Short-term, small-dollar financial services organizations, such as payday lenders, installment loan lenders, and car title lenders are in the wake of burgeoning oversight from the Consumer Financial Protection Bureau (CFPB). Lenders in these industries must shift their attention to potential risks involving all operational aspects of a loan cycle. Lenders are required to be proactive in mitigating misrepresentations and other misconduct by developing comprehensive governance, risk, and compliance controls. The CFPB requires lenders to maintain a Compliance Management System (CMS) to ensure adherence with regulations related to marketing and advertising; application and origination processes; payment, refinancing, and sustained use; debt collection; consumer reporting procedures; consumer complaints management, and all other processes related to third-party suppliers.
The Rising Importance of Governance and Risk Controls in Small-Dollar Lending
An effective compliance program meeting CFPB regulations requires strong governance, risk controls, written policies, monitoring, auditing, and an active compliance committee. Small-dollar financial services firms must recognize the importance of compliance management systems when conducting lending activities. Federal and state regulators have increased enforcement actions against small-dollar lenders in recent years, making compliance more critical than ever. Increased regulatory scrutiny raises the risk of financial penalties and lasting reputational damage. The CFPB remains cautious toward payday, installment, and car title lending practices. Lenders using these models must proactively align their compliance systems with CFPB expectations. Regulatory concern stems from abusive interest rates, frequent rollovers, misleading disclosures, and unlawful consumer targeting. To prevent these outcomes, lenders must commit to meaningful regulatory compliance. Lenders should evaluate operations against the intent of consumer financial protection laws to ensure fair lending practices.
CFPB REGULATIONS AND BEST PRACTICES FOR PAYDAY AND INSTALLMENT LENDERS
Assessing internal operations against CFPB regulations requires ongoing effort from internal and external professionals to ensure full regulatory compliance. Organizations often rely on internal resources and external compliance advisors to meet CFPB requirements. Most consumer financial laws apply broadly to short-term small-dollar products, including payday, installment, and car title loans.
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The Truth in Lending Act (TILA)
requires lenders to disclose all material terms of a financial engagement. Including but not limited to interest rates, payment schedules, conditions, and other account summary information needed to properly process, maintain, and record accurate balances and the like.
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The Electronic Fund Transfer Act (EFTA)
protects consumers from compulsory conditions requiring authorization of loan repayment through a recurring electronic payment medium.
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The Fair Debt Collection Practices Act (FDCPA)
oversees debt collection practices managed by third-party agencies that either purchase debt directly from a lender or collects past due debt on a lender’s behalf.
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The Fair Credit Reporting Act
governs all credit reporting practices relative to lenders that gather and furnish information to consumer credit reporting agencies or bureaus.
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The Gramm-Leach-Bliley Act
prevents financial institutions from sharing and disclosing nonpublic personal financial information with third parties without consent. Further, it requires financial organizations to disclose and maintain prudent privacy policies.
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The Equal Credit Opportunity Act (ECOA)
sets forth fair lending controls to prevent financial institutions from discriminatory lending practices on the basis of race, color, religion, national origin, sex, or marital status or age.
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unfair, deceptive, or abusive acts or practices (UDAAPs)
as measures to assess the spirit of companies’ actions and conduct in relation to operational controls such as marketing and advertising practices, debt collection, obscure contractual terms, and various other misconduct lenders have with their consumers.
The foregoing regulations are pertinent considerations that small dollar lenders must consider in establishing a CMS that is compliant with the CFPB landscape. CFPB compliance and readiness requires routine monitoring of these key subject areas against operational efficiencies, controls and risks. Companies that fail to properly address CFPB compliance considerations run the risk of penalties and expensive fines. This is especially concerning for the short-term, small-dollar lending industry. As mentioned previously, small dollar lending is an unconventional lending channel targeting consumers with cash flow shortages.
Although these financial products may assist many consumers, the CFPB still perceives such lending activities as predatory if other characteristics exists when originating these loans. Small dollar lenders must begin to embrace the reality of their industry from the CFPB’s perspective. Although state agencies regulate small-dollar lenders annually or biannually, the CFPB has generally refrained from aggressively pursuing small-dollar loan products. This, however, has changed drastically. Recent shifts in advisory opinions, court cases, and the overarching perception of small dollar lending require financial institutions to develop compliance controls to mitigate serious regulatory compliance risks.
IMPLEMENTING CFPB READINESS REVIEWS AND INDEPENDENT RISK ASSESSMENTS
Small-dollar lenders are faced with the daunting task of ensuring business practices adhere with the regulatory landscape. Regulatory requirements are generally challenging due to swings in enforcement, the inconsistency of regulatory interpretations and advisory opinions, and the complexity of companies’ lines of business, product offerings, and general operations. Furthermore, small-dollar lenders are often ill-equipped to manage legal and compliance concerns due to a lack of proper resources such as trained compliance professionals, inefficient auditing tools, outdated policies and procedures, and a host of related matters. These considerations are areas of exposure and could lead to a company succumbing to a compliance violation.
