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On February 12, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2018, through September 30, 2018. The report, which is required by the Dodd-Frank Act, addresses issues including problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau when acting Director Mick Mulvaney was still in office. The report is the first to be released under Kathy Kraninger, who was confirmed as Director in December 2018. In her opening letter, Kraninger emphasized that during her tenure the Bureau will “vigorously and even-handedly enforce the law,” and will make sure the financial marketplace “is innovating in ways that enhance consumer choice.” Among other things, the report focuses on credit invisibility and mortgage shopping as two significant problems faced by consumers, noting that credit invisibility among adults tends to be concentrated in rural and highly urban areas and, based on recent studies, more than 75 percent of borrowers report applying for a mortgage with only one lender.
The report also includes an analysis of the efforts of the Bureau to fulfill its fair lending mission. The report highlights the most frequently cited violations of Regulation B (ECOA) and Regulation C (HMDA) in fair lending exams during the reporting period and emphasizes that during the reporting period the Bureau did not initiate or complete any fair lending public enforcement actions or refer any matters to the DOJ with regard to discrimination.
On February 1, Federal Reserve Governor Lael Brainard spoke at the “Research Symposium on the Community Reinvestment Act” hosted by the Federal Reserve Bank of Philadelphia to discuss the need to update Community Reinvestment Act (CRA) regulations. Brainard summarized comment letters received in response to the OCC’s Advance Notice of Proposed Rulemaking (ANPR) published last August (previously covered by InfoBytes) seeking input on ways to transform or modernize the CRA regulatory framework, and discussed the following six key takeaways:
- There is broad support for the CRA among commenters—including academics, financial institutions, banking trade associations, community organizations, consumer groups, and citizens—who, among other things, applaud the volume of CRA loans and investments that support low-and-moderate income households and communities.
- There is general agreement among commenters for the need to modernize—but not completely overhaul—CRA assessment areas, while retaining its core focus.
- Commenters support different performance tests for different types of banks. According to Brainard, there is broad agreement that “CRA regulations cannot be one-size-fits-all” and should be tailored to banks of different sizes, as well as different business models.
- CRA modernization should keep the focus on underserved areas. Commenters discussed concerns about “CRA hotspots and credit deserts,” and the need for incentives to ensure CRA capital can reach underserved communities has been a common theme at regional roundtables.
- Commenters offered recommendations on how to increase the “consistency and predictability of CRA evaluations and ratings.”
- Roundtable discussions as well as commenters have emphasized the “historical context of the CRA as it relates to redlining practices,” and demonstrated strong support for the CRA to retain its underlying focus of reaching all underserved borrowers, including low-income communities and communities of color.
CFPB’s latest fair lending report focuses on promoting fair, equitable, and nondiscriminatory access to credit
On December 4, the CFPB issued its sixth fair lending report to Congress, which outlines the Bureau’s efforts in 2017. According to the report, in 2017, the Bureau continued to focus on promoting fair, equitable, and nondiscriminatory access to credit, highlighting several fair lending priorities such as redlining, mortgage and student loan servicing, and small business lending. The report also addresses the Bureau’s risk-based prioritization approach to supervisory examinations and enforcement activity relating to underwriting, pricing, steering, servicing, and HMDA data integrity. Specifically, the report covers fair lending supervision and enforcement activities, guidance and rulemaking, and interagency coordination efforts, including (i) taking enforcement actions against a bank for alleged credit card lending discrimination, and a mortgage lender that allegedly failed to accurately report consumer application and loan data; (ii) issuing its first no-action letter to a company that uses alternative, non-traditional data and modeling techniques “to make credit and pricing decisions to support innovation and enable people with limited credit history, among others, to obtain credit or obtain credit on better terms”; (iii) collaborating with other federal banking regulators to issue, among other things, the “HMDA Examiner Transaction Testing Guidelines,” which present uniform guidelines for examiners when evaluating whether covered mortgage lenders are reporting accurate data; and (iv) communicating fair lending information to the public through various platforms. Notably, the report is silent regarding plans for upcoming fair lending activities in 2019, unlike previous reports that included future actions. (See InfoBytes coverage on the 2016 report here.)
