July 2017 Newsletters
by Dimitris Rousseas, Deputy General Counsel
As of July 1, 2017, credit bureaus have stopped reporting on tax liens (for unpaid state or federal taxes) and civil judgments (which can arise out of a lawsuit), when there is no social security number or birthdate associated with the record. The rule is retroactive; new judgements won’t be reported and old judgements will be scrubbed clean.
Great news for the 5 to 7 percent of Americans with a tax lien or civil judgment — as of July 1, your credit score just got better. Bad news for all you bankers out there — the credit report is no longer going to show tax liens or civil judgements.
Nearly every loan officer relies on a credit report to verify the debts of an applicant and determine the quality of the credit. Now that civil judgments and tax liens are falling off the credit report, bankers are going to have to rely on the honesty of the applicant to include it on their application. I would venture to guess that at least a handful of applicants with a civil judgment or tax lien are unscrupulous or desperate enough for credit and omit the fact on their application. Banks should be on higher alert, especially in the first few months of the change.
The change will cause some heartburn for credit departments who can no longer rely on credit reports to give a full picture of an applicant’s outstanding debts. There are, however, other ways to get this information. The more tedious way is to search the online state and county records for a match. Most states have a free search of civil judgement, while others have a fee. Creditors would be wise to at least search the state in which the borrower lives or had previously lived in the last few years, which is where a judgement or a tax lien is likely to be for a borrower. It would be difficult or even cost prohibitive to check every state on your own, but there are third party services that can help.
This isn’t a new regulation but it nevertheless puts an additional burden on banks. Specifically, this creates more uncertainty in an applicant’s risk profile which in turn is going to put pressure on pricing. We may see the cost of credit go up marginally due to the elevated risk. This hurts good borrowers without judgements on their record.
The impact is going to be most significant for the marginal borrower. Some estimate a bump of possibly 40 points or more for removing a judgement, but the average is estimated at about a 10-point bump for affected applicants. Extra due diligence would then be advisable for applicants just over your minimum threshold.
To better serve our members, C/A has a banking compliance toolkit built expressly around the Fair Credit Reporting Act — find it here.
As always, please refer to Compliance Alliance’s website for other other helpful banking compliance toolkits, templates and tips.
In addition, members can register here for the upcoming online monthly huddle where compliance professionals meet to discuss all kinds of hot-button compliance topics together in an open moderated forum. This is scheduled for Wednesday, August 9th, 2017, at 2:30 CST.
By Victoria E. Stephen, Associate General Counsel
On June 15, 2017, the Consumer Financial Protection Bureau (CFPB) announced that it was proposing a laundry list of amendments to the Prepaid Accounts Final Rule, which was originally published in November of 2016.
This is the second round of changes to the Rule by the way. If you recall the amended rule was issued this past April, while the effective date of the original Final Rule was extended from October 1, 2017 to April 1, 2018.
While we’re on the topic, the new Proposal addresses additional requests to extend the effective date of the Rule by even longer than six months. While the CFPB does not directly propose an extension, it is asking for comment on whether a further delay is necessary and/or appropriate. The amendment will also change the term “effective date” to “compliance date” when referring to October 1, 2018 to clarify that although general compliance with the Rule was delayed, the requirement to submit agreements to the CFPB by October 1, 2018 has not changed.
The meat of the Proposal would amend Regulation E’s error resolution and limited liability requirements so that they would not extend to prepaid accounts that have not successfully completed the consumer identification and verification process. Examples of accounts that would fall within this exemption are those that have not yet concluded the process; those that have concluded the process but the consumer’s identity could not be verified; and those for which there is no such process at all. If the consumer’s identity is later verified, however, the Bank would be required to resolve errors and limit liability of disputed transactions that occurred before verification.
The Proposal also creates a limited exception designed to address certain complications that came up in applying the section on linked credit card accounts to digital wallets. This type of account would still receive general Regulation Z protections, but the hybrid prepaid credit card provisions of the Final Rule would not apply. Specifically, the definition of “business partner” would no longer include business arrangements between prepaid account issuers and issuers of traditional credit cards if certain conditions are met. Some of these are:
- The exception would only apply to traditional credit card accounts linked to prepaid accounts.
- Parties could not allow the prepaid card to access the credit card account unless the consumer submits a written request to authorize linking the two accounts.
- The written request has to be separately signed or initialized.
- The Bank cannot require the written request as a condition to acquiring or retaining either of the accounts.
The Proposal makes a number of other limited changes, including exceptions for delivery of pre-acquisition disclosures and clarifying the exclusion for certain loyalty, award, and promotional gift cards.
Finally, the Bureau also released an updated Small Entity Compliance Guide reflecting some of these changes. The deadline to submit comments on the Proposal is August 14, 2017, so there’s still plenty of time to do so if the bank is interested.
