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On July 27, the CFPB and the DOJ jointly filed a lawsuit against a Delaware-based mortgage lender for engaging in unlawful discrimination. The complaint, filed in the U.S. District Court for the Eastern District of Pennsylvania, alleges that the defendant violated the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B and the Consumer Financial Protection Act (CFPA) by, among other things, engaging in unlawful discrimination on the basis of race, color, or national origin against applicants and prospective applicants, including by redlining majority-minority neighborhoods, and by engaging in acts and practices directed at prospective applicants that would discourage prospective applicants from applying for credit. The DOJ also alleged a violation of the Fair Housing Act, including the “making unavailable or denial of dwellings to persons because of race, color, and national origin,” among other things.
The proposed consent order, if entered by the court, would be Bureau’s first nonbank mortgage redlining resolution. It would require the defendant, among other things, to: (i) deposit $18.4 million into a loan subsidy program; (ii) pay a $4 million penalty to the Bureau; and (iii) pay $2 million to fund advertising to generate applications in redlined areas. The proposed order also notes the defendant neither admits nor denies the allegations in the complaint. According to a statement released by CFPB Director Rohit Chopra, the Bureau “will continue to seek new remedies to ensure all lenders meet and fulfill their responsibilities and obligations and the CFPB continues to be on the lookout for emerging digital redlining to ensure that discrimination cannot be disguised by an algorithm.”
On May 26, the CFPB released Circular 2022-03 to reiterate creditors’ adverse action notice requirements under ECOA. The Circular, among other things, explains that ECOA and Regulation B require companies to explain the specific reasons for denying an application for credit or taking other adverse actions, even if the creditor is relying on credit models using complex algorithms. Specifically, the Circular stated that “[l]aw-abiding financial companies have long used advanced computational methods as part of their credit decision-making processes, and they have been able to provide the rationales for their credit decisions.” While the Bureau recognized that some creditors “make credit decisions based on the outputs from complex algorithms, sometimes called ‘black-box’ models,” it stressed that the adverse action notice requirements of ECOA and Regulation B apply equally to all credit decisions, regardless of the technology used to make them. The Bureau expressed that “the reasoning behind some of these models’ outputs may be unknown to the model’s users, including the model’s developers,” and that “with such models, adverse action notices that meet ECOA’s requirements may not be possible.” The Bureau further explained that, “[c]reditors cannot lawfully use technologies in their decision-making processes if using them means that they are unable to provide these required explanations.” Stated differently, a “creditor cannot justify noncompliance with ECOA and Regulation B’s requirements based on the mere fact that the technology it employs to evaluate applications is too complicated or opaque to understand.”
On May 9, the CFPB issued an advisory opinion to affirm its interpretation that ECOA bars lenders from discriminating against customers after they have applied for and received credit, not just during the application process. The Bureau’s opinion and analysis interprets ECOA and its implementing rule, Regulation B, as applying to the “approval, denial, renewal, continuation, or revocation of any open-end consumer credit account,” and is consistent with the agency’s joint amicus brief filed last December with the DOJ, Federal Reserve Board, and FTC, which argued that the term “applicant” as used in ECOA/Regulation B, includes both those seeking credit, as well as persons who have sought and have received credit (i.e., current borrowers). (Covered by InfoBytes here.) This has been the agency’s “longstanding position,” the Bureau stressed, noting it was the view of federal agencies prior to the Bureau’s creation as well.
However, “[d]espite this well-established interpretation, the Bureau is aware that some creditors fail to acknowledge that ECOA and Regulation B plainly apply to circumstances that take place after an extension of credit has been granted, including a revocation of credit or an unfavorable change in the terms of a credit arrangement,” the advisory opinion stated, explaining that ECOA prohibits creditors from lowering a borrower’s available line of credit or subjecting a borrower to more aggressive collections practices on a prohibited basis, such as race or national origin. “In addition, the Bureau is aware that some creditors fail to provide applicants with required notifications that include a statement of the specific reasons for the adverse action taken or disclose an applicant’s right to such a statement.” Creditors are required to provide “adverse action notices” when denying a loan, the Bureau wrote, adding that these notices are required when the terms of an existing loan are modified or terminated. “This interpretation of ECOA, therefore, forecloses a potential loophole that could effectively swallow much of the Act. Such a loophole would be plainly inconsistent with ECOA,” the advisory opinion stressed. While the Bureau acknowledged that “a few other district court decisions have interpreted ‘applicant’ to include only persons actively seeking credit,” the agency stressed that the district courts “read ‘applicant’ in isolation instead of reading this statutory term in context, as required by the Supreme Court,” and that “no court of appeals has endorsed these district courts’ narrow reading.”
