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METRO2® Regulatory Considerations and FCRA Compliance

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Michael Canale, David King, Alexandra Sawyer and Beji VargheseNavigant Consulting, Inc.

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mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: [email protected] • website: www.lorman.com • seminar id: 399979

Prepared By:Michael Canale, David King, Alexandra Sawyer, and Beji Varghese

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METRO 2® REGULATORY UPDATES

AND FCRA COMPLIANCE

DRAFT: FOR DISCUSSION PURPOSES ONLYPrivileged and Confidential Attorney Client Communication

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TABLE OF CONTENTS

Furnishing Overview

Disputes Overview

Introduction and Credit Reporting OverviewI

III

IV

Compliance Approach

Questions

V

VI

Regulatory EnvironmentII

SECTION IINTRODUCTION AND CREDIT REPORTING OVERVIEW

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INTRODUCTION AND CREDIT REPORTING OVERVIEWNavigant Introduction

Navigant Consulting, Inc.:

Specialized, global professional services firm with focus on industries and clients facing transformational change and significant regulatory or legal pressures

Provide range of advisory, consulting, outsourcing, and technology / analytics solutions primarily serving clients in financial services, healthcare, and energy sectors

Headquartered in Chicago, IL with over 5,000 employees across North America, Europe, Middle East, and Asia

Financial Services presence in New York, Washington DC, Houston, Dallas, Charlotte, and San Francisco

Publicly traded since 1996 (NYSE: NCI)

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INTRODUCTION AND CREDIT REPORTING OVERVIEWNavigant Speakers / Bios

BEJI VARGHESEMANAGING [email protected]

Mr. Varghese is a Managing Director in the Banking, Insurance and Capital Markets practice, based out of Navigant’s Charlotte, NC office. Mr. Varghese specializes in the area of governance, risk and compliance and has advised multiple companies in the design and implementation of effective financial reporting internal controls.

Mr. Varghese has worked on multiple large bank and non-bank FCRA related projects from a regulatory (CFPB focus) perspective. In addition, he has been intimately involved in helping mortgage servicers mitigate the current issues affecting their foreclosure, bankruptcy and mortgage servicing processes. He recently moderated a panel of industry experts at a regulatory conference discussing the impact of the current consent orders, the potential impact of the CFPB and other related issues. He is the author of “Fixing a Flawed Process” discussing the complexities of implementing a Single Point of Contact within the current mortgage servicing environment in the November 2011 issue of the Mortgage Banking magazine –a premier mortgage banking publication.

Mr. Varghese has led credit reporting reviews, risk and compliance reviews, distressed workouts, consent order reviews and lending best practice reviews for the top 20 US consumer finance companies. Mr. Varghese also has a strong technology background having led multiple data migration and warehousing projects for top ten mortgage banks.

Prior to joining Navigant, Mr. Varghese was the Chief Operating Officer at a specialty residential mortgage servicer. In that role, he was responsible for growing the business ($600million in UPB to $3.5 billion in UPB) and for operations management and servicing system performance improvements.

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DAVID [email protected]

Mr. King is a Director in the Banking, Insurance and Capital Markets practice, based out of Navigant’s Houston, TX office. He has extensive project management and consulting experience across a wide variety of financial service functions. Mr. King has led engagements covering risk management, compliance, data extraction and analysis, systems integration, systems development and document management. He is a Certified Fraud Examiner, holds a CDIA FCRA Data Furnisher Requirements certificate of completion, and has been a team leader and project manager for compliance reviews, vendor audits and government inquiries for numerous companies across the world.

Mr. King has conducted numerous current state assessments and system change implementation projects related to FCRA. The assessments include reviews of policies and procedures pertaining to disputes, furnishing and usage, an evaluation of Metro 2® files submitted by clients to the CRAs, and the testing of trade lines. He has also supervised the teams acting as the independent consultant in consent orders issued by the CFPB related to FCRA. His systems experience includes business requirements documentation, developing use cases and supervising user acceptance testing. He has assisted a wide variety of clients in the auto, card, student and mortgage lending industries, some of whom are furnishing millions of trade lines a month and investigating thousands of disputes.

Mr. King has been heavily involved in the development of various Navigant tools, including our online loan review tool and suite of credit reporting modules. This has involved managing business analysts and software developers, overseeing version releases, user acceptance testing, drafting business requirements documentation, designing reporting, and soliciting feedback from end users for enhancements.

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ALEXANDRA SAWYERASSOCIATE [email protected]

Alexandra Sawyer is an Associate Director in the Consumer Finance practice at Navigant. With over sixteen years of experience, Alexandra has a proven track record in leading a variety of engagements, including: assessing client’s current state compliance organizations; developing management regulatory compliance process, controls and procedures; managing large, complex projects; developing business strategies and reporting, data quality analysis, and system implementation.

Alexandra’s experience at Navigant includes assisting clients with management of compliance and risk related issues and has allowed her to successfully develop expertise in project and change management. These experiences have afforded her the opportunity to lead a number of large process improvement initiatives in the consumer services industries. Most recently, her experiences have allowed her to lead a number of FCRA compliance engagements. These engagements have included the assessment of organizations current state process for the furnishing of data to Credit Reporting Agencies along with evaluation of FCRA compliance practices. Additionally, Alexandra previously lead Credit Reporting User Acceptance Testing workstreams in support client’s furnishing system implementation.

Prior to joining Navigant Consulting Inc., Alexandra was with Andersen, LLP where she conducted numerous IT audit assessments in support of financial statement audits.

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MICHAEL CANALEASSOCIATE [email protected]

Mr. Canale is an Associate Director in the Banking, Insurance and Capital Markets practice, based out of Navigant’s New York City, NY office. He has over twelve years of professional experience including project management focused on compliance, operations, finance, accounting, and bankruptcy administration and liquidation.

Mr. Canale’s experience at Navigant includes service as an Independent Consultant for multiple consent orders relating to FCRA. In addition, he has project managed several engagements evaluating the credit disputes process including direct and indirect disputes, fraud, and default, ensuring that furnishers maintain effective policies and procedures associated with CFPB rules and regulations. Recently, Mr. Canale led the FCRA review for a large financial institution conducting an operational assessment, data analytics, and performing credit bureau account testing.

