When a big bank gets hit with a big penalty I often find that community banks think it is a “big bank thing” that does not impact community banks. Big banks make the same mistakes as community banks but they do it on a bigger scale.

The recent settlement between the Consumer Financial Protection Bureau (CFPB) and USAA Federal Savings Bank (USAA) is a good case in point. The CFPB found that USAA:

• Violated the Electronic Fund Transfer Act and Regulation E by:
• Failing to properly honor consumers’ stop payment requests on preauthorized electronic fund transfers; and
• Failing to initiate and complete reasonable error resolution investigations.
• Violated the Consumer Financial Protection Act of 2010 by reopening deposit accounts consumers had previously closed without seeking prior authorization or providing adequate notice.

This is not a “big bank thing,”, any bank of any size could make the same mistakes. Instead of dismissing the issues, learn the lesson that is available to be learned.

Under the terms of the Consent Order, USAA must pay:

• Approximately $12,000,000 in restitution to certain consumers who were denied a reasonable error resolution investigation;
• A $3,500,000 civil money penalty.

Those are big bank numbers. Drop a few zeros and you can catch a glimpse of what a smaller bank might have to pay.

Stop Payment Orders

• USAA failed to enter stop payment orders after account holders notified the Bank of their desire to stop payment on Preauthorized EFTs, including by refusing to enter stop payments or by requiring consumers to contact the merchants initiating the EFTs as a prerequisite to implementing stop payment orders. This action was found to be in violation of section 907(e) of EFTA and section 1005.10(c) of Regulation E.
• USAA did not consistently honor oral stop payment requests for 14 days. Under EFTA and Regulation E, an oral stop payment request for a Preauthorized EFT is binding on the institution for 14 days. Failure to honor such oral stop payment requests violated section 907(a) of EFTA and section 1005.10(c)(2) of Regulation E.

Corrective action regarding stop payment orders includes:

• When communicating with consumers who express concern about future EFTs, even if they do not expressly indicate a desire to enter a stop payment, inform them of their right to enter a one-time stop payment or a permanent stop payment;
• Grant stop payment requests to all consumers who contact the Bank seeking to stop payment on future Preauthorized EFTs within three business days of the EFT;
• Implement consumer stop payment requests without requiring consumers to contact the merchant initiating the EFT instead of or as a prerequisite to the entry of the stop payment;
• Inform consumers of their right to enter a stop payment order immediately whenever USAA tells consumers seeking a stop payment about the potential benefits of contacting the merchant who is originating the EFT;
• Honor stop payment requests for EFTs free of charge for a period of two years from the Effective Date of the Order;
• Whenever a consumer notifies USAA that a stop payment order was ineffective, refund any stop payment fees charged and reimburse any other related fees incurred in connection with the ineffective stop payment order;
• Whenever a consumer requests to stop payment on a debit card Preauthorized EFT, (i) inform the consumer that the stop payment may not be effective in certain circumstances; (ii) explain that if the transaction posts to the account, the consumer may not be able to seek reimbursement unless the consumer also has revoked authorization for the transaction beforehand; and (iii) if the consumer wants to revoke authorization, advise the consumer to contact the merchant in writing to revoke authorization and provide the consumer with the last-known address for the merchant, if known to the Bank;
• Whenever a consumer notifies USAA that a stop payment order was ineffective and the reason the stop payment was ineffective was because the merchant designated a debit card EFT as “installment” or initiated a series of one-time debit card EFTs at regular intervals, then assist the consumer in disputing the amount debited;
• Inform consumers about their options in the event that a consumer notifies USAA that a stop payment order is ineffective, including closing the account and disputing the transaction, and, where applicable, helping the consumer revoke authorization and complete the WSUD or other required forms;