As previously covered by InfoBytes, the Bureau finalized its Advisory Opinions Policy in 2020. Under the policy, entities seeking to comply with existing regulatory requirements are permitted to request an advisory opinion in the form of an interpretive rule from the Bureau (published in the Federal Register for increased transparency) to address areas of uncertainty.
On April 29, the CFPB released Spanish translations for certain model and sample forms included in the Prepaid Rule in Regulation E and for certain adverse action model and sample notices included in Regulation B. According to the Bureau, the release is part of its continuing effort to ensure fair access to competitive and transparent markets for all consumers. The Bureau also reminded financial institutions of their obligation to serve the communities where they conduct business, which includes communities with limited English proficiency, in addition to encouraging the use of the translations as they work with Spanish-speakers.
On February 22, the CFPB, DOJ, FDIC, Fed, FHFA HUD, OCC, and NCUA released an interagency statement “to remind creditors of the ability under [ECOA] and Regulation B to establish special purpose credit programs [(SPCPs)].” The statement points creditors to the CFPB’s December 2020 Advisory Opinion on SPCPs, which clarified (i) the content that a for-profit organization must include in a written plan that establishes and administers a SPCP under Regulation B; and (ii) the type of research and data that may be appropriate to inform a for-profit organization’s determination that an SPCP is needed to benefit a specified class of persons. The statement highlights December 7, 2021 HUD guidance, which concluded that SPCPs “instituted in conformity with ECOA and Regulation B generally do not violate the FHA,” conveying that SPCPs may also be appropriate avenues to expand credit access in mortgage lending. This was reiterated in a post released by the CFPB, stating that the “[interagency] statement [on SPCPs] calls attention to these programs as one way to expand access to critical financial services, including mortgage lending.”
On February 23, the FTC announced it recently provided the CFPB with its annual summary of activities related to ECOA enforcement, focusing specifically on the Commission’s activities with respect to Regulation B. The summary discussed, among other things, the following FTC enforcement, research, and policy development initiatives:
- The FTC filed a joint amicus curiae brief with the CFPB, DOJ, and Federal Reserve Board in the U.S. Court of Appeals for the Seventh Circuit last December asserting that the term “applicant,” as used in ECOA and its implementing rule, Regulation B, includes both those currently seeking credit as well as persons who have sought and have received credit (i.e., current borrowers). (Covered by InfoBytes here.)
- Last October, the FTC released a staff report, Serving Communities of Color, that discusses the Commission’s enforcement and outreach efforts related to the impact of fraud on majority Black and Latino communities. One of the studies examined disparities related to payment methods received from consumers who live in communities of color compared to consumers who live in majority White communities. (Covered by InfoBytes here.)
- 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 the ECOA and Regulation B.”
- The FTC continued to participate in the Interagency Task Force on Fair Lending, along with the CFPB, DOJ, HUD, and federal banking regulatory agencies. The Commission also continued its participation in the Interagency Fair Lending Methodologies Working Group to “coordinate and share information on analytical methodologies used in enforcement of and supervision for compliance with fair lending laws, including the ECOA, among others.”
The summary also highlighted FTC ECOA enforcement actions, business and consumer education efforts on fair lending issues, as well as blog posts discussing discrimination and potential bias affecting protected classes and the risks of using artificial intelligence in automated decision-making.
On December 16, the CFPB filed a joint amicus brief with the DOJ, Federal Reserve Board, and the FTC arguing that the term “applicant” as used in ECOA and its implementing rule, Regulation B, includes both those seeking credit as well as persons who have sought and have received credit (i.e., current borrowers). (See also a Bureau blog post discussing the brief.) The amicus brief is in support of a plaintiff in an action where the plaintiff consumer sued a national bank for closing his credit card account without providing an explanation for the adverse action as required by ECOA. The case is currently on appeal before the U.S. Court of Appeals for the Seventh Circuit after a district court determined that ECOA protections only apply “during the process of requesting credit and do not protect those with existing credit accounts.”
