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CFPB Publishes ECOA Baseline Review Modules
Yesterday afternoon, the CFPB released its ECOA baseline review modules, which supplement the recently updated ECOA examination procedures. Completed baseline modules will be included in an institution’s examination work papers and may be considered in conjunction with any fair lending statistical analysis to assess an institution’s fair lending compliance and risks.
The baseline review procedures provide examiners with a series of questions in six modules to assess the following:
- Fair lending supervisory history;
- Fair lending compliance management system – management participation, policies and procedures, training, and internal controls and monitoring;
- Mortgage lending - policies and procedures for mortgage underwriting and pricing, including frequency of deviations, compensation structures, third-party involvement, and marketing practices;
- Mortgage servicing - policies and procedures as they relate to fair lending;
- Auto lending – policies and procedures for direct and indirect auto lending, including information related to pricing, underwriting, referrals, origination, and third-party compensation; and
- Other products – policies and procedures with respect to any additional products selected for review, e.g. secured and unsecured consumer lending, credit cards, add-on products, private student lending, payday lending, and small business lending.
The CFPB baseline review differs from the CFPB’s targeted review process, during which a supervised institution can be subject to an in-depth look at a specific area of fair lending risk, and is separate from the CFPB’s HMDA review, which includes transactional testing for HMDA data accuracy.
CFPB, Federal Reserve Board, DOJ Plan Indirect Auto Fair Lending Compliance Event
On July 15, the Federal Reserve Board announced that it will co-host an upcoming consumer compliance webinar with the CFPB and the DOJ entitled “Indirect Auto Lending – Fair Lending Considerations.” The event, which will be held August 6, 2013, 11:30 a.m. – 12:30 p.m. (ET), will feature Maureen Yap, special counsel and manager of the Federal Reserve’s Fair Lending Enforcement Section; Coty Montag, deputy chief of the DOJ’s Housing and Civil Enforcement Section of the Civil Rights Division; and Patrice Ficklin, assistant director of the CFPB’s Office of Fair Lending and Equal Opportunity. The panelists plan to discuss (i) the CFPB’s indirect auto lending bulletin and compliance with ECOA; (ii) supervisory guidance; (iii) examination procedures; (iv) public settlements; and (v) “emerging issues.” Following their presentations, the panelists will take audience questions, which may be submitted in advance.
Ninth Circuit Holds Repeated Erroneous Default Notices Can Be ECOA Adverse Action
On July 3, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit held that a mortgage servicer’s alleged repeated delivery of notices of default and acceleration to borrowers who were current on their obligation could be “adverse action,” triggering the ECOA notification requirements. Schlegel v. Wells Fargo Bank, No. 11-6816, 2013 WL 3336727 (9th Cir. July 3, 2013). According to the borrowers, although they received a discharge in bankruptcy, they reaffirmed their mortgage loan, subject to a modification that apparently reduced their monthly payment obligation. The borrowers claimed that the servicer did not correct its records to reflect the loan modification and sent several notices of default and acceleration. The Ninth Circuit held that, while sending a mistaken default notice would not necessarily constitute an adverse action, the conduct alleged in the complaint, in which the creditor repeatedly stated that the obligation was immediately due and payable, fell within the definition of an “adverse action” as, among other things, a “revocation of credit.” Therefore, the court reversed the district court’s dismissal of the borrowers’ claim that the mortgage servicer had failed to provide a notification within 30 days after taking adverse action, as required under ECOA. The appellate court, however, upheld the district court’s dismissal of the borrowers’ claim under the FDCPA, holding that the complaint failed to adequately allege that the servicer was a “debt collector” under the FDCPA — i.e., either that its principal business was the collection of debts or that it was collecting the subject debt “for another.”
Congress, CFPB Trade Letters on Fair Auto Lending Guidance
On June 20, 35 Republican Members of the U.S. House of Representatives sent a letter to CFPB Assistant Director of the Office of Fair Lending and Equal Opportunity, Patrice Ficklin, questioning the manner in which recent CFPB guidance regarding lending practices in the auto lending industry was rendered and requesting details concerning the process of analyzing potential fair lending violations. The letter comes on the heels of a similar inquiry made by 13 Democratic Members of the House Financial Services Committee to CFPB Director Richard Cordray on May 28, 2013. The CFPB 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.
