CFPB warning: incentives can harm consumers
Bonuses and quotas can cause workers to violate standards
By Fred O. Williams | Published: January 19, 2017
Expert on consumer credit laws and regulations
Financial companies from lenders to debt collectors must ensure that incentives for their workers do not fuel aggressive practices that harm customers, the U.S. Consumer Financial Protection Bureau said in an official filing published Wednesday in the Federal Register.
The broad warning comes four months after the consumer watchdog agency fined Wells Fargo $100 million for secretly opening some 2 million fake bank accounts and credit cards for customers, a scandal that had its roots in the bank's aggressive sales incentives.
"Despite their potential benefits, incentive programs can pose risks to consumers," the CFPB guidance in the Federal Register said, "especially when they create an unrealistic culture of high-pressure targets."
The warning was initially published on the CFPB's website in November 2016. Wednesday's official publication may be part of a stronger enforcement emphasis on companies that put sales goals ahead of customers' interests.
"I would not be surprised if we saw a future uptick in enforcement actions," said Jenny Lee, a former CFPB enforcement attorney now at Dorsey & Whitney. The agency has published such guidance in the past to prepare the way for enforcement actions against companies to show courts that companies had ample warning, she said.
The broad warning about incentives covers the spectrum of financial industries the agency regulates, and extends from the initial sale or initiation of a financial product to the collection of unpaid debt from customers. As a "compliance bulletin," the warning does not face the years-long review process that agency regulations face.
The agency noted that it has penalized companies in 12 cases where incentives caused credit card add-on products to be marketed improperly. Incentives have also caused deceptive enrollment in bank overdraft programs, according to the agency bulletin.
Incentives are widely used, such as rewards for sales or opening new accounts, or quotas that workers must meet to advance or even to keep their jobs. Last week, CFPB Director Richard Cordray cited commission-based incentives in the debt collection industry as a source of unfair and abusive collection practices.
The official warning states that the risks from incentives include:
- Deceptive information designed to lure customers into products or services that they may not benefit from.
- Enrolling consumers in accounts without their knowledge or consent, leading to improper fees, collection actions and demerits on consumers' credit reports.
- Overcharging or providing a less favorable product than the consumer qualifies for, such as a higher interest rate on a loan.
"You don't leave incentives out there tied to one goal," said Donald Maurice, a banking attorney at Maurice Wutscher. For example, sales goals not balanced with an accompanying goal for customer satisfaction can reward unethical conduct. Without checks in place, "bad behavior will ultimately percolate to the top," he said.
Companies that use incentives can take steps to keep them from harming customers, the CFPB guidance stated. Among the precautions are training and monitoring workers, managing consumer complaints, and having an independent compliance audit.
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