Unpacking Junk Fees – Steps to Take Now
In early March, the Consumer Financial Protection Bureau (CFPB) issued a Supervisory Highlights Junk Fees Special Edition. The CFPB and their scrutiny of "junk fees" comes as no surprise as they have signaled a heightened focus on these fees by launching an initiative aimed at savings consumers billions of dollars a year by reducing these types of fees charged by financial institutions.
The March report identified several areas of focus including: Deposits, Auto Servicing, Mortgage Servicing, Payday and Small-Dollar Lending, and Student Loan Servicing. This discussion will focus on those areas most common to credit unions - deposits, auto, and mortgage lending. Credit unions can use these insights to review internal policies and practices and weigh the potential compliance risks.
The report outlined several concerns related to deposits with unfair authorize positive, settle negative (APSN) overdraft fees as well as multiple NSF fees charged for the same transaction being two of the most common. These practices can potentially trigger UDAAP violations. By way of review, UDAAP may be violated according to a three point test: 1) an act or practice causes or is likely to cause substantial injury to consumers; 2) the injury is not reasonably avoidable; and 3) the injury is not outweighed by countervailing benefits. This is the criteria credit unions must use as they think through their policies on charging fees.
Here is an example that illustrates when the concern regarding APSN may come into play with your members. A member of the credit union uses their debit card to purchase their morning latte at their favorite local coffee house. At the time, the transaction is authorized based on a positive account balance. Later that morning, another transaction settles the account before the coffee house processes the latte transaction and this brings the account negative. Therefore the latte purchase settles on a negative account and the credit union issues an NSF fee on the member.
The CFPB determined that financial institutions engaged in unfair acts or practices by charging consumers multiple NSF fees when the same transaction was presented multiple times for payment against an insufficient balance in the consumer's account, potentially as soon as the next day. Applying the UDAAP guidelines above the consumer could not reasonably avoid the injury of such a practice and the injury was not outweighed by countervailing benefits.
Auto Loan Servicing
The CFPB noted areas of concern in several aspects of auto loan servicing including overcharging of late fees for late payments, charging unauthorized late fees after loan acceleration or repossession, charging excessive fees for repossession, and charging unexpected fees for making payments.
Understanding the contracts between the Credit Union and your member is critical. Loan contracts often contain caps on the amount of late fees that can be charged, such as no more than 5% of the payment amount. In some cases, examiners found that servicers were coding their systems to charge $25, regardless of what the contract stated. While loan contracts allow servicers to charge late fees, this may change once the loan balance has been accelerated or collateral repossessed and some servicers have continued to charge fees in those situations. When repossessing vehicles, some servicers have charged consumers fees that were significantly higher than the true cost of the service. Other servicers charged a fee for consumers to make their payments using the most common payment methods . Was the consumer able to avoid these fees? No. Were these UDAAP violations according to the CFPB? Yes. Reviewing current loan contracts, internal procedures and lending policies can help ensure your organization is complying with regulations, as well as the terms of your loan contracts.
Much like auto loan servicers, mortgage servicers took advantage of consumers when it came to charging late fees, charging more than what the mortgage loan contract allowed. Mortgage investors generally require servicers to perform property inspection visits for accounts that reach a specified level of delinquency. Servicers are generally required to complete those property inspections on a monthly basis and often satisfy that requirement by hiring a third party that sends an agent to physically locate and view the property. The servicers pass along the cost of the property inspection to the consumer, with fees ranging from $10 to $50. These mortgage servicers not only charged a fee for unnecessary inspections but knowingly hired inspectors that reported the addresses were incorrect, which still resulted in a fee for the consumer.
Other servicing nightmares included consumers being billed directly for Private Mortgage Insurance (PMI) when the lender was responsible for these payments and continuing to charge for PMI after it should have been removed. Other consumers were charged fees that should have been waived due to the CARES Act. While credit unions may partner with third parties for mortgage originations and servicing, these examples show the importance of ongoing vendor due diligence. As a reminder compliance cannot be outsourced! Credit unions are still ultimately responsible for any vendors with whom they engage.
Several themes emerged in this report: 1) overall weakness in policies related to charging fees; 2) processes that did not match the terms of loan contracts; and 3) a clear lack of vendor oversight for outsourced functions, such as loan servicing. There are several prudent steps credit unions can take now.
- Don't wait to ensure your policies are up to date. Most leagues/associations provide affiliated members with access to CU PolicyPro, a platform that contains hundreds of model policies.
- Review your vendor management program and conduct additional due diligence on your key vendor partners. Consider if these vendors still align with your credit union's values and policies.
- Conduct reviews of your lending operations including loan file level reviews.
- Consider a compliance monitoring platform like ComplySight, to assist with tracking your regulatory compliance.
What is the call to action? CU Risk Intelligence has products and services that you need to assess your current level of compliance and risk. We offer both a self-assessment tool and a full customizable independent compliance review service for key operational areas as well as a vendor management platform that can assist with vendor reviews.
Contact us at Info@CURiskIntelligence.com to learn more about resources to help with vendor management, operational compliance reviews, and internal lending audits.
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