The Republican letter takes issue with the CFPB “initiating [a] process 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.” The letter notes that “allegations of disparate impact do not involve intentional conduct, but instead consist solely of statistical analysis of past transactions” and that any model assessing such impact must be reliable and accurate. Because the guidance fails to disclose the model for assessing fair lending violations, Congress requested the CFPB provide all pertinent details regarding its methodology to evaluate whether the statistical model supports its supervision and examination of financial institutions.
In addition to taking issue with the CFPB’s statistical analysis, the Republican letter also characterized the ECOA compliance controls suggested in the CFPB bulletin as “onerous and unrealistic,” noting that “restricting consumer choice is highly problematic.” To support the controls prescribed by the guidance, the Republican letter requested that the CFPB provide “all studies, analysis, and information it relied upon in developing its guidance document.” Specifically, the two congressional letters requested the analysis conducted by the CFPB on the impact of these prescribed controls on the auto lending industry and any coordination activities undertaken with other agencies in developing the guidance. The House members, like many in the auto industry, are concerned the guidance will have an adverse impact on competition, result in increased overall costs for consumers, and potentially exclude lower-income customers from the credit market entirely.
Amid these growing concerns regarding the CFPB’s guidance and inquiry into auto finance practices, on June 20, Director Cordray provided a response to the May 28 Democrat letter. Mr. Cordray’s response essentially reiterates both the CFPB’s authority to supervise and investigate financial institutions engaged in auto finance and the CFPB’s concerns that pricing discretion may create a significant risk of discrimination. In responding to the issues of the Democrat letter, Director Cordray indicated that the CFPB uses a proxy methodology to analyze disparate impact in the auto lending industry, though it is short on the specifics behind the methodology used. The CFPB response acknowledged that ECOA fair lending analysis is more complex than mortgage lending analysis given the absence of data similar to that collected in the mortgage context under the Home Mortgage Disclosure Act. Director Cordray also posited that the use of proxies for unavailable data is a widely accepted mathematical and systematic approach in various arenas, including for marketing in the auto industry itself. According to Director Cordray, the CFPB uses both surnames and geographic location as proxies for unavailable characteristics. The proxy analysis is then conducted through publicly available data from the Social Security Administration and Census Bureau.
Notwithstanding the information provided regarding the CFPB’s methodology for analyzing potential discrimination within the auto finance industry, it appears that both Members of Congress and industry participants remain skeptical of the accuracy of such an approach and continue to call for increased transparency from the CFPB regarding its due diligence in creating this proxy methodology and disclosure of the methodology itself. Opponents also question the manner in which the guidance was released and absence of public hearings or public comment periods. The most recent Republican letter raised these precise issues and requested a response from the CFPB within 30 days.
CFPB Updates TILA, ECOA Examination Procedures
On June 4, the CFPB released new TILA and ECOA examination procedures, which were updated to incorporate certain of the CFPB mortgage rules finalized in January 2013 that address appraisals, escrow accounts, and mortgage loan originator compensation and qualifications. Parts of the Regulation Z (TILA) amendments took effect June 1, 2013, while the majority of the changes to both Regulation Z and Regulation B (ECOA) take effect in January 2014. The CFPB explained that the procedures will help financial institutions and mortgage companies understand how they will be examined under the new requirements that, among other things: (i) set qualification and screening standards for loan originators, (ii) prohibit steering incentives, (iii) prohibit “dual compensation,” (iv) extend the required duration of an escrow account on higher-priced mortgage loans, (v) prohibit mandatory arbitration, (vi) require lenders to provide appraisal reports and valuations, and (vii) prohibit single premium credit insurance.
House Democrats Raise Concerns about CFPB Auto Lending Enforcement
On May 28, a group of 13 Democratic Members of the House Financial Services Committee sent a letter to CFPB Director Richard Cordray seeking “any and all background information about . . . [the CFPB’s] investigation into alleged practices within the auto lending industry.” As has been reported, earlier this year the CFPB issued guidance to bank and nonbank indirect auto lenders about compliance with federal fair lending requirements, and the CFPB has spent the past several months implementing that guidance through supervision and examination of lenders. In particular, the CFPB is focused on the practice by which auto dealers “mark up” the indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. In their letter to Director Cordray, the Members of Congress remind the Director that vehicle ownership can be critical to a consumer’s ability to obtain and maintain employment and find affordable housing, and raise concerns about the impact of the CFPB’s auto lending enforcement activity on consumers’ access to affordable credit for vehicle purchase. The Members ask the Director to provide specific information about allegations stemming from investigations of auto lenders and the methodology the CFPB is employing to determine whether fair lending violations exists. They also seek additional information about the CFPB’s compliance expectations for indirect auto lenders with regard to dealer compensation policies. The letter asks the CFPB to respond by June 7, 2013.
