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On June 13, the CFPB published a guide to assist a range of stakeholders accessing publicly available HMDA data on lending patterns that may result in racial and economic inequality due to redlining practices or other “unjustified disparities.” Through the Beginner’s Guide to Accessing and Using Home Mortgage Disclosure Act Data, stakeholders can better understand the sources and meanings of various HMDA data types as well as the financial institutions that are required to maintain, report, and publicly disclose loan-level information about mortgage applications and loans. According to the Bureau, HMDA data can provide insights on whether lenders are serving the housing needs of their communities and help guide policy decisions.
On May 6, the CFPB issued its annual fair lending report to Congress, which outlines the Bureau’s efforts in 2021 to fulfill its fair lending mandate. Much of the Bureau’s work in 2021 focused on addressing racial injustice and long-term economic consequences of the Covid-19 pandemic. According to the report, the Bureau continued to prioritize promoting fair, equitable, and nondiscriminatory access to credit, with a particular focus on fair lending supervision efforts in areas related to “mortgage origination and pricing, small business lending, student loan origination work, policies and procedures regarding geographic and other exclusions in underwriting, and  the use of artificial intelligence (AI) and machine learning models.” Fair Lending Director Patrice Alexander Ficklin said that while she is “encouraged by the possibility of utilizing vehicles like special purpose credit programs to expand access to credit,” she remains “skeptical of claims that advanced algorithms are the cure-all for bias in credit underwriting and pricing.” The report addressed enforcement and supervision work, highlighting four fair lending-related enforcement actions taken last year related to (i) illegal redlining practices; (ii) failure to provide accurate denial reasons on adverse-action notices; (iii) UDAAP violations related to the treatment of “gate money” for incarcerated individuals; and (iv) fees and payments associated with immigration bonds. The report also discussed initiatives concerning small business lending and data collection rulemaking, automated valuation models rulemaking, and a final rule amending certain provisions in Regulation X related to Covid-19 protections offered by mortgage servicers. Additionally, the report discussed an interpretive rule concerning ECOA’s prohibition on sex discrimination, stakeholder engagement on matters concerning fair lending compliance and policy decisions, HMDA reporting, and interagency engagement and reporting, among other topics. The report noted that going forward, the Bureau intends to sharpen its focus on digital redlining and algorithmic bias to identify emerging risks as more tech companies influence the financial services marketplace. According to CFPB Director Rohit Chopra, “[w]hile technology holds great promise, it can also reinforce historical biases that have excluded too many Americans from opportunities.”
On April 29, the National Fair Housing Alliance (NFHA) announced a settlement agreement with a real estate company resolving allegations that the company perpetuated redlining practices through its policies and procedures. NFHA, along with nine other fair housing organizations, sued the company following an investigation into its practices. The fair housing organizations alleged that the company’s minimum home price policy violated the Fair Housing Act by discriminating against sellers and buyers of homes in communities of color. Limiting or denying services for homes priced under a certain value can “perpetuate racial segregation and contribute to the racial wealth gap” the organizations claimed in the press release. According to the complaint, the company disproportionately withheld its services to homebuyers and sellers in these communities at a higher rate than in White zip codes in multiple major cities across the U.S, thereby disincentivizing homebuying within these communities, reducing housing demand and values, and perpetuating residential segregation. Under the terms of the settlement, the company will make several national operational changes and enhancements, including (i) expanding housing opportunities for consumers in communities of color in major cities throughout the country; (ii) eliminating its minimum housing price policy for a period of five years; and (iii) appointing a fair housing compliance officer, adopting an equal opportunity in housing policy, and developing a fair housing training program. The company will also pay $4 million to go towards expanding homeownership opportunities in the covered cities and to cover conduct monitoring, compliance efforts, litigation fees and costs.
