[co-author: Kristin Lee]

On March 31, 2022, the Federal Deposit Insurance Corporation (FDIC) issued 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 the FDIC’s supervision of state-chartered banks and thrifts that are not members of the Federal Reserve System. It provides important guidance regarding compliance priorities for these financial institutions.

The FDIC’s consumer compliance examination program focuses on identifying and addressing the greatest potential risks to consumers. In accordance with this focus, the program examines supervised institutions for compliance with more than thirty different consumer protection laws and regulations. In 2021 alone, the FDIC conducted approximately 1,000 consumer compliance examinations.

The FDIC’s Supervisory Highlights details the most commonly cited violations resulting from these examinations, as well as observations regarding significant consumer compliance issues identified by examiners. The most frequently cited violations—representing nearly 80% of the total violations identified—were of the Truth in Lending Act (TILA), Flood Disaster Protection Act (FDPA), Electronic Fund Transfers Act (EFTA), 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 examiners.

The Supervisory Highlights also provide examination observations for significant consumer compliance issues identified by the FDIC on matters including liability protections, automated overdraft programs, re-presentment of unpaid transactions, and fair lending compliance.

• Regulation E – Liability Protections. Regulation E, which implements EFTA, outlines procedures financial institutions must follow for investing and resolving electronic fund transfer (EFT) errors alleged by consumers. The FDIC noted that customers have been targeted for fraud on EFT platforms and that certain institutions attempted to protect themselves, through their account disclosures, from liability under Regulation E that may result from the fraud. The FDIC noted that “consumer account disclosures cannot limit the protections provided for in the regulation.”
• Automated Overdraft Programs. Automated overdraft programs authorize or decline transactions presented against insufficient funds and either apply a static or dynamic overdraft limit. While the static limit applies a fixed amount to all customers, the dynamic limit may vary by each customer and may change periodically based on 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 instances, the financial institutions failed to provide sufficient information about the change in the program. The FDIC found that the lack of disclosure for customers to make informed decision was deceptive acts and cited violations of Section 5 of the Federal Trade Commission (FTC) Act.
• Re-presentment of Unpaid Transactions. Financial institutions commonly charge non-sufficient funds (NSF) fees when a charge 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 re-presented the transaction after it was declined. The FDIC stated that this practice may result in heightened risk of violations of Section 5 of the FTC Act. Some disclosures did not clearly explain that the same transaction might result in multiple NSF fees if re-presented. The failure to disclose material information about re-presentment practices and fees may be deceptive.
• Fair Lending. The FDIC conducts fair lending review for compliance with anti-discrimination laws and regulations such as Equal Credit Opportunity Act (ECOA). The publication states two cases where the FDIC believed the creditors were engaging in a pattern or practice of discrimination in violation of ECOA. The first case was where an institution used Cohort Default Rate (CDR) for its private student loan debt consolidation and refinancing. The CDR is published by the U.S. Department of Education to show the percentage of a school’s borrowers who default on certain loans. While the institution’s use of CDR was neutral as a policy, it had disparate impact on the prohibited basis on race. The Second case was where the FDIC found that an institution was redlining in certain markets in the intuition’s lending area. The FDIC concluded that the institution was not making credit available to certain geographic areas based on the racial composition of those areas.

The Supervisory Highlights also cover other various regulatory developments that have occurred over the past year. Banking regulators have issued guidance and rules on conducting due diligence on financially technology companies and transitioning away from the LIBOR interest rate index for consumer financial products, and Federal Emergency Management Agency implemented a new pricing methodology for national flood insurance programs. Regulators continue to review Community Reinvestment Act modernization, financial institutions’ use of artificial intelligence, and third-party risk management.

The FDIC’s Supervisory Highlights provide a thorough overview of ongoing areas of regulatory concern. Supervised institutions and their counsel would be well-advised to review the Highlights to ensure their compliance programs address each of the areas of concern highlighted by the FDIC.