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District Court grants motion for reconsideration on reverse redlining claim
On April 26, the U.S. District Court for the Eastern District of Michigan granted in part and denied in part the plaintiffs’ motion for reconsideration of its order granting the defendants summary judgment and dismissing claims under the Fair Housing Act (FHA) and the ECOA. The plaintiffs argued the court erred in its decision to dismiss their FHA and ECOA claims without addressing their disparate treatment claims. The court found plaintiffs’ arguments on reverse redlining (i.e., alleged intentional targeting of borrowers in minority areas for predatory loans) supported their claims of disparate treatment under the FHA and the ECOA, and the court had erred in “dismissing those claims in their entirety[.]”
Since this revived plaintiffs’ FHA and ECOA claims, the court then addressed a defendant’s motion for summary judgment, which argued that it was entitled to summary judgment because it merely facilitated a loan to a co-defendant and did not engage in any conduct controlled or restricted by the FHA. The court found that the scope of FHA § 3604(a) extended beyond owners and agents to other actors who are in a direct position to deny housing rights to a member of a protected group. The court found the defendant participated actively in the acquisition and disposition of residential property (e.g., the defendant was the primary funder of property acquisitions, participated in the design of the purchase contracts, had detailed knowledge of a co-defendant’s business model, reviewed a co-defendant’s marketing and advertising strategies, and participated in decisions on individual purchase contracts).
According to the court, this supported plaintiffs’ allegation that such defendant directly affected the availability of housing within the meaning of FHA § 3604(a). The court also disagreed with defendant’s alternative arguments regarding plaintiffs’ showing of disparate treatment, stating “plaintiffs can establish disparate treatment based on reverse redlining by showing that (1) they are a member of a protected class; (2) they applied for and were qualified for loans; (3) they received grossly unfavorable terms; and (4) they were intentionally targeted or intentionally discriminated against.” Therefore, because the court found issues of material fact on plaintiffs’ FHA and ECOA claims, the court denied the defendant’s motion for summary judgment.
GAO calls for the FDIC to address outstanding recommendations
On April 30, GAO sent a letter to the FDIC on its outstanding recommendations, emphasizing the importance of two priority recommendations, which pertained to blockchain technology and fintech. Regarding blockchain technology, the letter stressed the need for the FDIC and other financial regulators to establish a formal mechanism to identify and address blockchain-related risks. Despite the regulator's coordination, the response to crypto-asset risks had been criticized as untimely. With respect to fintech, this recommendation would have the FDIC and relevant agencies clarify the appropriate use of alternative data in loan underwriting for banks that partner with fintech lenders. The letter also called for the FDIC's attention to additional high-risk areas, including IT management, human capital, federal real property, cybersecurity, and the personnel security clearance process.
Fed releases April SLOOS on bank lending practices from Q1 2024
On May 6, the Fed released its quarterly survey of the Senior Loan Officer Opinion Survey (SLOOS) on bank lending practices for the first quarter of the year which revealed tightened lending standards and a decrease in demand across loans. Regarding business lending, the survey asked banks about commercial and industrial lending (C&I) and commercial real estate lending (CRE). For C&I loans, banks reported stricter standards and a decline in demand from firms of all sizes. Banks reported tightening due to a less favorable economic outlook, reduced tolerance for risk, and a worsening of industry-specific problems. For CRE loans, banks reported a tightening of standards for all types of loans. A significant share of banks reported weaker demand for nonfarm nonresidential and multifamily residential lending. For household lending, banks also tightened residential real estate (RRE) loan standards, while demand for all RRE loan types declined. Home equity lines of credit also faced stricter standards. Banks also tightened consumer lending standards for credit card, auto, and other consumer loans. Demand for these loans decreased as well, with a significant drop in auto loan inquiries.
OCC and FDIC release CRA evaluations on 69 banks
On May 2, the OCC released its CRA performance evaluations for April and the FDIC released its evaluations for February. The OCC evaluated 13 national banks, federal savings associations, and insured federal branches of foreign banks. Of the 13 evaluations, most entities were rated “Satisfactory,” one entity was rated “Outstanding,” and one entity was rated as “Needs to Improve.” The FDIC released its May list of state nonmember banks of assigned CRA ratings in February. Out of 56 evaluations, two banks were rated “Outstanding,” 52 were rated as “Satisfactory,” one bank was rated as “Needs to Improve,” and one bank was rated as “Substantial Noncompliance.”