On November 9, the CFPB issued its semi-annual report to Congress, covering the Bureau’s work from October 1, 2017 to March 30, 2018. The report, which is required by the Dodd-Frank Act, addresses, among other things, problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken during the majority of acting Director Mick Mulvaney’s tenure. Specifically, the report includes (i) a summary of five “significant” state Attorney General actions pursuant to Section 1042 of the Dodd-Frank Act, which allows states to enforce the federal law; (ii) a review of the Bureau’s fair lending efforts, noting that it “conducted fewer fair lending supervisory events. . .than in the prior period,” but “cleared a substantially higher number of MRAs or MOU items from past supervisory events than in the prior period”; (iii) a discussion of non-prime and secured credit cards marketed to consumers; and (iv) a list of upcoming initiatives, which includes requests for information regarding, among other things, the Bureau’s consumer complaint and consumer inquiry handling processes, the Bureau’s inherited regulations and inherited rulemaking authorities, the Bureau’s adopted regulations and new rulemaking authorities, Bureau rulemaking processes, Bureau public reporting practices of consumer complaint information, Bureau external engagements, the Bureau’s supervision program, and the Bureau’s enforcement processes.
Notably, the report also discusses the budget for FY 2018, acknowledging the unusual January 2018 request for zero dollars in funding for the Bureau’s quarterly operations (previously covered by InfoBytes here). As for FY 2019, Mulvaney most recently requested nearly $173 million for Q1, which is still significantly below former Bureau Director Richard Cordray’s FY 2017 Q1 request of $217 million.
On October 22, the Pennsylvania Attorney General announced a request for mortgage borrowers and home-loan applicants who believe they may be victims of redlining to file complaints with that office. The announcement states that the Attorney General is investigating evidence of redlining by financial institutions in Philadelphia neighborhoods where lenders either refused to make loans due to the applicant’s race or dissuaded minorities from applying for mortgage loans. The investigation is in response to an investigative article identifying a pattern of racial discrimination in mortgage lending in the Philadelphia area.
On October 18, the U.S. Court of Appeals for the 7th Circuit affirmed summary judgment for a mortgage servicer, holding that the plaintiff homeowners failed to show racial discrimination in violation of the Equal Credit Opportunity Act (ECOA) when the servicer required the homeowners to bring the prior loan current before assuming it. According to the opinion, the homeowners purchased a home from the previous homeowner with an existing mortgage. Soon after the purchase, the homeowners learned that the previous owner had stopped making his mortgage payments and that the bank had begun to foreclose on the home. After receiving notice of foreclosure, the homeowners tried repeatedly to assume the previous owner’s mortgage which the mortgage servicer conditioned on the homeowners bringing the loan current. Unable to do so, the homeowners sued, bringing various state and federal law claims, including under ECOA, after an employee of the servicer allegedly made a remark that implied that the homeowners were not being allowed to assume the loan because of their race. The district court rejected the claims and entered summary judgment for the mortgage servicer.
On appeal, the 7th Circuit affirmed, concluding that the homeowners failed to counter the servicer’s representation that they never produced a complete application. Moreover, the court held that the alleged statement, which attributed the servicer’s decision to a race, was vague and “require[d] too much speculation to conclude that their race” was a determining factor in the requirement to satisfy the outstanding loan payments, a requirement that was otherwise consistent with the loan agreement.
On September 5, a coalition of 14 state Attorneys General sent a comment letter to the CFPB raising concerns about statements made by acting Director Mick Mulvaney in May suggesting that the Bureau may reexamine its requirements and enforcement of the Equal Credit Opportunity Act (ECOA). The letter notes that Mulvaney’s comments followed the Bureau’s repeal of the agency’s 2013 guidance on indirect auto lending and compliance with ECOA last May. (See previous InfoBytes coverage on resolution S.J. Res. 57 disapproving the guidance here.) The Attorneys General point out that the resolution did not eliminate regulations promulgated in 1977 and adopted by the Bureau in 2011 that interpret “ECOA to provide for disparate impact liability without limitation to the type of lending.” The Attorneys General express concern over the Bureau’s possible break with “the federal government’s longstanding interpretation that ECOA provides for disparate impact liability” both because states share ECOA enforcement authority with the Bureau and because many states model their antidiscrimination statutes on ECOA.
