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On June 29, the CFPB announced a joint action with the DOJ against a regional bank with operations in Memphis, Tennessee for allegedly engaging in discriminatory mortgage lending practices in violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). According to the CFPB’s and the DOJ’s complaint, between January 1, 2011 and December 31, 2015, the bank (i) engaged in redlining practices in the Memphis area by structuring its business to meet the credit needs of majority-White neighborhoods while ignoring the credit needs of individuals in majority-minority neighborhoods; (ii) discriminated against African American borrowers by allowing its employees to practice discretion in making credit decisions on mortgage loans, which ultimately resulted in African Americans being denied certain mortgages at significantly greater rates than similarly situated white applicants; (iii) charged African Americans, on average, 30 basis points more for first lien and 64 basis points more for second lien mortgage loans than similarly situated white borrowers; and (iv) implemented a policy under which loan officers were advised to deny minority applicants more quickly than other applicants and to deny credit assistance to “borderline” applicants. The complaint further alleges that a series of matched-pair tests at Memphis branches “revealed that the Bank treated African American testers less favorably than similarly situated white testers.”
Subject to approval, the proposed consent order would require the bank to take several remedial actions to improve its allegedly discriminatory mortgage lending practices, among which include: (i) allocating $4 million to a loan subsidy program that offers mortgage loans on a more affordable basis to applicants in majority-minority neighborhoods; (ii) spending at least $300,000 on a targeted advertising and outreach campaign that considers the results of a credit needs assessment performed by an independent third-party auditor, advertises the loan subsidy program, and generates mortgage loan applicants from qualified residents in majority-minority neighborhoods; (iii) spending $500,000 on local partnerships that provide education, credit repair, and other assistance in majority-minority neighborhoods; (iv) opening an additional branch or loan production office in a high-minority neighborhood; (v) extending credit offers to African American consumers who were denied mortgage loans as a result of the bank’s allegedly discriminatory underwriting policy; and (vi) implementing policies that ensure employees provide equal assistance to mortgage loan applicants, regardless of race or other prohibited characteristics. Under the proposed consent order, the bank would pay $2.78 million in consumer redress and a $3 million civil penalty. The CFPB’s proposed consent order notes that the bank has “recently taken a number of steps to improve its compliance management system, reduce its fair lending risk, and increase its lending in minority areas.”
On April 29, the CFPB released its fourth annual report to Congress on fair lending activities. The report recaps the CFPB’s 2015 supervisory and enforcement efforts around fair lending and identifies ongoing priorities in the areas of: (i) mortgage lending, noting a continuing focus on HMDA data integrity and fair lending risks related to redlining, underwriting, and pricing; (ii) indirect auto lending, noting targeted ECOA reviews in examinations; (iii) credit cards, focusing “on the quality of fair lending compliance management systems and on fair lending risks in underwriting, line assignment, and servicing”; and (iv) other product areas including small-business lending, focusing on risks in underwriting, pricing, and redlining, and offering that “current and future small business lending supervisory activity will help expand and enhance the Bureau’s knowledge in this area, including the credit process; existing data collection processes; and the nature, extent, and management of fair lending risk.” The report highlights that “supervisory work on mortgage servicing has included use of the ECOA Baseline Review Modules … to identify potential fair lending risk in mortgage servicing and inform [its] prioritization of mortgage servicers.” In addition to recaps of its 2015 rulemaking, published guidance and efforts at interagency cooperation (including its MOU and sharing of customer complaints with HUD), the report also indicates that the CFPB had a number of authorized enforcement actions in settlement negotiations or pending investigations at year end in areas including mortgage lending, indirect auto lending, and credit cards.
On February 29, HUD announced an agreement with a Kansas City-based bank over its alleged redlining practices against African-American mortgage applicants. Two fair housing organizations (Complainants) filed separate complaints with HUD in October 2015 alleging that the bank engaged in discriminatory acts and violated the Fair Housing Act. According to Complainants, the bank’s “lack of market penetration in African-American communities made residential real estate products less available to persons based on race.” Complainants further alleged that the bank “designated their service area, or assessment area, in a way that excluded areas of high African-American concentration, which resulted in making residential real estate products less available to persons based on race” – a practice generally referred to as redlining. The agreement requires that the bank must, during the three-year agreement period: (i) allocate $75,000 in subsidy funds to provide discounts on home purchase loans to majority African-American census tracts in the Kansas City area; and (ii) originate $2.5 million in mortgage loans in African-American neighborhoods. Additional fair lending financing commitments pursuant the agreement require that the bank: (i) establish a loan pool of $105,000 to rehabilitate vacant or destroyed homes; (ii) spend $50,000 on marketing and outreach to African-American communities; (iii) provide $30,000 to support financial education in African-American communities; and (iv) spend $50,000 in support of the Complainants’ fair lending and community reinvestment work. The bank will also be required to appoint a Community Development Lender to focus on African-American neighborhoods and other lower-income communities. Finally, dependent upon the OCC’s approval of the bank’s application for a merger, the bank will be required to maintain three full-service branches in majority-minority census tract in the Kansas City area.
