted the debt
collection industry and consumers. These measures include prohibitions
on new wage garnishments or bank attachments, and a requirement that
consumers be offered the option to defer scheduled payments.
Consumer Risk
Examiners' review of debt collectors' PA responses indicated
several issues that raise the risk of consumer harm, discussed below.
In certain instances, there were delays in processing suspensions
of administrative wage garnishments (AWG), followed by attempts by
collectors to rectify the effects of those delays. Several servicers of
commercially owned Federal student loans voluntarily suspended AWG
collections. However, some employers did not promptly suspend
garnishment of consumer wages. As a result, collectors made additional
efforts to contact the employers and to provide refunds for wages
garnished after the suspension.
Examiners reviewed the potential for FDCPA compliance risks
associated with new restrictions on wage garnishment and bank
attachments. FDCPA violations can occur independent of whether State
law has been violated. Nonetheless, when evaluating whether an action
taken to enforce a judgment violates FDCPA section 808's prohibition of
``unfair or unconscionable'' debt collection practices, one fact the
Bureau may consider is whether applicable law permits resort to
garnishment or attachment of a consumer's assets in a particular set of
circumstances. Several State laws or regulations promulgated during the
review period appear to prohibit debt collectors from imposing new
attachments on bank accounts or new wage garnishments on employers. Of
the examined debt collectors that engage in litigation and judgment
enforcement activities, several voluntarily stopped imposing new bank
attachments and/or wage garnishments during the review period. Due to
significant complexities and a rapidly shifting landscape of State
restrictions, continued litigation and judgment enforcement during the
pandemic could still pose compliance risks and, as a result, risks to
consumers.
There were payment processing delays for some entities caused by
the transition to remote work. Certain collectors experienced delays in
processing payments that were sent by mail and received at a physical
location which was temporarily inaccessible due to the pandemic. In
those instances, examiners generally observed the entity retroactively
posting payments effective on the date payment was delivered.
3.7 Deposits
Market Response to Consumers & Industry Challenges
As part of the CARES Act, Congress authorized direct monetary
payments, known as Economic Impact Payments (EIPs), to many consumers.
The CARES Act also increased the amount of State unemployment insurance
consumers might receive. Direct deposit was the primary method of
distribution for EIPs. Direct deposit was and is a significant
distribution method for State unemployment insurance benefits. Due to
the economic hardship caused by the pandemic, consumers' ability to
access these benefits was critical.
Depository institutions responded to the challenges posed by the
pandemic in several ways. Many institutions closed physical branch
locations to protect the health of both their staff and customers. A
number of institutions transitioned staff to remote work, increased
call center staffing in order to deal with the influx of customer
questions, and increased ATM deposit and withdrawal limits to maintain
consumers' access to their funds.
In response to the pandemic, a number of institutions activated
their existing disaster relief programs. Numerous institutions made
temporary changes to existing policies and procedures and documented
those changes in informal documents, including job aids, playbooks, and
FAQs issued to employees. A few institutions also made changes to
formal policies and procedures. Whether through existing disaster
relief programs, temporary changes, or formal policy and procedure
updates, many institutions reported taking actions to reach out to
consumers to offer assistance and provide resources in connection with
pandemic-related hardships.
Consumer Risk
Examiners' review of institutions' PA responses found several
issues that elevate the risk of harm to consumers. The most commonly
observed risks arose from the failure of institutions to fully
implement the protections states put in place to protect consumers'
access to the full amount of their government benefits, specifically
EIPs and unemployment insurance benefits. Some states prohibited
institutions from using EIPs or unemployment insurance benefits to
cover charged-off loan obligations, fees owed to the institutions, or
overdrawn account balances. Other states limited actions to garnish
government benefits to satisfy judgments, attachments, or levies for
third-party creditors.\17\ These State actions took a number of
different forms, including executive orders, emergency legislation,
court orders, and State attorney general guidance.
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\17\ The Coronavirus Response and Relief Supplemental
Appropriation Act of 2021 provides many consumers with a second
Economic Impact Payment. The legislation authorizing the payments
directs financial institutions to treat these EIPs as exempt from
garnishment orders.
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Many institutions sought to identify, analyze, and, as appropriate,
ensure compliance with State measures that imposed legal obligations on
the institutions. But based on the limited information obtained through
the PAs, examiners could not determine that all the institutions
identified and/or
[[Page 7279]]
analyzed compliance obligations under State laws with respect to
exercising setoff rights and/or garnishing government benefits. Failure
to properly identify, analyze, and, as applicable, comply with State
actions poses a risk that consumers might be deprived of the full use
of government benefits. Such a failure could, in turn, under certain
circumstances, constitute an act or practice that violates Federal
consumer financial law.