The central issue identified in the brief revolves around whether ECOA applies beyond persons seeking credit to persons who have already received credit. The brief focused on this issue by analyzing (i) ECOA’s text, history and purpose; (ii) the application of Regulation B; and (iii) alleged incorrect interpretations in the underlying defendant’s arguments. In looking at the text of ECOA, the brief asserted that ECOA applies to “applicants” without regard to how their credit is resolved because ECOA defines “applicant” as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” In further analyzing the statutory text, the brief further explained that ECOA also gives consumers the right to adverse action notices, which include the “revocation of credit” as well as a “change in the terms of an existing credit arrangement”—actions, the brief stated, “that can be taken only with respect to persons who have already received credit.” The brief also stated that legislative history shows it was Congress’s intent to reach discrimination “in any aspect of a credit transaction.”
In looking at the context of Regulation B, the brief asserted, among other things, that ECOA’s protections continue to apply after an applicant receives credit, explaining that Regulation B “did so by defining ‘applicant’ to include, ‘[w]ith respect to any creditor[,] … any person to whom credit is or has been extended by that creditor.’” Moreover, the brief asserted, ECOA provides a private right of action, which allows aggrieved applicants to file suits for alleged ECOA/Regulation B violations. In this instance, the term “applicant” cannot be meant to refer only to consumers with pending credit applications because otherwise a consumer whose application was denied on a prohibited basis would have no private right of action recourse. These references, the brief emphasized, “further confirm that the term “applicant” is not limited to those currently applying for credit.”
On December 30, the U.S. District Court for the Northern District of California approved the stipulated final judgment and order against a California-based online lender (defendant) for alleged violations of fair lending regulations and a 2016 consent order. As previously covered by InfoBytes, the CFPB filed a complaint against the defendant (the third action taken against the defendant by the CFPB) for allegedly violating the terms of a 2016 consent order related to false claims about its lending program. The 2016 consent order alleged that the defendant engaged in deceptive practices by misrepresenting, among other things, the fees it charged, the loan products that were available to consumers, and whether the loans would be reported to credit reporting companies, in violation of the CFPA, TILA, and Regulation Z (covered by InfoBytes here). According to the September 8 complaint, the defendants continued with much of the same illegal and deceptive marketing that was prohibited by the 2016 consent order. Among other things, the complaint alleged that the defendants violated the terms of the 2016 consent order and various laws by: (i) deceiving consumers about the benefits of repeat borrowing; and (ii) failing to provide timely and accurate adverse-action notices, which is in violation of ECOA and Regulation B.
The settlement prohibits the defendant from: (i) making new loans; (ii) collecting on outstanding loans to harmed consumers; (iii) selling consumer information; and (iv) making misrepresentations when providing loans or collecting debt or helping others that are doing so. The order also imposes a $100,000 civil money penalty based on the defendant’s inability to pay.
On December 8, the CFPB released its fall 2021 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of credit card account management, debt collection, deposits, fair lending, mortgage servicing, payday lending, prepaid accounts, and remittance transfers. The report’s findings cover examinations that were completed between January and June of 2021 in addition to prior supervisory findings that led to public enforcement actions in the first half of 2021. Highlights of the examination findings include:
- Credit Card Account Management. Bureau examiners identified violations of Regulation Z related to billing error resolution, including instances where creditors failed to (i) resolve disputes within two complete billing cycles after receiving a billing error notice; (ii) reimburse late fees after determining a missed payment was not credited to a consumer’s account; and (iii) conduct reasonable investigations into billing error notices concerning missed payments and unauthorized transactions. Examiners also identified deceptive acts or practices related to credit card issuers’ advertising practices.
- Debt Collection. The Bureau found instances of FDCPA violations where debt collectors represented to consumers that their creditworthiness would improve upon final payment under a repayment plan and the deletion of the tradeline. Because credit worthiness is impacted by numerous factors, examiners found “that such representations could lead the least sophisticated consumer to conclude that deleting derogatory information would result in improved creditworthiness, thereby creating the risk of a false representation or deceptive means to collect or attempt to collect a debt in violation of Section 807(10).”
