WASHINGTON—The Federal Reserve has published a Consumer Compliance Supervision Bulletin, which provides high-level summaries of a variety of compliance issues the agency has observed in its supervised entities.
The two key focuses of the bulletin are fair lending risks and Unfair, or Deceptive Acts of Practices (UDAP), important areas of concern for credit unions, CUNA explained.
Fair lending topics include:
- Redlining: According to the Bulletin, institutions should conduct a redlining review to properly mitigate risk, which includes assessing:
- Whether the CRA assessment area excludes minority census tracts
- Whether the lending record shows significant disparities
- Whether the branching strategy excludes minorities
- Whether the marketing and outreach strategy excludes minorities
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A review of complaints to determine whether the institution treats certain geographies differently on a prohibited basis
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Mortgage target pricing: Fair lending risks can arise if the institution has several mortgage loan originators with different target prices, and the mortgage loan originators with the higher target prices tend to serve minority areas, the Bulletin explained.
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Small dollar loans: Fair lending issues can arise from lack of clear pricing criteria, such as lack of rate sheets or other pricing guidelines, broad pricing discretion at the loan officer level, lack of clear documentation of reasons for pricing decisions and lack of monitoring for potential pricing disparities.
- Discrimination based on disability income or pregnancy: Some banks have required applicants receiving Social Security Disability Income to demonstrate income stability by submitting a doctor’s letter describing the nature of the disability and whether it is expected to continue for at least three years. However, Fannie Mae, Freddie Mac, and HUD’s Federal Housing Administration do not.
UDAP topics include:
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Student Financial Products and Services: Several violations of Section 5 of the Federal Trade Commission Act (which prohibits UDAP) were observed when banks, sometimes through third parties, entered into agreements with post-secondary schools to provide student deposit accounts, debit and pre-paid card services as methods for disbursing financial aid refunds.
- Overdrafts: Overdrafts can present an elevated UDAP risk. UDAP violations and risks have been identified when a bank makes misleading omissions or representations concerning its overdraft program. In addition, unfair or deceptive practices have arisen in connection with the use of third-party vendor software to process overdraft transactions and assess overdraft fees, the Bulletin noted.
- Loan officer misrepresentations: Loan officers have made misrepresentations that consumers would qualify for certain mortgage loan programs notwithstanding prior bankruptcies or short sales that subsequently prevented them from qualifying. Consumers have in some cases relied on loan officer misrepresentations to their detriment, and banks have been required to pay restitution as a result, the Bulletin noted.