For those institutions that did waive setoff rights in response to
State actions discussed above or on their own initiative, other
consumer risks were identified. Institutions used a variety of methods
to waive setoff rights. These methods included refunding fees that
contributed to a consumer's account being overdrawn, permanently
forgiving overdrawn account balances, and issuing checks to consumers
with overdrawn accounts for the full amount of their EIPs or protected
unemployment insurance benefits. Institutions most frequently waived
setoff rights through the issuance of provisional credits in the amount
of the overdrawn account balances. These credits would then be revoked
at a later date, potentially leaving some consumers with a negative
account balance.
Waiver of setoff rights allowed consumers access to the full amount
of government benefits. At several institutions, examiners found risk
when the institutions failed to clearly communicate to consumers how
and when provisional credits would be revoked. This risk was
exacerbated if the institutions lacked a clear policy preventing
assessment of an overdraft fee when the revocation of provisional
credit resulted in a negative account balance. Consumer complaints
indicated confusion about the use and revocation of provisional
credits. Examiners also observed a risk with respect to policies and
procedures around the waiver or refund of account fees. In response to
COVID-19, some institutions expanded existing account fee waiver or
refund policies either through a blanket waiver or upon consumer
request. These institutions informed consumers of the changes on their
websites or via press releases. However, examiners observed a risk when
the institutions failed to implement policies and procedures that
clearly and consistently operationalized account fee waivers and
refunds.
3.8 Prepaid Accounts
Market Response to Consumers & Industry Challenges
Pandemic-related business closures led to millions of consumers
receiving State unemployment insurance benefits. For a period of time,
the CARES Act enhanced the amount of unemployment insurance benefits
that consumers received. Many States issue prepaid cards as a method
for disbursing unemployment insurance benefits. Aside from unemployment
insurance benefits, some consumers received EIPs on prepaid cards. As a
result, prepaid accounts experienced an unexpected spike in demand.
This rapid growth caused issues related to transaction and
maintenance fees, service availability, and continuity. The industry
encountered difficulty in fully staffing call centers to quickly answer
questions and resolve conflicts relating to the significant increase in
volume and number of prepaid accounts. Although depository institutions
issue prepaid accounts, they often contract with third-party service
providers to assist in managing the accounts. The compliance
infrastructure at these third parties is generally less mature, which
exacerbates the potential for consumer harm caused by unforeseen
changes in the prepaid marketplace.
Consumer Risk
Prepaid account issuers generally made changes to address staffing
challenges and operational difficulties caused by the COVID-19 pandemic
and the significant rise in volume and number of accounts. Nonetheless,
examiners highlighted a few key COVID-19 related risks with respect to
issuers of unemployment insurance benefit prepaid accounts.
Due to surge in demand, one institution lacked sufficient supply of
the required disclosures and privacy notices and, rather than delay
account access, mailed the prepaid account information to consumers
without the required disclosures and privacy notices. To mitigate the
lack of paper written disclosure, the institution included the address
of a website where consumers could review the information online. The
lack of paper disclosures presented a risk of harm as these consumers
did not receive disclosures that included the terms of use and privacy
notices as required by law.\18\ These required disclosures cover, among
other things, the fee schedule and error resolution rights associated
with the prepaid accounts. The institution addressed this issue by
subsequently mailing the required disclosures and privacy notices to
impacted consumers.
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\18\ Electronic Fund Transfer Act, 12 U.S.C. 1693 et seq.;
Regulation E, 12 CFR 1005.15(c)(1); Regulation P, 12 CFR part 1016.
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3.9 Small Business Lending
The Bureau has supervisory authority over large insured depository
institutions and insured credit unions, many of which have originated
PPP loans. Consistent with its authority to ensure compliance with the
Equal Credit Opportunity Act (ECOA), the Bureau conducted PAs to assess
potential fair lending risks attendant to the institutions'
participation in the program. Below are the supervisory observations
resulting from these PAs.
Market Response to Consumers & Industry Challenges
The COVID-19 pandemic had a swift and dramatic impact on small
businesses. Many small businesses were forced to shut down temporarily
or reduce operations in response to mandatory State and local stay-at-
home orders issued to reduce exposure to, and transmission of, COVID-
19. Small businesses also experienced a significant drop in demand for
goods and services and disruptions in their supply chains. Because of
these impacts, many small businesses experienced a sharp drop in
revenue and increased economic stress.
To address this problem, section 1102 of the CARES Act amended
section 7(a) of the Small Business Act, 15 U.S.C. 636(a), to create a
temporary small business lending program known as the PPP. Under the
PPP, small businesses could receive loans from private lender to cover
eligible payroll, costs, business mortgage payments and interest, rent,
and utilities for either an 8- or 24-week period after disbursement.