Prior to joining Navigant, Mr. Canale worked for Navigant Capital Advisors where he served on the leadership team of a $300 Million liquidating Trust. During the company’s liquidation, Mr. Canale was responsible for project management, the service release of 512,000 loans to transferee servicers, administration of approximately $12 Billion in filed claims, assisting the CFO with cash management and reporting to the U.S. Trustee, valuation and liquidation of company assets, and the management and sale of a portfolio of forfeiture properties on behalf of the U.S. Government.

Mr. Canale has a Master’s of Business Administration from the University of Virginia’s Darden School of Business, a Bachelor of Arts in Economics from Boston University, and is a Certified Insolvency Restructuring Advisor (CIRA).

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INTRODUCTION AND CREDIT REPORTING OVERVIEWKey Terms

Collects consumer credit information on a monthly basis to create a consumer credit report describing a consumer’s creditworthinessFour major CRAs: Experian, Equifax, Transunion, and Innovis

CRA

Consumer Reporting Agency

Institution which provides consumer credit information on a monthly basis to CRAsFurnisher

Trade association of furnishers which Develops the annual Credit Reporting Resource Guide

CDIA

Consumer Data Industry Association

Published annually by the CDIA and provides the industry standard on how to report in Metro 2® format

CRRG

Credit Reporting Resource Guide

Enacted in 1971 to promote the accuracy, fairness, and privacy of information in the files of consumer reporting agenciesGuiding document for all credit reporting activities

FCRA

Fair Credit Reporting Act

Character format used to furnish data Made up of segments: Base, J1, J2, and K1

Metro 2®

Regulatory agency with power to enforce provisions of FCRACFPB

Consumer Financial Protection Bureau

Industry wide disputes management system that houses indirect disputes. Online Solution for Complete and Accurate Reporting -developed by Equifax, Experian, Innovis and TransUnion

e-OSCAR®

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INTRODUCTION AND CREDIT REPORTING OVERVIEWMajor Sections of the Law/Regulations

FCRA §605B, §615(e), §615(f), §622(a)(6): ID Theft / Fraudulent Activity

Duties of Furnishers Upon Notice of ID Theft-Related Information

Furnisher that is notified of a block of ID theft-related information is required to establish reasonable procedures to prevent the furnisher from re-reporting the information to the CRAsWhen the furnisher learns of the ID theft directly from the consumer, the furnisher is required to

complete its own investigation on the account and no longer report this information to the CRAsFurnisher is also prohibited from selling, transferring, or placing for collection the ID theft account

ID Theft Red Flag Rules

Requires any covered creditor or financial institution (i.e. furnishers) to develop and implement a written ID Theft Prevention Program designed to detect, prevent, and mitigate ID theftAs part of this Program, it is recommended that furnishers identify relevant “Red Flags” (i.e. patterns,

practices, or activities that may indicate ID theft) and should also detect and respond to the identified Red Flags

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FCRA §611: Procedure for CRAs in Case of Disputed Accuracy

Reinvestigations of Disputed Information

Required to conduct a reasonable reinvestigation to determine whether disputed information is inaccurateRecord the current status of the disputed information or delete the item from the file as appropriate

before the end of the 30-day period beginning on the date the CRA receives the consumer notice of dispute

Statement of Dispute

If the reinvestigation does not resolve the dispute, the consumer may file a statement regarding the nature of the disputeCRA may limit statement to 100 words or less

Notification of Customer Dispute in Subsequent Consumer Reports

Unless there are reasonable grounds to believe the dispute is frivolous or irrelevant, the CRA shall clearly note the consumer dispute and provide a summary statement in any subsequent report containing the disputed information

Notification of Deletion of Disputed Information

CRA shall furnish, at the request of the consumer, notification that the item has been deleted

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FCRA §605(h) and §617: Responsibilities of furnishers of information to CRAs

Duty to Provide Accurate Information

Do not furnish consumer information if there is reasonable cause to believe information is inaccurateDo not furnish information after notice and confirmation of errors

Duties upon Notice of Dispute

Conduct an investigation with respect to the disputed informationReview all relevant information provided by the CRAReport the results of the investigation to the CRA before the end of the 30-day period beginning on the

date the CRA receives the consumer notice of dispute (§611 (a)(1))Upon making any determination that a dispute is frivolous or irrelevant, the furnisher shall notify the

consumer of such determination no later than 5 business days after such determination ((§623 (f)(ii))Report those results to all other CRAs, if applicable

Negative Information Notice

Lenders that furnish “negative information” (i.e. information concerning a customer’s delinquencies, late payments, insolvency, or any form of default) must notify borrowers no later than 30 days after furnishing such information

Address Discrepancies

CRAs are required to provide users of consumer reports with an Address Discrepancy Indicator (ADI) if the address provided by the user differs substantially from the address on file with the CRALenders must establish reasonable policies and procedures for furnishing an address for the

consumer that the lender has “reasonably confirmed is accurate” to the CRA from which it received an ADI

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FCRA §1022 Appendix E (a-m): Specific Components of Policies and Procedures

Establishing and implementing a system for furnishing information about consumers to CRAs that is appropriate to the nature, size, complexity, and scope of the furnisher's business operations(a)

Using standard data reporting formats and standard procedures for compiling and furnishing data, where feasible, such as the electronic transmission of information about consumers to CRAs(b)

Maintaining records for a reasonable period of time, not less than any applicable recordkeeping requirement, in order to substantiate the accuracy of any information about consumers it furnishes that is subject to a direct dispute

(c)

Establishing and implementing appropriate internal controls regarding the accuracy and integrity of information about consumers furnished to CRAs, such as by implementing standard procedures and verifying random samples of information provided to CRAs

(d)

Training staff that participates in activities related to the furnishing of information about consumers to CRAs to implement the policies and procedures(e)

Providing for appropriate and effective oversight of relevant service providers whose activities may affect the accuracy or integrity of information about consumers furnished to CRAs to ensure compliance with the policies and procedures

(f)

Furnishing information about consumers to CRAs following mergers, portfolio acquisitions or sales, or other acquisitions or transfers of accounts or other obligations in a manner that prevents re-aging of information, duplicative reporting, or other problems that may similarly affect the accuracy or integrity of the information furnished

(g)

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FCRA §1022 Appendix E (a-m): Specific Components of Policies and Procedures

