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CFPB releases report on state community reinvestment acts
On November 2, the CFPB issued a report on several states’ community reinvestment laws. The report focused on how much outstanding mortgage debt banks hold in the residential mortgage market: in 1977, “banks held 74 percent of outstanding mortgage debt. By 2007, this share had declined to just 28 percent.”
In 1977, Congress passed the Community Reinvestment Act (CRA) to combat redlining practices that prevailed despite the passing of the Fair Housing Act of 1968 and the Home Mortgage Disclosure Act of 1975. While the federal CRA applies to banks only, many states created their community reinvestment laws to cover non-bank mortgage companies, including CT, IL, MA, NY, RI, WA, WV, and DC.
Key findings from the CFPB's report are below:
- Some states require mortgage companies to provide affirmative lending, service delivery, and investment services;
- Some states conduct independent examinations, while other states review federal performance evaluations in conjunction with state factors;
- Enforcement includes limitations on mergers, acquisitions, branching activities, and licensing;
- Some states collect information beyond federal requirements for evaluation; and
- Some state acts have been amended in response to market changes.
The CFPB finds that states play an active role in promoting reinvestment by institutions, but further review is necessary to understand these developments.
Agencies issue final rule to modernize Community Reinvestment Act regulations
On October 24, the Fed, FDIC, and OCC issued an interagency announcement regarding the modernization of their rules under the Community Reinvestment Act (CRA), a law enacted in 1977 to encourage banks to help meet the credit needs of their communities, especially low- and moderate-income (LMI) neighborhoods, in a safe and sound manner. The new rule overhauls the existing regulatory scheme that was first implemented in the mid-1990s.
For banks with assets of at least $2 billion (Large Banks), the final rule adds a new category of assessment area to the existing facility based assessment area (FBAA). Large Banks that do more than 20 percent of their CRA-related lending outside their FBAAs will have that lending evaluated in retail lending assessment areas, i.e., MSAs or states where it originated at least 150 closed-end home mortgage loans or 400 small business loans in both of the previous two years. All Large Banks will be subject to two new lending and two new community development tests, with lending and community development activities each counting for half a bank’s overall CRA rating. Banks with assets between $600 million and $2 billion will be subject to a new lending test. Large Banks with assets greater than $10 billion will also have special reporting requirements.
Additionally, the rule (i) implements a standardized scoring system for performance ratings; (ii) revises community development definitions and creates a list of community development activities eligible for CRA consideration, regardless of location; (iii) permits regulators to evaluate “impact and responsiveness factors” of community development activities; (iii) continues to make strategic plans available as an alternative option for evaluation; (iv) revises the definition of limited purpose bank so that it includes both existing limited purpose and wholesale banks and subjects those banks to a new community development financing test; and (v) considers online banking in the bank’s evaluations.
Most of the rule’s requirements will be effective January 1, 2026. The remaining requirements, including the data reporting requirements, will apply on January 1, 2027.
DOJ and RI-based bank settlement agreement regarding redlining claims
On September 27, the DOJ announced a $9 million settlement agreement with a Rhode Island-based community bank to resolve allegations that the bank engaged in a pattern or practice of lending discrimination by engaging in “redlining” in Rhode Island. The DOJ’s complaint claimed that from 2016 to at least 2021, the bank failed to provide mortgage lending services in majority-Black and Hispanic neighborhoods in Rhode Island. The DOJ also alleged that all of the bank’s branches were concentrated in majority-white neighborhoods, and that the bank did not take meaningful measures to compensate for not having a physical presence in majority-Black and Hispanic communities.
Under the proposed consent order, the bank will, among other things, (i) invest at least $7 million in a loan subsidy fund for majority-Black and Hispanic neighborhoods in Rhode Island to increase access to credit for home mortgage, improvement, and refinance loans, and home equity loans and lines of credit; (ii) invest $1 million towards outreach, advertising, consumer financial education, and credit counseling initiatives; (iii) invest $1 million in developing community partnerships to expand access to residential mortgage credit for Black and Hispanic consumers; (iv) establish two new branches, ensure at least two mortgage loan officers, and employ a “Director of Community Lending” in majority-Black and Hispanic neighborhoods in Rhode Island; (v) conduct a community credit needs assessment; and (vi) produce a fair lending status report and compliance plan and conduct fair lending training. The announcement cited the bank’s cooperation with the DOJ to remedy the identified redlining concerns.
CFPB issues guidance on adverse action reasons by creditors using AI
On September 19, the CFPB issued guidance about legal requirements that creditors must follow when using artificial intelligence and other complex models.