Error Resolution Procedures

• On numerous occasions, when consumers notified USAA about suspected errors regarding EFTs that were incorrect, unauthorized, or exceeded the authorization granted by the consumer, USAA failed to promptly initiate Error Resolution Investigations. As a matter of policy USAA did not investigate reported errors unless the consumer asserting the error submitted a completed WSUD (written statement of unauthorized debit) within 10 days of USAA sending the consumer the form.
• USAA required consumers contesting transactions from payday loan lenders to have their WSUDs notarized before submitting them. If a consumer contesting an error concerning a payday loan lender did not provide a notarized WSUD, USAA did not conduct an Error Resolution Investigation. USAA’s failure to promptly initiate and conduct Error Resolution Investigations upon notification from consumers of suspected errors violated section 908 of EFTA and section 1005.11 of Regulation E.
• USAA lacked a procedure requiring that a reasonable Error Resolution Investigation occur whenever a consumer notified the Bank about a suspected error regarding an EFT. As a result USAA routinely failed to conduct a reasonable review of all relevant information within its own records prior to making a determination about whether the consumer had asserted a valid error. On numerous occasions during this period:
• When consumers had transactions with the merchant at issue that predated the disputed transaction, the Bank made the summary determination that no error had occurred, without reasonably considering other evidence in its own records, including the consumer’s assertion that the EFT was unauthorized or an incorrect amount or the bases for the consumer’s assertion; and
• Even when the consumer did not have a transaction history with the merchant, USAA failed to reasonably consider relevant details in its own records, including the consumer’s account history, the consumer’s assertions that the EFT was unauthorized or an incorrect amount, or the bases for the consumer’s assertion.
• In numerous instances when USAA found no error, a reasonable review of all relevant information within the Bank’s own records would have resulted in a determination in favor of the consumer.
• As a result of these practices, USAA failed to address adequately the unauthorized or incorrect transactions, as required by law. USAA’s failure to conduct a reasonable review of all relevant records and information in its own records when investigating an error notification violated section 908 of EFTA and section 1005.11(c)(4) of Regulation E.

Corrective action regarding error resolution includes:

• Conduct a prompt, thorough, and reasonable Error Resolution Investigation whenever a consumer notifies the Bank of a suspected error;
• Promptly commence Error Resolution Investigations without requiring consumers asserting an error to contact the merchant that originated the EFT instead of or as a prerequisite to the Error Resolution Investigation;
• Promptly investigate all errors asserted by USAA consumers, without regard to whether the consumer has submitted a WSUD;
• Refrain from requiring that consumers who have asserted an alleged error have their WSUDs notarized;
• During the course of an Error Resolution Investigation, reasonably consider all relevant information in the Bank’s records that pertains to the account for which the assertion of error is made, including, but not limited to, the consumer’s oral or written statements regarding the error;
• During the course of an Error Resolution Investigation initiated due to a consumer assertion that an ACH transaction was unauthorized, request from the originating depository financial institution documentation sufficient to prove the transaction was authorized and reasonably consider the documentation provided or any failure to provide documentation in the Error Resolution Investigation;
• Refrain from declining to enter a stop payment or conduct an error investigation related to an EFT because that EFT was or will be initiated by a payday or other small dollar lender; and
• When consumers initiate either a stop payment or error resolution request, inform them that they can simultaneously avail themselves of both.

Closed Accounts

When USAA received certain types of debits or credits to accounts previously closed by the account holders, the Bank reopened the accounts without obtaining consumers’ prior authorization and providing timely notice to consumers informing them when their accounts had been reopened.

• When USAA reopened accounts to process debits, some account balances became negative and therefore potentially subject to various fees, including overdraft fees and fees for non-sufficient funds.
• When USAA reopened an account to process a credit, creditors had the opportunity to initiate debits to the account and draw down the funds, possibly resulting in a negative balance and the accumulation of fees.
• USAA’s practice of reopening accounts potentially impacted, among others, consumers who had closed their accounts because the stop payment order or error resolution process was ineffective.
• When USAA processed a credit through an account that USAA had reopened, those funds became available to entities attempting to debit funds from that account, including any entity related to a previous dispute or stop payment request.
• USAA’s practice of reopening consumer accounts without obtaining consumers’ prior authorization and providing timely notice caused substantial injury to consumers that was not reasonably avoidable or outweighed by any countervailing benefit to consumers or to competition.