Deleting, updating, and correcting information in the furnisher's records, as appropriate, to avoid furnishing inaccurate information(h)

Conducting reasonable investigations of disputes(i)

Designing technological and other means of communication with CRAs to prevent duplicative reporting of accounts, erroneous association of information with the wrong consumer(s), and other occurrences that may compromise the accuracy or integrity of information provided to CRAs

(j)

Providing CRAs with sufficient identifying information in the furnisher's possession about each consumer about whom information is furnished to enable the CRAs to properly to identify the consumer

(k)

Conducting a periodic evaluation of its own practices, CRA practices of which the furnisher is aware, investigations of disputed information, corrections of inaccurate information, means of communication, and other factors that may affect the accuracy or integrity of information furnished to CRAs

(l)

Complying with applicable requirements under the FCRA and its implementing regulations(m)

SECTION IIREGULATORY ENVIRONMENT

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REGULATORY ENVIRONMENTAG Settlements with CRAs

2015 - Major National Settlement with 31 AGs and the CRAs

Key provisions of the settlement include:

Higher Standards for Furnishers: The CRAs must maintain information about ‘problem’ data furnishers and provide a list of those furnishers to the states upon

request The CRAs and data furnishers must use a better, more detailed system to share data

Limits to direct-to-consumer marketing: The CRAs cannot market credit monitoring services to a consumer during a dispute phone call until the dispute portion of the

call has ended The CRAs must tell consumers that purchasing a product is not a requirement for disputing information on their credit reports

Added protections for consumers who dispute credit reporting information: The CRAs must implement an escalated process for handling complicated disputes such as identity theft, fraud, or mixed files. Each CRA must notify other agencies if it finds a mixed file (in which one consumer’s information is mixed with another’s) The CRA must send a consumer’s supporting documents to the data furnisher Consumers may obtain one additional free credit report in a 12-month period if they dispute information on their credit report

and a change is made as a result of the dispute

Limits to certain information that can be added to a consumer’s credit report: The CRAs are generally prohibited from adding information about fines and tickets to credit reports The CRAs cannot place medical debt on a credit report until 180 days after the account is reported to the CRA, which gives

consumers time to work out issues with their insurance companies The CRAs must require debt collectors to provide the original creditor’s name and information about the debt before the debt

information can be added to a credit report

Additional consumer education: The CRAs must tell consumers how they can further dispute the outcome of an investigation into a dispute, such as by filing a

complaint with other agencies Each CRA must provide a link to its online dispute website on the following website: www.annualcreditreport.com, and the

CRA’s dispute website must be free of ads and any marketing offers

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2015 – NYAG Settlement with the CRAs

Key provisions of the settlement include:

Data Accuracy and Quality: Reporting of collection data Retire Metro 1 reporting format Medical Debt Collections Authorized User Accounts Illegal Lenders Minimum Identification Elements on Trade and

Collection Data Accuracy of Public Record Data

The Dispute Process: Initiating a Dispute Repeat Disputes Dispute Information Sharing Among CRAs Improving Notifications to Consumers on

Reinvestigation Results Additional Free Annual Credit Report to Consumers

Following Reinvestigation Enhancing e-OSCAR Furnisher Certifications and

Terms of Use Escalated Dispute Handling for Mixed Files, Fraud,

and Identity Theft Review of Supporting Dispute Documentation

Submitted by Consumers

AnnualCreditReport.com: Enhancing AnnualCreditReport.com Promoting AnnualCreditReport.com

Educational Campaign: Topics for Educational Content Framework of Campaign NYAG Involvement Campaign Costs

Furnisher Monitoring: Working Group Composition of the Working Group Frequency of Working Group Meetings Functions of the Working Group Corrective Action Against Certain Furnishers

Customer Complaints: Each CRA shall designate a department or group within

their respective companies to assist the NYAG in addressing consumer complaints

Compliance: Each CRA shall provide the NYAG with semi-annual

affidavits of compliance

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Schedule for Implementation

The changes to the credit reporting industry, as stated in the 2015 settlement, are scheduled to take place over the next couple of years with a deadline of 2018. A few key initiatives per phase are listed below.

Phase 1

(within 6 months)

Announce retirement of Metro 1 data reporting formatInform furnishers of date of birth reporting requirements for newly opened accountsEliminate conditions for accepting disputesPromote AnnualCreditReport.com on landing webpages

Phase 2

(within 18 months)

Develop guidelines and procedures for communicating with consumers about mixed files and create educational contentProvide consumers the right to request one additional free annual credit report disclosure during the 12-

month reporting period following a change to the consumer’s fileUpdate AnnualCreditReport.com with educational material regarding the dispute process and updates to the

website to enhance the consumer experience

Phase 3

(by Completion Date)

Migrate to Metro 2® data reporting format and no longer accept Metro 1 data reporting formatEstablish new standards regarding indicative information and public recordsProvide standardized notices following reinvestigation of disputesImplement policies relating to furnisher monitoring

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REGULATORY ENVIRONMENTCFPB Consent Orders

CFPB – Selection of Consent Orders with FCRA Implications

CitiFinancial Servicing. – January 23, 2017 $4,400,000 to consumers for incorrectly reporting settled accounts as being charged off and not properly investigating disputes within the

required time frame, along with other RESPA and Dodd-Frank violations, in addition to a $4,400,000 penalty

Works & Lentz, Inc. – January 9, 2017 $577,135 to relieve harmed customers for collecting and representing non-verified debt and for not ensuring the accuracy of consumer

information furnished to credit reporting companies, in addition to a $78,800 penalty

TransUnion and Equifax – January 3, 2017 Over $17,600,000 to consumers for deceiving consumers about the cost and usefulness of credit scores and credit products, in addition to

$5,500,000 in fines

Flurish, Inc. (doing business as LendUp) – September 27, 2016 $1,800,000 civil penalty along with $1,830,000 in refunds to 50,000 consumers for failing to deliver on product promises, improperly

furnishing information to the CRAs, and failing to have written policies and procedures regarding furnishing consumer information to CRAs.