Student loan servicer and trust could pay more than $5M in enforcement action with CFPB
On May 6, the CFPB filed a complaint against a Pennsylvania-based student loan servicer and 15 student loan trusts for alleged failure to properly respond to various borrower requests in violation of the CFPA. The complaint alleged thousands of borrower requests went unanswered from 2015 to 2021. Many of these requests allegedly sought forms of payment relief including: (i) co-signer release; (ii) extension of forbearance or deferment; (iii) loan settlement or forgiveness; (iv) Servicemember Civil Relief Act benefits; and (v) other forms of payment or interest rate reduction.
The CFPB also released two proposed stipulated final judgment orders for the trusts and the servicer to resolve the claims. If agreed upon by the court, the trusts and servicer will have to pay civil money penalties of $400,000 and $1.75 million, respectively, in addition to providing close to $3 million in compensation to impacted consumers. Additionally, the orders required non-monetary relief, such as the approval of outstanding borrower applications, the rectification of credit reports, the suspension of debt collection efforts, and the implementation of a functional process.
FHFA shares ‘lessons learned’ from evaluating exposure to climate-related risks
On May 1, the FHFA released a report covering the “lessons learned” from its review of the Climate Scenario Analysis (CSA) which was used by financial institutions and regulators to evaluate exposure to climate-related risk. Climate-related risk can be categorized in two ways: (i) physical risk which is damage to property, land, and infrastructure due to severe weather and environmental changes; and (ii) transition risk that results from policy and technological shifts towards a low-carbon economy.
In its preliminary CSA exercises, the FHFA made the following key observations:
- Data and Methodology Limitations: There were data limitations and methodological shortcomings as current tools depend on incomplete data.
- Modeling Assumptions: Results were significantly impacted by modeling assumptions.
- Challenges with Existing Credit Models: Current credit loss models were constrained while incorporating climate risks.
- Predictive Inaccuracy: The tools used to estimate the historical relationship between climate-related events and financial impacts may not be representative of future financial impacts.
The FHFA concluded that these findings indicated the CSA a complex process with room for enhancement and that no single risk assessment can fully capture the breadth of potential impacts from climate-related physical and transition risks.
HUD guidance on AI to prevent housing discrimination
On April 29, the Office of Fair Housing and Equal Opportunity of HUD issued two guidance documents concerning the use of artificial intelligence (AI) in housing-related practices, specifically in tenant screening and housing advertising. The guidance came in response to Biden's Executive Order to address potential biases in automated systems within the housing sector (covered by InfoBytes here).
HUD emphasizes the need for transparency and fairness when housing providers and screening companies use AI-assisted tenant screening processes. The tenant screening guidance recommended best practices for housing providers and screening companies to prevent discrimination based on race, color, national origin, religion, sex, disability, and familial status. The HUD guidance provided the following six “Guiding Principles for Non-Discriminatory Screenings”: (i) choose relevant screen criteria; (ii) use only accurate records; (iii) follow the applicable screening policy; (iv) be transparent with applicants; (v) allow applicants to challenge negative information; and (vi) design and test complex models for Fair Housing compliance.
Regarding housing advertising, HUD’s guidance warned advertisers and online platforms about the risks of using targeted advertising tools that could violate the Fair Housing Act by denying consumers information about housing opportunities or targeting individuals based on their protected characteristics. To reduce the risk of violating the Fair Housing Act, HUD recommended that advertisers should: (i) utilize advertising platforms that are taking steps to manage the risk of discriminatory delivery of housing-related ads; (ii) ensure the advertisements related to housing are accurately identified to the platform; (iii) analyze the composition of audience datasets; and (iv) monitor outcomes of advertising campaigns to identify and mitigate discriminatory outcomes. Advertising platforms are recommended to: (i) ensure that housing-related ads are run in a separate process designed to avoid discrimination; (ii) avoid providing targeting options for housing-related ads that describe or are related to FHA-protected characteristics; (iii) conduct regular end-to-end testing of advertising systems; (iv) proactively identify and adopt less discriminatory alternatives for AI models and algorithmic systems; (v) ensure that algorithms are similarly predictive; (vi) ensure that ad delivery systems are not resulting in differential charges on the basis of protected characteristic; and (vii) document, retain, or publicly release in-depth information about ad targeting functions and internal auditing.
