REGular Blog: What We Can Learn from the Fed's Consumer Compliance Outlook

The Federal Reserve recently published its quarterly issue of the Consumer Compliance Outlook. This publication generally focuses on what the Federal Reserve is identifying in the review of banks under their purview. This offers us an opportunity to see some trends (regulatory agencies tend to focus on similar things) and gain expertise on how we can jumpstart and improve our processes and avoid similar violations.

Issue 4 focused on the top violations in 2022 for Regulation E Error Resolution Requirements, Regulation X Escrow Account Requirements, Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA). Do you see a trend here?

Below are some highlights from the articles. Note that the “common issues” identified by the Federal Reserve for the violations identified across the board were generally inadequate training, controls, and procedures.

FCRA and ECOA Violations

• Adverse Action Notices. It was identified that financial institutions were not providing notices when required, not including the range of credit scores utilized, and not including required FCRA disclosures. Examiners also cited financial institutions for failing to provide notices in a timely manner (within 30 days of receiving a complete credit application). Procedures should identify when an application is considered “complete.”
• Spousal Signatures. Financial institutions cited were requiring individual creditworthy applicants to obtain the signature of their spouse or another person as a condition of their loan. With state law implications and certain exceptions, procedures need to be in place with proper controls to avoid violations.
• Copies of Appraisals and Required Disclosures. Examiners cited financial institutions for not appropriately providing applicants copies of appraisals or valuations on first-lien mortgage applications. Financial institutions also failed to mail or deliver notice in writing of the applicants right to receive a copy of appraisal/valuations, no later than the third business day after the creditor receives an application.

Regulation E and Escrow Requirements

• Investigating Errors. Financial institutions were not promptly conducting error resolution investigations after being notified by consumers. Issues were also identified with staff not recognizing when consumers were making error resolution claims, initiating investigations, and not correctly identifying disputed transactions.
• Provisional Credit. Financial institutions were not providing provisional credit for the amount of the alleged error within 10 business days of receiving an error notice when the financial institution was not able to complete the investigation within 10 business days and took up to 45 days to investigate. Also identified was failure to provide full access to use of the provisionally credited funds during the investigation.
• Investigations. Examiners identified financial institutions not conducting adequate investigation of error claims. When the alleged error is an unauthorized EFT, the burden of proof is on the financial institution to establish the transaction was not authorized. A consumer’s claim cannot be denied without conducting a reasonable investigation under the Regulation.
• Escrow analysis. Examiners found that the initial and annual escrow analyses were inaccurately computed and disclosed. Incorrect system settings and payment amount issues typically caused the errors identified.
• Annual Escrow Analysis. Financial institutions were conducting annual escrow account analyses beyond the 12-month computation year, without issuing short-year statements as required.

This issue also identifies “sound compliance practices” for financial institutions to consider. It should be no surprise that some of those practices include board and management oversight and increasing oversight of third parties, internal controls, consumer complaints, training, audits, and policy/procedure management.