InfoBytes Blog

Arkansas Amends Fair Mortgage Lending Act Regulations

On January 10, the Arkansas Securities Department finalized amendments to certain sections of the rules that implement the Fair Mortgage Lending Act. The regulations were adopted as proposed. The regulations were amended to expand disclosure requirements for new and transferred loans to include: (i) any notice required under federal law; (ii) a schedule of the ranges and categories of the servicer’s costs and fees for its servicing-related activities; and (iii) a notice that the servicer is licensed in the state and that complaints can be submitted to the Securities Department. The rule also prohibits advertising that indicates a consumer’s ability or likelihood to obtain any new mortgage credit product or term, or a refinancing or modification, has been preapproved or guaranteed. Finally, the rule, among other things, (i) expands payment processing requirements to include payments made via electronic transfer; and (ii) amends record keeping rules to require licensees to maintain records in a format compatible with electronic examination software, and to expand the types of documents servicers must maintain. The new rules take effect February 9, 2014.

Mortgage Origination Mortgage Servicing Fair Lending Fair Servicing Agency Rule-Making & Guidance

DOJ Alleges Community Bank's Unsecured Loan Pricing Violated ECOA

Last month, the DOJ announced a settlement with a three-branch, $78 million Texas bank to resolve allegations that the bank engaged in a pattern or practice of discrimination on the basis of national origin in the pricing of unsecured consumer loans. Based on its own investigation and an examination conducted by the FDIC, the DOJ alleged that the bank violated ECOA by allowing employees “broad subjective discretion” in setting interest rates for unsecured loans, which allegedly resulted in Hispanic borrowers being charged rates that, after accounting for relevant loan and borrower credit factors, were on average 100-228 basis points higher than rates charged to similarly situated non-Hispanic borrowers. The DOJ claimed that “[a]lthough information as to each applicant's national origin was not solicited or noted in loan applications, such information was known to the Bank's loan officers, who personally handled each loan transaction.”

The consent order requires the bank to establish a $159,000 fund to compensate borrowers who may have suffered harm as a result of the alleged ECOA violations. Prior to the settlement, the bank implemented uniform pricing policies that substantially reduced loan officer discretion to vary a loan’s interest rate. The agreement requires the bank to continue implementing the uniform pricing policy and to (i) create a compliance monitoring program, (ii) provide borrower notices of non-discrimination, (iii) conduct employee training, and (iv) establish a complaint resolution program to address consumer complaints alleging discrimination regarding loans originated by the bank. The requirements apply not only to unsecured consumer loans, but also to mortgage loans, automobile financing, and home improvement loans.

The action is similar to another fair lending matter referred by the FDIC and settled by the DOJ earlier in 2013, which also involved a Texas community bank that allegedly discriminated on the basis of national origin in its pricing of unsecured loans.

FDIC Fair Lending ECOA Consumer Lending DOJ Enforcement

CFPB, DOJ Announce First Joint Fair Lending Action Against Indirect Auto Finance Company

This morning, the CFPB and the DOJ announced their first ever joint fair lending enforcement action to resolve allegations that an auto finance company’s dealer compensation policy, which allowed for auto dealer discretion in pricing, resulted in a disparate impact on certain minority borrowers. The $98 million settlement is the DOJ’s third largest fair lending action ever and the largest ever auto finance action.

Investigation and Claims

As part of the CFPB’s ongoing targeted examinations of auto finance companies’ ECOA compliance, the CFPB conducted an examination of this auto finance company in the fall of 2012. This finance company is one of the largest indirect automobile finance companies in the country which, according to the CFPB and DOJ’s estimates, purchased over 2.1 million non-subvented retail installment contracts from approximately 12,000 dealers between April 1, 2011 and present. The CFPB’s investigation of the finance company allegedly revealed pricing disparities in the finance company’s portfolio with regard to auto loans made by dealers to African-American, Hispanic, and Asian and Pacific Islander borrowers. The CFPB referred the matter to the DOJ just last month, and the DOJ’s own investigation resulted in findings that mirrored the CFPB’s.

Specifically, the federal authorities claim that, based on statistical analysis of the loan portfolios, using controversial proxy methodologies, the investigations showed that African-American borrowers were charged on average approximately 29 basis points more in dealer markup than similarly situated non-Hispanic whites for non-subvented retail installment contracts, while Hispanic borrowers and Asian/Pacific Islander borrowers were charged on average approximately 20 and 22 basis points more, respectively. The complaint also faults the finance company for not appropriately monitoring pricing disparities or providing fair lending training to dealers.