Wells Fargo – August 22, 2016 $3,600,000 civil penalty in addition to $410,000 refund of late fees for misapplying borrower payments, misleading borrowers, illegal late

fees, and failing to correct inaccurate borrower information furnished to CRAs

CarHop – December 17, 2015 $6,465,000 civil penalty for impacting 84,000 accounts ($75+ per account), Independent Consultant required to do a review of policies,

procedures, practices and systems

Collecto Inc. EOS CCA – December 7, 2015 $1,850,000 civil penalty for collecting on non-verified and disputed debt and providing inaccurate information to CRAs, in addition to

$743,000 refund to customers

Clarity Services, Inc. – December 3, 2015 $8,000,000 civil penalty for illegal credit reporting practices and improper dispute investigation procedures

DriveTime – November 19, 2014 $8,000,000 civil penalty, Independent Consultant required to review furnishing policies, procedures and practices

First Investors – August 20, 2014 $2,750,000 civil penalty, Independent Consultant required to review compliance with the Consent Order

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REGULATORY ENVIRONMENTCFPB Activity

CFPB Oversight Uncovers and Corrects Credit Reporting Problems Report issued March 2, 2017 with discussion around:

Issues identified by the CFPB since the start of credit reporting industry monitoring1 related to inaccurate information furnished and maintained by the CRAs

Steps that have been taken by the CFPB to ensure consumer’s credit reports are accurate

Consumer Complaints: Approximately 185,700 complaints have been received by the CFPB from consumers related to credit reports from July 21,

2011 through February 1, 2017 Consumers frequently complain about lack of investigation into disputes and inaccurate information in their credit report, such

as paid-off debts still showing on the credit report

Focus Areas related to Credit Reporting Include: Fixing data accuracy at consumer reporting companies

o CRAs previously lacked quality control programs; recent reviews identified enhanced programs Repairing broken dispute processes at consumer reporting companies

o CRAs previously were not adequately investigating disputes and not providing notice to customers; recent reviews have noted an improved process

Cleaning up information from furnisherso Furnishers (both banks and nonbanks) lacked proper processes for investigating disputes; recent reviews have

observed increased efforts related to dispute investigations and corrective action to rectify inaccurate information

Remark (bold emphasis added): “Since we began our oversight work, the CFPB has been uncovering and correcting problems in the consumer reporting

industry. Because of our work, important improvements are being made. Much more work needs to be done but our corrective actions are leading to positive changes that are benefiting consumers all over the country.” CFPB Director Richard Cordray.

[1] “The Consumer Financial Protection Bureau (CFPB) adopted a rule today [July 16, 2012], to being supervising larger consumer reporting agencies, which include what are popularly called credit bureaus or credit reporting companies. This is the first time these companies will be supervised at the federal level…Previously, consumer reporting was subject, at the federal level, only to law enforcement authority…The rule outlining the CFPB’s supervision of this market will be effective September 30, 2012.” https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-to-superivse-credit-reporting/

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REGULATORY ENVIRONMENTCFPB Supervisory Highlights

Supervisory Highlights – Fall 2016 [May 2016 – Aug. 2016]

Periodic Report: For the past two years, three (3) issues of the Supervisory Highlights have been published by the CFPB (Winter,

Summer and Fall)

Topics vary across reports, including areas such as: Auto loan origination and servicing Debt collection Mortgage origination and servicing Student loan servicing Fair Lending

In the October 2016 report, the Relevant Findings related to FCRA (bold emphasis added) included: “Examiners have identified several violations of the FCRA, including failing to investigate indirect disputes, and

having inadequate furnishing policies and procedures.” “Examiners observed that one or more entities failed to provide adequate guidance and training to staff

regarding differentiating FCRA disputes from general customer inquiries, complaints, or FDCPA debt validation requests. As a result, employees could not review the historic records of FCRA disputes or perform effective root cause analyses of disputes.”

“Supervision directed one or more entities to develop and implement a training program appropriately tailored to employees responsible for logging, categorizing, and handling FCRA direct and indirect disputes.”

“Examiners determined that one or more debt collectors never investigated indirect disputes that lacked detail or were not accompanied by attachments with relevant information from the consumer.”

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REGULATORY ENVIRONMENTCFPB Supervisory Highlights

Supervisory Highlights Special Edition – Winter 2017

A Special Edition of the CFPB’s Supervisory Highlights was released in March 2017 focusing on observations made both at consumer reporting agencies and at data furnishers.

Supervisory Observations and Improvements Identified at Consumer Reporting Agencies

Data Accuracy: Accurate information is crucial for correct credit reports. Initial reviews identified potential areas for improvement. In subsequent reviews, enhancements were noted by the CFPB and include the following among others: Establishment of quality control programs Review of furnishers to ensure minimum data security

standards are met Developed procedures to monitor furnisher dispute data

Dispute Handling and Resolution: Consumers are able to dispute information in his/her credit report. Major improvement has been achieved in the past in this area, but the CFPB is now focused on improving the dispute resolution procedures and communication of the investigation with the consumer.

Supervisory Observations and Areas Requiring Action at Data Furnishers

CMS/Data Governance Weak oversight by

management and the BOD over furnishing practices

Failure to update policies and procedures

Weak training of employees who conduct furnishing and dispute handling operations

Reasonable P&PsFailure to have written P&Ps for: Handling and

investigating direct disputes

Creation/retention of documents used in dispute investigation

Third party service providers who furnish on behalf of the furnisher

Appendix EFurnishers need to incorporate, as appropriate, the guidelines of Appendix E to ensure information is furnished accurately and with integrity. CFPB identified areas of Appendix E that were not sufficiently addressed.

Data Accuracy Reporting

information with actual knowledge of errors

Failure to report accurate dates of first delinquencies

Failure to update and correct inaccurate information

Dispute Handling Failure to report the

results of direct dispute investigations to consumers

Failure to comply with indirect dispute handling requirements

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REGULATORY ENVIRONMENTFTC Consent Orders and Complaints

Selection of Recent FTC Consent Decrees and Complaints with FCRA ImplicationsThe FTC has brought over 100 FCRA cases and has collected over $30M in civil penalties related to credit reporting errors.

