Bank Law Monitor

Bank Law Monitor

A Legal Blog for the Financial Services Industry

Core Considerations for Core Contracts

Posted in Banking

Available Lease Signature Contract

Negotiating the terms of a core processing contract makes haggling over a used car seem like child’s play. For most banks, the reality is stark—you might get some wiggle room on price if you’re willing commit to a longer term. You might also get a few changes on issues that “really matter.” But with only a few major core providers to choose from, these providers tend to think they hold most of the cards and don’t like to deviate from their form of master agreement. And when they do, they always seem to want a price adjustment. So it pays to be laser focused on the issues that matter to your institution and let the rest go. Here are some “core” considerations for your next core contract negotiation, or to any other major contract your bank may be considering.

Beware the Discount
Discounts are good, right? They save your bank money, and make you feel like you’ve negotiated a great deal. But before popping open the champagne, pause to consider what tradeoffs you’re being asked to make. Like cable providers, core providers often try to bundle services to get you to purchase things you weren’t otherwise intending to buy. They also may require you to agree to a longer term than you expected. Lastly, don’t excitedly push your team to meet a “discount deadline” at the risk of losing focus on other key issues in the contract—those so-called “deadlines” are usually flexible. Continue Reading

Banks Fight Back Against ADA Website Claims

Posted in Banking

What do financial institutions, restaurants, and clothing stores have in common? They’re the most recent targets of demand letters from plaintiffs’ law firms threatening lawsuits because the institution’s website supposedly violates the Americans with Disabilities Act (ADA). These law firms then offer to improve the accessibility of the institution’s website for a hefty fee. They call it “consulting services;” some banks and credit unions see it differently – calling it extortion and fighting back. The resistance might be working.

The scheme works like this: the bank (often a small community bank with a limited litigation budget) receives a demand letter from a firm purporting to represent a potential customer who’s visually impaired. The letter alleges that the bank’s website fails to comply with the ADA in any number of ways, from font sizes that’re too small to menus that’re too graphical. The firm will typically boast a list of dozens of lawsuits they’ve filed but offer to avoid litigation if the bank agrees to engage the firm to improve its website. The firm’s so-called “consulting fees” range from $15,000 to $50,000—all to settle a single plaintiff’s claim. Paying this fee doesn’t prevent the bank from receiving a similar demand letter the very next day. Continue Reading

No Credit History, No Problem: CFPB Ponders Novel Credit Scoring Ideas

Posted in CFPB, Credit Cards

2017-03-09 08_39_11-credit report - Google SearchLast month, the CFPB issued a Request for Information (“Request”) to identify potential ways to increase credit access for underserved segments of the population. In particular, the CFPB noted that certain groups of individuals lack enough credit history to obtain a reliable credit score. While the CFPB’s Request was primarily directed at the financial services industry, the Request also sought input and comments from all interested members of the public.

Generally speaking, an individual’s credit score (and creditworthiness) is assessed based on his or her credit report. A credit report includes a variety of information about the individual’s financial history, including whether he or she regularly makes debt payments on time and the types of debt he or she has incurred (such as mortgages, credit cards, and other forms of loans). This information is then plugged into an algorithm (or generated by a third party, such as FICO or VantageScore Solutions) to calculate the individual’s credit score. The higher the credit score, the easier it is to obtain credit at favorable rates (and vice-versa).

If an individual’s credit report lacks traditional forms of credit history, his or her credit score may suffer. For example, if an individual has never had a mortgage (which is the case for an increasing number of millennials) or qualified for a credit card or other loan, the individual’s credit report may lack valuable information to plug into the algorithm, which in turn places him or her at a severe disadvantage when seeking affordable credit.

According to the CFPB, an estimated 26 million Americans are “credit invisible,” meaning they lack sufficient credit history with a reporting agency (such as Equifax, TransUnion, or Experian) to produce a credit score. Another estimated 19 million Americans are considered “unscorable” because their credit file is too thin or stale to produce a reliable credit score. Consequently, lenders shy away from such borrowers, and those individuals face barriers to credit, including having to agree to higher interest rates.

On these points, the CFPB noted in its Request:

Most of these 45 million Americans are underserved by the mainstream credit system and they are disproportionately Black and Hispanic, low-income, or young adults. Some populations, like those recently widowed or divorced or recent immigrants, have difficulty accessing the mainstream credit system because they have not established a long enough credit history on their own or in this country. Some underserved consumers instead resort to high-cost products that may not help them build credit history.

To combat these issues, the CFPB is exploring whether it is advisable to consider unconventional sources of information to help build and supplement an individual’s credit history. This “alternative data” may include:

  • Rent payments,
  • Insurance payments,
  • Phone bills,
  • Cable TV payments,
  • Bank account information, such as deposits, withdrawals, or transfers,
  • Frequency of changes in residences, employment, phone numbers, etc.,
  • Education and occupation, and
  • Social media and the ways the individual interacts with the website.

The theory is that these alternative forms of information could provide valuable insight into an individual’s history of meeting debt obligations and, thus, ultimately improve his or her credit score. For example, an individual may not have a traditional loan repayment history but might pay a phone bill on a timely and regular basis, which could reassure lenders that he or she is a viable credit risk. The CFPB noted that “[p]otentially millions of consumers previously locked out of mainstream credit could become eligible for credit products that might help them buy a car or a home.” That being said, there are obvious risks associated with analyzing this information during the credit application process, such as claims of discrimination, privacy concerns, and issues related to inaccurate or incomplete information.

At this point, the CFPB is only seeking public feedback with respect to the opportunities and pitfalls of using alternative data sources in making lending decisions. As discussed above, the CFPB is seeking comments from all interested members of the public, which must be received by May 19, 2017. In light of the significant opportunities associated with alternative data sources (and the large underserved pool of potential borrowers), many forward-thinking lenders will undoubtedly keep a close eye on the CFPB’s stance on these practices and consider adjusting their lending practices accordingly.

The Future of the CFPB Under the Trump Administration

Posted in CFPB, Trending News, UDAAP

Update (2/16/17):  The U.S. Court of Appeals for the District of Columbia granted the CFPB’s request to reconsider its earlier ruling with respect to the President’s ability to remove the Director of the CFPB. This ruling provides a glimmer of hope for the continuity of the CFPB’s leadership. Oral argument is set for May 24, 2017.

Ever since its inception as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (CFPB) has faced heavy criticism. Many believe the CFPB lacks accountability and engages in improper “regulation-through-enforcement” tactics. One of the CFPB’s biggest critics, House Financial Services Committee Chairman Jeb Hensarling (R-Texas), has stated:

“The CFPB undoubtedly remains the single most powerful and least accountable Federal agency in all of Washington. When it comes to the credit cards, auto loans, and mortgages of hardworking taxpayers the CFPB has unbridled, discretionary power not only to make those less available and more expensive, but to absolutely take them away.” Continue Reading