The CFPB and the DOJ did not claim that the finance company intentionally discriminated against any borrowers. Instead the federal agencies alleged that the finance company’s facially neutral pricing policy allowed auto dealers to price in such a manner that resulted in certain minority groups, on average, paying more for credit than non-Hispanic white borrowers. The federal authorities employed disparate impact theory of discrimination, which allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate).  When announcing the settlement, CFPB Director Cordray stated that “[w]hether or not [the finance company] consciously intended to discriminate makes no practical difference. In fact, we do not allege that [the finance company] did so. Yet the outcome, and the harm to consumers, is the very same here.”

Resolution

The investigation and potential enforcement action were disclosed by the finance company earlier this year. The final terms, formalized in a CFPB administrative consent order and a DOJ consent order filed in the U.S. District Court for the Eastern District of Michigan, require the finance company to pay an $18 million penalty and provide $80 million for a settlement fund to compensate borrowers allegedly harmed between April 2011 and December 2013. The CFPB and the DOJ will identify borrowers to be compensated and the amount to be paid to each identified borrower using an undisclosed methodology, and the payments will be administered by a third party administrator paid for by the finance company.

In addition, the finance company is required to adopt and implement a compliance plan pursuant to which the finance company must: (i) establish a dealer compensation policy that limits the maximum spread between the buy rate and the contract rate to no more than the spread currently permitted; (ii) provide regular notices to dealers explaining ECOA and dealer pricing obligations; (iii) establish quarterly and annual portfolio-wide analysis of markups based on the CFPB and the DOJ statistical methodologies; (iv) take prompt corrective action with respect to dealers identified in such quarterly analysis that culminates in prohibiting a dealer’s ability to mark up the rate or termination of the dealer relationship; and, (v) providing remuneration for affected customers.

While the settlements do not bar discretionary dealer compensation, they provide an incentive for the finance company to eliminate the practice. The agreements permit the finance company to develop a non-discretionary compensation plan for approval by the CFPB and the DOJ, subsequent to which the finance company no longer is required to implement the majority of the compliance plan.

Looking Ahead

Dealer compensation practices have been targeted by the CFPB for the past year, including in guidance issued earlier this year, which the CFPB recently defended at a public forum. We expect the CFPB’s scrutiny of dealer compensation and auto finance companies more generally to continue into next year. Questions regarding the matters discussed in this alert may be directed to any of the lawyers in our Auto Finance or CFPB practices, or to any other BuckleySandler attorney with whom you have consulted in the past.

CFPB Auto Finance Fair Lending ECOA DOJ Enforcement Disparate Impact

Report On CFPB's Auto Finance Forum

This morning, the CFPB hosted an auto finance forum, which featured remarks from CFPB staff and other federal regulators, consumer advocates, and industry representatives.

Some of the highlights include:

• Patrice Ficklin (CFPB) confirmed that the CFPB, both before issuing the March bulletin and since, has conducted analysis of numerous finance companies’ activities and found statistically significant disparities disfavoring protected classes. She stated that there were “numerous” companies whose data showed statistically significant pricing disparities of 10 basis points or more and “several” finance companies with disparities of over 20 or 30 basis points.
• Much of the discussion focused on potential alternatives to the current dealer markup system.  The DOJ discussed allowing discretion within limitations and with documentation of the reasons for exercising that discretion (e.g., competition). The CFPB focus was exclusively on non-discretionary “alternative compensation mechanisms”, specifically flat fees per loan, compensation based on a percentage of the amount financed, or some variation of those. The CFPB said it invited finance companies to suggest other non-discretionary alternatives. Regardless of specific compensation model, Ms. Ficklin stated that in general, nondiscretionary alternatives can (i) be revenue neutral for dealers, (ii) reduce fair lending risk, (iii) be less costly than compliance management systems enhancements, and (iv) limit friction between dealers on the one hand and the CFPB on the other.
• There was significant debate over whether flat fee arrangements, or other potential compensation mechanisms, actually eliminate or reduce the potential for disparate impact in auto lending. There was also criticism of the CFPB’s failure to empirically test whether these “fixes” would result in other unintended consequences.  Industry stakeholders asserted that such arrangements fail to mitigate fair lending risk market-wide while at the same time potentially increase the cost of credit and constrain credit availability. Industry stakeholders also questioned the validity of the large dollar figures of alleged consumer harm caused by dealer markups.  When assessing any particular model, the CFPB’s Eric Reusch explained, finance companies should determine whether (i) it mitigates fair lending risk, (ii) creates any new risk or potential for additional harm, and (iii) it is economically sustainable, with sustainability viewed through the lens of consumers, finance companies, and dealers.
• Numerous stakeholders urged the CFPB to release more information about its proxy methodology and statistical analysis, citing the Bureau’s stated dedication to transparency and even referencing its Data Quality Act guidelines.  The DOJ described its commitment to “kicking the tires” on its statistical analyses and allowing institutions to do the same.  The CFPB referenced its recent public disclosure of its proxy methodology, noting that this was the methodology the CFPB intended to apply to all lending outside of mortgage.
• Steven Rosenbaum (DOJ) and Donna Murphy (OCC) pointedly went beyond the stated scope of the forum to highlight potential SCRA compliance risks associated with indirect auto lending.

