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On October 7, the CFPB and the FTC (collectively, “agencies”) filed an amici curiae brief with the U.S. Court of Appeals for the Second Circuit in an action addressing “whether a person ceases to be an ‘applicant’ under ECOA and its implementing regulation after receiving (or being denied) an extension of credit.” According to the brief, a consumer filed suit against a national bank for allegedly violating ECOA and Regulation B’s adverse-action notice requirement when it closed his line of credit and sent an email acknowledging the closure without including (i) “‘the address of the creditor,’” and (ii) “either a ‘statement of specific reasons for the action taken’ or a disclosure of his ‘right to a statement of specific reasons.’” The district court dismissed the action after adopting the magistrate judge’s Report and Recommendation recommending that the bank’s motion be granted without prejudice to plaintiff, who had leave to brief the court on whether an amended complaint should be permitted.
The agencies disagreed with the district court and filed the amici brief on behalf of the applicant. Specifically, the agencies argue that ECOA’s protections apply to any aspect of a credit transaction, including those who have an existing arrangement with a creditor, noting there is “‘no temporal qualifier in the statute.’” According to the agencies, ECOA has provisions that cover the revocation of credit or the change in credit terms, and therefore, those provisions “would make little sense if ‘applicants’ instead included only those with pending requests for credit.” Moreover, the agencies argue that the district court’s interpretation of “applicant” would “curtail the reach of the statute,” and introduce a large loophole. Lastly, the agencies assert that the legislative history of ECOA supports their interpretation, such as the addition of amendments covering the revocation of credit, and most notably, Regulation B’s definition of “applicant,” which includes those who have received an extension of credit.
On July 28, the CFPB issued a request for information (RFI) seeking input on ways to create a regulatory environment that expands credit access and ensures consumers and communities are protected from discrimination with respect to any aspect of a credit transaction. The RFI seeks comments to “identify opportunities to prevent credit discrimination, encourage responsible innovation, promote fair, equitable, and nondiscriminatory access to credit, address potential regulatory uncertainty, and develop viable solutions to regulatory compliance challenges under the Equal Credit Opportunity Act (ECOA) and Regulation B.” The RFI is in lieu of a symposium previously planned for this fall on topics related to ECOA. Information received will assist the Bureau in exploring ways to address regulatory compliance challenges, prevent unlawful discrimination, and foster innovation. Among other things, the Bureau seeks comments on ways to provide clarity under ECOA and/or Regulation B related to: (i) disparate impact analysis; (ii) meeting the credit needs of borrowers with limited English proficiency; (iii) special purpose credit programs; (iv) affirmative advertising to disadvantaged groups; (v) small business lending, particularly minority and women-owned firms; (vi) the prohibition of discrimination on the basis of a sexual orientation or gender identity; (vii) the scope of federal preemption of state law; (viii) situations in which “creditors seek to ascertain the continuance of public assistance benefits in underwriting decisions”; (ix) credit underwriting decisions based in part on models using artificial intelligence or machine learning; and (viii) adverse action notices. Comments on the RFI are due 60 days after publication in the Federal Register.
The same day, Director Kathy Kraninger published a blog post outlining Bureau priorities for ensuring a more inclusive financial system. In addition to the RFI, Kraninger discussed (i) the usefulness of the consumer complaint system in identifying cases of discrimination and fair lending violations; (ii) examinations and enforcement actions; (iii) the Bureau’s request for legislative authority to compensate whistleblowers; and (iv) education efforts focusing on consumers’ rights in the financial marketplace, including those related to disparities in student loan outcomes.
On July 20, a group of eighteen senators wrote to the acting Comptroller of the OCC, Brian Brooks, regarding reports that senior officials at the agency “have undermined OCC examiners’ efforts to investigate and pursue violations of civil rights laws,” including the Fair Housing Act (FHA) and ECOA. The letter cites to reports of at least three instances where examiners allegedly found discriminatory lending patterns present, yet OCC leadership failed to pursue action against the institutions.
