Last month the CFPB issued Bulletin 2016-03 – Detecting and Preventing Consumer Harm from Production Incentives — warning us that creating incentives for employees to meet sales goals can result in harm to consumers. What would seem to be a normal business practice in most every industry, often called “upselling,” draws the wrath of the CFPB in connection with consumer lending. Examples of harm in the eyes of the CFPB include the sale of allegedly unnecessary ancillary products. The CFPB also frowns upon a compensation system that awards employees for achieving a loan rate higher than might otherwise be justified by the consumer's credit standing.

The Director said in the press release accompanying the Bulletin, “Tying bonuses and job security to business goals that are unrealistic or not properly monitored can lead to illegal practices like unauthorized account openings and deceptive sales tactics. The CFPB is warning companies to make sure that their incentives operate to reward quality customer service, not fraud and abuse.”

The Bulletin acknowledges that “reasonable incentives that are properly overseen can benefit consumers and enhance an institution's overall performance.” However, when incentives reward bad behavior, the CFPB calls foul. Examples of bad behavior include opening accounts without consent, misrepresenting benefits of products, and steering consumers towards less favorable products or terms.

The CFPB stated, as it has many times, that a Compliance Management System that is appropriate to the size and complexity of a lender can be effective in helping to eliminate such bad behaviors. Because a good CMS involves the board of directors in management oversight of policies and procedures, requires training and monitoring, and independent compliance audits, the chances that a company will adopt harmful business practices are reduced. Of course, even with all of the enormous compliance dollars available to a well-known national bank, its CSRs [Customer Service Representatives] practices of opening accounts without consumer consent, still occurred and has cost that bank dearly.

In the final analysis, all of the policies, procedures, training and monitoring in the world will not necessarily catch unfair, deceptive, or abusive practices. Some responsible person in management must be tasked with analyzing products and services to ensure that that they are being offered to customers in a fair and appropriate context. And, if there are systems – like compensation systems – that tend to draw attention away from honoring appropriate behavior of CSRs and employees, such systems need to be carefully reviewed.