CFPB Publishes Additional Mortgage Rule Compliance Guides
On May 2, the CFPB published three additional guides to assist companies seeking to comply with its HOEPA rule, ECOA valuations rule, and TILA high-priced mortgage appraisal rule. As with other prior guides it has released, the CFPB cautions that the guides are not a substitute for the rules and the Official Interpretations, and that the guides do not consider other federal or state laws that may apply to the origination of mortgage loans. BuckleySandler also has prepared detailed analyses of these and other CFPB mortgage rules.
DOJ Charges Community Bank with Discriminatory Pricing of Unsecured Consumer Loans
On February 19, the DOJ announced a settlement with a $338 million Texas community bank to resolve allegations that the bank engaged in a pattern or practice of pricing discrimination on the basis of national origin. Specifically, the DOJ alleged, based on its own investigation and an examination conducted by the FDIC, the bank violated ECOA by charging Hispanic borrowers higher interest rates on unsecured consumer loans compared to the rates charged to similarly situated white borrowers. The consent order requires the bank to establish a $700,000 fund to compensate borrowers who may have suffered harm as a result of the alleged ECOA violations. It also requires that the bank (i) establish uniform pricing policies, (ii) create a compliance monitoring program, (iii) provide borrower notices of non-discrimination, and (iv) conduct employee training. The new requirements apply not only to unsecured consumer loans, but also to all residential single-family real estate construction financing, automobile financing, home improvement loans, and mortgage loans.
Special Alert: Analysis of Final ECOA and HPML Appraisal Rules
On January 18, the federal banking agencies issued a final rule amending Regulation Z to implement certain requirements from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that require creditors to obtain appraisals for a subset of loans called Higher-Priced Mortgage Loans (HPMLs), and to notify consumers who apply for these loans of their right to a copy of appraisal. On the same day, the Consumer Financial Protection Bureau issued a final rule under the Equal Credit Opportunity Act (ECOA), as amended by the Dodd-Frank Act, to require creditors to provide residential mortgage loan applicants with a copy of any and all appraisals and other written valuations developed in connection with an application for closed or open-end credit that is to be secured by a first lien on a dwelling. Both rules take effect on January 18, 2014. BuckleySandler has prepared a Special Alert that provides additional details regarding the HPML appraisal rule, as well as a Special Alert regarding the ECOA appraisal rule.
Special Alert: CFPB and DOJ Announce MOU to Coordinate Fair Lending Enforcement Efforts; CFPB Issues First Annual Report to Congress on Fair Lending Activities
On December 6, the Consumer Financial Protection Bureau (CFPB or Bureau) and the U.S. Department of Justice (DOJ) announced a Memorandum of Understanding (MOU) to coordinate enforcement of the federal fair lending laws, including the Equal Credit Opportunity Act (ECOA). Simultaneously, the CFPB issued its first annual Fair Lending Report to Congress as required by the Dodd-Frank Act, which describes the Bureau’s efforts to build its Office of Fair Lending and Equal Opportunity and reviews its fair lending accomplishments. Together, these initiatives demonstrate that the CFPB and DOJ are continuing to work together closely to aggressively enforce the federal fair lending laws.
Memorandum of Understanding Regarding Fair Lending Coordination
The new MOU supplements an existing Information Sharing Agreement Regarding Fair Lending Investigations among the DOJ, the U.S. Department of Housing and Urban Development, and the Federal Trade Commission, which allows these fair lending enforcement agencies to share confidential information related to fair lending investigations, screening procedures, and investigative techniques. It also follows a general cooperation MOU that the DOJ and CFPB entered into earlier this year.
The new MOU focuses on information sharing and referral of matters alleging ECOA violations, but also governs the agencies’ referral processes for other fair lending-related laws and joint fair lending investigations.