In prior guidance, the agency stated that lenders must provide specific and accurate reasons for adverse actions against consumers. The latest guidance expanded upon that prior guidance to clarify that lenders cannot simply use CFPB sample adverse action forms and checklists when taking adverse actions against consumers, but must explain the reasons for such adverse actions to help improve consumers’ chances for future credit, and protect consumers from illegal discrimination.
In its announcement of the updated guidance, the CFPB discussed the potential that consumers may be denied credit as a result of the increased use of complex, predictive decision-making technologies to analyze large datasets that may include consumer surveillance data or other information that the consumer may not believe is relevant to their finances. The agency confirmed that creditors must disclose the specific reasons for adverse action, even if consumers may be surprised, upset, or angered to learn their credit applications were being graded on data that may not intuitively relate to their finances. According to the guidance, a creditor is not absolved from the requirement to specifically and accurately inform consumers of the reasons for adverse actions because the use of predictive decision-making technologies in their underwriting models makes it difficult to pinpoint the specific reasons for such adverse actions.
DOJ, Oklahoma bank agree to consent order over redlining
On August 28, the DOJ announced a settlement agreement to resolve allegations of redlining by an Oklahoma-based bank. According to the complaint, defendant allegedly engaged in redlining by refraining from providing home loans and other mortgage-related services, and also engaged in biased behavior, to deter individuals residing in or seeking credit within predominantly Black and Hispanic neighborhoods in Tulsa from pursuing mortgage opportunities. According to the proposed consent order, without admitting or denying the allegations, defendant agreed to (i) invest $1.15 million to increase credit opportunities in neighborhoods of color; (ii) invest at least $950,000 in a loan subsidy fund for predominantly Black and Hispanic neighborhoods in Tulsa; (iii) invest $100,000 for advertising, outreach and consumer education; (iv) invest $100,000 for community partnerships to improve access to residential mortgage credit services; (v) “open a new community-oriented loan production office in the historically Black area of Tulsa”; and (vi) assign at least two mortgage loan officers to solicit mortgage applications in predominantly Black and Hispanic neighborhoods in Tulsa, among other things.
The DOJ press release makes reference to the 1921 Tulsa Race Massacre. The bank's press release announcing the settlement responded by stating that “[a]s Oklahomans, we carry a profound sense of sorrow for the tragic events of the Tulsa Race Massacre over a century ago. It is with deep concern that we note the Justice Department’s decision to reference this distressing historical event in its complaint against our bank, established a mere 25 years ago.”
Fed’s Barr raises concerns about AI redlining
On July 18, Federal Reserve Vice Chair for Supervision Michael Barr delivered a speech on adjusting the Fair Housing Act and ECOA in response to the increasing relevance of artificial intelligence. Barr explained how the digital economy offers many great utilizations, such as accessing the creditworthiness of individuals without credit history and facilitating wider access to credit for those who may otherwise be excluded. Along with a digital economy, Barr cautioned, comes negative implications where technologies can potentially violate the fair lending laws and may perpetuate existing disparities and inaccuracies, among other things. Barr highlighted Special Purpose Credit Programs as a tool to address discrimination and bias in mortgage credit transactions. In addition, Barr highlighted two recent initiatives taken by the Fed to tackle appraisal discrimination and bias in housing mortgage credit transactions—one involved inviting public feedback on a proposed rule to uphold credibility and integrity in automated valuation models, and the other sought input on guidance addressing risks related to deficient home appraisals, emphasizing "reconsiderations of value" in the process. (Covered by InfoBytes here and here.) Barr also commented that through the Fed’s supervisory process, it is evaluating whether firms have proper risk management and controls, including with respect to these new technologies.
Highlights from the CFPB’s 2022 fair lending report
On June 29, the CFPB issued its annual fair lending report to Congress which outlines the Bureau’s efforts in 2022 to fulfill its fair lending mandate. Much of the Bureau’s work in 2022 was directed towards unlawful discrimination in the home appraisal industry and addressing redlining. According to the report, the CFPB also honed its efforts on factors that influence fair access to credit which included insight into factors affecting consumers’ credit profiles. The report highlights one fair lending enforcement action from 2022, where the CFPB and DOJ filed a joint complaint and proposed consent order against a company for allegedly violating ECOA, Regulation B, and the CFPA by discouraging prospective applicants from applying for credit. Notably, the Bureau notes that under section 704 of ECOA, it must refer any cases with instances of a creditor being believed to have engaged in a “pattern or practice of lending discrimination” to the DOJ. According to the report, the FDIC, NCUA, Federal Reserve Board, and CFPB collectively made 23 such referrals to the DOJ in 2022, a 91 percent increase from 2020. Five of the 23 matters were sent by the CFPB, four of which involved alleged racial discrimination in redlining, and one involving alleged discrimination in underwriting based on receipt of public assistance income. The report also discusses the CFPB’s risk-based prioritization process that resulted in initiatives concerning small business lending, policies and procedures on exclusions in underwriting, and the use of artificial intelligence. Moving forward, the Bureau will continue its collaborative approach with other agencies and prioritize areas such as combating bias in home appraisals, redlining, and the use of advanced technologies in financial services. Additionally, the report states that by focusing on restorative outcomes, comprehensive remedies, and equal economic opportunities, the CFPB aims to create a fair, equitable, and nondiscriminatory credit market for consumers.