Additional detail from each panel follows. Please note that these details are based on notes taken during the event and could differ from actual statements made during the event. The entire report is subject to alteration or clarification, particularly if a transcript or archived video are made available.

Opening Remarks

Director Cordray opened the forum. He stressed the importance of vehicles to individual consumers and to the broader economy. He stated that some consumers may be subject to discrimination that may result in millions of dollars in consumer harm each year.

As he did in a Senate hearing earlier this week, Mr. Cordray emphasized that neither the 2012 fair lending bulletin nor the March 2013 auto finance bulletin were new; they simply served as a reminder to finance companies of liability under ECOA, particularly with regard to indirect auto finance.

He stated that the CFPB uses proven statistical methods and publicly available data to assess the probability that a particular customer belongs to a particular racial group or is of a particular national origin.

The March bulletin provided guidance about steps auto finance companies might consider taking to ensure they are ECOA-compliant. One approach described by the Director is to develop robust fair lending compliance management systems to monitor for disparate impact and promptly remedy consumer harm on an ongoing basis when it is identified. The bulletin also stated that finance companies could take steps to comply with the law by adopting some other pricing mechanism that fairly compensates dealers for their work but avoids the fair lending risks that are inherent in pricing by discretionary markup. Director Cordray stated that such mechanisms include: a flat fee per transaction, or a fixed percentage of the amount financed, or other nondiscretionary approaches that market participants may devise that would work to address these concerns.

He acknowledged that dealers are entitled to fair compensation, but stressed that the CFPB wants to make sure the process is transparent. He stated it is worth considering further how the disclosure of markup practices actually works.

Panel 1

Patrice Ficklin (CFPB): Ms. Ficklin described and defended the March bulletin, asserting that the CFPB did not provide any new legal interpretations, but rather reminded finance companies about existing law. She noted and defended the CFPB’s proxy methodology, as described recently in letters to Congress, but did not provide additional detail. She stated that the CFPB’s supervisory and enforcement work in this area is more substantial than it was in March, and continues to indicate fair lending risk—the CFPB has found “substantial and statistically significant” disparities between African Americans, Hispanics, and Asians and similarly situated white borrowers.  The CFPB has identified numerous institutions with disparities over 10 basis points, and several over 20 or 30 basis points.

Going forward, the CFPB is committed to continuing a constructive dialogue with industry, a dialogue in which alternative compensation structures has been the key theme to date.

Melissa Yap (FRB): Ms. Yap described the Fed’s ECOA authority post-Dodd-Frank. She stated that pricing remains the greatest area of risk. The Fed employs the 2009 interagency fair lending procedures and looks at (i) financial incentives, (ii) the amount of discretion, and (iii) disparities in note rate and markup over buy rate. She described the Fed’s proxy methodology, which differs slightly from the CFPB’s, but which the Fed believes is appropriate for the size and complexity of the institutions it supervises. For race, the Fed geocodes and defines majority-minority census tracts as those over 50%. She defended name proxies for gender and ethnicity, stating they are as likely to over count as under count. She also referenced two webinars the Fed and other hosted this year, which included discussion of these issues, see e.g., August webinar.

Steven Rosenbaum (DOJ): Mr. Rosenbaum described the DOJ’s broad authority to enforce ECOA and noted that it has a number of investigations ongoing, including joint investigations with the CFPB. He stated that Congress created the issue that requires the use of proxies, given that ECOA protects classes in consumer lending but does not require data collection similar to HMDA. The DOJ is using the CFPB’s method on joint investigations, but it continues to “kick the tires” on its methods and analyses and invites finance companies to do the same.

He stated, twice, that ECOA does not require nor prohibit discretion in pricing; risk from discretion can be managed, for example by setting caps or requiring justifications and documentation.

Mr. Rosenbaum added that the DOJ also enforces SCRA, and stated that if finance companies have not thought about SCRA compliance in their auto finance programs, they ought to do so.  He also acknowledged the DOJ’s ongoing investigation of buy-here, pay-here dealers, though the issues differ in that those dealers may be offering predatory products in minority neighborhoods.

