BankThink

Banks Unprepared to Prevent 'Consumer Harm'

The Federal Reserve Board and the Office of the Comptroller of the Currency issued announcements with respect to the mortgage consent orders stating that consumers who believe they were financially harmed during the mortgage foreclosure process by specific financial institutions in 2009 and 2010 can potentially receive compensation.

This represents a "new new" in the regulatory landscape pertaining to consumer protection. These actions are meant to drive a new consumer protection agenda, on which increasing power and influence are given to the consumer and an emphasis is given to consumer complaints.

This development has ramifications for a bank's entire consumer product portfolio, not just mortgages.

Very few banks, or financial services companies more broadly, are equipped to manage this change. Banks' current compliance monitoring and reviews programs do not include the means to identify, measure and remediate potential consumer harm — a key regulatory expectation coming out of the mortgage consent orders.

A gap needs to be bridged, as regulatory expectations of consumer protection have evolved to a point where banks are not yet prepared to meet the emerging requirements.

Understanding and patience are needed on both sides as we enter this new era of consumer protection. Banks will need to recognize that a philosophical shift has occurred among regulators regarding consumer protection. Regulators will need to appreciate that compliance and risk programs will need to undergo extensive changes in order to attain the desired state.

As banks assess the way forward, they will recognize that existing compliance programs and the focus on simply being in compliance are no longer sufficient and should be considered only a baseline in light of this new regulatory focus.

Banks must assess their practices from the standpoint of consumer protection, observing principles of "fairness," "clarity" and "reasonableness." They must address areas of consumer practices that may lead to consumer harm generally and financial injury more specifically. This increased emphasis on fairness, product reasonableness and consumer complaints will have a major impact on a bank’s compliance and risk management program.

One issue will be quantifying fairness. It will be difficult to categorize into specific metrics that could be monitored on a regular basis.

Yet ultimately, "consumer harm" compliance will call for banks to offer up a comprehensive, fresh look at the entire consumer products process. It necessitates consumer practice reviews and heightened attention and response to consumer complaints, including gray areas like product suitability and clarity.

Over the longer term this will require an increase of programmatic controls both up front and on the back end in terms of ongoing monitoring, testing and remediation.

Timing is critical as bank compliance departments also will need to prepare for upcoming Consumer Financial Protection Bureau exams, revisiting current compliance risk assessments, servicing practices and product life-cycle analyses to meet the new requirements and anticipate CFPB supervision plans.

The bureau's Supervision and Examination Manual further supports the new consumer protection focus. The scope of an examination will be based in part on an assessment of risk to consumers (i.e. the potential to suffer economic loss or other injuries) determined by considering the inherent risk in an entity's particular line of business or the entity overall, and the quality of controls in place to manage and mitigate that risk.

In addition, the bureau states that consumer complaints will play a key role in the detection of unfair, deceptive and abusive practices and that multiple complaints about the same product or service will be viewed as "a red flag indicating that examiners should conduct a detailed review of the relevant practice."

Consumer protection and areas in which the CFPB will focus exams are still fairly conceptual in nature so regulators will have to resolve uncertainty on how all of these new expectations align with a bank’s overall regulatory framework and provide guidance on the controls and metrics they will look to monitor. In our discussions with bank compliance leaders, it appears that their challenges include managing information requests, exam processes, and the ongoing monitoring of regulatory issues due to the new law.

A shift in regulatory direction around consumer protection has occurred and promises to affect a bank's complete consumer product portfolio. In order to comply with this new reality, a revamp of compliance and risk management programs will be required. It will take some time for best practices to emerge and for banks to make the necessary adjustments.

Linda Gallagher is the national leader of KPMG LLP’s financial services regulatory practice and an executive sponsor of the firm's FS Regulatory Reform Center of Excellence. Amy Matsuo is a principal in the practice.

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Law and regulation
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