Several banking practices recently have caused regulatory governing bodies like the Consumer Financial Protection Bureau to step in and take action. These troubling events have occurred throughout banking, including mortgage lending, student lending, debt collection, and sales incentive practices. So, it would be prudent for all financial institution to take a step back and re-evaluate their compliance practices and procedures to mitigate risks. Bank management must remain focused and nimble; especially in light of the uncertainty in the compliance landscape requiring flexible and focused management.
In October, CFPB Director Richard Cordray announced that the bureau will continue its efforts to enforce fair mortgage lending practices through further simplification of the Know Before You Owe disclosures that were rolled out last year. He also announced the implementation of reviews on company compliance management systems that will include transaction testing at the loan level. Cordray stressed those reviews will seek to be diagnostic and corrective rather than punitive.
The CFPB Ombudsman’s Office released an October 2016 report showing student loan borrowers could be driven back into default due to gaps between student loan programs. The report included recommendations to policymakers to simplify the path from default to affordable payment plans, and to provide support for vulnerable borrowers. The CFPB has not made any official policy changes to date, but it will likely dive deeper into the issue in the near future.
Consumer complaints regarding collection practices resulted in victim repayment and penalty fines exceeding $28 million for one prominent credit union — the first time a credit union was fined by the CFPB. Aside from financial penalties, the credit union must make corrective actions to change policies for debt collection communication, as well as changes to allow account access throughout the collection process. This fine came shortly after sales incentive practices were already in the headlines for the largest enforcement action ever made by the CFPB, fining a bank in excess of $100 million for the creation of fraudulent accounts, including credit cards, and activity on those accounts to generate incentives for sales teams.
What does all of this regulation mean for credit unions and other financial institutions?
Financial institutions have to work harder than ever to earn and keep the trust of their members. FICO reported in 2016 that millennials are two times more likely this year than last year to close all accounts and switch banks. In addition, Facebook reported that only 8% of millennials trust their financial institution. Managing compliance factors that affect the security and functionality of members’ products will be an important step in retaining members.
Financial institutions also will face challenges to bring innovation to consumers while still managing compliance effectively. Younger consumers want their banks to know and understand them in order to retain them. NGDATA reported that more than 50% of U.S. consumers ages 18-34 would be happier if their banks understood them better, compared with just 27% of those 35 or older. To know and understand consumers requires data and the ability to offer products and programs that fit their wants and needs, see Elan’s featured paper about Big Data. Less than 30% of consumers believe their bank is customizing offers to their individual needs.
Political pressure to end abusive practices continues to mount. New York Gov. Andrew M. Cuomo put state-chartered banks and credit unions on official notice to ensure employee incentive arrangements do not produce another fraud event. In addition to the political and regulatory pressure to end any aggressive practices, if malfeasance is uncovered, reputational risk remains significant and costly to repair.
Regulatory and consumer pressure continues to move the industry to a more transparent banking environment. The Know Before You Owe mortgage disclosure rule replaces four disclosure forms with two new ones, the Loan Estimate and the Closing Disclosure. The new forms are easier to understand and use for the consumer. The rule also requires that members have three business days to review their Closing Disclosure and ask questions before they close on a mortgage. The Know Before You Owe disclosures will continue to be updated to encourage more clear communication regarding the terms of various financial products.
Today, multiple regulatory agencies oversee the financial industry with a growing number of whistleblower programs. The growing competency in both internal and external audits show certainty that regulators’ efforts will continue.
The recent election and appeals of the federal courts decision to overturn the CFPB organization structure will all impact the current state of compliance management. In the short term, the CFPB continues to release new policies and enforcement actions compelling the financial industry to stay diligent and prepared.
For nearly 50 years, Elan has delivered a best-in-class credit card program, card products and exceptional service to its valued credit union partners. Today, Elan helps over 250 credit unions navigate the rapidly changing card issuance landscape. Year after year, our partners remain pleased with the Elan solution, as Elan has seen a more than 96 percent renewal rate.
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