Now more than ever, financial services firms need to proactively focus on issues of concern identified by the CFPB and ensure that they are engaged in industry best practices that are clearly identified and carefully monitored. In the mortgage originations sphere, the new TRID/ KBYO rule, MSAs, LO compensation, UDAAP, and fair lending are all issues for companies to focus on in the coming year.
Compliance with the new TILA-RESPA Integrated Disclosure/Know Before You Owe (TRID/KBYO) rule will likely be an area of Bureau concern in 2016. The rule took effect on October 3, 2015 and does not include a “hold harmless” period for errors as lenders implement the new disclosure requirements, although letters from the OCC, FDIC, and CFPB have clarified that regulators will focus in the beginning on institutions’ implementation plans, training, and handling of early technical problems. It is likely that the CFPB will require remediation back to the rule’s compliance date when it identifies tangible consumer harm, but it is unlikely that the Bureau will bring enforcement actions initially based on technical issues where there is no tangible consumer harm.
GSEs have also issued letters stating they will not perform TRID/KBYO compliance file reviews at the beginning of the implementation period. The GSEs further stated that it will not exercise its repurchase and other remedies unless (1) a required form is not used or (2) a practice would impair its enforcement of its rights against borrowers. In contrast, the FHA has stated that it expects lenders to comply with “all federal, state, and local laws, rules, and requirements applicable to the mortgage transaction as outlined in [the] FHA Handbook….”
MSAs and RESPA Enforcement
The CFPB set forth a strong position in October 2015 regarding Section 8 of RESPA, which generally prohibits kickbacks in connection with the referral of settlement services. Through enforcement actions, the CFPB has taken a broad interpretation of the term “thing of value,” finding that the opportunity to participate in a business—even if market rates are paid for services—can itself constitute a thing of value sufficient to create Section 8 liability for kickbacks.
This calls into question the legality of marketing services agreements (MSAs) generally. While the CFPB has stated that it does not view MSAs as per se illegal and has acknowledged that it does not have the authority to declare them per se illegal without a formal rulemaking process, it is possible that the Bureau may pursue further public enforcement actions regarding MSAs if it does not see institutions pulling back from using them. State examiners are also aware of the issue and may refer nonbank entities that they supervise to the CFPB if they see issues with MSA usage. Courts are getting the opportunity to weigh in on these RESPA issues, through the appeal to the D.C. Circuit of the PHH enforcement action and the 9th Circuit’s reversal of the district court’s refusal to certify the class in Edwards v. FAC.
LO Compensation Rule
The CFPB has been aggressive in applying the Federal Reserve Board’s LO Compensation rule, as amended by the CPFB. While the rule was passed to avoid steering of borrowers into certain products, the CFPB does not need to establish steering to prove a violation and instead tends to build cases based on technical non-compliance with the rule. In bringing cases under the rule, the CFPB often names individuals as well as companies. It should be noted that the CFPB views payments to LLCs controlled by producing branch managers based on mortgage profits as illegal compensation under the rule. In examinations, the CFPB typically looks for a written compensation plan and cites institutions that do not reflect their compensation practices in their plan, even if those practices are legal.
Examination Enforcement Trends and UDAAP
The CFPB has heighted its focus on vendor management, scrutinizing vendor products and services during examinations (including the marketing of these products and services as well as the value they add), and will bring enforcement actions or court cases where it finds issues. Biweekly payments are one area of heighted scrutiny, as the CFPB has been skeptical of the value added by this service. The Bureau has also focused on loss mitigation contracts that suggest that a borrower has waived rights in connection with receiving the modification.
“What’s old is new again” in 2016 fair lending – issues such as pricing, discretion, and the charging or waiving of fees remain important. Regulators will remain focused on redlining and access to credit. The September 24, 2015 Hudson City Savings Bank enforcement action, requiring the bank to pay $27 million, focused on the role of brokers in redlining. The CFPB’s Office of Fair Lending and Equal Opportunity is a hybrid examination and enforcement division, which provides insight into the CFPB’s approach to fair lending. The CFPB also will look at nonbanks’ fair lending and bring enforcement actions against these institutions to the extent it finds problems.
