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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.
On February 26, the FTC announced it had recently provided the CFPB with its annual summary of work on ECOA-related policy issues including the following FTC research and policy development initiatives:
- The FTC held a series of public hearings on competition and consumer protection in the 21st century. Session seven specifically addressed issues related to the use of algorithms, artificial intelligence, and predictive analytics. Panelists addressed how fairness, bias, and discrimination may impact the use of such technologies and debated whether current legal protections such as ECOA sufficiently cover these issues.
- The FTC continued its qualitative study of consumer experiences when buying and selling automobiles at dealerships, which the agency believes will help focus initiatives, such as educating consumers about the purchase and financing process and providing business education to promote compliance with the FTC Act and ECOA.
- The FTC’s Military Task Force, which consists of a cross-section of agency representatives, continued to work on military consumer protection issues. Workshops were conducted to examine financial issues and scams targeting military consumers, including servicemembers and veterans. In addition, the FTC participated in a training program for servicemembers and their families to discuss ECOA and Regulation B protections.
- The FTC maintained its membership in the Interagency Task Force on Fair Lending, along with the CFPB, DOJ, HUD, and the federal banking regulatory agencies, and participated in the Financial Fraud Enforcement Task Force.
Concerning fair lending, the FTC stated that it provided education on several topics, including those related to credit transactions that fall under Regulation B.
On February 12, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2018, through September 30, 2018. The report, which is required by the Dodd-Frank Act, addresses issues including problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau when acting Director Mick Mulvaney was still in office. The report is the first to be released under Kathy Kraninger, who was confirmed as Director in December 2018. In her opening letter, Kraninger emphasized that during her tenure the Bureau will “vigorously and even-handedly enforce the law,” and will make sure the financial marketplace “is innovating in ways that enhance consumer choice.” Among other things, the report focuses on credit invisibility and mortgage shopping as two significant problems faced by consumers, noting that credit invisibility among adults tends to be concentrated in rural and highly urban areas and, based on recent studies, more than 75 percent of borrowers report applying for a mortgage with only one lender.
The report also includes an analysis of the efforts of the Bureau to fulfill its fair lending mission. The report highlights the most frequently cited violations of Regulation B (ECOA) and Regulation C (HMDA) in fair lending exams during the reporting period and emphasizes that during the reporting period the Bureau did not initiate or complete any fair lending public enforcement actions or refer any matters to the DOJ with regard to discrimination.
On August 28, the U.S. District Court for the Eastern District of Wisconsin dismissed an action against a credit union, holding that the credit union’s decision to consider only dispute-free credit reports of all applicants does not amount to a “prohibited basis” under the Equal Credit Opportunity Act (ECOA). According to the opinion, the credit union required the consumer to remove his disputed debts from his credit report in order for his application for a home equity loan to move forward. After the disputes were removed, the consumer’s credit score dropped below the minimum required by the credit union, and his application was denied. In December 2017, the consumer brought an action against the credit union, alleging that he was discriminated against in violation of ECOA for exercising his dispute rights under the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA). The court rejected the consumer’s arguments, concluding that the FDCPA and the FCRA do not give a consumer a right to dispute debts, but rather a right to ensure that disputed debts are accurately reported as such. The court also rejected the consumer’s theory of recovery under ECOA, finding that his arguments were inconsistent with ECOA’s implementing regulation, Regulation B. The court determined that Regulation B allows a creditor to restrict the types of credit history that it will consider if the restrictions are applied to all applicants without regard to a prohibited basis. Because the dispute-free restriction was applied to all applicants of the credit union equally, the consumer’s claim failed.
CFPB Announces Final Rule Modifying ECOA Regulations, Seeks Public Comment on Proposed Disclosure of HMDA Data
On September 20, the CFPB announced its Final Rule amending Regulation B, which implements the Equal Credit Opportunity Act (ECOA), as well as a notice of proposed policy guidance requesting public comment on modifications to loan-level HMDA data that will be made publicly available beginning in 2019.
Amendments to Regulation B. The Final Rule, among other things, permits institutions not subject to HMDA reporting requirements to choose, on an “application-by-application basis,” between two approaches to collecting race and ethnicity data from applicants for certain dwelling-secured loans: either collect such data in the aggregate or use the disaggregated and more expansive categories required for HMDA-reporting institutions under revisions to Regulation C effective in 2018. According to the Final Rule, this means that creditors that are not HMDA reporters could transition to using the 2016 Uniform Residential Loan Application, which was updated to comply with the upcoming changes to Regulation C. As previously covered in InfoBytes, the justification for the change was to provide consistency and clarity with respect to other Bureau rules.
Proposed Policy Guidance Regarding Publicly Available Loan-Level HMDA Data. The CFPB has issued a notice of proposed policy guidance with a request for public comment concerning modifications that it intends to apply to publicly available loan-level HMDA data that financial institutions will be required to report in connection with the new HMDA data reporting requirements that become effective January 1, 2018. The CFPB is specifically seeking comment on whether certain data fields should be included or modified in the publicly available loan-level HMDA data; these fields include the universal loan identifier, application date, loan amount, action taken date, property address, age, credit score, debt-to-income ratio, and property value, among others. As previously covered in InfoBytes, the CFPB issued its final rule amending Regulation C in August. Comments on the proposed guidance are due 60 days after publication in the Federal Register.