Credit Protection Association (May 2016) Allegations that Credit Protection Agency “failed to consider and incorporate the appropriate guidelines from Appendix E of the

Furnisher Rule.” Specifically, subsections b, c, e, i and l. $72,000 civil penalty

Sprint (Oct. 2015) Allegations that Sprint violated the risk based pricing rule by failing to alert customers who were placed in a program with

lower credit scores and charged an extra monthly fee. $2,950,000 civil penalty

Tricolor Auto Group (TAA) (Sept. 2015) Allegations that TAA “failed to establish and implement any reasonable written policies and procedures regarding the accuracy

and integrity…that it furnishes to CRAs…” $82,777 civil penalty

Instant Checkmate (April 2014) Allegations that company “advertised potential uses of its consumer data for employment and tenant screening purposes,” and

“used a Google AdWords campaign to display ads for its services that would appear in search results when consumers sought background checks on ‘nannies,’ ‘babysitters,’ ‘maids,’ and ‘housekeepers.’”

$550,000 civil penalty

Certegy Check Services, Inc. (August 2013) Allegations that Certegy did not properly review disputes and “failed to follow reasonable procedures to assure maximum

possibly accuracy of the information it provided to its merchant clients…” $3,500,000 civil penalty

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REGULATORY ENVIRONMENTFTC Activity

FTC Position on the Use of Big Data Analytics

Big Data Report in January 2016: Big Data: A Tool for Inclusion or Exclusion?

Understanding the Issues Addressed the use of big data analytics to target and make decisions about customers, and how FTC considers whether

a company is subject to the FCRA

FTC’s Positions: FCRA is not limited to traditional CRAs, credit bureaus, and lenders subject to the statute

Applies to “data brokers,” particularly if those companies “advertise their services for eligibility purposes” Yet the statute does not specifically mention advertisement of services as a factor in determining whether the

FCRA applies

Whether a company uses “traditional” credit scoring models or “non-traditional” consumer characteristics like zip code, social media usage, or shopping history, the FTC uses the same methods and standards

Conducts a “fact-specific analysis” to determine whether any given practice is subject to or violates the FCRA

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REGULATORY ENVIRONMENTCFPB Consent Orders and FTC Complaints

Recent Remarks (bold emphasis added)

January 4, 2017Richard Cordray, CFPB Director: “TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises. Credit scores are central to a consumer’s financial life and people deserve honest and accurate information about them.”

May 10, 2016Jessica Rich, Director FTC’s Bureau of Consumer Protection: “…when consumers dispute potentially incorrect information in their credit reports, companies must not only investigate those disputes, but also let consumers know whether the information has been corrected. Otherwise, consumers may be unaware of additional steps they may need to take under FCRA, including filing dispute statements directly with credit reporting agencies.”

February 3, 2016Richard Cordray, CFPB Director: “Today we are issuing a bulletin warning banks and credit unions that they must meet their legal obligation to have appropriate systems in place with respect to accuracy when they report information, such as negative account histories, to the consumer reporting companies. More effort and rigor are needed to make sure that the risks consumers actually pose to potential financial providers can be evaluated correctly.”

Of course, the specialty consumer reporting companies that track deposit accounts also merit our scrutiny as we work on these issues. They have important legal obligations with respect to the accuracy of the information they sell, as specified in the Fair Credit Reporting Act. Ensuring that they are adopting and implementing reasonable procedures to assure maximum possible accuracy of the credit reporting information they provide, as the law requires, is an important area for regulatory oversight.

September 16, 2015Jessica Rich, Director FTC’s Bureau of Consumer Protection: “An inaccurate credit report can have a huge impact on consumer’s ability to make purchases, be hired and more.”

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Private ActionPrivate Action1

No private right of action for accuracy, but;

Private right of action for failure to conduct a reasonable investigation of an indirect dispute:

Actual Damages, costs and attorney’s fees

Civil Penalties of $100 - $1,000

Federal Enforcement (CFPB)Federal Enforcement (CFPB)2

Regulatory agencies, including the CFPB, can bring

enforcement action under the Consumer Financial Protection Act for violations of a federal

consumer law (including Credit Reporting)

Penalty Amounts (12 U.S. Code § 5565):

Any violation (i.e. including unintentional ones) up to $5,000 per day

Recklessly engages in a violation up to $25,000 per day

Knowingly violates a Federal consumer law up to $1,000,000 per day

Mitigating factors include the gravity of the violation, the losses to consumers, and the history of previous violations

The penalties and consequences of non compliance can be severe.

REGULATORY ENVIRONMENTPenalties for Non-Compliance

SECTION IIIFURNISHING OVERVIEW

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28

FURNISHING OVERVIEWCredit Reporting Life Cycle

Metro 2® Credit Reporting Resource

Guide

Defines rules and

requirements for reporting

Programming logic generates Metro 2® file to send to CRAs

Servicing System and Account Information

(Periodic) Cycle or Month end

credit reporting process initiated

CRAs process

Metro 2® file to create

reports for consumers

CRAs process Metro 2® file to create credit

reports attached to consumers

CDIA

Consumer Reporting Agencies

Credit Report End Users

Consumer Credit

Reports

Organizations and end users use credit

reports to determine consumer ability to

repay

1

2

3

4

Data Furnishers

Credit reporting is the accurate submission of servicing system data by data furnishers to Consumer Reporting Agencies in Metro 2® format as per the current Credit Reporting Resource Guide circulated by the CDIA.

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FURNISHING OVERVIEWAccuracy and Integrity

The requirements of the FCRA and Fair and Accurate Credit Transactions Act (FACTA) of 2003 can be broken down to four main “pillars”:

Permissibility

Usage

Fraud & Identity Theft

Furnishing

§660.2 “Furnishers,” are organizations that report information monthly on consumers to at least one Consumer Reporting Agency for inclusion in a credit report‡. Furnishers are bound by the rules outlined in the FCRA

In order to furnish with accuracy, Furnishers should use the industry standard furnishing formats, such as Metro 2®

§660.2 Accuracy: means that information that the Bank provides to the consumer reporting agency about an account or other relationship with the consumer correctly:

Reflects the terms of and liability for the account or other relationship

Reflects the consumer's performance and other conduct with respect to the account or other relationship

Identifies the appropriate consumer

§660.2 Integrity: means that information that the Bank provides to a consumer reporting agency about an account or other relationship with the consumer:

Is substantiated by the furnisher's records at the time it is furnished

Is furnished in a form and manner that is designed to minimize the likelihood that the information may be incorrectly reflected in a consumer report

Includes the information in the Bank’s possession about the account or other relationship that the Bureau has