Keith Ernst (FDIC): Mr. Ernst similarly described the FDIC’s jurisdiction and addressed in broad terms its approach to indirect auto financing. He stated that all examination and statistical results that are consistent with a violation are subject to independent review and all statistical analyses are reviewed by a team. The FDIC provides institutions with the results, data, and methods and provides an opportunity for questions and other feedback. Mr. Ernst also noted that this dialogue includes providing institutions with the opportunity to provide non-discriminatory explanations for statistical disparities. According to Mr. Ernst, the FDIC has amended analyses as part of these processes. The FDIC believes the vast majority of its banks are effectively managing fair lending risk in auto finance, but that examinations can reveal compliance management systems concerns that fall short of a fair lending violation.

Tonya Sweat (NCUA): Ms. Sweat stated that the practices identified in the CFPB bulletin are not prevalent in the credit union industry, but NCUA still examines for fair lending risk and safety and soundness. The NCUA advises credit unions that sound practices include sampling and testing of loans, particularly to ensure third-party compliance. Credit unions should implement written policies that require written approval of any changes to underwriting criteria.

Donna Murphy (OCC): Ms. Murphy provided only brief comments, and generally referenced and incorporated what others had said on proxies. The OCC is revising and updating its methods for fair lending risk assessments and scoping based on changes in markets, the legal environment, and technology. These changes are intended to result in more consistency in examinations and the ability of the OCC to conduct more analysis across banks.  For auto finance, the OCC is looking at how it gathers factors regarding use of third-parties. Ms. Murphy also noted the OCC’s attention to SCRA, stating that last year it revised examination procedures and enhanced examiner training for SCRA, including in auto finance, and that those enhancements are reflected in this year’s examination cycle.

Panel 2

The second panel was moderated by the CFPB’s Rohit Chopra and featured remarks from the National Association of Minority Automobile Dealers (NAMAD), the National Consumer Law Center (NCLC), the Consumer for Auto Reliability and Safety (CARS), and the NAACP.

Stuart Rossman from the NCLC described his part in a series of class actions against auto finance companies in the 2000s. Those actions, as he described, resulted in markup caps, the last of which sunsetted last year. He asserted that the market forces that led to those actions persist, as do fundamental problems in discretionary pricing policies.  Citing more restrictive class action requirements and less access to critical data, he called on the CFPB to take the lead in enforcement.

NAMAD acknowledged the possibility that bad actors exist in the market, but argued against eliminating discretion. NAMAD called for approval and documentation requirements for discretionary programs. NAMAD supports uniform data collection, enhanced proxies, training and education for dealers and consumers.

CARS noted California’s markup cap statute and reported that a proposal for a ballot proposition outlawing dealer discretion has been filed with the state attorney general. CARS also encouraged the CFPB to look at the impact of percentage rate markups in the motor home market.

Panel 3

Bill Himpler, American Financial Services Association (AFSA): Mr. Himpler stressed that the current indirect auto finance model is efficient and proven. He noted that auto finance complaints are at record lows, and pointed out that even the CFPB’s database shows a small number of complaints compared to other markets.  Since the CFPB has refused to assess the impact of a broad market shift towards flat fee compensation structures or other alternatives, AFSA is commissioning an independent study to assess the present model and evaluate costs and benefits of alternative models.

Chris Kukla, Center for Responsible Lending (CRL): Mr. Kukla countered that the current compensation model gives rise to potential discrimination and should be ended. Consumers have no ability to know what part of their rate is based on risk and what is due to compensation. He defended the CRL’s 2011 study on indirect auto finance from attacks, including those that followed Senator Warren’s reference to the study during a Senate hearing earlier this week.  That study concluded that consumers pay $26 billion each year in markups. Mr. Kukla explained that CRL never said consumers would not otherwise be charged a portion of those fees, and only sought to define the size of the market. He referenced other research that indicates a market-wide adoption of flat fee arrangements would have little impact on dealers.

Paul Metrey, National Automobile Dealers Association (NADA): Mr. Metrey outlined a preferred approach by federal regulators to unintentional disparate impact discrimination: (i) understand the market, (ii) develop appropriate methods, and (iii) if present, address in a manner that assists consumers. He called for the CFPB to pursue more open processes on this issue, including by identifying its complete statistical methodology and fully accounting for neutral legitimate factors. He presented NADA’s case against flat fee arrangements, in part on the basis that dealers still will have discretion to select among finance sources that may offer different flat fee arrangements.

Rich Riese, American Bankers Association (ABA): Mr. Riese challenged the CFPB’s post hoc approach to obtaining input on its auto finance program, stating that the forum does not substitute for the kind of engagement the issue requires. He argued that the guidance should have been proposed and subject to notice and comment.  The ABA believes proxies should be viewed with skepticism; they can be useful to identify risks and can be useful in compliance programs, but they should not be used to prove violations. Citing the 1999 interagency exam procedures, he argued that discretion is not an appropriate area to apply disparate impact, and, before straying too much from prior policy, regulators should recognize that Reg. B applies to creditors determination of creditworthiness and the discretion being applied in auto finance is for compensation and is not part of a creditor’s determination of creditworthiness.

