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On February 3, the FTC announced it recently provided the CFPB with its annual summary of work on ECOA-related policy issues, focusing specifically on the Commission’s activities with respect to Regulation B during 2020. The summary discusses, among other things, the following FTC research and policy development initiatives:
- The FTC submitted a comment letter in response to the CFPB’s request for information on ways to provide additional clarity under ECOA (covered by InfoBytes here). Among other things, the FTC noted that Regulation B explicitly incorporates disparate impact and offered suggestions should the Bureau choose to provide additional detail regarding its approach to disparate impact analysis. The FTC also urged the Bureau to remind entities offering credit to small businesses that ECOA and Regulation B may apply based “on the facts and circumstances involved” and that entities cannot avoid application of these statutes based solely on how they characterize a transaction or the benefits they claim to provide.
- The FTC hosted the 13th Annual FTC Microeconomics Conference, which focused on the use of machine-learning algorithms when making decisions in areas such as credit access.
- The FTC’s Military Task Force continued to work on military consumer protection issues, including military consumers’ “rights to various types of notifications as applicants for credit, including for adverse action, and information about the anti-discrimination provisions, in ECOA and Regulation B.”
- The FTC continued to participate in the Interagency Task Force on Fair Lending, along with the CFPB, DOJ, HUD, and the federal banking regulatory agencies. The Commission also joined the newly formed Interagency Fair Lending Methodologies Working Group with the aforementioned agencies in order “to coordinate and share information on analytical methodologies used in enforcement of and supervision for compliance with fair lending laws, including ECOA.”
The summary also highlights FTC ECOA enforcement actions, business and consumer education efforts on fair lending issues, as well as blog posts discussing fair lending safeguards and the use of artificial intelligence in automated decision-making.
On January 13, the CFPB released fair-lending guidance for financial institutions that provide services to borrowers with limited English proficiency (LEP). As previously covered by InfoBytes, last July the Bureau issued a request for information that sought, among other things, information on ways to provide clarity under the Equal Credit Opportunity Act (ECOA) and/or Regulation B related to meeting the credit needs of LEP borrowers. During a 2020 roundtable focusing on LEP issues, the Bureau was also urged to publish additional guidance to assist financial institutions in expanding products and services to LEP consumers while also maintaining compliance with statutes and regulations. The Statement Regarding the Provision of Financial Products and Services to Consumers with Limited English Proficiency (Statement) incorporates feedback received from stakeholder groups, advocacy organizations, financial institutions, financial regulators, and trade associations. The Statement addresses, among other challenges, issues “related to balancing legal requirements and practical considerations” and potential UDAAP risks associated with offering support in certain non-English languages but not in others. The Statement further provides principles and guidance to assist financial institutions when making decisions related to assisting LEP consumers. Additionally, the Statement also includes key considerations and guidelines for institutions to use when developing compliance solutions for providing products and services in non-English languages to LEP consumers, while at the same time complying with Dodd-Frank, ECOA, and other applicable laws and regulations.
Recently, FTC staff submitted a comment letter in response to the CFPB’s request for information (RFI) seeking input on ways to provide additional clarity under the Equal Credit Opportunity Act (ECOA) and implementing Regulation B. As previously covered by InfoBytes, the CFPB issued the RFI last July requesting comments 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. Included in the RFI was a request for input on whether “the Bureau should provide additional clarity regarding its approach to disparate impact analysis under ECOA and/or Regulation B.” Citing to legislative history, the FTC noted that Regulation B explicitly incorporates disparate impact, and stressed that “[a]rticulating a single approach to disparate impact analysis that covers diverse sets of present and future facts and circumstances of discrimination could be difficult and could risk being both over and under inclusive.” The FTC suggested that if the Bureau chooses to provide additional detail regarding its approach to disparate impact analysis, a disclaimer should be included that such information is not intended to “bless” any violations of ECOA and Regulation B, but is rather “intended to provide examples of how the agency might approach a fair lending matter.”