CFPB, FTC, and consumer advocates ask 7th Circuit to review redlining dismissal
The CFPB recently filed its opening brief in the agency’s appeal of a district court’s decision to dismiss the Bureau’s claims that a Chicago-based nonbank mortgage company and its owner violated ECOA by engaging in discriminatory marketing and consumer outreach practices. As previously covered by InfoBytes, the Bureau sued the defendants in 2020 alleging fair lending violations predicated, in part, on statements made by the company’s owner and other employees during radio shows and podcasts. The agency claimed that the defendants discouraged African Americans from applying for mortgage loans and redlined African American neighborhoods in the Chicago area. The defendants countered that the Bureau improperly attempted to expand ECOA’s reach and argued that ECOA “does not regulate any behavior relating to prospective applicants who have not yet applied for credit.”
In dismissing the action with prejudice, the district court applied step one of the Chevron framework (which is to determine “whether Congress has directly spoken to the precise question at issue”) when reviewing whether the Bureau’s interpretation of ECOA in Regulation B is permissible. The court concluded, among other things, that Congress’s directive does not apply to prospective applicants.
In its appellate brief, the Bureau argued that the long history of Regulation B supports the Bureau’s interpretation of ECOA, and specifically provides “that ‘[a] creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.” While Congress has reviewed ECOA on numerous occasions, the Bureau noted that it has never challenged the understanding that this type of conduct is unlawful, and Congress instead “created a mandatory referral obligation [to the DOJ] for cases in which a creditor has unlawfully ‘engaged in a pattern or practice of discouraging or denying applications for credit.’”
Regardless, “even if ECOA’s text does not unambiguously authorize Regulation B’s prohibition on discouraging prospective applicants, it certainly does not foreclose it,” the Bureau wrote, pointing to two perceived flaws in the district court’s ruling: (i) that the district court failed to recognize that Congress’s referral provision makes clear that “discouraging . . . applications for credit” violates ECOA; and (ii) that the district court incorrectly concluded that ECOA’s reference to applicants “demonstrated that Congress foreclosed prohibiting discouragement as to prospective applicants.” The Bureau emphasized that several courts have recognized that the term “applicant” can include individuals who have not yet submitted an application for credit and stressed that its interpretation of ECOA, as reflected in Regulation B’s discouragement prohibition, is not “arbitrary, capricious, or manifestly contrary to the statute.” The Bureau argued that under Chevron step two (which the district court did not address), Regulation B’s prohibition on discouraging prospective applicants from applying in the first place is reasonable because it furthers Congress’ efforts to prohibit discrimination and ensure equal access to credit.
Additionally, the FTC filed a separate amicus brief in support of the Bureau. In its brief, the FTC argued that Regulation B prohibits creditors from discouraging applicants on a prohibited basis, and that by outlawing this type of behavior, it furthers ECOA’s purpose and prevents its evasion. In disagreeing with the district court’s position that ECOA only applies to “applicants” and that the Bureau cannot proscribe any misconduct occurring before an application is filed, the FTC argued that the ruling violates “the most basic principles of statutory construction.” If affirmed, the FTC warned, the ruling would enable creditor misconduct and “greenlight egregious forms of discrimination so long as they occurred ‘prior to the filing of an application.’”
Several consumer advocacy groups, including the National Fair Housing Alliance and the American Civil Liberties Union, also filed an amicus brief in support of the Bureau. The consumer advocates warned that “[i]nvalidating ECOA’s longstanding prohibitions against pre-application discouragement would severely limit the Act’s effectiveness, with significant consequences for communities affected by redlining and other forms of credit discrimination that have fueled a racial wealth gap and disproportionately low rates of homeownership among Black and Latino households.” The district court’s position would also affect non-housing credit markets, such as small business, auto, and personal loans, as well as credit cards, the consumer advocates said, arguing that such limitations “come at a moment when targeted digital marketing technologies increasingly allow lenders to screen and discourage consumers on the basis of their protected characteristics, before they can apply.”