The panelists also discussed the comparison of indirect auto finance to the mortgage market, particularly the use of broker yield spread premiums. Mr. Riese pointed out that in the mortgage context, brokers were alleged to have steered borrowers into “bad” loans without considering suitability; that is not the case in the auto market where there are no option arms, teaser rates, etc. Mr. Himpler and Mr. Metrey agreed. Mr. Metrey added that the comparison is apples to oranges—the markets have performed differently; there is nothing going on in auto ABS like there was in MBS. He added that Congress directed an end to yield spread premiums and there has been no similar action in auto, and the Fed tested to see if a fix was necessary but there has been no similar testing in auto.

Mr. Kukla responded that the mechanics may be different, but the impact and incentives are the same.  A broader view of “steering” covers any instance in which a consumer is provided a loan with less advantageous terms than the consumer otherwise would have received.

FDIC CFPB Nonbank Supervision Federal Reserve OCC NCUA Auto Finance Fair Lending ECOA DOJ Enforcement Bank Supervision

Senators Challenge CFPB On Indirect Auto Finance Guidance

On October 30, a bipartisan group of 22 Senators sent a letter to the CFPB raising concerns about CFPB guidance affecting the indirect auto financing market and auto dealers’ ability to negotiate retail margins with consumers. The guidance at issue, contained within CFPB Bulletin 2013-02, advised bank and nonbank indirect auto financial institutions about compliance with federal fair lending requirements in connection with the practice by which auto dealers “mark up” the financial institution’s risk-based buy rate and receive compensation based on the increased interest revenues.

In August, the CFPB responded to a similar inquiry from House members. The Senate letter asserts that the CFPB still has not explained a basis for alleging that discrimination under a “disparate impact” theory of liability exists in the indirect auto financing market.  Nor, the letter continues, has the CFPB released the statistical methodology it uses to evaluate disparate impact in an indirect auto lender’s portfolio.

The Senators request details concerning the CFPB’s statistical methodology and also seek information about: (i) coordination among the CFPB, Federal Reserve Board, and FTC regarding the CFPB’s fair lending guidance to financial institutions; (ii) the decision to issue the guidance via a bulletin without public comment rather than employing the Administrative Procedures Act rulemaking process; and (iii) any cost-benefit analysis conducted into the affect that industry adoption of a flat-fee dealer compensation mechanism would have on the cost for consumers across the credit spectrum.

The letter comes on the heels of a related inquiry to the FTC last week, which urged the FTC to investigate, among other things, auto dealer practices regarding interest rate markups and requested information on the FTC’s auto dealer markup enforcement activity.

CFPB FTC Auto Finance Fair Lending U.S. Senate

Special Alert: Agencies Issue Joint Statement On Fair Lending Compliance And The CFPB's ATR/QM Rule

On October 22, the CFPB, the OCC, the FDIC, the Federal Reserve Board, and the NCUA (collectively, the Agencies) issued a joint statement (Interagency Statement) in response to inquiries from creditors concerning their liability under the disparate impact doctrine of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B by originating only “qualified mortgages.”  Qualified mortgages are defined under the CFPB’s January 2013 Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule).  The DOJ and HUD did not participate in the Interagency Statement.

The Interagency Statement describes some general principles that will guide the Agencies’ supervisory and enforcement activities with respect to entities within their jurisdiction as the ATR/QM Rule takes effect in January 2014.  The Interagency Statement does not state that a creditor’s choice to limit its offerings to qualified mortgage loans or qualified mortgage “safe harbor” loans would comply with ECOA; rather, the Agencies state that they “do not anticipate that a creditor’s decision to offer only qualified mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.”  Furthermore, the Interagency Statement will not necessarily preclude civil actions.

The Agencies acknowledge that although there are several ways to satisfy the ATR/QM Rule, some creditors may be inclined to originate all or predominantly qualified mortgages, particularly when the ATR/QM Rule first becomes effective.  In selecting business models and product offerings, the Agencies “expect that creditors would consider and balance demonstrable factors that may include credit risk, secondary market opportunities, capital requirements, and liability risk.”  The Agencies further understand that creditors may have a “legitimate business need” to fine-tune their product offerings over the next few years in response to the impact of the ATR/QM Rule, just as they have in response to other significant regulatory changes that have occurred in the past.

The Agencies advise creditors to continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring their policies and practices and implementing effective compliance management systems.  Nonetheless, the Agencies state that individual cases will be evaluated on their own merits.