In response to the Bureau’s request for information about ways it might support efforts to meet the credit needs of small businesses, the FTC highlighted recent enforcement actions involving small businesses, including actions involving deceptively advertised financial products and unfair billing and collection practices, particularly with respect to merchant cash advances. The FTC also urged the Bureau to remind entities offering credit to small businesses that ECOA and Regulation B apply and that entities cannot avoid application of these statutes based solely on how they characterize a transaction or the benefits they claim to provide. The FTC further stressed that collecting small business lending demographic data could aid in enforcement efforts, as would encouraging small businesses to report misconduct and refer complaints to the FTC and the states. In addition, the FTC highlighted the importance of educating small businesses about different products and terms, as well as potential law violations, which could assist small businesses in comparing products resulting in less expensive financing options.
On December 21, the CFPB issued an advisory opinion addressing ECOA’s implementing regulation, Regulation B, as it applies to certain aspects of special purpose credit programs (SPCPs). The CFPB issued the advisory opinion in response to feedback from the Bureau’s request for information (RFI) covering ECOA and Regulation B issued in July (covered by InfoBytes here). The Bureau notes that, while Regulation B provides creditors guidance for developing SPCPs that comply with ECOA, stakeholders were interested in additional guidance to ensure the development of compliant SPCPs. To address this, the advisory opinion clarifies (i) the content that a for-profit organization must include in an SPCP written plan, including details regarding the class of persons designed to benefit from the program and the procedures for extending credit pursuant to the program; and (ii) the type of research and data that may be appropriate to inform a for-profit organization’s determination that a SPCP would benefit a certain class of people, which can include external sources such as HMDA data.
For more details on the CFPB’s advisory opinion program, please see InfoBytes coverage here.
On October 23, a Chicago-based nonbank mortgage company moved to dismiss a CFPB redlining action on the grounds that the Bureau’s complaint “improperly seek[s]” to expand ECOA to “prospective applicants.” As previously covered by a Buckley Special Alert, in July, the Bureau filed a complaint against the mortgage company alleging the mortgage company engaged in redlining in violation of ECOA and the Consumer Financial Protection Act. The Bureau argued, among other things, that the company redlined African American neighborhoods in the Chicago area by discouraging their residents from applying for mortgage loans from the company and by discouraging nonresidents from applying for loans from the company for homes in these neighborhoods. To support its arguments, the Bureau cited to (i) a number of racially disparaging comments allegedly made by the owner and employees on the company’s broadcasts; (ii) the company’s comparatively low application volume from African American neighborhoods and applicants; (iii) its lack of specific marketing targeting the African American community in Chicago; (iv) and its failure to employ African American mortgage loan officers.
In support of its motion to dismiss, the mortgage company argued that the Bureau’s complaint is “flawed” by seeking to expand the reach of ECOA to “prospective applicants” and regulate the company’s behavior before a credit transaction begins. In addition to expanding the application of ECOA, the company argued that the Bureau is attempting to impose—through Regulation B’s “discouragement” definition—(i) “affirmative requirements to target advertising to specific racial or ethnic groups”; (ii) “a demographic hiring quota”; and (iii) “a requirement to have business success with specific racial or ethnic groups.” Moreover, the company argued the Bureau’s interpretation of ECOA and Regulation B violates the company’s First Amendment rights by attempting to regulate “the content and viewpoint of protected speech . . . in a way that is unconstitutionally overbroad and vague.” Lastly, the company argued the Bureau similarly violated the Fifth Amendment’s due process clause by seeking to enforce Regulation B’s definition of “discouragement,” because it is unconstitutionally vague.
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 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 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.
- Daniel R. Alonso to discuss "How to become an AUSA" at the New York City Bar Association Minorities in the Courts Committee “How To” series
- Michelle L. Rogers and Kathryn L. Ryan to discuss “Fintech U.S. expansion” at the Tech Nation 3.0 cohort meeting
- Melissa Klimkiewicz to discuss "Flood insurance basics" at the NAFCU Virtual Regulatory Compliance School
- Jonice Gray Tucker to discuss "Compliance under Biden" at the WSJ Risk & Compliance Forum