Corrective action regarding closed accounts includes:

• Once a consumer closes an account, not process any additional transactions to that account except (i) transactions originated before the account was closed, or (ii) when USAA is required to accept and settle the transaction under card network or NACHA rules;
• If a consumer closes an account and the Bank subsequently reopens the account consistent with the requirements of this Consent Order, then (i) forward any credits posted to that account to the consumer as soon as practicable; (ii) ensure that the consumer knows the account has been reopened as soon as practicable after the account has been reopened; and (iii) reclose the account as soon as practicable; and
• For each account that USAA reopened during the Account Reopening Redress Period without obtaining the consumer’s prior authorization and providing timely notice to the consumer, notify any consumer reporting agency to which USAA furnished information on or with respect to the reopened account to delete such information.

A copy of the full Consent Order is available at: https://files.consumerfinance.gov/f/documents/bcfp_usaa-federal-savings-bank_consent-order.pdf

2018 was an interesting year for those of us in the compliance field. We completed implementation of HMDA and TRID revisions, and got a jump start on implementing the provisions of the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA).

In last year’s New Years greeting I stated, “In my 42-year career I have seen the pendulum swing from one extreme to another several times. Since the mortgage crisis 10 years ago we have been plagued with a huge volume of new and revised compliance laws and regulations. With the current administration and Congress it appears that in the coming years the volume of new laws and regulations will decline. But if the promised deregulation is similar to the deregulation projects of the past, laws and regulations will not disappears, they will change. When there is change, there is work for the compliance department. 2018 should be an interesting year.”

The changes from EGRRCPA were more numerous than anticipated but did little to actual reduce the regulatory burden.  But as predicted the changes did create a lot of work for the compliance department.

So what is the prediction for 2018. We don’t expect a lot of new laws. The CRA revision process will be interesting. The regulator’s stated goals for the CRA revisions are ambitious. Will the actual changes measure up to the goals? Provisions from EGRRCPA will continue to unfold and keep us busy into the new year.

We hope that 2018 was a good year for you and for those you love and we hope that 2019 is better in every way.

On December 31, 2018, with the last few hours of 2018 quickly approaching, the Consumer Financial Protection Bureau has published the final lending threshold updates just in time for 2019. The updates include:

• The HMDA asset-size exemption threshold, increased from $45 million to $46 million. The final rule is available here.
• The Truth in Lending asset-size exemption for certain creditors to qualify for an exemption to the requirement to establish an escrow account for a higher-priced mortgage loan based on the annual percentage change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers for the 12- month period ending in November. The exemption threshold is adjusted to increase from $2.112 billion to $2.167 billion. The final rule is available here.

Fortunately the Federal Emergency Management Agency (FEMA), with some arm-twisting from the mortgage lending industry and Congress, has backed off on its position of not allowing the operations of the National Flood Insurance Program (NFIP) to resume during the government shut down. The change is retroactive to December 21, 2018, the date Congress provided last minute funding for the NFIP.

With the NFIP funding crisis resolved until May 31, 2019, hopefully Congress can shift their focus to returning the NFIP to long term solvency.

Also with the resolution of the temporary crisis, Compliance Resource is cancelling the  crisis management webinar entitled Lapse of FEMA Authority to Issue Flood Insurance Policies, scheduled for January 2, 2019. The materials for the program had been developed, earlier in the year when the possibility of the crisis became evident, with the hope that a NFIP crisis could be averted. Now the materials will be put back on the shelf, again with the hope that a crisis will be avoided next May.

We reported on December 23rd that the President had signed legislation extending the National Flood Insurance Program (NFIP) until May 31, 2019. The Congress and the President did their part,  but then the Federal Emergency Management Agency (FEMA) ruled on December 27th that the NFIP cannot be renewed during the ongoing government shutdown.

Now the industry is protesting FEMA’s ruling, saying that it conflicts with the will of Congress expressed in the bill signed into law on December 21. Until this apparent conflict is resolved, new flood policies are not available. So what options do you have when FEMA policies are not available?

To assist with this immediate dilemma Compliance Resource has scheduled a one-hour webinar, entitled Lapse of FEMA Authority to Issue Flood Insurance Policies, for 11:00 a.m. EST on Wednesday January 2, 2019. For more information and to register for the program click HERE. The program will be recorded and available for distribution shortly after  completion of the live program. In the event the dilemma is resolved in the interim the program will be cancelled and full refunds will be made immediately.

