Banks’ Reliance on Automated Compliance Systems Draws CFPB’s Eyes

Big banks and other consumer financial services firms’ increasing reliance on automated systems to perform basic functions is drawing federal regulators’ heightened scrutiny.

The Consumer Financial Protection Bureau established in the fall of 2021 new procedures for its examiners to review companies’ information technology systems, ranging from compliance management and company units’ communications to credit-determination algorithms set up to make credit decisions.

Since then, Wells Fargo & Co., fintech Hello Digit LLC and other companies have been targets of the CFPB’s enforcement or critical reports for failures in their automated compliance and consumer response systems.

Automated systems have become a key part of how banks and other financial services firms operate over the decades. On the retail and consumer side, companies use auto-systems to track payments and communicate with customers, among a growing list of tasks.

“An error in an automated system theoretically can cause much more consumer harm simply by volume,” Craig Cowie, the director of the Blewett Consumer Law & Protection Program at the University of Montana Blewett School of Law, said.

Regulators’ focus on technology is a “natural evolution” as technology, particularly artificial intelligence and machine learning, become a bigger part of banks’ decisions on issuing loans and other forms of credit, said Cowie, a top former CFPB enforcement attorney.

Rewards and Risks

Federal regulators have in the past taken action for failed automated processes, including cracking down on robo-signing of subprime mortgage documents in the run-up to the 2008 financial crisis, according to Shelley Metz-Galloway, a managing director at consulting firm Protiviti.

But the CFPB’s recent focus on automated systems is upping the pressure on companies to make sure their internal systems work, she said.

“What we may be feeling is that there is increased focus, at this time, on these areas,” Metz-Galloway said.

The benefits of an automated system to process a loan payment is that, when done right, consumers quickly and efficiently get credit for paying on time. When done wrong—as in the case of Wells Fargo in its December $3.7 billion settlement with the CFPB—thousands of people can have their cars wrongfully repossessed because the automated system didn’t work.

In other instances, the CFPB is targeting algorithms that banks, fintechs and other firms use to make credit decisions and process payments.

The CFPB ordered fintech Hello Digit to pay a $2.7 million fine because a faulty algorithm caused some users to get hit with overdraft fees.

The CFPB, along with the Justice Department and other regulators, are monitoring algorithms and other automated systems to ensure there’s no bias built into them that result in discriminatory lending practices, Metz-Galloway said.

“It’s safe to say that all of the federal regulators are concerned about how appropriately automated systems are being used in the credit process for consumers,” she said.

The CFPB has also dinged the consumer credit reporting industry for its use of automated responses when people complain about potential mistakes on their credit reports. Relying too heavily on automated responses could mean that companies aren’t taking complaint response seriously enough.

“There is an increased emphasis on complaint handling generally and talking about automated complaint handling is an easy way to reflect consumers’ frustrations,” said Laurel Loomis Rimon, a Paul Hastings LLP partner and former top CFPB enforcement attorney.

A January CFPB report found that the big three credit bureaus—Equifax Inc., Experian and TransUnion—have lessened their use of automated responses and improved their communications with consumers regarding complaints.

Robot Overlords

Banks and other companies’ dependence on automated systems isn’t likely to wane even as the CFPB and other federal and state regulators take a harder look.

That’s particularly true at large financial institutions with trillions of dollars in assets, billions of dollars in outstanding loans, and millions of customers.

“It’s extremely challenging in these large financial institutions, where you have so many pieces and processes,” Rimon, a former federal prosecutor, said.

Companies that spot their own mistakes and take steps to fix them on their own, by both updating systems and paying redress to consumers, are likely to get off easier with the CFPB than those where examiners spot the problems.

“That’s a reason for not penalizing them, or not penalizing them as much,” Cowie said.