Determined that the absence of which would likely be materially misleading in evaluating a consumer's creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living

‡ Source: http://www.ecfr.gov/cgi-bin/text-idx?rgn=div5&node=16:1.0.1.6.77

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FURNISHING OVERVIEWMetro 2® Format

Appendix E to 12 CFR Part 1022 “A through M” Specific Components of Policies and Procedures: (B) Using standard data reporting formats and standard procedures for compiling and furnishing data, where feasible, such as the electronic transmission of information about consumers to CRA’s

Most common industry standard furnishing format is Metro 2® accepted by Experian, Equifax, Transunion and other CRAs

There are a number of important advantages to reporting in the Metro 2® Format, including:

Accepted by many consumer reporting agencies (including the three major nationwide consumer reporting agencies), the Metro 2® Format enables the reporting of consistent, complete, and timely credit information

Meets all requirements of the Fair Credit Billing Act (FCBA), the Fair Credit Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA), and all applicable state laws

Allows credit information to be added and mapped to the consumer’s file with greater consistency

Allows complete identification information to be reported for each consumer (including co-debtor, co-signer, etc.) each month which improves the ability of the consumer reporting systems to match to the correct consumer

Accommodates cycle reporting of data, which allows for timely updating of the credit file

The Payment History Profile (up to 24 months) makes it possible for the credit grantor to supply automated updates/corrections for the file rather than costly manual updates/corrections and reduces consumer disputes

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FURNISHING OVERVIEWCommon Pitfalls and Mistakes

Not reporting charge off amount for charged off accounts

Not reporting a Date of First Delinquency (DOFD) for accounts with a delinquent / derogatory status

Populating Payment Rating for account statuses that are supposed to be blank filled

Invalid Portfolio and Account Type combinations

Paid in full loans with DOFD

Not changing Scheduled Monthly Payment to zero once account charged off

Illogical Conditions

Including interest/finance charges in Original Loan Amount

Not including fees and/or interest due in Current Balance

Rounding rather than truncating values Using end of month for Date Closed Counting delinquency immediately rather than 30

days after the bill due date Using billing date for Date of Account Information Using charge off date as DOFD Only reporting last payment amount not summing all

payments in reporting period Payment History Profile not being updated e.g. for

retroactive deferrals

Placing businesses in base segment Placeholders (999999999, 1234, etc.) for social

security numbers Furnishing accounts with insufficient information

after a transfer, e.g. unknown DOFD Including amounts not 30 days past due in

Amount Past Due field

Zeroing out Current Balance Not reporting Dates of Last Payment Incorrect Consumer Information Indicators Incorrect Payment History Profile (e.g. D

between petition date and resolution) Not reporting a DOFD when a borrower in J1/J2

has a CII but borrower in base does not Reporting a DOFD for post petition bankruptcy

debt

Data Quality

Continuing to report closed accounts Continuing to report deceased borrowers Using deletions too frequently/inappropriately Failure to distinguish between voluntary/involuntary

surrender ‘Re-Pollution’ of accounts corrected via eOSCAR

after dispute Use of AI Special Comment Code potentially

impacting SCRA Not using code for foreign addresses (may not

create tradelines) Failure to apply Compliance Condition Codes to

accounts with direct disputes

Bankruptcy Calculation Errors

Others

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FURNISHING OVERVIEWFurnishing Examples

Per the 2016 Metro 2® Guide, there is currently no specific direction on treating total loss accounts; however, based on industry best practice, the following actions are recommended depending on the scenario:

Lease Early Termination, Total Insurance Loss – Report Special Comment Code BH (Early termination/insurance loss) when insurance has confirmed the total loss situation prior to the account being closed or paid in full and use Special Comment Code BH

Reporting Insurance Total Loss – Closed Account: Report Special Comment Code BP (Paid by insurance) when a total loss account is paid in full after an insurance payment is received and the system shall report Account Status 13 (paid in full, zero balance) or Account Status 64 (paid in full, charge off) when the account has been paid in full

Navigant has observed instances where an account was current and reported as a total loss but the account was charged off on the same day the insurance payment of the vehicle was received and a special comment code “BA” was applied (transferred to recovery). As a result of the insurance payment, the account was current but was still reported as an Account Status 97 (unpaid balance reported as a loss, charge-off)

It is recommended per industry practice that derogatory account statuses and special comment codes not be reported in these instances as they may lead to inaccuracies in a borrower’s credit report

Example 1: Total Loss AccountsExample 1: Total Loss Accounts

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# Sample Field / SegmentSample Reported

ValueIssue

1Surname, First Name, Middle Name

Null ValuesNot reporting the consumer’s demographic data according to Metro 2® guidelines could potentially lead to an inability to identify the correct consumer.

2 Address Line 1 Bankrupt

Metro 2® guidelines specifically state that account description terminology such as Bankrupt, Repossession, etc. should not be reported in the Address fields. Similar to the example above, not following Metro 2® guidelines could lead to an inability to identify the correct borrower on the account.

3 J2 Segment Null Values

The servicing system reports a co-borrower on the account with a different address so it should be reported in the J2 Segment per Metro 2® guidelines. If the consumers demographic information is not reported in the correct segments according to Metro 2® guidelines, it may increase the risk that account information will not be correctly tied to the right borrowers.

4 Base SegmentReporting Business Account Information

Reporting business accounts in the Base segment does not conform to the Metro 2® Guide requirements for reporting and may cause processing issues for CRAs managing the file.

Example 2: Incorrect Values / Banned Language in Demographic FieldsExample 2: Incorrect Values / Banned Language in Demographic Fields

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34


Payment History Profile (PHP) contains up to 24 months of consecutive payment activity for the previous 24 reporting periods prior to the Date of Account Information being reported. The first byte should represent the Account Status Code reported in the previous reporting period. For example, if an account is current but was 30 days past due in the previous reporting period, it should be reported as “100000000000000000000000”.