The senators argue that failing to pursue fair lending violations “not only harms borrowers and their communities, but also undermines meaningful bank evaluations under the Community Reinvestment Act (CRA).” The senators list a series of questions regarding the OCC’s supervision of the FHA and ECOA since 2017, including information covering the number of fair lending citations that the OCC has issued, as well the number of fair lending referrals the OCC has made to the DOJ. The letter sets a response deadline of July 31.
On July 15, the Consumer Financial Protection Bureau filed a complaint against a Chicago-based nonbank mortgage company alleging fair lending violations predicated, in part, on statements made by the company’s owner and other employees during radio shows and podcasts from 2014 through 2017. The complaint, filed in federal court in Illinois, marks the first instance in which a federal regulator has taken a public enforcement action against a nondepository institution based on allegations of redlining.
According to the CFPB, the mortgage company violated the Equal Credit Opportunity Act and the Consumer Financial Protection Act by engaging in discriminatory marketing and applicant outreach practices that allegedly:
On July 7, the CFPB released a blog post discussing the use of artificial intelligence (AI) and machine learning (ML), addressing the regulatory uncertainty that accompanies their use, and encouraging stakeholders to use the Bureau’s innovation programs to address these issues. The blog post notes that “AI has the potential to expand credit access by enabling lenders to evaluate the creditworthiness of some of the millions of consumers who are unscorable using traditional underwriting techniques,” but using AI may create or amplify risks, including unlawful discrimination, lack of transparency, privacy concerns, and inaccurate predictions.
The blog post discusses how using AI/ML models in credit underwriting may raise compliance concerns with ECOA and FCRA provisions that require creditors to issue adverse action notices detailing the main reasons for the denial, particularly because AI/ML decisions can be “based on complex interrelationships.” Recognizing this, the Bureau explains that there is flexibility in the current regulatory framework “that can be compatible with AI algorithms.” As an example, citing to the Official Interpretation to Regulation B, the blog post notes that “a creditor may disclose a reason for a denial even if the relationship of that disclosed factor to predicting creditworthiness may be unclear to the applicant,” which would allow for a creditor to use AI/ML models where the variables and key reasons are known, but the relationship between them is not intuitive. Additionally, neither ECOA nor Regulation B require the use of a specific list of reasons, allowing creditors flexibility when providing reasons that reflect alternative data sources.
In order to address the continued regulatory uncertainty, the blog post encourages stakeholders to use the Trial Disclosure, No-Action Letter, and Compliance Assistance Sandbox programs offered by the Bureau (covered by InfoBytes here) to take advantage of AI/ML’s potential benefits. The blog post mentions three specific areas in which the Bureau is particularly interested in exploring: (i) “the methodologies for determining the principal reasons for an adverse action”; (iii) “the accuracy of explainability methods, particularly as applied to deep learning and other complex ensemble models”; and (iii) the conveyance of principal reasons “in a manner that accurately reflects the factors used in the model and is understandable to consumers.”
On July 2, the DOJ announced a settlement with a Maryland used car dealership and its owner and manager (collectively, “defendants”) resolving allegations that the defendants violated ECOA by offering terms of credit based on race to consumers seeking to purchase and finance used cars. As previously covered by InfoBytes, in September 2019, the DOJ announced it filed a lawsuit in the U.S. District Court for the District of Maryland alleging that between September 2017 and April 2018, compliance testing done by the DOJ concluded that the defendants’ “actions, policies, and practices discriminate against applicants on the basis of race with respect to credit transactions. . .by offering more favorable terms to white testers than to African American testers with similar credit characteristics.” Specifically, the complaint alleged that African American testers were, among other things, (i) told they needed higher down payment amounts than white testers for the same car; (ii) quoted higher bi-weekly payments for “buy here, pay here” financing than white testers for the same car; and (iii) not offered to fund down payments in two installments, as compared to white testers.