The comment letter asserts that dropping disparate impact from ECOA reviews would be inconsistent with the 2015 U.S. Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (as covered by a Buckley Sandler Special Alert). The Attorneys General cite to the Supreme Court’s holding that disparate impact liability was provided for under a provision of the Federal Housing Act, and assert that the holding “dictates that the text of ECOA unambiguously provides for disparate impact liability.” Because, they claim, the “CFPB has no authority to overrule the Supreme Court's interpretation of unambiguous text, any action to reinterpret ECOA not to provide for disparate impact liability could be set aside by a court as arbitrary, capricious, and otherwise not in accordance with law.”
As previously covered in InfoBytes, last month 17 state Attorneys General sent a comment letter to HUD urging the agency to not make any changes to its 2013 Disparate Impact Regulation, which implements the Fair Housing Act’s disparate impact standard, as well as the 2016 Application of the Fair Housing Act’s Discriminatory Effects Standard to Insurance.
On August 23, the New York Department of Finance Services (NYDFS) released updated guidance reminding institutions engaged in indirect auto lending through third parties that they must comply with the state’s Fair Lending Law, despite the May repeal of the CFPB’s Bulletin 2013-02 on indirect auto lending and compliance with the Equal Credit Opportunity Act (ECOA). (The repeal was previously covered by InfoBytes here.) The updated guidance “consolidates, streamlines and reinforces previous guidance issued by [NYDFS]’s predecessor, the New York State Banking Department,” which applies to supervised financial institutions and their subsidiaries and affiliates (lenders). The guidance provides a list of actions lenders should take to develop a fair lending compliance program for indirect auto lending, including (i) submitting all applications for loans that are rejected or withdrawn to an automatic review by a higher-level supervisor; (ii) implementing a fair lending training program for both new hires and current employees; (iii) obtaining written agreements from all dealers that certify that the dealer acknowledges its responsibility to comply with fair lending laws and the policies and procedures contained in the fair lending plan; and (iv) extending fair lending plan principles to refinancing and collection practices.
On August 20, 17 state Attorneys General in a comment letter urged HUD to not make any changes to its 2013 Disparate Impact Regulation (regulation), which implements the Fair Housing Act’s disparate impact standard, as well as the 2016 Application of the Fair Housing Act’s Discriminatory Effects Standard to Insurance (supplement). The comment letter responded to HUD’s June advance notice of proposed rulemaking (ANPR), which sought comments on whether the 2013 regulation and the 2016 supplement are consistent with the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (Covered by a Buckley Sandler Special Alert.)
In the letter, the Attorneys General state that the regulation “strikes the proper balance between promoting an integrated society and protecting housing providers from unmeritorious discrimination claims” and is “entirely consistent” with the Supreme Court decision. The letter cites to multiple federal and state court decisions, which have held that the regulation is “‘adopted’ by, or consistent with, the Supreme Court decision” and emphasizes that, to their awareness, no court has held the regulation to be inconsistent. Conversely, even if the Supreme Court decision left room for revisions to the regulation, the letter notes that the issues of segregation and discrimination in the housing and lending market have not dissipated in the five years since the regulation was finalized and therefore, no revisions are warranted. Lastly, among other points, the Attorneys General conclude that any revisions would “reduce clarity and add uncertainty because any revision would likely fail to rely on the half century of disparate impact case law.”
The letter was led by North Carolina Attorney General, Josh Stein. The other state Attorneys General included California, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia and Washington as well as the District of Columbia.
On August 17, Congressman Emanuel Cleaver, II (D-MO) released a report detailing his findings from an investigation into the small business lending practices of fintech companies, concluding that the algorithms used in the application process may not reduce the risk of discrimination. The report notes that one company disclosed utilized a third-party fair lending consulting firm to assist in preventing discrimination, but that some survey responses “lacked key information or were willfully vague” about how the algorithms help avoid income-based and racial bias. The report cites to other criticisms of small business lending in the fintech industry, including (i) the use of forced arbitration clauses; and (ii) utilizing personal credit scores to establish a business’ credit worthiness. In contrast, the report emphasizes that fintech lending “can be potentially advantageous for small businesses looking to get a leg up in a competitive market” and that fintech companies often serve markets traditionally ignored by banks. The report concludes with a list of best practices and principles for fintech companies that will lend to small businesses, such as (i) registering with the CFPB’s complaint database; (ii) replicating TILA disclosures required for consumers; and (iii) securing third party fair-lending audits.
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Creative character evidence in criminal and civil trials" at the Litigation Counsel of America Spring Conference & Celebration of Fellows
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program