Common payment history profile issues include:

Reporting a payment history profile value of “B” (i.e. no payment history available) for historical periods after implementing a new servicing system (e.g. “0BBBBBBBBBBBBBBBBBBBBBBB” instead of “000000000000000000000000”)

Reporting incorrect Payment History Profile values during bankruptcy (e.g. reporting “D” between petition date and resolution)

Reporting Metro 2® values of “K” (Repossession) instead of “J” (Voluntary Surrender) where applicable

Example 3: Payment History ProfileExample 3: Payment History Profile

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FURNISHING OVERVIEWQuality Control

Data lacks consistency from input to output i.e., inappropriate values in fields, position of fields using incorrect record layout

Inaccurate demographic information such as, Dummy SSN, Inaccurate DOB, Zip Codes, etc.

Lack of information in general, sparse data inputs into the Metro 2®processing

Garbage In Garbage Out

Incorrect information in one field can have cascading effect on other fields

Data Quality

Incorrect or inadequate Metro 2®/ Business Requirements Documentation

Misunderstanding of Business Definitions, e.g. Interest Due, Date Opened, Date Closed, Deferred Payment Start Date

Delinquency for Metro 2® purposes may be calculated differently than for day to day business and collection activity

Even the Credit Reporting Resource Guide can provide conflicting information or items that may conflict with other areas of law

Metro 2® Interpretation

Incorrect calculation of fields, e.g. ensuring that fees and interest are appropriately reflected in Current Balance but do not include future charges

Failure to develop and document appropriate hierarchies, e.g. for Account Status where an account is delinquent and charged off and repossession has taken place or for Special Comment Codes

Timing issues such as when the transmission is generated and how reversed payments are addressed

Programming Error

During furnishing, issues often manifest in the following four areas:

Lack of formalized IT/Technical documentation for Metro 2® file generation

Procedures are outdated and reference older versions of Metro 2® guidance using incorrect codes

Process maps do not adequately reflect what is taking place and are lacking risk and control points

Failure to document key concepts such as the organization’s definition of a reasonable investigation or a frivolous dispute

Poor Documentation

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36

Many industry participants do not yet have well developed infrastructure and expertise to cope with the current regulatory environment. Most are aware of the need to change.

Num

ber

of F

irms

Maturity of Practices

Least Mature Most Mature Mature

Number of firms at Maturity LevelNumber of firms at Maturity Level

2017 Majority

Complete checks on population with monthly reporting tools and dashboards

Full independent validation

Full documentation on end to end processes

Minimal inconsistencies in Metro 2® Transmission

Complete checks on population with monthly reporting tools and dashboards

Full independent validation

Full documentation on end to end processes

Minimal inconsistencies in Metro 2® Transmission

Lack of data governance checks or tools

No independent validation

Limited documentation on end to end processes

Widespread inconsistencies in Metro 2® Transmission

Lack of data governance checks or tools

No independent validation

Limited documentation on end to end processes

Widespread inconsistencies in Metro 2® Transmission

Limited assessment of any missing fields or invalid values

Limited independent validation

Documentation for some aspects of key processes

Some inconsistencies in Metro 2® Transmission

Limited assessment of any missing fields or invalid values

Limited independent validation

Documentation for some aspects of key processes

Some inconsistencies in Metro 2® Transmission

FURNISHING OVERVIEWFCRA / Metro 2® Compliance Maturity

2017

2014

SECTION IVDISPUTES OVERVIEW

20

38

DISPUTES OVERVIEWDirect and Indirect Disputes

Consumers may dispute furnished information in two ways:

Indirect: a dispute submitted to a CRA (e-OSCAR)

Direct: a dispute submitted directly to a furnisher (Mail, Phone, Fax, E-mail)

Upon receipt of an indirect or direct dispute, the furnisher must:

Conduct a reasonable investigation of the dispute and review all relevant information provided by the CRA about the dispute

Report findings to the CRA

Provide corrected information to every CRA that received the information if the investigation shows the information is incomplete or inaccurate

Modify the information, delete it, or permanently block its reporting if the information turns out to be inaccurate or incomplete or cannot be verified. FCRA 623(b)(1)

Furnishers must complete these steps to resolve the dispute within 30 days of the CRA receiving the dispute from the consumer

Source: https://www.ftc.gov/system/files/documents/plain-language/bus33-consumer-reports-what-information-furnishers-need-know_0.pdf, pg. 7-8

39

DISPUTES OVERVIEWReasonable Investigation

.

Upon receipt of an indirect or direct dispute, the furnisher must conduct a reasonable investigation

The FCRA does not define what it means to conduct a reasonable investigation

Case law demonstrates that whether an investigation is “reasonable” will depend upon the facts of a particular case

Some courts have employed a balancing test, which weighs the potential harm from inaccuracy against the burden of safeguarding against such inaccuracy

Whether or not an investigation is reasonable depends on what information was provided to the furnisher. For example:

Vague, limited or “scant” information: Courts have typically found it was sufficient for the furnisher to review its own internal records and confirm that the reported information was consistent with the information contained in its records

More specific information: Some types of disputes may require the furnisher to consider information that is outside of its systems and records

Consumer Alleges Fraud or “Not Mine”: Where the dispute is related to fraud, or where the consumer claims that he or she is not a co-obligor on the debt, courts have sometimes required the furnisher to conduct an investigation by obtaining and considering information that is not included in its system or part of its own records

Regardless of the content of the notice of the dispute, the furnisher must provide sufficient time to allow for a reasonable investigation to take place

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40

DISPUTES OVERVIEWFrivolous Disputes

Direct Disputes The furnisher is not required to investigate if the furnisher reasonably determines the dispute is “frivolous” or

“irrelevant,” based on the following:(1) the consumer did not provide sufficient information to investigate the dispute, or(2) the dispute is substantially the same as one previously submitted either directly or through the CRA (but if any new information is submitted, it is not “substantially the same”)

Once the furnisher has made a determination that the dispute is frivolous or irrelevant, the furnisher must: Notify the consumer of that determination within five business days after making the determination The notice must include the reason for the exception or determination that the dispute is frivolous or

irrelevant and must identify any information required to investigate the disputed information The notice may consist of a standardized form describing the general nature of such information

Indirect Disputes Unlike Direct Disputes, the FCRA does not include any exceptions to the investigation requirement for indirect

disputes A furnisher must investigate every dispute it receives from a CRA

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DISPUTES OVERVIEWIndirect Disputes – e-OSCAR

.