The consent order, which is subject to court approval and does not assess a monetary penalty, requires the dealership to, among other things, (i) develop written policies designed to prevent discrimination and ensure compliance with ECOA, including standardizing procedures for all credit applicants to reduce individual discretion in determining terms and conditions of credit; (ii) post and display a non-discrimination notice; (iii) attend ECOA training; and (iv) engage in on-going compliance monitoring and recordkeeping and reporting requirements with the DOJ.
On June 30, the CFPB released its spring 2020 rulemaking agenda. According to a Bureau announcement, the information details the regulatory matters that the Bureau “expect[s] to focus on” between May 1, 2020 and April 30, 2021. The announcement notes that the agenda was set before the Covid-19 pandemic struck and while the Bureau “continues to move forward with other regulatory work,” it will prioritize work related to supporting consumers and the financial sector during and after the Covid-19 pandemic.
In addition to the rulemaking activities already completed by the Bureau in May and June of this year, the agenda highlights other regulatory activities planned, including:
- Escrow Rulemaking. The Bureau intends to issue a proposed rule to implement Section 108 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which directs the Bureau to exempt certain loans made by creditors with assets of $10 billion or less (and that meet other criteria) from the escrow requirements applicable to higher-priced mortgage loans.
- Small Business Rulemaking. The Bureau states that in September 2020, it will publicly release materials for an October panel (convening under the Small Business Regulatory Enforcement Fairness Act) with small entities likely to be directly affected by the Bureau’s rule to implement Section 1071 of Dodd-Frank.
- HMDA. The Bureau states that two rulemakings are planned, including (i) a proposed rule that follows up on a May 2019 advanced notice of proposed rulemaking which sought information on the costs and benefits of reporting certain data points under HMDA and coverage of certain business or commercial purpose loans (covered by InfoBytes here); and (ii) a proposed rule addressing the public disclosure of HMDA data.
- Debt Collection. The Bureau intends to release the final rule amending Regulation F to implement the Fair Debt Collection Practices Act in October 2020 (InfoBytes coverage of the May 2019 proposed rule here). Additionally, “at a later date” the Bureau intends to finalize the February supplemental proposal, which covers time-barred debt disclosures (covered by a Buckley Special Alert here).
- Qualified Mortgages (QM). The Bureau states it is considering issuing a proposed rule “later this year” that would create a new “seasoning” definition of a QM under Regulation Z, allowing for QM status after the borrower has made consistent timely payments for a defined period.
Additionally, in its announcement, the Bureau notes that it is (i) participating in an interagency rulemaking process on quality control standards for automated valuation models (AVMs) with regard to appraisals; and (ii) continuing to review and conduct the five-year lookback assessments under Section 1022(d) of Dodd-Frank.
On May 27, the FTC announced settlements with a New York City auto dealer and its general manager (collectively, “defendants”) to resolve allegations that the defendants engaged in illegal auto financing sales practices and maintained a policy of charging African-American and Hispanic car buyers more for financing that similarly situated non-Hispanic white consumers. The complaint alleges that the defendants violated the FTC Act, TILA, and ECOA. According to the complaint, the defendants engaged in deceptive and unfair practices by, among other things, allegedly (i) advertising low sales prices but failing to honor them; (ii) inflating the cost through a variety of methods, including telling buyers that they had to pay unnecessary charges to purchase “certified pre-owned” cars, double-charging consumers for taxes and fees without their consent, and altering the terms in the middle of a sale; and (iii) charge higher financing “markups” and fees to African-American and Hispanic customers.
The defendants—who neither admit nor deny the allegations—have each agreed under the terms of the settlements (see here and here) to pay $1.5 million in consumer redress. The orders also prohibit the defendants from misrepresenting the cost or terms to purchase, lease, or finance a car, and require the defendants to obtain express, informed buyer consent for all charges and provide clear financing disclosures. The defendants are also banned from engaging in unlawful credit discrimination, and are prohibited from engaging in credit transactions unless they establish a fair lending program that will, among other things, provide training for employees and cap the allowed rate markups.