On March 17, the U.S. District Court for the Northern District of Georgia agreed that claims against a group of mortgage lenders for conduct arising prior to November 2013 were barred under the two-year statute of limitations of the Fair Housing Act (FHA). Plaintiffs Cobb County, DeKalb County, and Fulton County, Georgia (collectively, “Counties”) alleged that the defendants “engaged in, and continue to engage in, discriminatory schemes that expose borrowers to unreasonable levels of risk; needlessly inflate interest rates, penalties, and fees; generate unauthorized and inflated charges for default related services; and lead to higher foreclosure rates among minority borrowers.” According to the Counties, these alleged practices have caused them to incur financial injury, including foreclosure-related costs, loss of property tax revenue, increased segregation, and organizational harm to County departments and authorities due to the forced reallocation of funds to address harms caused by the defendants’ actions. The Counties filed a complaint on November 20, 2015, asserting three counts related to disparate impact and disparate treatment theories under the FHA. Defendants moved for partial summary judgment on statute-of-limitations grounds, arguing that the Counties’ allegations are time-barred because they are based on allegedly discriminatory conduct occurring before November 20, 2013. Defendants further contended that the Counties could not “allege a ‘continuing violation’ that tolls the statute of limitations for each allegedly discriminatory act until the continuing violation ends because [a plaintiff’s] knowledge of a claim, or reason to have knowledge of a claim, cuts off equitable tolling of the statute of limitations for claims based on a continuing violation, and the Counties knew or should have known of their FHA claims at least as of May 2011.”
The court agreed with the defendants, pointing out that, among other things, there is “copious circumstantial evidence” that the Counties knew or should have known of their claims prior to May 2011, including well publicized allegations against the same defendants for similar conduct, and their retention of outside counsel in 2010 to investigate potential discrimination claims. According to the court, while a reasonable jury could find that the Counties themselves did not know of their claims, the record left no doubt that the outside counsel “knew of the claims prior to the statutory period, or would have known of the claims if he conducted himself with reasonable prudence.” Because the outside counsel’s “knowledge is imputed to his clients, no reasonable jury could find in the Counties’ favor on the statute-of-limitations issue.”
On November 1, the New York governor signed S5246A, which expands the New York Community Reinvestment Act (New York CRA) to cover non-depository lenders. Under the act, nonbank mortgage providers’ lending and investment in low- and moderate-income communities will be subject to NYDFS review. The anti-redlining law—which previously only measured banks’ activities in low- to moderate-income communities—is intended to “ensure everyone has fair and equal access to lending options in their pursuit of purchasing a home, especially in communities of color which continue to be impacted by the effects of the pandemic and have historically faced many more hurdles when seeking a mortgage,” Governor Kathy Hochul stated. The act follows a report issued by NYDFS in February, which examined redlining in the Buffalo metropolitan area and concluded that there is a “distinct lack of lending by mortgage lenders, particularly non-depository lenders” to majority-minority populations and to minority homebuyers in general. (Covered by InfoBytes here.) At the time, the report made numerous recommendations, including a recommendation to amend the New York CRA to cover nonbank mortgage lenders and a request that the OCC and the CFPB investigate federally regulated institutions serving the Buffalo area for violations of fair lending laws. The act takes effect in a year.
DOJ, CFPB, and OCC announce aggressive redlining initiative; take action against national bank for alleged lending discrimination
On October 22, the DOJ, in collaboration with the CFPB and the OCC, announced a new initiative to combat redlining and lending discrimination. The Combatting Redlining Initiative will be led by the DOJ’s Civil Rights Division’s Housing and Civil Enforcement Section in partnership with U.S. Attorney’s offices, and will, among other things, (i) “ensure that fair lending enforcement is informed by local expertise on housing markets and the credit needs of local communities of color”; (ii) “[e]xpand the department’s analyses of potential redlining to both depository and non-depository institutions” (the DOJ noted that non-depository lenders now make the majority of mortgages in the U.S.); (iii) strengthen financial regulator partnerships to ensure fair lending violations are identified and referred to the DOJ; and (iv) increase fair lending coordination with state attorneys general to identify potential violations. Attorney General Merrick Garland stated that the initiative will “address modern-day redlining by making far more robust use of our fair lending authorities,” and marks the DOJ’s “most aggressive, coordinated effort to address redlining.” Garland noted that several redlining investigations are currently ongoing and more are expected to be opened in the upcoming months.