On December 20, 2018 the Federal Deposit Insurance Corporation, Federal Reserve Board of Governors, and the Office of the Comptroller of the Currency, together referred to as the Agencies, published the annual adjustment to the asset-size thresholds used to define small bank, small savings association, intermediate small bank, and intermediate small savings association under the Community Reinvestment Act (CRA) regulations.

Annual adjustments to these asset-size thresholds are based on the change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million. With a 2.59 percent increase in the CPI-W, the definitions of small and intermediate small institutions for CRA examinations will change as follows effective January 1, 2019:

• “Small bank” or “small savings association” means an institution that, as of December 31 of either of the prior  two calendar years, had assets of less than $1.284 billion.
• “Intermediate small bank” or “intermediate small savings association” means a small institution with assets of at least $321 million as of December 31 of both of the prior two calendar years and less than $1.284 billion as of December 31 of either of the prior two calendar years.

The adjustments were published in the Federal Register on December 27, 2018.

All of us at Compliance Resource wish you the happiest of Happy Holiday seasons!

Just before the National Flood Insurance Program (NFIP) expired on December 21, 2018 Congress passed and the President signed a resolution continuing the NFIP until May 31, 2019.

Prior articles on this topic:

• Flood Insurance – congress Continues to Play Games https://www.jackscomplianceresource.com/flood-insurance-congress-continues-to-play-games/
• National Flood Insurance Program Still Hanging on a Thread https://www.jackscomplianceresource.com/flood-insurance-update/
• Flood Insurance Update https://www.jackscomplianceresource.com/flood-insurance-update/

Last week we reported that the CFPB has its first Director, not Acting Director, since Richard Cordray resigned a little over a year ago. We observed that due to lack of meaningful prior experience it is difficult to predict the direction in which Director Kathy Kraninger might steer the agency. She appears to be starting out with a few lightweight items.

For example, under Director Cordray the agency was the Consumer Financial Protection Bureau. Acting Director Mick Mulvaney changed to the name to the Bureau of Consumer Financial Protection, but before the name could be changed on all products and materials Director Kraninger has halted the changes and has decided to retain the original name. Now we don’t have to learn to state BCFP instead of CFPB.

On December 3, 2018, the Federal Banking Agencies, including the Federal Reserve Board, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National Credit Union Administration, and Office of the Comptroller of the Currency, issued a joint statement to encourage banks to consider, in appropriate circumstances, implementing innovation in complying with the Bank Secrecy Act/anti-money laundering (BSA/AML) requirements. The Agencies noted such innovation (e.g. new ways of using existing tools, adopting new technologies, etc.), where appropriate, may “…further strengthen the financial system against illicit financial activity.”

The ultimate goal of the Agencies is to ensure banks maintain effective BSA/AML compliance programs to combat money laundering and terrorist financing; the use of innovation may provide effective enhancement tools. While the Agencies did not specify particular methods or technologies, they did identify areas in which innovation would be most beneficial including risk identification, transaction monitoring, and suspicious activity monitoring. Examples of innovation included in the statement are artificial intelligence and digital identity.

Engaging with banks and technology providers is a priority for the Agencies to learn and discuss innovative approaches. In addition, pilot programs are important in validating the effectiveness of such approaches. Banks undertaking pilot programs, while expected to maintain compliance with the BSA/AML requirements and evaluate associated risks (e.g. information security, third-party providers, privacy, consumer compliance), will not be subjected to increased regulatory criticism resulting from responsibly testing innovative approaches. Banks are encouraged to consult with their regulators early in the process of innovative change.

Financial institutions should be aware that while the Agencies are encouraging use of innovative approaches, they will not penalize or criticize banks that maintain effective BSA/AML compliance programs commensurate with their risk profiles but choose not to pursue innovative approaches. This is encouraging for smaller, community-based institutions with lower risk profiles who have fewer resources. These lower risk institutions should consider the Agencies’ other recent statement, related to resource sharing, and evaluate how both statements may impact the expectations of their examiners and the resources available to their institution.