e-OSCAR Web-based, Metro 2® compliant, automated system that enables Furnishers and CRAs to create and respond to

consumer credit history disputes Provides for Furnishers to send "out-of-cycle" credit history updates to CRAs May not be used to add or create a record on a consumer's file or as substitute for "in-cycle" reporting to the CRAs Primarily supports Automated Credit Dispute Verification (ACDV) and Automated Universal Dataform (AUD)

processing as well as a number of related processes that handle registration, subscriber code management and reporting

Automated Credit Dispute Verification (ACDV) ACDVs initiated by a CRA on behalf of a consumer are routed to the appropriate Furnisher based on the CRA and

subscriber code affiliations indicated by the Furnisher ACDV is returned to the initiating CRA with updated information (if any) relating to the consumer's credit history If an account is modified or deleted, carbon copies are sent to each CRA with whom the Furnisher has a reporting

relationship

Automated Universal Dataform (AUD) AUDs are initiated by the Furnisher to process out-of-cycle credit history updates The system is used to create the AUD and route it to the appropriate CRAs based on subscriber codes specified by

the Furnisher in the AUD record Intended to provide the CRA with a correction to a consumer's file that must be handled outside of the regular

activity reporting cycle process

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SECTION VCOMPLIANCE APPROACH

43

COMPLIANCE APPROACHAction Steps to Improve Compliance

1 2 3 4

Analyze and determine Furnishing and Disputes

Issue Input Channels

Analyze and determine Furnishing and Disputes

Issue Input Channels

Servicing System to Metro 2® File Review, Metro 2® File to CRA

Soft Pull Credit Reports

Servicing System to Metro 2® File Review, Metro 2® File to CRA

Soft Pull Credit Reports

Risk Rank and Prioritize Identified Furnishing and

Disputes Issues

Risk Rank and Prioritize Identified Furnishing and

Disputes Issues

Review CRA Reject Reports and Warnings reports to identify high frequency error types

Perform customer complaint and dispute trend analysis and management reporting

Remediate Issues and Implement Corrective

Action

Remediate Issues and Implement Corrective

Action

Develop and complete action plan for remediation of issues based on risk ranking

Perform quality check on remediation efforts to determine effectiveness of actions taken

Determine appropriate approach and methodology for ranking issues based on severity, impact, and scope

Determine necessity of remediation (look back correction) for identified issues

Analyze system of record translation and generated Metro 2® files to identify issues and discrepancies

Compare and analyze Metro 2® files provided to CRAs and resulting output for sampled consumers

Identify systemic issues or trends

AnalyzeAnalyze FocusFocus ActAct

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44

COMPLIANCE APPROACHAction Steps to Improve Compliance

6

Establish Credit Reporting Oversight Framework Going Forward

Establish Credit Reporting Oversight Framework Going Forward

Establish QA processes and controls for Metro 2® file generation (independent lines of defense and monitoring, center of excellence for process and controls, etc.)

Conduct training to ensure accurate information is furnished

Establish change management process for activities or systems impacting credit reporting – including ‘upstream’ business processes

Formal oversight committees for credit reporting to meet on a periodic basis to review progress and determine

next steps (executive steering committees)

5

Establish Ongoing Management Reporting dashboards

Establish Ongoing Management Reporting dashboards

Develop and establish a credit reporting monitoring dashboard for the organization to identify key issues on an ongoing basis

Setup repeatable investigation and remediation processes to enhance overall process efficiency

SustainSustain

7

Update Policies and ProceduresUpdate Policies and Procedures

Ensure that practices and processes are accurately documented in policies and procedure documentation

“Get credit” for activities being performed by staff

Formalize control processes and documentation retained for future reviews and audits

45

COMPLIANCE APPROACHExecutive Reporting Dashboard

Design Executive Reporting Dashboards to facilitate

monitoring of key disputes and furnishings metrics

across various product lines, and also tracking results of

FCRA based data analytics

Establish tolerance thresholds for each risk indicator

based on industry standards, regulations and benchmark

analysis

Execute action items based on key risk indicator trend

Perform continuous surveillance of business activities

through data collection and analysis

Metrics can be monitored to:

Ensure compliance with FCRA timelines and the accuracy and integrity of furnishing data

Identify potential risks in the overall credit reporting process

Management can monitor Credit Reporting metrics and focus on high risk areas using customized dashboardsManagement can monitor Credit Reporting metrics and focus on high risk areas using customized dashboards

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46

COMPLIANCE APPROACHExecutive Reporting Dashboard - Sample Metrics

% of Disputes: Monitor dispute volume variances as a

percentage of furnishings

# of Disputes per FTE: Monitor operational strain on the

dispute resolution process

Average time per dispute: Identify team performance related

issues or enhanced dispute complexity

% Disputes pending for over “x” days: Monitor disputes

ageing for potential response timeline risk

% Modified account disputes: Trend analysis to identify

potential systemic inaccuracies

% Disputes QA’d: Monitor performance of QA and quality of

underlying disputes

Disputes by Credit Bureau: Monitor and identify volume of

disputes across credit bureaus

Disputes by Distinct Accounts: Monitor and identify disputes

arising from same customer account

Regulatory Pronouncements: Track additional regulatory

guidance received that requires updates to the Credit Reporting

process

% Account Suppressed: Monitor and analyze account

suppression trends and surges

# of accounts neither suppressed nor furnished: Diagnose

and remediate accounts neither suppressed nor furnished

% of Warnings per furnished accounts: Identify and resolve

potential systemic errors lowering furnishing process

performance

% of Rejects per furnished accounts: Trend analysis of

rejects and remediation of systemic errors

# of accounts QA'd: Monitor performance of QA and quality of

furnishing process

% of QA'd accounts with findings: Monitor and identify issues

with furnishing process

Tradeline Testing (% of QA'd accounts with findings):

Monitor and identify high priority issues with Metro 2® file

Data Analytics Issue Indicator: Monitor and identify high

priority issues with Metro 2® file

Direct and Indirect Disputes MetricsDirect and Indirect Disputes Metrics Furnishing MetricsFurnishing Metrics

47

COMPLIANCE APPROACHKRIs and Tolerances - Sample

FurnishingFurnishing

25

48

COMPLIANCE APPROACHKRIs and Tolerances - Sample

DisputesDisputes

SECTION VIQUESTIONS

26

metro2 regulatory considerations and fcra compliance · metro2® regulatory considerations and fcra...

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