CFPB Warns Financial Institutions About Incentives
Use caution when creating incentives for employees and service providers to meet sales and other business goals, the Consumer Financial Protection Bureau warned financial institutions in a new Compliance Bulletin.
What happened
Likely triggered by recent allegations tied to one of the nation’s largest banks– where employees allegedly opened bank accounts and other products without the knowledge or authorization of consumers in order to achieve sales goals—the Consumer Financial Protection Bureau (CFPB or the Bureau) published Compliance Bulletin 2016-03 to warn financial institutions about the risks involved in using incentives.
“Tying bonuses and job security to business goals that are unrealistic or not properly monitored can lead to illegal practices like unauthorized account openings and deceptive sales tactics,” CFPB Director Richard Cordray said in a statement. “The CFPB is warning companies to make sure that their incentives operate to reward quality customer service, not fraud and abuse.”
Programs tying outcomes to certain benchmarks abound in the financial industry, the CFPB acknowledged, and can provide benefits to stakeholders and the marketplace as a whole. “For instance, companies may be able to attract and retain high-performing employees to enhance their overall competitive performance,” the Bureau wrote in “Detecting and Preventing Consumer Harm from Production Incentives.” “Consumers may also benefit if these programs lead to improved customer service or introduce them to products or services that are beneficial to their financial interests.”
But when incentives are not properly implemented or monitored, the risks are significant, the CFPB said. According to the CFPB, consumer risks arise out of an unrealistic culture of high-pressure targets at financial institutions that can lead to overly aggressive marketing, sales, servicing, or collection tactics. These high quotas may incentivize employees to achieve a result without actual consent or by means of deception, the Bureau suggested, while paying more compensation for some types of transactions than for others could lead employees or service providers to steer consumers to transactions not in their interests.
“Depending on the facts and circumstances, such incentives may lead to outright violations of Federal consumer financial law and other risks to the institution, such as public enforcement, supervisory actions, private litigation, reputational harm, and potential alienation of existing and future customers,” according to the Bulletin.
The Bureau has taken action over the improper use of incentives by financial institutions, including 12 different cases of improper practices to market credit card add-on products (or retain consumers once enrolled in the products) where employees and service providers received incentives without proper controls in place, leading to deceptive marketing. Incentives also played a role in at least one matter where consumers were deceived into opting in to overdraft services, the CFPB said, as well as an enforcement action based on the opening of thousands of unauthorized deposit and credit card accounts to satisfy sales goals and earn financial rewards pursuant to bank incentives.
Reinforcing the CFPB’s expectations with regard to incentives, the Bulletin emphasizes the importance of a “robust” compliance management system (CMS) reflecting the risk, nature, and significance of the programs to which they apply. The strictest controls are necessary where incentives concern products or services less likely to benefit consumers, the Bureau noted.
An effective CMS typically includes board of directors and management oversight, including a culture of strong customer service related to incentives; policies and procedures (with reasonably attainable sales or collections quotas); training, featuring standards of ethical behavior and common risky behaviors to avoid; monitoring (especially of spikes and trends in sales and financial incentive payouts); corrective action that includes the termination of employees if necessary; a consumer complaint management program; and independent compliance audits.
“The CFPB expects supervised entities that choose to utilize incentives to institute effective controls for the risks these programs may pose to consumers, including oversight of both employees and service providers involved in these programs,” the Bureau wrote.
To read the CFPB’s Compliance Bulletin 2016-03, click here.
Why it matters
The CFPB is paying even more attention to incentive programs, and financial institutions should now re-examine their policies. While the Bulletin does not outright prohibit the use of sales incentives, the CFPB repeatedly cautions financial institutions about the dangers of such programs and the potential for enforcement action when incentives are not properly implemented and monitored. “The risks these incentives may pose to consumers are significant and both the intended and unintended effects of incentives can be complex, which makes this subject worthy of more careful attention by institutional leadership, compliance officers, and regulators alike,” the CFPB notes. “We thus will continue to invite further dialogue and discussion around the issues addressed in this Bulletin.” Violations can also present substantial reputational risk.