The Agencies state that they “believe that the same principles…apply in supervising institutions for compliance with the Fair Housing Act.”  However, because neither DOJ nor HUD participated in issuing the Interagency Statement, it remains to be seen how those agencies would view this issue.

It is noteworthy that the standard articulated in the Interagency Statement (“legitimate business needs”) differs from HUD’s disparate impact rule relating to the Fair Housing Act.  In its rule, HUD codified a three-step burden-shifting approach to determine liability under a disparate impact claim.  Once a practice has been shown by the plaintiff to have a disparate impact on a protected class, the rule states that the defendant would have the burden of showing that the challenged practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent…or defendant…A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.”  (Emphasis added.)

Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

• Jeffrey P. Naimon, (202) 349-8030

FDIC CFPB Federal Reserve HUD Fair Housing OCC NCUA Fair Lending ECOA DOJ Agency Rule-Making & Guidance

Justice Department Announces Three Fair Lending Actions

Recently, the DOJ released information regarding three fair lending actions, all three of which included allegations related to wholesale lending programs. On September 27, the DOJ announced separate actions—one against a Wisconsin bank and the other against a nationwide wholesale lender—in which the DOJ alleged that the lenders engaged in a pattern or practice of discrimination on the basis of race and national origin in their wholesale mortgage businesses. The DOJ charged that, during 2007 and 2008, the bank violated the Fair Housing Act and ECOA by granting its mortgage brokers discretion to vary their fees and thus alter the loan price based on factors other than a borrower’s objective credit-related factors, which allegedly resulted in African-American and Hispanic borrowers paying more than non-Hispanic white borrowers for home mortgage loans. The bank denies the allegations but entered a consent order pursuant to which it will pay $687,000 to wholesale mortgage borrowers who were subject to the alleged discrimination. The allegations originated from an FDIC referral to the DOJ.

The DOJ charged the California-based wholesale lender with violations of the Fair Housing Act and ECOA, alleging that over a four-year period, the lender’s practice of granting its mortgage brokers discretion to set the amount of broker fees charged to individual borrowers, unrelated to an applicant’s credit risk characteristics, resulted in African-American and Hispanic borrowers paying more than non-Hispanic white borrowers for home mortgage loans. The lender did not admit the allegations, but agreed to enter a consent order to avoid litigation. Pursuant to that order the lender will pay $3 million to allegedly harmed borrowers. The order also requires the lender to take other actions including establishing race- and national origin-neutral standards for the assessment of broker fees and monitoring its wholesale mortgage loans for potential disparities based on race and national origin.

Finally, on September 30, the DOJ announced that a national bank agreed to resolve certain legacy fair lending claims against a thrift it acquired several years ago, which the bank and the OCC identified as part of the acquisition review. Based on its own investigation following the OCC referral, the DOJ alleged that, between 2006 and 2009, the thrift allowed employees in its retail lending operation to vary interest rates and fees, and allowed third-party brokers as part of its wholesale lending program to do the same, allegedly resulting in disparities between the rates, fees, and costs paid by non-white borrowers compared to similarly-situated white borrowers. The bank, which was not itself subject to the DOJ’s allegations, agreed to pay $2.85 million to approximately 3,100 allegedly harmed borrowers to resolve the legacy claims and avoid litigation.

FDIC Fair Housing OCC Fair Lending ECOA DOJ Wholesale Lending

CFPB HMDA Data Tool Launches with Banking Regulators' Release of 2012 HMDA Data

On September 18, the CFPB launched a new web-based tool for use in analyzing HMDA data. The CFPB explains that its new HMDA tool focuses on the number of mortgage applications and originations, in addition to loan purposes and loan types for 2010 through 2012, and allows the public to see nationwide summaries or employ interactive features to isolate the information for metropolitan areas. The CFPB is planning additional features for the site, including (i) “easy-to-use tools” that allow users to filter HMDA records and create summary tables and (ii) an application programming interface that will allow researchers and software developers to incorporate the CFPB-provided HMDA data into other applications and visualizations. During a CFPB Consumer Advisory Board meeting at which the new tool was demonstrated, Director Cordray explained that the CFPB’s HMDA tool is designed to enhance the value of the HMDA data to help identify potentially discriminatory lending patterns and determine whether lenders are serving the housing needs of their communities.