CFPB reports that complex pricing leads to higher consumer costs
On April 30, the CFPB published a report titled Price Complexity in Laboratory Markets indicating that consumers may pay higher prices for products with complex pricing structures. The report drew on experiments conducted in “simple markets,” where participants engaged in transactions as buyers and sellers. According to the report, these experiments revealed that when product prices were divided into several sub-parts, making them more complicated, participants generally paid more compared to products with a single, comprehensive price.
The study involved participants acting in the roles of buyers and sellers, with transactions involving products priced either as a lump sum or split into eight or 16 separate charges. According to the report, the results showed that in situations with more fragmented pricing, the average selling price increased and buyers found it more challenging to compare prices between sellers. For products with 16 separate charges, the Bureau reported that sellers’ total asking price was typically 60 percent higher than products with one price. In a second experiment, the CFPB investigated the effects of increased competition on market outcomes, finding that increased competition “generally improved, but did not eliminate, the negative effects of price complexity.” The Bureau noted that the findings of this research align with existing studies and evidence suggesting that alleged "junk fees" can lead to higher overall prices than those typically found in a fair and competitive market.
CFPB releases report on costs of HSAs
On May 1, the CFPB released a report on health savings accounts (HSAs). The CFPB reported that consumers owned 36 million HSAs in 2023, and these HSAs held over $116 billion in assets – a 500 percent increase over the past decade. The CFPB believed this growth was likely due to HSAs’ tax-advantage status. According to the CFPB, HSAs differ from other healthcare spending accounts in ways that can “present increased costs, primarily in the form of fees and low interest rates.” The CFPB reported, for example, that suppliers of HSAs charged various fees, including monthly maintenance fees, paper statement fees, outbound transfer fees, and account closure fees. In the report, the CFPB indicated that the three largest HSA suppliers charge monthly fees at or around $4. Some suppliers reportedly did not make these fee schedules available publicly, and the fee responsibility varied between the company and the individual. On switching costs, one company charged a $20 outbound transfer fee for moving funds to a different HSA account. On closing costs, some companies charged a $25 account closure fee. The CFPB believed these “exit fees” were uncommon in deposit accounts. There were also delays in the transfer of funds from two to eight weeks. On other fees, the CFPB found some suppliers charge paper statement fees and ATM transaction fees.
CFPB Director, Rohit Chopra, released a statement with the Bureau’s report. In it, Director Chopra described the “captive consumer” model where consumers are often given an HSA automatically that better meets the needs of the employer than those of the consumer.
3rd Circuit finds appellant does not have FDCPA standing where only injury was confusion
On April 26, the U.S. Court of Appeals for the Third Circuit held that an appellant who sued a debt collector for allegedly violating the FDCPA did not have standing to bring her claim because she “failed to plead a concrete injury” under Article III. The appellant received a debt collection letter that failed to explicitly state if the money was owed to the original creditor or the current creditor and then filed a putative class action alleging a violation of the FDCPA. The appellant asserted that the uncertainty caused her confusion, but failed to allege that she suffered any other harm as a result of the confusion and uncertainty. Relying on precedent, the Third Circuit found that while an intangible harm such as confusion or uncertainty could qualify as a cognizable injury, it must still “bear a ‘close relationship’ to an injury ‘traditionally recognized as providing a basis for a lawsuit in American courts[.]’” Failing to do so, the court ruled that the appellant did not reach the threshold for establishing Article III injury. Therefore, the Third Circuit vacated the judgment of the district court (a dismissal for failure to state a claim) and remanded the case with instructions to dismiss the complaint.