DOJ announces $9 million redlining settlement with Ohio bank
On February 28, the DOJ announced a settlement with an Ohio-based bank to resolve allegations that the bank engaged in a pattern or practice of lending discrimination by engaging in “redlining” in the Columbus metropolitan area. The DOJ’s complaint claimed that from at least 2015 to 2021, the bank failed to provide mortgage lending services to Black and Hispanic neighborhoods in the Columbus area. The DOJ also alleged that all of the bank’s branches were concentrated in majority-white neighborhoods, and that the bank did not take meaningful measures to compensate for not having a physical presence in majority-Black and Hispanic communities.
Under the proposed consent order, the bank will, among other things, (i) invest a minimum of $7.75 million in a loan subsidy fund for majority-Black and Hispanic neighborhoods in the Columbus area to increase access to credit for home mortgage, improvement, and refinance loans, and home equity loans and lines of credit; (ii) invest $750,000 to go towards outreach, advertising, consumer financial education, and credit counseling initiatives; (iii) invest $500,000 to be spent in developing community partnerships to expand access to residential mortgage credit for Black and Hispanic consumers; (iv) establish one new branch and one new mortgage loan production office in majority-Black and Hispanic neighborhoods in the Columbus area (the bank must “ensure that a minimum of four mortgage lenders, at least one of whom is Spanish-speaking, are assigned to serve these neighborhoods” and employ a full-time community development officer to oversee lending in these neighborhoods); and (v) conduct a community credit needs assessment to identify financial services needs in majority-Black and Hispanic census tracts in the Columbus area. The announcement cited the bank’s cooperation with the DOJ to remedy the identified redlining concerns.
District Court dismisses CFPB redlining action against nonbank lender
On February 3, the U.S. District Court for the Northern District of Illinois dismissed with prejudice claims that a Chicago-based nonbank mortgage company and its owner violated ECOA by engaging in discriminatory marketing and applicant outreach practices. The CFPB sued the defendants in 2020 alleging fair lending violations, including violations of ECOA and the CFPA, predicated, in part, on statements made by the company’s owner and other employees during radio shows and podcasts from 2014 through 2017. (Covered by a Special Alert.) The complaint (which was later amended) marked the first time a federal regulator has taken a public enforcement action against a nondepository institution based on allegations of redlining.
The Bureau claimed that the defendants discouraged African Americans from applying for mortgage loans from the company and redlined African American neighborhoods in the Chicago area by (i) discouraging their residents from applying for mortgage loans from the company; and (ii) discouraging nonresidents from applying for loans from the company for homes in these neighborhoods. The defendants moved to dismiss with prejudice, arguing that the Bureau improperly attempted to expand ECOA’s reach “beyond the express and unambiguous language of the statute.” The defendants explained that while the statute “regulates behavior towards applicants for credit, it does not regulate any behavior relating to prospective applicants who have not yet applied for credit.” The Bureau countered that courts have consistently recognized Regulation B’s discouragement prohibition even when applied to prospective applicants.
In dismissing the action with prejudice, the court applied step one of Chevron framework (which is to determine “whether Congress has directly spoken to the precise question at issue”) when reviewing whether the Bureau’s interpretation of ECOA in Regulation B is permissible. Explaining that ECOA’s plain text “clearly and unambiguously prohibits discrimination against applicants”—defined as a person who applies for credit—the court concluded (citing to case law in support of its decision) that Congress’s directive only prohibits discrimination against applicants and does not apply to prospective applicants. The court stressed that the agency’s authority to enact regulations is not limitless and that the statute’s use of the term “applicant” clearly marks the boundary of ECOA.
The court also rejected the Bureau’s argument that ECOA’s delegation of authority to the Bureau to adopt rules to prevent evasion means the anti-discouragement provision must be sustained provided it reasonably relates to ECOA’s objectives. The Bureau pointed to the U.S. Supreme Court’s decision in Mourning v. Fam. Publ’ns Serv., Inc. (upholding the “Four Installment Rule” under similar delegation language in TILA), but the court held that Mourning does not permit it to avoid Chevron’s two-step framework. Because the anti-discouragement provision does not survive the first step, the court did not reach whether the provision is reasonably related to ECOA’s objectives and dismissed the action with prejudice. The remaining claims, which depend on the ECOA claim, were also dismissed with prejudice.
The firm will be sending out a Special Alert in the next few business days providing additional thinking on this decision.