The Commission vote authorizing the filing of the complaint and stipulated final order was 5-0. Commissioner Chopra issued a concurring statement addressing disparate impact and unfair discrimination in the auto industry, and emphasized it is time for the FTC to use its rulemaking authority to establish protections for car buyers and honest auto dealers. Commissioner Slaughter agreed that there is a need for auto financing and sales market reform, and suggested that the FTC can begin by initiating a rulemaking under Dodd-Frank to regulate dealer markups.
On April 30, the CFPB issued its annual fair lending report to Congress, which outlines the Bureau’s efforts in 2019 to fulfill its fair lending mandate. According to the report, in 2019 the Bureau continued to focus on promoting fair, equitable, and nondiscriminatory access to credit, highlighting several fair lending priorities that continued from years past such as mortgage lending, student loans, and small business lending. The Bureau also highlighted three policies released over the last year to promote innovation and to facilitate compliance: the No-Action Letter Policy, the Trial Disclosure Program Policy, and the Compliance Assistance Sandbox Policy (covered by InfoBytes here). Additionally, the report discussed the Bureau’s efforts in encouraging consumer-friendly innovation to expand access to unbanked and underbanked consumers and communities. These include: (i) using alternative data in credit underwriting to expand credit access responsibly; (ii) issuing a request for information on the use of “Tech Sprints” (covered by InfoBytes here) to encourage regulatory innovation and stakeholder collaboration; (iii) continuing to enforce fair lending laws such as ECOA and HMDA, including reaching a settlement with one of the largest HDMA reporters nationwide to resolve HMDA reporting allegations; and (iv) engaging with stakeholders to discuss fair lending compliance, issues related to credit access, and policy decisions. The report also provides information related to supervision, enforcement, rulemaking, and education efforts.
On May 6, the CFPB issued three clarifying FAQs regarding ECOA and Regulation B loan denial and adverse action notice requirements as they relate to the Paycheck Protection Program (PPP). The three FAQs provide the following clarifications of the requirements for notification of action:
- Notice of Action Taken. A PPP application is not determined to be a “completed application” under Regulation B for purposes of a notice of action taken until a creditor receives a loan number from the SBA or a response about the availability of funds. Once the creditor has received a loan number from the SBA or a response about the availability of funds, the creditor has 30 days to notify the applicant of the action taken on the application.
- Adverse Action Notice. If a creditor “refus[es] to grant” a PPP credit request without ever submitting the loan to the SBA, the creditor is still required under Regulation B to provide an adverse action notice within 30 days and provide the applicant with the specific reason for the denial.
- Denial for Incompleteness. If the creditor has received sufficient information from the applicant for a credit decision, but has not received a loan number from the SBA or a response about the availability of funds, under Regulation B, the creditor may not deny the application based on incompleteness. An application can only be denied for incompleteness if the application is missing information the applicant can provide—not the SBA.
- Thomas A. Sporkin to discuss "Managing internal investigations and advanced government defense" at the Securities Enforcement Forum
- Jeffrey P. Naimon to discuss "2021 - A new beginning/what's to come" at the QuestSoft Lending Compliance & Risk Management Virtual Conference
- H Joshua Kotin to discuss "Mortgage servicing in a recession: Early intervention, loss mitigation and more" at the NAFCU Virtual Regulatory Compliance Seminar
- Daniel R. Alonso to discuss "Independent monitoring in the United States" at the World Compliance Association Peru Chapter IV International Conference on Compliance and the Fight Against Corruption
- Jonice Gray Tucker to discuss "Cyber security, incident response, crisis management" at the Legal & Diversity Summit
- Jonice Gray Tucker to discuss "The future of fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "Pandemic fallout – Navigating practical operational challenges" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "BSA/AML - Covid impact and regulatory/guidance roundup" at an NAFCU webinar