In his remarks, CFPB Director Rohit Chopra also warned that the Bureau will be “closely watching for digital redlining, disguised through so-called ‘neutral algorithms, that may reinforce the biases that have long existed.’” He added that “the speed with which banks and lenders are turning lending and advertising decisions over to algorithms is concerning,” and cautioned against assuming that algorithms will be bias free.
In conjunction with the announcement of the multi-agency initiative, the DOJ, CFPB, and OCC, took action against a national bank for alleged redlining practices. According to the complaint, the bank violated the Fair Housing Act, ECOA, and the CFPA by deliberately engaging in conduct that discouraged consumers in majority-Black and Hispanic neighborhoods in the Memphis metropolitan area from seeking credit. The bank also allegedly established a limited number of branches in majority-Black and Hispanic communities, and did not provide mortgage-lending services to walk-in customers in these neighborhoods. The complaint further alleged, among other things, that the bank’s fair lending policies and procedures did not adequately ensure equal access to credit to majority-Black and Hispanic neighborhoods, and that internal governance and oversight committees to oversee fair lending were not established until after the OCC initiated a fair lending examination of the bank.
Under the terms of the proposed settlement, the bank will be required to pay a $5 million civil money penalty. The bank will also have to invest $3.85 million through a loan subsidy program to increase access to credit, and provide $400,000 to develop community partnerships to increase access to residential mortgage credit. The loan subsidy program will go towards closing cost assistance, down payment assistance, and payment of mortgage insurance premiums. Additionally, the bank must increase branches and outreach efforts in majority-Black and Hispanic neighborhoods, devote at least $200,000 in targeted advertising annually to generate applications for mortgages in these neighborhoods, and take remedial efforts to improve its fair lending compliance.
On October 7, NYDFS announced the first awards from the New York Community Development Financial Institution (CDFI) Fund to support access to safe and affordable banking services in historically underserved and redlined, low-income communities. According to the announcement, with a multi-year $25 million New York state-commitment, the CDFI Fund plans to allocate resources for the growth of CDFIs to assist in the delivery of affordable financial products and services and financial literacy programming to low- and moderate-income New York citizens. In addition, the CDFI Fund will expand “access to capital and technical assistance services for New York State small businesses and non-profit organizations.” In total, 31 CDFIs were selected to receive financial inclusion grants, which totaled nearly $5 million.
On August 30, the DOJ and the OCC announced coordinated efforts to resolve allegations of lending discrimination by a Georgia-based bank for violations of the Fair Housing Act and ECOA by allegedly redlining predominantly Black and Hispanic neighborhoods in Texas from 2013-2017. The OCC, which referred the matter to DOJ, ordered the bank to pay a $3.3 million civil money penalty. Under the DOJ’s settlement, the bank will invest more than $5.5 million to increase credit opportunities for residents of those neighborhoods.
On June 29, the CFPB released its summer 2021 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of auto loan servicing, consumer reporting, debt collection, deposits, fair lending, mortgage origination and servicing, payday lending, private education loan origination, and student loan servicing. The findings of the report, which are published to assist entities in complying with applicable consumer laws, cover examinations that generally were completed between January and December of 2020. Highlights of the examination findings include:
- Auto Loan Servicing. Bureau examiners identified unfair acts or practices related to lender-placed collateral protection insurance (CPI), including instances where servicers charged unnecessary CPI or charged for CPI after repossession. Examiners also identified unfair acts or practices related to payoff amounts where consumers had ancillary product rebates due, and also found unfair or deceptive acts or practices related to payment application.