CFPB Proposes Amendment to Regulation B to Harmonize Regulation B with Other Mortgage Lending Regulations
On March 24, the CFPB announced the release of its proposal to amend Regulation B (12 CFR Part 1002), which implements the ECOA, a federal civil rights law that protects applicants from discrimination by lenders. According to the Bureau, the proposed amendment is intended to “provide additional flexibility for mortgage lenders concerning the collection of consumer demographic information.” Specifically, the regulation, as amended, would allow lenders to use the updated Uniform Residential Loan Application form adopted by Fannie Mae and Freddie Mac in 2016, rather than the 2004 version currently included in Regulation B, along with additional changes that would permit lenders to employ more uniform practices.
As explained in a March 24 CFPB blog post, a core justification for the proposed change is consistency and clarity with respect to other Bureau rules. While ECOA and Regulation B generally prohibit creditors from asking loan applicants about their race, religion, ethnicity, national origin, or gender, in some cases, such as mortgage loans, other regulations (i.e., Regulation C and the HMDA) require creditors to specifically ask for some of the very same information – including, for instance, race and ethnicity. To address this issue, the proposed amendments would allow institutions not subject to HMDA reporting requirements to choose on an “application-by-application basis” between two approaches to collecting personal demographic data from applicants: either the more limited, aggregate race and ethnicity categories required by Regulation B, or the disaggregated and more expansive categories required for HMDA-reporting institutions under revisions to Regulation C effective in 2018. The new rule would also create a safe harbor allowing for the collection (in certain circumstances) of data previously barred by Regulation B, establish consistent race and ethnicity categories that could be used in complying with both Regulation B and C.
Comments on the proposal will be due within 30 days of its publication in the Federal Register.
Appellate Court Holds Secondary Market Mortgage Investor Not Liable Under ECOA for Discriminatory Conduct of Unaffiliated Originator
On February 16, the U.S. Court of Appeals for the Fifth Circuit issued an opinion addressing whether Section 8 mortgage applicants may claim discrimination under the Equal Credit Opportunity Act (ECOA) by both a mortgage originator and a subsequent investor in the secondary mortgage market. See Alexander v. AmeriPro Funding, Inc. No. 15-20710, 2017 WL 650193 (5th Cir. Feb. 16, 2017). At issue before the Appellate Court were claims alleging that both the mortgage originator that interacted with borrowers, made credit decisions, and actually gave mortgages to home buyers, and the investor, engaged in the business of investing in or buying mortgages originated by the mortgage originator, were subject to liability for discriminatory conduct in violation of ECOA based upon plaintiffs’ allegations that “they applied for mortgages through [the mortgage originator] and that [the mortgage originator] did not consider their Section 8 income in processing the application because it intended to sell the mortgages to [the investor].”
Ultimately, the Court denied all but a small subset of the various claims asserted by plaintiffs. Among other things, the Court held: (i) that the record did not support a claim that the investor—having purchased the mortgages at issue in the secondary market after execution—discriminated against and/or failed to consider Section 8 income in assessing the creditworthiness of any plaintiff; (ii) that plaintiffs’ allegations concerning their application with the mortgage originator could not also be applied to a subsequent secondary mortgage investor such as the investor; and (iii) that the record similarly did not support a finding that the investor was a “creditor” with respect to the plaintiffs and/or the mortgage agreements entered into with the mortgage originator.
The Appellate Court did, however, side with plaintiffs as to those claims against the mortgage originator that set forth facts plausibly alleging conduct on the part of the mortgage originator that might constitute improper discounting of Section 8 income in assessing their creditworthiness. The Appellate Court reversed the district court’s dismissal as to those claims and remanded for further proceedings.
Notably, the Court expressly disagreed with the CFPB’s argument (as amicus) for a broader definition of “creditor” under ECOA and Regulation B’s definition of the term because it determined that “a potential assignee who establishes underwriting guidelines for its purchases but does not influence individual credit it not a creditor,” and that Regulation B’s definition would not include “those who have no direct involvement whatsoever in an individual credit decision.”
- Brandy A. Hood to discuss "Ongoing challenges of TRID compliance" at the Mortgage Bankers Association Live: Legal Issues and Regulatory Compliance Conference
- Daniel R. Alonso to discuss "Resisting temptation in a crisis: How to make sure ethics and compliance don't get diluted under financial strain" at a New York City Bar Association webcast
- Daniel P. Stipano to discuss "BSA for BSA seasoned officers" at an NAFCU webinar
- Jon David D. Langlois to discuss "LIBOR transition: Preparations for legal professionals" at a Mortgage Bankers Association webinar
- Garylene D. Javier to discuss "Navigating workplace culture in 2020" at the DC Bar Conference