On September 24, the CFPB and DOJ announced a joint enforcement action against a federally-chartered savings association, alleging that the lender excluded predominantly minority neighborhoods from its mortgage lending business. The consent order, subject to court approval, would require the lender to, among other things, (i) pay $25 million in various subsidies to assist minority borrowers; (ii) provide a total of $2.25 million, over a five-year period, to local initiatives providing assistance and consumer education to residents in the excluded neighborhoods; and (iii) pay a $5.5 million civil money penalty.
On September 10, New York Attorney General Eric Schneiderman announced a settlement agreement with a New York-based community bank to resolve allegations that the bank engaged in discriminatory mortgage lending practices by excluding potential borrowers who resided in predominantly African-American neighborhoods in the Buffalo area. Under terms of the agreement, the bank agreed to revise its consumer and commercial lending policies to eliminate minimum mortgage amount requirements, provide fair lending training, to expand its lending footprint into previously excluded areas, and to establish an $825,000 fund to promote new homeownership and affordable housing opportunities.
On May 26, the U.S. Department of Housing and Urban Development announced that it entered into a conciliation agreement with a Wisconsin-based bank to resolve claims that, from 2008 to 2010, the bank discriminated on the basis of race and national origin by denying loans to qualified African-American and Hispanic applicants, and making few loans in majority-minority census tracts in five metropolitan areas in Illinois, Minnesota, and Wisconsin (while making loans in nearby predominantly white tracts). Among other things, the agreement requires the bank, over a three-year period, to: (i) pay nearly $10 million in the form of lower interest rate home mortgages and down payment/closing cost assistance to qualified borrowers in majority-minority census tracts in specified housing markets in Illinois, Minnesota, and Wisconsin, (ii) invest nearly $200 million in increased mortgage lending in majority-minority census tracts in these areas, (iii) provide nearly $3 million to help existing homeowners repair their properties in these predominantly minority communities, (iv) pay $1.4 million to support affirmative marketing of loans in these census tracts, and (v) open offices in certain specified majority-minority census tract areas. According to HUD, this is the largest redlining settlement that it has initiated.
On April 28, the CFPB published its third annual report to Congress on its fair lending activities. Among other developments, the report highlights the following key supervision and enforcement priorities taken by the Bureau in the past year: (i) A continued focus on discrimination in the mortgage lending industry, including redlining and underwriting disparities; (ii) Emphasis on the auto lending industry, which has resulted in guidance given to lenders on complying with Federal consumer financial laws, and action taken when lenders do not abide by those laws; (iii) Attention to the credit card market, including an enforcement action against a company for its alleged failure to provide certain consumers with debt relief offers because of national origin; and (iv) Assistance to consumers who receive disability income by issuing Bulletin 2014-03 to lenders, which outlines the rights of a consumer whose income is derived, in part or in whole, from a public assistance program. According to the report, the Bureau’s efforts in 2014 to protect consumers from credit discrimination lead to financial institutions providing approximately $224 million in monetary relief to over 300,000 consumers.
On February 10, the DOJ, along with the U.S. Attorney’s Office for the Western District of North Carolina and the North Carolina AG, announced the settlement of the federal government’s discrimination suit involving two “buy here, pay here” auto dealerships. According to the DOJ, this is the federal government’s first-ever settlement involving discrimination in auto lending. Filed in January 2014, the settlement resolves a lawsuit alleging that two North Carolina-based auto dealerships violated the federal Equal Credit Opportunity Act by “intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases.” The North Carolina AG further alleges that the auto dealerships’ lending practices violated the state’s Unfair and Deceptive Trade Practices Act. The terms of the settlement require the two dealerships to revise the terms of their loans and repossession practices to ensure that “reverse redlining” ceases to exist; required amendments include: (i) setting the maximum projected monthly payments to 25% of the borrower’s income; (ii) omitting hidden fees from required down payment; (iii) prohibiting repossession until the borrower has missed at least two consecutive payments; and (iii) providing better-quality disclosure notices at the time of the sale. Also required by the settlement agreement, the two auto dealerships must establish a fund of $225,000 “to compensate victims of their past discriminatory and predatory lending."
On January 19, the New York Attorney General (AG) announced an agreement with a New York-based community bank that the AG alleged had excluded predominantly minority neighborhoods from its mortgage lending business. As part of the agreement, the bank will (i) open two branches in neighborhoods with a minority population of at least 30 percent, with the first located within two miles of a majority-minority neighborhood and the second located within one mile of a majority-minority neighborhood; (ii) create a special financing program to provide $500,000 in discounts or subsidies on loans to residents of majority-minority neighborhoods; and (iii) create a marketing program directed at minority communities. Additionally, the bank agreed to submit to reporting and monitoring by the AG for a three-year period and pay $150,000 in costs to the State of New York.