As always, please refer to Compliance Alliance’s website for other helpful training, templates and tips.
by Silvia Garcia Maggio, CRCM, Associate General Counsel
We often get questions on the Compliance Alliance hotline related to debt collection and there’s a lot of confusion surrounding what’s actually required of banks in relation to the Fair Debt Collection Practices Act. The FDCPA has a number of prohibitions against certain types of communications, notification and identifying requirements, and rules about verifying debts. Sometimes, the consumer, through a credit repair company or otherwise, will initiate a FDCPA request and the bank is unaware of what is really being asked for, and whether it’s a valid request. For banks, the most paramount part of understanding the FDCPA is understanding the scope of the rule and how it applies to them.
The scope of the FDCPA, as it may apply to banks, is actually found in the definitions sections. It’s actually the definition of “Debt Collector” that eliminates many community banks from the auspices of the rule. The definition of debt collector only includes third-party debt collectors – parties that collect debts for creditors for payment. Therefore, a bank attempting to collect on a delinquent loan they own wouldn’t fall under this requirement at all. That doesn’t mean that a bank that collects its own debt doesn’t have any debt collection rules to follow though. Many state laws track with the FDCPA but have a wider scope. Additionally, the UDAAP guidance also has rules related to misleading, deceiving or abusing consumers in relation to banking in general, including debt collection.
If, however, within the scope of their services, the bank does fall under the FDCPA as a debt collector, there are a number of collection rules that must be followed. The basic premise of the rule is that the bank cannot harass, abuse, mislead or treat the consumer unfairly. The FDCPA has specific actions that would fall under those terms. In addition, the rule lays out a list of prohibited communications. For example, a debt collector cannot call at strange hours which means before 8 am or after 9 pm. However, that’s not based on where the bank is – it’s based on local time of the consumer. So if the call center is in California, they can’t call a consumer at 9 p.m. local time if the consumer lives in New York. There are also obvious prohibitions like, not contacting a consumer directly when they are represented by an attorney, not contacting the consumer at work where the employer forbids it, and getting a court’s permission to contact third parties when there’s a formal collection judgment.
The section on harassment and abuse lays out examples of things that would be considered abusive or harassing. For example, debt collectors threatening harm to the consumer, a third party, the consumer’s reputation or property. It also prohibits using profanity and calling excessively (or even allowing the phone to ring excessively). In addition, a debt collector cannot publish a list of debtors nor advertise the sale of a debt in order to try to shame the debtor. This prohibition extends to social media, as well. Of course, the debt can still be reported to a credit reporting agency, but the spirit of the rule is looking at public disclosure of debt in order to harangue the debtor into paying.
The section on false or misleading representations prohibits actions like pretending to be affiliated with the government (state or Federal) and mischaracterizing the amount of debt or its legal status or who the debt collector is. For example, a debt collector can’t imply that they are an attorney or use a fake name. In addition, a debt collector can’t imply that the debtor will be arrested or take some action that would be prohibited by law. They also can’t threaten the consumer about actions that the creditor could lawfully take but has no intention to do so. Thus, a collector must inform the consumer that they are a debt collector and that any information they take will be for the purpose of collecting the debt. In addition, there is a section on unfair and unconscionable practices that also prohibits collecting any other amounts other than what is owed, threatening to repossess collateral if that’s not intended and calling collect. Another requirement prohibits using post cards and putting anything on an envelope that would indicate that the sender is a debt collector. Again, this is a requirement tied to not publicly disclosing that a consumer may owe a debt.
One of the more misunderstood sections relates to having to give a notice with basic information about the debt (amount, name of creditor, etc.) This provision allows consumers to review the debt, dispute the debt and get verification that the debt actually exists. This sometimes comes up with credit repair services sending letters to any creditor requiring FDCPA validation of debt but again, the FDCPA does not apply to creditors collecting their own debt. As noted above, there may be state law that requires similar items, including validation of debt but requests specifically related to the FDCPA wouldn’t be valid requests for a non-FDCPA “debt collector”.
Another major FDCPA consideration is the ramifications of not complying with the requirements. First, the FDCPA can trigger civil liability of actual damages. Additionally, the debt collector can be charged attorney fees and statutory damages up to $1,000 per person. For a class action suit, the damages can be as much as $500,000 or 1% of the net worth of the debt collector. Besides the monetary issues, actions that are listed as FDCPA prohibitions could easily also be UDAAP violations, state law violations and cause substantial injury to the collector’s reputation in the eyes of the surrounding community and general public for debt collector banks and banks that aren’t subject to the FDCPA. Therefore, it would be best practice to ensure that all banks are aware of the requirements of the FDCPA and that their policies prohibits they type of activity that would be considered harassment, abuse, unfair, unconscionable and misleading, and in general, lead to poor business practices.
To better serve our members, C/A has a banking compliance toolkit expressly for Fair Debt Collection Practices Act here.
As always, please refer to Compliance Alliance’s website for other other helpful banking compliance toolkits, templates and tips, as well as to register for the upcoming compliance training webinar on Fair Debt Collection Practices Actthis week on Wednesday, July 20th, 2017.