- Deposits. The Bureau discussed violations related to Regulation E, including error resolution violations related to misdirected payment transfers and failure to investigate error notices where consumers alleged funds were sent via a person-to-person payment network but the intended recipient did not receive the funds.
- Fair Lending. The report noted instances where examiners cited violations of ECOA and Regulation B by lenders "discriminating against African American and female borrowers in the granting of pricing exceptions based upon competitive offers from other institutions,” which led to observed pricing disparities, specifically as compared to similarly situated non-Hispanic white and male borrowers. Among other things, examiners also observed that lenders’ policies and procedures contributed to pricing discrimination, and that lenders improperly inquired about small business applicants’ religion and considered religion in the credit decision process.
- Mortgage Servicing. The Bureau noted that it is prioritizing mortgage servicing supervision attributed to the increase in borrowers needing loss mitigation assistance due to the Covid-19 pandemic. Examiners found violations of Regulations Z and X, as well as unfair and deceptive acts and practices. Unfair acts or practices included those related to (i) charging delinquency-related fees to borrowers in CARES Act forbearances; (ii) failing to terminate preauthorized EFTs; and (iii) assessing fees for services exceeding the actual cost of the performed services. Deceptive acts or practices found by examiners related to mortgage servicers included incorrectly disclosed transaction and payment information in a borrower’s online mortgage loan account. Mortgage servicers also allegedly failed to evaluate complete loss mitigation applications within 30 days, incorrectly handled partial payments, and failed to automatically terminate PMI in a timely manner. The Bureau noted in its press release that it is “actively working to support an inclusive and equitable economic recovery, which means ensuring all mortgage servicers meet their homeowner protection obligations under applicable consumer protection laws,” and will continue to work with the Federal Reserve Board, FDIC, NCUA, OCC, and state financial regulators to address any compliance failures (covered by InfoBytes here).
- Payday Lending. The report identified unfair and deceptive acts or practices related to payday lenders erroneously debiting consumers’ loan balances after a consumer applied and received confirmation for a loan extension, misrepresenting that consumers would only pay extension fees on the original due dates of their loans, and failing to honor loan extensions. Examiners also found instances where lenders debited or attempted one or more duplicate unauthorized debits from a consumer’s bank account. Lenders also violated Regulation E by failing “to retain, for a period of not less than two years, evidence of compliance with the requirements imposed by EFTA.”
- Prepaid Accounts. Bureau examiners found violations of Regulation E and EFTA related to stop-payment waivers at financial institutions, which, among other things, failed to honor stop-payment requests received at least three business days before the scheduled date of the transfer. Examiners also observed instances where service providers improperly required consumers to contact the merchant before processing a stop-payment request or failed to process stop-payment requests due to system limitations even if a consumer had contacted the merchant. The report cited additional findings where financial institutions failed to properly conduct error investigations.
- Remittance Transfers. Bureau examiners identified violations of Regulation E related to the Remittance Rule, in which providers “received notices of errors alleging that remitted funds had not been made available to the designated recipient by the disclosed date of availability” and then failed to “investigate whether a deduction imposed by a foreign recipient bank constituted a fee that the institutions were required to refund to the sender, and subsequently did not refund that fee to the sender.”
The report also highlights recent supervisory program developments and enforcement actions.
On December 6, CFPB Director Rohit Chopra released a statement regarding HUD’s guidance, also issued that day, clarifying that special purpose credit programs that conform with ECOA and its implementing regulation, Regulation B, generally do not violate the Federal Housing Act. According to HUD’s memorandum, the two statutes are complementary and “intended to harmoniously coexist.” As previously covered by InfoBytes, in December 2020, the CFPB issued an advisory opinion addressing Regulation B as it applies to certain aspects of special purpose credit programs. In his statement, Chopra encouraged creditors “to explore the opportunities available through special purpose credit programs,” which “provide targeted means by which creditors can better serve communities who have been historically shut out or otherwise disadvantaged.”
Acting Comptroller of the Currency Michael Hsu also issued a statement encouraging banks and federal savings associations to “explore the opportunities available through special purpose credit programs.” Taking advantage of the special purpose credit program provisions of ECOA and Regulation B “can be a significant step in addressing the racial and ethnic homeownership and wealth gaps that persist in the United States,” Hsu stated.