Increased Regulatory Scrutiny Renders Credit Furnishers Vulnerable

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Rising consumer debt, the potential specter of recession and an intensified regulatory focus on credit reporting and disputes management are creating a perfect storm for companies that provide credit, including banks.

And yet, from my vantage point as an expert in credit dispute operations technology, I see troubling gaps in how furnishers conduct their credit dispute management operations. Weak credit dispute management will be a liability for banks. My advice to leaders of operational risk and portfolio operations business lines? Shore up your operations now before the inevitability of a rising tide of disputes overwhelms you.

Some effects of a slowing economy that hint at a potential recession are already affecting consumer pocketbooks. Rising consumer prices continue to curtail spending as consumers prioritize groceries and gas over other expenses, most notably debt repayment.

Add spiraling interest rates to that mix, and it should come as no surprise that consumer debt has ballooned to new highs that surpass pre-Great Recession levels. This comes as the job market is expected to eventually trend downward and tools that cash-strapped consumers use, like buy now, pay later, become more popular. These worrisome indicators all point to a significant reboot in the consumer credit score cycle. Here’s what that shift looks like:

  • Lenders look to adjust credit risk.
  • Loan pricing tightens.
  • Interest rates increase as credit scores decrease.
  • Cost of funds increases for consumers with lower credit scores.
  • Consumers take a greater interest in their credit score.
  • Furnishers see dispute volumes increase.
  • Consumers get frustrated and turn to credit repair organizations (CROs).

Yes, we’ve been down this road before and weathered it. But this time could be different.

A Renewed Focus on the FCRA
What is unique to this 2022 cycle, compared to the last cycle that spanned 2009 to 2014, is the notable change in the federal government’s interest in consumer protection. During the last cycle, fewer consumers had the savviness or empowerment to understand credit reporting and scores; additionally, the Consumer Financial Protection Bureau had just been created. Today however, the CFPB is strong, established and primed to act.

Even prior to the war in Ukraine and inflation materialized, CFPB Director Rohit Chopra had already begun laying out his thesis on stronger consumer credit protections — one that includes a far more intentional focus on credit furnishing and dispute provisions within the Fair Credit Reporting Act, or FCRA. The CFPB has clearly signaled that FCRA adherence is its top priority and that this time around, furnishers will be held to account.

Efficiency will protect and help your bank manage the increased volume of disputes expected in an era of stronger consumer credit protections. Let’s examine where those disputes are coming from. Disputes originating from credit repair organizations are the top concern for credit providers. A poll from a recent Consumer Data Industry Association conference shows that 74% of the respondents identified CROs as the “biggest pain point” in their operations. Additionally, the market size for these services is expected to grow by 9.5% this year.

That’s a clear signal for every organization to shore up its credit dispute management and credit furnishing today. Organizations need to be able to demonstrate accurate furnishing standards and adherence, produce relevant policies and procedures that encapsulate reasonable investigation for credit reporting disputes and, above all, adequately demonstrate evidence that “what was said would be done and what was actually done” match. To do anything else is to unnecessarily invite increased regulatory scrutiny at a time when credit furnishers are most vulnerable.

How well prepared is your bank for this increased regulatory scrutiny? If you’re not sure, reach out to a trusted expert to help evaluate and implement the technology and regulatory guidance needed to help accurately and efficiently resolve credit reporting issues before they become disputes.

Managing the Board and CEO Relationship During Times of Stress

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boxing.jpgImagine this scene between a disgruntled bank director and the CEO.

Director: How did these bad loans happen?
CEO: They were good when we made them. The economy has gone south and you guys agreed and approved these deals.
Director: But we’re not bankers. You were supposed to know. Now the regulators are all over us.

This exchange has occurred in countless bank boardrooms lately. For most directors and CEOs, this is their first experience living through a severe credit crisis and they are now learning how to manage a bank – and boardroom tensions – in this environment. We offer the following guidelines to help navigate this difficult experience so that the board and bank can emerge stronger. 

Recognition

Repeated, emotional “debate” should be viewed as a “dispute,” which boards need to address immediately. It is time to address the dispute if it:

  • has divided the board into “camps” or has divided management from the board
  • becomes known to the employees, stockholders, customers or community
  • consumes too much board meeting time and interferes with making other decisions
  • causes the board to doubt the CEO’s recommendations or increasingly turn to attorneys and consultants on key decisions
  • prompts previous undercurrents to resurface and boil over
  • spurs conversations between directors outside of board meetings on a particular issue, and complaints arise that it is not being addressed in an open session

There are many natural reasons directors attempt to ignore a festering dispute, however, the costs of denial can substantially impact the board. Denial can result in a drain on time and emotions, poor decision making, decreased morale, loss of key directors or officers and regulatory perceptions of inaction.

Facilitation

Dispute resolution cannot begin until it is determined who will facilitate the process. Some boards have effectively used an insider who is not a combatant. Outside facilitators, however, are advantageous in dealing with trust issues and other emotions. A neutral party, such as an attorney or consultant, can be invaluable.

When choosing a facilitator, it is important to consider:

  • Is this person experienced as a director or an advisor who has regularly attended board meetings?
  • Does this person understand the special issues facing bank boards, including regulatory issues?
  • Will this person be patient, a good listener, and maintain neutrality and independence?
  • Take special care if a local facilitator is used, and have any facilitator sign a confidentiality agreement
  • This person must understand the unique dynamics between board/governance and CEO/management.
  • A good facilitator should help the board develop their solution, and one that is owned by the entire board.

Resolution

Based on our experience with bank boards, we offer some suggestions on dispute resolution:

  • Trust issues exist in bank boardroom disputes that worsen as disputes go unresolved. Again, we urge boards to deal with disputes immediately. 
  • Power imbalances exist in the boardroom. The CEO is the only person who can be fired and therefore may feel isolated and threatened. It is beneficial to have a consultant, such as a former bank CEO or chairman, to serve as a confidant. Additionally, it is important to remember that all directors equally share liability regardless of their personal company stock holding. Their fiduciary responsibility is the same as the larger stockholder. 
  • Scheduling routine executive sessions provides a forum for independent director discussion, which is healthy and beneficial. Following executive sessions, one or two directors should communicate the results to the CEO. 
  • Create a written understanding of the resolution once it is reached. This allows everyone to understand the resolution and helps create a sense of closure to the process.

Diagnosis

Boards often determine the true source of a dispute is related to the bank’s governance process.

  • Many boards realize they were not properly involved in setting risk parameters or overseeing compliance, understanding loan risk concentrations, and understanding how lending strategies had drifted toward risky waters.
  • An unhealthy understanding of the board’s role versus the CEO’s role might exist. The recent banking stress has caused many bank boards to properly redefine their role from a “social/advisory” to a “fiduciary/governance” role.
  • Communication process improvements might help reduce the probability and severity of future disputes.
  • Is the dispute simply a “rough patch” or has it revealed a root cause that points to performance/qualification issues with the CEO, or, conversely, the board?

Future Planning

During inevitable future disputes, who does a CEO turn to if he feels there is a dispute with a director or the board? How does the board make it easier to identify and resolve small disputes before they become large ones? Most governance experts agree that as a best practice, boards include a dispute resolution process in the board policy, conduct dispute resolution training, and even consider conflict resolution skills when recruiting new directors.