- Consumer Reporting. The Bureau found deficiencies in consumer reporting companies’ (CRCs) FCRA compliance related to the following requirements: (i) accuracy; (ii) security freezes applicable to certain CRCs; and (iii) ID theft block requests. Specifically, examiners found that CRCs continued to include information from furnishers despite receiving furnisher dispute responses that “suggested that the furnishers were no longer sources of reliable, verifiable information about consumers.” Additionally, the report noted instances where furnishers failed to update and correct information or conduct reasonable investigations of direct disputes.
- Debt Collection. The report found that examiners found instances of FDCPA violations where debt collectors (i) made calls to a consumer’s workplace; (ii) communicated with third parties; (iii) failed to stop communications after receiving a written request or a refusal to pay; (iv) harassed consumers regarding their inability to pay; (v) communicated, and threatened to communicate, false credit information to CRCs; (vi) made false representations or used deceptive collection means; (vii) entered inaccurate information regarding state interest rate caps into an automated system; (viii) unlawfully initiated wage garnishments; and (ix) failed to send complete validation notices.
- Deposits. The Bureau discussed violations related to Regulation E and Regulation DD, including error resolution violations, issues with provisional credits, failure to investigate, failure to remediate errors, and overdraft opt-in and disclosure violations.
- Fair Lending. The report noted instances where examiners cited violations of HMDA/ Regulation C involving HMDA loan application register inaccuracies, and instances where lenders, among other things, violated ECOA/Regulation B “by engaging in acts or practices directed at prospective applicants that would have discouraged reasonable people in minority neighborhoods in Metropolitan Statistical Areas (MSAs) from applying for credit.”
- Mortgage Origination. The Bureau cited violations of Regulation Z and the CFPA related to loan originator compensation, title insurance disclosures, and deceptive waivers of borrowers’ rights in security deed riders and loan security agreements.
- Mortgage Servicing. The Bureau cited violations of Regulation X, including those related to dual tracking violations, misrepresentations regarding foreclosure timelines, and PMI terminations.
- Payday Lending. The report discussed violations of the CFPA for payday lenders, including falsely representing an intent to sue or that a credit check would not be run, and presenting deceptive repayment options to borrowers that were contractually eligible for no-cost repayment plans.
- Private Education Loan Origination. Bureau examiners identified deceptive acts or practices related to the marketing of private education loan rates.
- Student Loan Servicing. Bureau examiners found several types of misrepresentations servicers made regarding consumer eligibility for the Public Service Loan Forgiveness (PSLF) program, and identified unfair acts or practices related to a servicer’s “failure to reverse negative consequences of automatic natural disaster forbearances.” Additionally, examiners identified unfair act or practices related to failing to honor consumer payment allocation instructions or providing inaccurate monthly payment amounts to consumers after a loan transfer.
The report also highlights recent supervisory program developments and enforcement actions.
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.
- Kathryn L. Ryan to host the affiliate members meeting at AARMR’s 2022 Annual Regulatory Conference & Training
- Kathryn L. Ryan and Jedd R. Bellman to discuss “Risk and compliance management: Are you covered?” at a Mortgage Bankers Association webinar
- Melissa Klimkiewicz and Daniel A. Bellovin to discuss “Things to know about flood insurance” at a NAFCU webinar
- Hank Asbill to discuss “Ethical issues at sentencing” at the 31st Annual National Seminar on Federal Sentencing
- Max Bonici will moderate a panel on “Enforcement risk and other regulatory and compliance issues related to crypto and digital assets” at the American Bar Association’s 2022 Annual Meeting
- John R. Coleman to provide a “CFPB Update” at MBA’s 2022 Regulatory Compliance Conference
- Amanda R. Lawrence to discuss “The shifting data privacy and data protection landscape” at MBA’s 2022 Regulatory Compliance Conference
- Benjamin W. Hutten to discuss “Fundamentals of financial crime compliance” at the Practicing Law Institute
- Benjamin W. Hutten to discuss “Ongoing CDD: Operational considerations” at NAFCU’s Regulatory Compliance & BSA Seminar