The launch corresponded with the FFIEC’s annual HMDA data release. The release provides data on mortgage lending transactions—including applications, originations, purchases and sales of loans, denials, and other actions related to applications—provided by 7,400 U.S. financial institutions covered by HMDA for the 2012 calendar year. The FFIEC release notes that 2012 HMDA data are the first to use the census tract delineations and population and housing characteristic data from the 2010 Census and from the American Community Survey and that the boundaries of many census tracts have been revised in the process of transitioning to the 2010 Census, and cautions users that boundary changes and updates to the population and housing characteristics of census tracts complicate intertemporal analysis of the annual HMDA data. The release further advises users that while the HMDA data can inform analysis of fair lending compliance, the HMDA data alone cannot be used to determine whether a lender is complying with fair lending laws because they do not include many potential determinants of creditworthiness and loan pricing, such as the borrower's credit history, debt-to-income ratio, and the loan-to-value ratio.

CFPB Fair Lending FFIEC HMDA

CFPB Issues Report on Examination Findings, Other Supervisory Activities

This afternoon, the CFPB released its summer 2013 Supervisory Highlights report, which covers supervisory activity from November 2012-June 2013.  This is the second such report the CFPB has released; the first report came out in October 2012 and covered activity from July 2011 through September 2012.

The report provides a brief review of the CFPB’s public enforcement actions and non-public supervisory actions and developments in the supervision program, including the issuance of bulletins, the issuance of new fair lending examination procedures, and the reorganization of supervision staff. The report also reviews the CFPB’s risk-based approach to examinations, including the “Institution Product Lines” approach, and outlines the factors that influence examination priorities.  The report does not identify any planned supervisory activities.

The bulk of the report, however, summarizes the CFPB’s examination findings. Key findings are discussed below.

Compliance Management Systems (CMS)

• CMS Elements
  • Although the report states no specific CMS structure is required, it also states that, based on the CFPB’s supervisory experience, an effective CMS commonly has the following components:  (i) board and management oversight; (ii) compliance program; (iii) consumer complaint management program; and (iv) independent compliance audit.  The report provides additional discussion on each component.
• Nonbanks
  • The report states that nonbanks are more likely than banks to lack a robust CMS. The CFPB found one or more instances of nonbanks that lack formal policies and procedures, have not developed a consumer compliance program, or do not conduct independent consumer compliance audits. According to the CFPB, the lack of an effective CMS has, in a number of instances, resulted in violations of Federal consumer financial laws. In these instances, the CFPB has required appropriate corrective action.
  • The report notes that CMS deficiencies in nonbanks are generally related to the supervised entity’s lacking a CMS structure altogether. CFPB examinations have found instances where nonbanks do not have a separate compliance function; rather, compliance is embedded in the business line, which can lead to deficiencies.
• Banks
  • The CFPB found that banks generally had an adequate CMS structure; however, several institutions lacked one or more of the components of an effective CMS.
  • The most common weakness the CFPB identified in banks is a deficient system of periodic monitoring and independent compliance audits. An entity that lacks periodic monitoring and instead relies on an annual independent compliance audit to identify regulatory violations and CMS deficiencies increases its risk that violations and weaknesses will go undetected for long periods of time, potentially leading to multiple regulatory violations and increased consumer harm.

   

Mortgage Servicing

• Servicing Transfers
  • Examiners found noncompliance with RESPA’s requirement to provide disclosures to consumers about transfers of the servicing of their loans.
  • Examiners also noted lack of controls relating to the review and handling of key documents – such as loan modification applications, trial modification agreements, and other loss mitigation agreements – necessary to ensure the proper transfer of servicing responsibilities for a loan.
  • Examiners noted that one servicer did not review any individual documents that the prior servicer had transferred, such as trial loan modification agreements.
  • At another servicer, examiners determined that documentation the servicer received in the transfer was not organized or labeled, and as a result, the servicer did not utilize loss mitigation information provided to the prior servicer in its loss mitigation efforts.
• Payment Processing
  • A servicer provided inadequate notice to borrowers of a change in the address to which they should send payments, which constituted a potentially unfair practice impacting thousands of borrowers. The entity acted promptly to ensure that it did not impose late fees or other delinquency fees, or any other negative consequences.
  • A servicer decided – without notice to borrowers – to delay property tax payments from December of one year to January of the next, resulting in the borrowers’ inability to claim a tax deduction for the prior year, which the CFPB cited as an unfair practice.
  • A servicer paid certain property taxes late, in violation of RESPA. The CFPB directed the servicer to pay any fees associated with the late payment and to investigate whether consumers experienced any additional harm as a result of the late payments. Further, at the CFPB’s direction, the servicer will notify consumers of the late payment and solicit information about any additional harm. If any such harm is identified, the servicer will remediate it.
  • Examiners have found violations of the Homeowners Protection Act (HPA) at several servicers. In one examination, examiners found excessive delays in processing borrower requests for private mortgage insurance (PMI) cancellation. Additionally, in cases where PMI was canceled, the servicer improperly handled unearned PMI premiums in violation of the HPA. The CFPB required the servicer to amend its policies and procedures relating to PMI cancellation. The servicer also must conduct a review to determine whether borrowers were subject to additional harm caused by delays in processing PMI cancellations.
  • Examiners identified a servicer that charged consumers default-related fees without adequately documenting the reasons for and amounts of the fees. Examiners also identified situations where servicers mistakenly charged borrowers default-related fees that investors were supposed to pay under investor agreements. Servicers have refunded these fees to borrowers.
• Loss Mitigation
  • Examiners have found issues related to: (i) inconsistent borrower solicitation and communication; (ii) inconsistent loss mitigation underwriting; (iii) inconsistent waivers of certain fees or interest charges; (iii) long application review periods; (iv) missing denial notices; (v) incomplete and disorganized servicing files; (vi) incomplete written policies and procedures; and (v) lack of quality assurance on underwriting decisions.
  • The CFPB states that weak compliance management surrounding loss mitigation processes creates fair lending risk and that it expects that entities servicing mortgage loans will implement fair lending policies, procedures, and controls to ensure that they are ECOA compliant. The CFPB states that servicers should conduct fair lending training for loss mitigation staff and engage in effective and timely fair lending risk assessments, compliance monitoring, and testing.