Referral of ECOA Violations to DOJ: The MOU explains the circumstances under which the CFPB will refer potential ECOA violations to the DOJ for further investigation or prosecution. Consistent with the established practice of the prudential federal bank regulators, the MOU requires the CFPB to refer to the DOJ all matters where it has “reason to believe” that one or more creditors has engaged in a pattern or practice of lending discrimination. The CFPB may also refer to DOJ any violation of Section 701(a) of ECOA, including a recommendation that a civil action be commenced if the CFPB cannot obtain compliance from the financial institution.
Following referral, the DOJ has 60 days to determine whether to proceed with its own investigation. Within that period, the CFPB may not unilaterally commence its own action with regard to the referred violation(s). Even if exigent circumstances arise during the 60-day review period, the CFPB must first consult with the DOJ before taking independent action.
The CFPB may also refer to the DOJ possible violations of fair lending-related laws for which the CFPB has no statutory examination or enforcement authority, but for which the DOJ possesses enforcement authority, including the Fair Housing Act and the Servicemembers Civil Relief Act. Despite its lack of statutory authority to enforce these laws, the CFPB’s Supervision & Examination Manual provides resources to identify such potential violations for purposes of referrals to another federal agency.
Joint Investigations: With regard to joint investigations, the MOU provides only that “[w]hen appropriate, the DOJ and the CFPB will seek to collaborate on investigations, and conduct joint investigations of entities allowing the Agencies to leverage resources and expertise.” The agreement calls for quarterly meetings to discuss investigative activity, but allows each agency to retain “independent authority to proceed in the manner that it determines is appropriate.”
Information Sharing: The MOU describes how the parties have agreed to designate, share, use, and protect as non-public, certain information related to investigations of potential ECOA violations, including confidential supervisory information collected by the CFPB under its supervision and examination authority. The MOU allows for additional case- or investigation-specific information sharing agreements as appropriate, based on a form agreement provided as an attachment to the MOU. Section 7 of the form agreement indicates that “sharing of any confidential information [between the CFPB and DOJ] under this Agreement does not constitute a waiver of, or otherwise affect, any privilege any agency or person may claim with respect to such information under federal law.” This provision appears to mirror the treatment of confidential information under 12 U.S.C. § 1828(x) that applies to the prudential bank regulatory agencies.
CFPB’s First Annual Fair Lending Report to Congress
The First Annual Fair Lending Report of the Consumer Financial Protection Bureau describes the CFPB’s efforts to build its Office of Fair Lending and Equal Opportunity and reviews that office’s accomplishments from July 21, 2011 through July 20, 2012. The CFPB includes among those accomplishments the issuance of “Bulletin 2012-04 on Discrimination in Lending” and the commencement of a number of non-public fair lending investigations, which are ongoing. The Report states that the Bureau continues to develop tools that allow it to identify areas of heightened fair lending risk and to promote efficiency in its supervisory and enforcement efforts. Earlier this year, in its strategic plan, the CFPB explained that it intends to base its fair lending-related performance on, among other indicators, the number of fair lending supervision activities opened during the fiscal year and the percentage of fair lending cases filed that were “successfully resolved” through litigation, settlement, or default judgment.
The Report states that federal regulators referred 12 ECOA-related matters to the DOJ from July 21, 2011 through December 31, 2011 and provides a summary of the most frequently cited Regulation B violations found by the federal regulators during examinations of financial institutions. The Report also provides a summary of a study and report by the CFPB to Congress on use of cohort default rates in private education lending, and provides a general status on rulemakings required by the Dodd-Frank Act. The CFPB describes the rulemaking to expand the scope of the data that must be collected and submitted under the Home Mortgage Disclosure Act (HMDA) as being in the “pre-rule stage,” and the Bureau has begun the planning process for new rules concerning data collection and reporting of small, minority- and women-owned business loan data by gathering information from stakeholders.
BuckleySandler LLP is a national leader in fair lending enforcement, litigation, and compliance. Attorneys in our Fair and Responsible Banking Team and CFPB Team defend institutions facing fair lending enforcement actions brought by the DOJ, CFPB and other federal agencies, and the firm regularly counsels an array of financial institutions seeking to comply with the full range of federal fair lending laws.