Electronic transfers

FDIC Consumer Compliance Monitoring Highlights for State and Community Banks | McGuireWoods LLP

[co-author: Kristin Lee]

On March 31, 2022, the Federal Deposit Insurance Corporation (FDIC) released the March 2022 edition of its Consumer Compliance Supervisory Highlights. The publication provides a high-level overview of consumer compliance issues identified in 2021 through FDIC oversight of state-chartered banks and savings institutions that are not members of the Federal Reserve. It provides important guidance regarding compliance priorities for these financial institutions.

The FDIC’s Consumer Compliance Review Program focuses on identifying and addressing the greatest potential risks to consumers. In line with this guidance, the program examines the compliance of supervised institutions with over thirty different consumer protection laws and regulations. In 2021 alone, the FDIC conducted approximately 1,000 consumer compliance reviews.

FDIC Oversight Highlights detail the most frequently cited violations resulting from these reviews, as well as observations regarding significant consumer compliance issues identified by reviewers. The most frequently cited violations – accounting for nearly 80% of the total violations identified – concerned the Truth in Lending Act (TILA), the Flood Disaster Protection Act (FDPA), the Electronic Fund Transfers Act (EFTA) and the Truth in Savings Act (TISA). , and the Real Estate Settlement Procedures Act (RESPA). Notably, these five regulations were also the source of the most frequently cited violations in 2020, demonstrating that they are an ongoing area of ​​focus for consumer compliance reviewers.

Monitoring highlights also provide review observations for significant consumer compliance issues identified by the FDIC on issues such as liability protection, automated overdraft programs, representation of unpaid transactions, and compliance. fair loans.

  • Regulation E – Liability Protections. Regulation E, which implements EFTA, outlines the procedures financial institutions must follow to invest and resolve electronic funds transfer (EFT) errors alleged by consumers. The FDIC noted that customers have been targeted for fraud on EFT platforms and that some institutions have attempted to protect themselves, by disclosing their accounts, from liability under Regulation E that could result from the fraud. The FDIC noted that “disclosure of consumer accounts cannot limit the protections provided by the regulations.”
  • Automated overdraft programs. Automated overdraft programs allow or decline transactions presented with insufficient funds and apply a static or dynamic overdraft limit. While the static limit applies a fixed amount to all customers, the dynamic limit can vary by customer and can change periodically depending on the customer’s usage and relationship with the institution. The FDIC noted that several financial institutions converted their program from a static limit to a dynamic limit in 2021. In some cases, financial institutions did not provide enough information about the program change. The FDIC concluded that the lack of disclosure allowing customers to make an informed decision was a deceptive act and cited violations of Section 5 of the Federal Trade Commission (FTC) Act.
  • Re-submission of unpaid transactions. Financial institutions typically charge an insufficient funds fee (NSF) when a fee is presented for payment but cannot be covered by the account balance. Some financial institutions charged multiple NSF fees for the same transaction when a merchant resubmitted the transaction after it was declined. The FDIC has stated that this practice may result in an increased risk of violations of Section 5 of the FTC Act. Some disclosures did not clearly explain that the same transaction could result in multiple NSF charges if re-submitted. Failure to disclose material information about entertainment practices and expenses may be misleading.
  • Fair loan. The FDIC performs a fair review of loans for compliance with anti-discrimination laws and regulations such as the Equal Credit Opportunity Act (ECOA). The publication indicates two instances where the FDIC believed creditors were engaging in a pattern or practice of discrimination in violation of the ECOA. The first case was where an institution used the cohort default rate (CDR) for the consolidation and refinancing of its private student loan debt. The CDR is released by the US Department of Education to show the percentage of a school’s borrowers who default on certain loans. While the institution’s use of the CDR was neutral as a policy, it had a disparate impact on the prohibited basis on race. The second case was when the FDIC found that an institution was redlining in certain markets in the lending zone of intuition. The FDIC concluded that the institution does not extend credit to certain geographic areas based on the racial makeup of those areas.

Oversight highlights also cover other miscellaneous regulatory developments that have occurred over the past year. Banking regulators have issued guidelines and rules on due diligence for fintech companies and the transition from the LIBOR interest rate index for consumer financial products, and the Federal Management Agency Emergencies has implemented a new pricing methodology for national flood insurance programs. Regulators continue to review the modernization of the Community Reinvestment Act, the use of artificial intelligence by financial institutions and the management of third-party risks.

FDIC Surveillance Highlights provide a comprehensive overview of current areas of regulatory concern. Supervised institutions and their attorneys would be well advised to review the highlights to ensure that their compliance programs address each of the areas of concern highlighted by the FDIC.