Fair Lending

• ECOA
  • The report states that some lenders are not complying with various aspects of the adverse action notification requirements under ECOA and Regulation B. The CFPB has found instances where supervised entities violated ECOA and Regulation B by failing to comply with either the provision, content, or timing requirements for adverse action notices and has directed the entities to develop and implement plans to ensure that the appropriate monitoring and internal controls are in place to detect and prevent future violations.
  • The report specifically notes that loan servicers should have systems in place to determine whether borrowers who apply for a change in the terms of credit are entitled to adverse action notices. The CFPB notes that some institutions may find it helpful to arrange for independent, internal reviews of loan files to ensure that the documentation supports the action taken and that all timing requirements are met. In addition, the report states that institutions should provide comprehensive periodic training to management and staff regarding compliance with ECOA and Regulation B, including compliance with provisions on adverse action notices.

CFPB Nonbank Supervision Mortgage Servicing Fair Lending Compliance Bank Supervision Loss Mitigation

CFPB Responds to Inquiry by Members of Congress on Indirect Auto Lending Guidance

On August 2, the CFPB responded to a letter submitted by 35 republican members of Congress who are concerned about the fair lending guidance the CFPB issued to indirect auto lenders earlier this year.  The bulletin, issued in March, confirmed the CFPB’s position that indirect auto finance companies are “creditors” subject to the fair lending requirements of ECOA and Regulation B and specifically addressed the risk of discrimination allegedly caused by discretionary dealer participation and compensation policies, concluding that indirect auto finance companies may be liable under the legal theories of both disparate treatment and disparate impact when pricing disparities on a prohibited basis exist within their portfolios.  The members criticized the CFPB’s lack of transparency and accountability in issuing the guidance “without a public hearing, without public comment, and without releasing the data, methodology, or analysis it relied upon to support such an important change in policy” and requested that the CFPB provide full details of the statistical disparate impact methodology used to support the bulletin’s directives.

The CFPB’s response letter affirms its indirect auto lending guidance, stating that the Bureau perceives frequent lack of fair lending compliance programs associated with this type of consumer lending despite Bureau’s assertion that ECOA applies to all credit transactions.  The CFPB further asserts that the notice-and-comment rulemaking process was not necessary for the bulletin, because the Administrative Procedure Act — which sets out the basic principles that apply to regulatory activity by federal agencies — does not require notice and comment for “general statements of policy, non-binding information guidelines, or interpretive memoranda.”  The letter also explains that because data about race, ethnicity, and gender is not typically collected in auto finance transactions, the CFPB employs a proxy methodology using surname and geographic location to identify potential pricing disparities affecting protected classes.  In support of its approach, the CFPB asserts that use of proxies for unavailable data is generally accepted and maintains that disparities will be considered “in view of all other evidence,” including the finance companies’ own analysis. The CFPB emphasized that “each supervisory examination or enforcement investigation is based on the particular facts presented” and that the CFPB “typically look[s] to whether there is a statistically significant basis point disparity in dealer markups received by the prohibited basis group.”  Lastly, the letter reiterates the CFPB’s ongoing coordination with other federal agencies to ensure that fair lending supervision and enforcement is “consistent, efficient, and effective.”

For additional information about federal authorities’ approach to fair lending in indirect auto finance, see our report on a recent Federal Reserve Board-sponsored webinar entitled “Indirect Auto Lending – Fair Lending Considerations,” in which presenters from the CFPB, FRB, and DOJ provided a perspective on the examination and enforcement activities of their respective organizations.

CFPB Auto Finance Fair Lending U.S. House