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CFPB Acts Against Three Reverse Mortgage Companies
The Consumer Financial Protection Bureau entered into consent orders with three reverse mortgage companies alleging each committed deceptive advertising in connection with the marketing of their products.
What happened
According to the CFPB, American Advisors Group, Reverse Mortgage Solutions, and Aegean Financial misled consumers with claims about the alleged benefits and advantages of reverse mortgages while failing to disclose the risks of such arrangements.
The three lenders entered into consent orders alleging that they violated the Mortgage Acts and Practices Advertising Rule—which bans misleading claims in mortgage advertising—as well as the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on deceptive acts or practices, according to the Bureau.
The consent orders note that the largest reverse mortgage lender in the United States, California-based American Advisors Group, ran television ads almost daily and disseminated its information kit—containing a DVD and brochures about its products—to approximately 1 million consumers. Despite all of that information, the Bureau said the ads misrepresented that consumers could not lose their home under a reverse mortgage agreement and that they would have the right to remain in their home for the rest of their lives. The ads also informed consumers that they would have no monthly payments and would be able to pay off all their debts with a reverse mortgage.
But reverse mortgages still require payments and can result in default, the CFPB noted, with borrowers losing their homes if they fail to comply with loan terms and payment of property taxes, homeowners insurance, and property maintenance.
To settle the charges, American Advisors must make clear and prominent disclosures in its reverse mortgage advertisements of these facts and implement a program to ensure compliance with all applicable laws. The CFPB also charged the company a $400,000 civil penalty.
The CFPB alleges that similarly deceptive claims were made by Reverse Mortgage Solutions (RMS) of Texas, which marketed its products via television, radio, print, direct mail and the Internet, misrepresenting since 2012 that consumers would not lose their homes, could remain in their homes for the rest of their lives, would “always retain ownership,” and could not “be forced to leave.” Consumers were also promised that their heirs would inherit the home without the disclosure of any material conditions (such as a requirement that the heir repay the reverse mortgage or pay 95 percent of the assessed value).
RMS used other deceptive tactics to sell its reverse mortgages, the CFPB said, creating a false sense of urgency for borrowers. Potential customers were told that if they didn’t sign the agreement by the end of the day, their file would be turned down and “you will miss out on a tremendous money-saving opportunity.”
Pursuant to the consent order with the CFPB, RMS will pay a $325,000 civil penalty, implement a program to ensure compliance with all applicable laws, and make clear and prominent disclosures in its reverse mortgage advertisements.
In the final action, the Bureau alleged Aegean Financial also led consumers astray with deceptive marketing claims (in print, direct mail, radio, and the Internet) that consumers could not lose their homes, would have the right to stay in their homes for the rest of their lives, would have no payments with a reverse mortgage, and would not be subject to costs associated with refinancing a reverse mortgage.
Aegean also falsely affiliated itself with the government in Spanish-language advertisements, making statements such as, “if you are 62 years old or older and you own a house, we have good news for you; you qualify for a reverse mortgage from the United States Housing Department.” Any disclosures provided by Aegean were in “small type” or “rapidly recited” at the end of commercials, the CFPB added.
On top of a ban on implying affiliations with the government and payment of a $65,000 civil penalty, Aegean must maintain complete and accurate records of its advertisements, make clear and prominent disclosures in its reverse mortgage advertisements, and implement a program to ensure compliance with all applicable laws.
To read the consent order in In the Matter of American Advisors Group, click here.
To read the consent order in In the Matter of Reverse Mortgage Solutions, click here.
To read the consent order in In the Matter of Aegean Financial, click here.
Why it matters
The CFPB is paying close attention to reverse mortgage products and is increasingly dubious of reverse mortgage product claims despite their many advantages for elder Americans seeking to tap into their home equity. “These companies tricked consumers into believing they could not lose their homes with a reverse mortgage,” Bureau Director Richard Cordray said in a statement about the actions. “All mortgage brokers and lenders need to abide by federal advertising disclosure requirements in promoting their products.” The CFPB noted that it has warned of the dangers of misleading and deceptive advertising for reverse mortgages since 2012, followed up by a 2015 study and Consumer Advisory warning. The actions also underscore the CFPB’s focus on the protection of the elderly from financial abuse, including through its Office of Older Americans.
