Consumer Financial Protection Bureau Compliance: What Banks Need to Know, Part II
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CFPB Regulation Enforcement
The CFPB is authorized to conduct investigations to determine whether any person is, or has, engaged in conduct that violates federal consumer financial law. The investigations often include subpoenas and other investigative demands for testimony, responses to written questions, documents, or other materials. Once a potential violation is discovered, the CFPB can pursue administrative proceedings or civil actions in Federal District Court. The CFPB is authorized to “any appropriate legal or equitable relief with respect to a violation of federal consumer financial law,” including, but not limited to, the following:
- Rescission and reformation of contracts
- Refund of money and return of property
- Disgorgement or compensation for unjust enrichment
- Payment of damages or other monetary relief
- Public notification regarding the violation
- Limits on the activities or functions of the person against whom the action is brought
- Civil monetary penalties
The regulations also provide that any entity who fails to comply is subject to civil liability for actual and punitive damages in individual or class actions. The CFPB has no criminal enforcement authority, and therefore must refer these matters to other agencies, often the Attorney General.
The following are recent cases that illustrate the CFPB’s enforcement methods:
- Santander Bank, N.A. – The CFPB found that Santander’s telemarketing vendor deceptively marketed the overdraft services to customers and signed some customers up without their consent. Santander bank was fined $10 million for illegal overdraft services. Santander Bank was also ordered to cease marketing the overdraft services, implement an oversight system for vendors, and to contact all customers to ask if they still wanted the services.
- Citibank, N.A. – The CFPB pursued two separate actions against Citibank for illegal debt sales and debt collection practices. In the first action, Citibank had to pay $5 million in consumer relief and pay a $3 million penalty for selling credit card debt with inflated interest rates. In the second action, the CFPB ordered Citibank and two debt collection agencies to refund $11 million to consumers and forego collecting about $34 million from nearly 7,000 customers.
- Fifth Third Bank – The CFPB took action against Fifth Third Bank for deceptive marketing of credit card add-on products. The action required the bank to provide an estimated $3 million in relief to eligible harmed customers and pay a $500,000 penalty.
These actions reveal some of the typical penalties levied against violating entities. The CFPB will sometimes accompany these liabilities and penalties with press releases that are damaging to an entity’s image and brand. An example of this would be when Frederick J. Hanna & Associates, a Georgia law firm, settled a CFPB claim for its alleged violations in debt collections. The firm did not admit any fault or wrongdoing in the settlement agreement. However, shortly after the agreement, the CFPB released a strongly worded statement implying the law firm’s guilt. The firm responded with a statement defending themselves and pointing out that the settlement agreement stipulated no admission of wrongdoing. This was the only remedial action the firm could take, but the damage to their image had already been sustained.
How to Prevent Action from the CFPB
The CFPB’s methods of enforcing regulations shift responsibility to financial service providers to address customer comments or complaints and to incorporate these into the organization’s services moving forward. The CFPB expects every entity it supervises to have an effective compliance management system adapted to its business strategy and operations. CFPB Supervisory Highlights, Summer 2013. Failure to address complaints can ultimately lead to action from the CFPB. Thus, it is important for organizations to get ahead of the process and alleviate complaints, or at the very least have a record that the grievances were addressed in some fashion rather than simply being ignored. A well-implemented customer service system can not only improve current customer satisfaction and reduce complaints, but also enhance and strengthen the organization’s reputation moving forward.
In order to accomplish this goal, regulated organizations should implement a layered “checks and balances” system to address customer complaints and to avoid potential oversights. Placing all customer service responsibilities on one department can be ineffective. By having separate departments check each other’s handling of complaints, these layers of inspection mitigate the risk of oversight. An internal customer service system should be thoroughly and clearly documented, updated as regulations change, and should regularly measure performance. Customer service systems can be bolstered by metric-driven insight and scoring by quantifying results and ensuring that they are tracked frequently.
Another necessary and effective practice is to ensure that any vendor acting on the organization’s behalf has a similar culture and recognizes the value of effective customer service. This can be achieved by thoroughly inspecting a vendor’s programs, policies, and practices prior to contacting them to ensure that they will comply with CFPB regulations. Effective communication of expectations with vendors is an essential link in the chain to implementing a competent customer service program. Revising the language in vendor contracts to include expectations on compliance can also be an effective tool. On-going monitoring of a vendor with periodic inspections to ensure that the vendor is maintaining its established compliance policies can also prevent potential violations.
In concert with an internal compliance system, regulated entities should internally promote awareness to each and every employee acting on behalf of the company. Whether this is through in-house seminars, guest presentations, or introductory training courses for employees, promoting awareness within a company can address the genesis of many complaints and alleviate them before a formal complaint is necessary. Developing a culture where each employee has a basic understanding of the regulations adds an additional layer of security to the prevention of potential violations.
In lieu of the CFPB’s customer-centered regulations, a financial service entity should shift to a long-term performance model that takes current feedback from consumers and incorporates that feedback into its services moving forward. Incorporating these monitoring concepts and ensuring that each employee is aware of the regulations are important measures for a modern financial service entity to take. The effort and resources expended in the short-term to implement these systems and policies will pay great dividends in the future with improved customer satisfaction and avoidance of CFPB action.
This post is Part II of a series of blog posts analyzing the CFPB’s regulatory authority, the manner in which they enforce, and how to defend an action from the CFPB. Please check back later for further blogs in this series which will provide more in-depth analysis of how the regulations affect financial service entities.