Each loan is fully guaranteed by the Small Business Administration
(SBA), which administers the PPP; small business borrowers do not have
to make any payments during the first six months of the loan term and
may receive a deferral up to one year; and small businesses may receive
complete or partial forgiveness of their loans if they use their loans
to cover certain expenses and meet other requirements. A wide range of
financial institutions were eligible to participate as lenders in the
PPP, including institutions that normally do not participate in the
SBA's
[[Page 7280]]
7(a) lending program.\19\ This includes federally insured depository
institutions, credit unions, and nonbanks.\20\
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\19\ The 7(a) loan program is the SBA's primary program for
providing financial assistance to small businesses. The program's
name comes from section 7(a) of the Small Business Act, 15 U.S.C.
636(a). The SBA offers several different types of loans through the
program.
\20\ Institutions that were not SBA-certified did have to apply
to the SBA and receive delegated authority to process PPP loan
applications.
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When the PPP opened on April 3, 2020, demand for PPP loans far
exceeded the initial $349 billion of funding for PPP loans and those
funds were exhausted in less than two weeks. Congress subsequently
provided another $310 billion (including $60 billion specifically to be
lent by smaller banks and credit unions), bringing the total funding
for the PPP to $659 billion. The second round of funding became
available on April 27, 2020 and was not exhausted. When the PPP closed
on August 8, 2020, $133 billion remained available.
While the PPP was active, Congress made additional funds available,
changed the term for new PPP loans, and revised other program
requirements. The SBA also issued numerous interim final rules related
to the program and lenders. PPP lenders were responsible for ensuring
that their participation in the PPP complied not only with the CARES
Act and SBA rules, but also with other applicable laws, including ECOA.
Fair Lending Risk
Examiners' review of small business lenders' PA responses
identified certain issues that may pose fair lending risks.
In implementing the PPP, multiple lenders adopted a policy that
restricted access to PPP loans beyond the eligibility requirements of
the CARES Act and rules and orders issued by the SBA (an ``overlay'').
Specifically, several small business lenders restricted access by
limiting eligibility for PPP loans to existing customers (an ``existing
customer overlay''). The Bureau's PA work in this area revealed that
the existing customer overlay fell into two general categories:
(1) Restrictive policies that allowed only small businesses with a
pre-existing relationship (or certain type of pre-existing
relationship) with the institution the opportunity to apply for a PPP
loan; and
(2) less restrictive policies that required small businesses
without a pre-existing relationship to first become customers of the
financial institution (usually by opening a business deposit account)
and then apply for a PPP loan.
Examiners determined that an overlay restricting access to PPP
loans for small businesses that do not have an existing relationship
with the institution, while neutral on its face, may have a
disproportionate negative impact on a prohibited basis and run a risk
of violating the ECOA and Regulation B. The small business lenders
provided business justifications for their use of existing customer
overlays, with the majority of institutions noting that they adopted
such overlays because of Know Your Customer legal requirements, the
prevention of fraud, or both. Several institutions also offered other,
operational reasons for adopting this overlay, including managing
extreme demand and enabling the institution to process as many
applications as possible before funds were depleted. Examiners noted
the challenges faced by small business lenders in implementing the PPP
during a nationwide emergency and found that the institutions' stated
reasons for adopting their overlays reflected legitimate business needs
during part or all of the review period. Examiners did not, however,
conduct a full analysis of any institution's overlay, and did not make
any determination about whether an institution's use of the overlay
complies with ECOA or Regulation B. Examiners encouraged the small
business lenders to consider the fair lending risks associated with
participation in the PPP, in further implementation of the PPP, and in
any new lending program and to evaluate and address any risks.
4. Conclusion
The Bureau is committed to being as transparent as possible about
its supervisory findings and will continue to publish Supervisory
Highlights to aid Bureau-supervised entities in their efforts to comply
with Federal consumer financial law. While the Bureau's PA reviews are
substantially complete, in some instances, examiners identified issues
that require follow up. The Bureau will follow-up on risks identified
during PAs in the course of its regular supervisory work and findings
may be shared in future editions of Supervisory Highlights.
5. Signing Authority
The Director of the Bureau, Kathleen L. Kraninger, having reviewed
and approved this document, is delegating the authority to
electronically sign this document to Grace Feola, a Bureau Federal
Register Liaison, for purposes of publication in the Federal Register.
Dated: January 19, 2021.
Grace Feola,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2021-01601 Filed 1-26-21; 8:45 am]
BILLING CODE 4810-AM-P