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Fintech Advocacy Group Reaches Out To Trump
A financial technology advocacy group has reached out to President-elect Donald J. Trump, encouraging him to create a new position at the Treasury Department to support fintech. The position that the President-elect and his administration will take on financial technology is still unclear. As a result, advocacy groups are attempting to gain leverage on these important issues.
What happened
In a letter to President-elect Donald J. Trump, Financial Innovation Now (FIN) suggested the creation of an Undersecretary for Technology position in the Department of the Treasury to “ensure the growth of financial technology jobs in the U.S.” as well as “foster competition and innovation in financial services to better serve consumers and the economy.”
“Technology and the Internet are changing the way consumers and small businesses manage money, access capital, and grow commerce,” Executive Director Brian Peters wrote. “While America’s financial regulators and Congress have recognized this potential on a bipartisan basis, more leadership and federal coordination is necessary.”
Federal agencies have developed some initiatives and programs to enable innovation in financial services, the letter acknowledged—citing the Consumer Financial Protection Bureau’s Project Catalyst and the Office of the Comptroller of the Currency’s “Innovation Initiative”—but FIN advocated for the appointment of financial regulators who “value technology’s potential.”
“In particular, we encourage the appointment of a Treasury Undersecretary for Technology, responsible for developing a national vision and coordinated strategy to ensure America is the best country to create companies and grow jobs developing financial technologies; and work across all federal financial regulators to foster competition and innovation in an antiquated banking sector to better serve consumers and the economy,” the group wrote.
The Trump administration should also promote open, interoperable standards for card payment security, FIN said. “[I]ncumbent financial services companies are building closed and proprietary networks, which locks out innovation and diminishes the greatest potential security and fraud reduction methods,” according to the letter. “FIN urges your administration to scrutinize technological barriers to payment security innovation and explore authentication methods that are truly standards-based, open, and interoperable.”
Other priorities for the group include streamlined money transmission licensing so that payment innovators are not forced to obtain and update licenses in nearly every state, consumer access to financial accounts and data (via whatever application or technology they wish, without charges that favor any one application or technology over another), and small business access to capital via the Internet.
“Antiquated state lending rules did not contemplate Internet-based services, and these inconsistencies may actually hold back the availability of capital from main street businesses that need it most,” FIN said, recommending that the President-elect’s administration and Congress “streamline lending laws across state jurisdictions to account for the innovative lending market of today.”
The group also recommended setting a deadline for real-time payments. While check deposits and payments can take days to clear through the system in the United States, other countries have already achieved real-time payment, FIN wrote. “American consumers cannot afford delays in accessing their own money,” according to the letter. “FIN urges your administration to ensure the availability of real-time payment networks for all Americans by 2020 and ensure such networks are affordable and secure.”
Finally, FIN advocated for leveraging fintech to lower the amount of unbanked and underbanked households in the country, encouraging President-elect Trump “to promote technology and mobile financial services as a means to overcome old barriers to financial services.”
To read the letter, click here.
Why it matters
The financial technology advocacy group encouraged the Trump administration to create a unified, coordinated national strategy to address the growing fintech market. Under the leadership of a Treasury Department Undersecretary of Technology, President-elect Trump should embrace technology in the world of finance by achieving real-time payments, ensuring consumer access to financial accounts and data, and leveraging mobile technology to increase financial inclusion, FIN advocated.
It is possible that a dedicated Undersecretary of Technology will work more swiftly to implement the results of the Request for Information regarding the Marketplace Lending Industry that it completed in early 2016. However, being more of a policy agency than regulator, the impact of the Treasury Department under any President in modernizing the current charter and licensing process is questionable. We expect to see more activity from the Office of the Comptroller of the Currency, Consumer Financial Protection Bureau and Federal Deposit Insurance Corporation in the coming year, with possible significant structural changes resulting from financial technology.
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