To mitigate noncompliance, organizations must ensure implementation and upkeep of an effective CMS under the CFPB. This generally includes having trained staff and a compliance officer, maintaining comprehensive compliance policies and procedures, conducting periodic trainings for staff, sustaining a vendor management program, and performing risk analyses by evaluating operational practices against regulations and presiding best business practices.
The most efficient way to ensure compliance with CFPB regulations is to implement routine internal audit procedures by having an external firm, consultant, or team of professionals facilitate a comprehensive CFPB readiness review. A CFPB readiness review provides insights into the CFPB’s internal examination process. A prudent consultancy, such as Riddle Compliance, designs CFPB readiness reviews in a manner aligned with actual examination criteria and best practices. Formal examinations, personnel interviews, record sampling, and performance assessments are all a part of Riddle Compliance’s CFPB readiness process. CFPB reprimands can result in monetary fines, potential monitorships, consumer distrust, and general damage to organizations’ reputations. A CFPB readiness evaluation is a necessary component of a compliance program, and it provides actionable data and qualitative findings to assist executive leadership in developing strategic initiatives to adhere with the regulatory landscape.
Components of CFPB readiness review
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 A risk assessment against CFPB examination manuals, press releases, and advisory opinions
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An assessment of an organization’s policies, procedures, and business processes
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A review of corporate training materials against regulatory requirements
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A governance effectiveness review to assess board and management oversight
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An assessment of monitoring activities, collection practices, and historical audits
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An advertising and marketing review
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An assessment of privacy controls and internal resources
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An evaluation of supplier management controls
A CFPB exam consumes a lot of time and effort as it requires the coordination of various departments within an organization. In addition, a substantial amount of information and documentation is required for a comprehensive discussion with CFPB examiners. Riddle Compliance’s mock CFPB audit focuses on companies’ technical compliance with consumer financial laws to foster readiness against the regulatory landscape in the event of a formal CFPB exam. Riddle Compliance designs its readiness audits to assist companies in assessing their ability to self-identify and self-correct compliance risks and violations. When a company is capable of monitoring and accounting for potential risks, this puts it in a strong position to handle a potential CFPB examination and ancillary marketplace scrutiny.
Incorporating both routine targeted audits and comprehensive reviews is a critical component of maintaining an effective CMS. The CFPB encourages adoption of practices and audit controls that fit the size and complexity of specific organizations. Small-dollar lenders should understand that adherence does not require implementing compliance programs that rival larger or more complex companies’ compliance management systems. Riddle Compliance offers a host of consulting services and outsourced solutions to assist companies in establishing effective practices.
WHAT HAPPENS IF MY COMPANY IS CONTACTED BY THE CFPB FOR EXAMINATION?
The CFPB generally facilitates examinations based on pattens of consumer abuse and/or deception, an organization’s poor reputation, or at random based on new regulatory objectives, initiatives, or developments within a specific industry. Although the CFPB may examine any organization regulated under its enforcement authority, organizations that have experienced rapid growth and/or a high-volume of consumer inquiries are at an increased risk of examination due to potential regulatory oversights. Small-dollar financial institutions that provide installment, payday, car title loans are also heavily scrutinized due to the nature of the financial products they offer, and the potential harm said products can cause to consumers.
Should the CFPB contact an organization, notice is provided to allow said organization to prepare for the underlying examination. An examination generally includes a thorough review of all policies and procedures; previous audit findings; origination, underwriting, and debt collection practices; an examination of marketing and advertising controls; an evaluation of third-party suppliers; and a deep analysis of ancillary practices associated with privacy, fair lending, and other best business practices. Having poor compliance controls discovered during a CFPB examination could lead to serious enforcement action and a potential administrative proceeding.
Although it is impossible to determine when or if an organization will be examined by the CFPB, prudent companies allocate sufficient resources to properly address the myriad of CFPB regulations. A CFPB readiness assessment or CFPB mock examination should be considered at least every two years to ensure compliance. Notwithstanding this notion, additional practices and controls should be a part of an organization’s CMS to foster compliance on an ongoing basis.
THE BOTTOM LINE: COMPLIANCE CONSULTING FOR SMALL-DOLLAR LENDERS
Small-dollar lenders must begin to embrace compliance violations as real threats to their reputation and bottom-line profits. Failing to invest into implementing efficient compliance controls is a mistake. The CFPB has been increasingly more critical of lenders that offer unconventional financial products. Compliance is here to stay, and it is evolving. Â The regulatory environment has become even more complex with technology, cybersecurity and privacy matters, and the ongoing development of unique financial devices and products. The culmination of developments has increased regulatory scrutiny for all financial services organizations, including short-term small-dollar lenders.
Riddle Compliance can assist your organizations in several ways, including but not limited to CFPB readiness reviews, compliance program assessments, corporate training and education, outsourced compliance support and compliance officer solutions, as well as customized compliance consulting services.
