Consumer Advisory Council: A Distant Early Warning System

When the Federal Reserve Board's Consumer Advisory Council ("CAC") meets, the discussion often serves as an early warning system for financial institutions. This is an arena in which consumer concerns, perceptions, and agendas are aired. The most recent CAC meeting included discussions of the FCRA, privacy notices, and predatory lending.

FCRA
In discussions of the FCRA, the group raised a number of concerns. Although the purpose of the discussion was to seek views on whether certain provisions of FCRA should be allowed to sunset at the end of this year, the discussion topics were much broader.

Consumers have serious concerns about accuracy of information in credit reports. There is strong feeling that there should be a duty for accurate information in the reports. When creditors pointed out that reporting is voluntary and rigid standards could discourage reporting, consumers responded by suggesting that reporting should be mandatory. Consumer advocates also recommended giving consumers a private right of action for inaccurate information.

Second, there are concerns that pre-screening practices create a fertile environment for identity theft. When consumers don't know what is coming to them in the mail, they have no way of knowing that it has been stolen and used.

Privacy continues to be a concern, including privacy violations that could result from information sharing between affiliates. Consumers continue to oppose this permission and would prefer to see either an opt-in rather than an opt-out procedure or an outright ban on information sharing.

Finally, consumers raised the idea that the FCRA adverse action notification requirements should be expanded to include situations where credit is offered but at a higher rate - in effect, a counteroffer.

Privacy Notice
While opinions on what the privacy laws should be vary widely, the CAC membership managed to agree that the current privacy notices are confusing and not helpful. They all supported a simplified notice and suggested the use of focus groups to develop a short-form notice.

Predatory Lending
When it comes to putting a lid on predatory lending, the most important element may be consumer education. The CAC urged the Federal Reserve to maintain its emphasis on financial literacy. The Council endorsed providing CRA credit to encourage financial literacy training efforts.

The CAC suggested that a level of public advocacy is needed to counteract or get in ahead of the predatory lenders. While such an effort is labor intensive, the CAC identified several avenues for reaching potential victims of predatory lenders.

One avenue would be through encouraging commercial lenders to work with their customers to deliver special programs to the customers' employees. CAC members listed several types of activities or services that could be important. These include encouraging direct payroll deposit to bring unbanked employees into the banking system, encouraging ACH bill payment, and creating new thresholds for customers with blemished credit records.

The old song of more effective CRA enforcement was also sung. Many consumer advocates believe that CRA is not being effectively enforced and that, if enforcement were intensified, financial institutions would work harder to compete with predatory lenders. If credit needs are not being met, then CRA is not being adequately enforced. This observation fails to address the concern that predatory lenders often prey on first-time home buyers who obtained their home loans because of CRA and that CRA programs may inadvertently provide fertile ground for predatory lenders.

The group did acknowledge that most predatory lenders are not subject to supervision. Financial literacy may be the most important approach to solving this problem. Another idea suggested was federal preemption of state-supervised predatory lenders. Bankers on the CAC suggested that the federal supervision of such lenders could put a stop to predatory lending.

Whether or not the concerns aired by the CAC result in new or revised rules, the financial industry should pay close attention to the concerns and conduct business in ways to accommodate those concerns - or there will be more rules.

Compliance Action thanks Rob Rowe, ICBA for his significant contributions to this article.

ACTION STEPS

Take a hard look at your practices for protecting customer information. If you send out marketing materials or pre-solicitations, what protections do you have in place for the consumer?
Meet with your commercial lenders and discuss the idea of reaching consumers through commercial customers.
Set up a schedule for financial education, using programs such as FDIC's Money Smart.
Review your privacy notices for clarity. Consider what could be shortened, deleted, or simplified and share your ideas with the FRB.