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Last month, the Government Accountability Office delivered a report at the request of Senators Elizabeth Warren (D-MA) and Sherrod Brown (D-OH) on the CFPB’s oversight and enforcement of fair lending laws after the agency’s 2018 reorganization which moved the Office of Fair Lending and Equal Opportunity from the Supervision, Enforcement, and Fair Lending Division to the Office of the Director and shifted certain responsibilities. GAO’s investigation focused on how the Bureau (i) “managed the reorganization of its fair lending activities”; (ii) “monitored and reported on its fair lending performance”; and (iii) used new HMDA data reported by some lenders since 2018 in its fair lending activities. The investigation team examined documents related to the Bureau’s fair lending activities, including strategic and performance reports and policies and procedures, and interviewed Bureau staff. GAO concluded that the Bureau “did not substantially incorporate key practices for agency reform efforts GAO identified in prior work” during the reorganization, and identified challenges related to the reorganization such as “loss of fair lending expertise and specialized data analysts,” which “may have contributed to a decline in enforcement activity in 2018.” The report also pointed out that the Bureau’s decision to stop reporting fair lending supervision and enforcement performance goals and measures has reduced transparency. However, the report noted that the Bureau has incorporated loan-level HMDA data to support its fair lending activities and that the new data points have improved the agency’s ability to compare how different institutions price loans, helping staff identify potentially discriminatory lending practices.
GAO’s report recommended that the Bureau: (i) collect and analyze information on the outcomes of its fair lending reorganization and use that assessment to address any related challenges or unintended consequences; and (ii) “develop and implement performance goals and measures specific to its efforts to supervise and enforce fair lending laws.” The Bureau agreed with both recommendations and affirmed its commitment to implementing them.
On January 16, Democratic members of the House Financial Services Committee sent a letter to the Government Accountability Office (GAO) inquiring about the benefits and drawbacks of using alternative data in mortgage lending, as well as the federal government’s role in overseeing the use of alternative data credit reporting agencies (CRAs) and lenders. The letter notes that while alternative data can be useful in helping lenders identify creditworthy potential borrowers who cannot be scored by CRAs through traditional measures, questions remain about how the use of alternative data may affect compliance with fair lending laws, including the Equal Credit Opportunity Act and Fair Housing Act. “While some alternative data, such as rental payment history, may provide an objective measure of creditworthiness, others might enable discrimination on the basis of a protected class, or infringe upon consumer privacy,” the letter cautions. The letter asks GAO to study the use of alternative data in expanding access to credit, with a particular focus on mortgage credit, and poses the following questions:
- How have different entities used alternative data to expand access to mortgage credit? Specifically, can alternative data determine consumer creditworthiness and whether a consumer is able to repay a mortgage? Additionally, are there certain alternative data sources that are better at predicting creditworthiness or some that are more likely to raise concerns about correlations with discriminatory factors? Furthermore, what federal activity has there been in this space?
- What are the potential benefits and risks associated with using alternative data and financial technology for access to mortgage credit, and are there variations in these benefits and risks across different groups, including minorities and younger borrowers?
- What potential risks does alternative data pose to fair lending compliance, and are the regulatory and enforcement agencies that govern the credit-granting system equipped to manage and prepare for an increased use of alternative data in mortgage lending?
- How do the benefits and trade-offs of other options for expanding access to mortgage credit compare to the use of alternative data in credit scoring?
On July 16, the U.S. Government Accountability Office (GAO) submitted a report to the ranking members of the Senate Banking Committee and the House Committee on Financial Services recommending that the CFPB improve communications to consumer reporting agencies (CRAs) and furnishers about the Bureau’s supervisory expectations. Specifically, the report—based on a CRA performance audit conducted by GAO from July 2018 to July 2019—presents two recommendations to the CFPB director on communicating expectations to CRAs concerning: (i) “reasonable procedures for assuring maximum possible accuracy of consumer report information;” and (ii) “reasonable investigations of consumer disputes.” According to the report, there are various causes for consumer report inaccuracies: errors in the data collected by CRAs and data not being matched to the correct consumer by CRAs. While the Bureau has “generally focused on assessing compliance with Fair Credit Reporting Act (FCRA) requirements,” GAO notes that the CFPB “has not defined its expectations for how CRAs can comply with key statutory requirements.” For instance, under the FCRA, CRAs must follow reasonable procedures for ensuring maximum possible accuracy and reasonably investigate consumer disputes. However, although the CFPB has identified deficiencies concerning these requirements in its CRA examinations, the Bureau “has not defined its expectations—such as by communicating information on appropriate practices—for how CRAs can comply with these requirements.” Therefore, GAO concluded, there exist opportunities for the Bureau to improve its oversight of CRAs. The CFPB neither agreed nor disagreed with GAO’s recommendations, and stressed that “it has made oversight of the consumer reporting market a top priority and that its supervisory reviews of CRAs have focused on evaluating their systems for assuring the accuracy of data used to prepare consumer reports.” The Bureau also commented on CRAs’ significant advances in promoting greater accuracy.
U.S. government watchdog studies fintech lending trends, recommends need for clarity on use of alternative data
In December, the Government Accountability Office (GAO) issued a report entitled “Financial Technology: Agencies Should Provide Clarification on Lenders’ Use of Alternative Data,” which addresses emerging issues in fintech lending due to rapid growth in loan volume and increasing partnerships between banks and fintech lenders. The report also addresses fintech lenders’ use of alternative data to supplement traditional data used in making credit decisions or to detect fraud. The report notes that many banks and fintech lenders would benefit from additional guidance to ease the regulatory uncertainty surrounding the use of alternative data, including compliance with fair lending and consumer protection laws. The report’s findings cover the following topics:
- Growth of fintech lending. GAO’s analysis discusses the growth of fintech lending and several possible driving factors, such as financial innovation; consumer and business demand; lower interest rates on outstanding debt; increased investor base; and competitive advantages resulting from differences in regulatory requirements when compared to traditional state- or federally chartered banks.
- Partnerships with federally regulated banks. The report addresses two broad categories of business models: bank partnership and direct lending. GAO reports that the most common structure is the bank partnership model, where fintech lenders evaluate loan applicants through technology-based credit models, which incorporate partner banks’ underwriting criteria and are originated using the bank’s charter as opposed to state lending licenses. The fintech lender may then purchase the loans from the banks and either hold the loan in portfolio, or sell in the secondary market.
- Regulatory concerns. GAO reports that the most significant regulatory challenges facing fintech lenders relate to (i) compliance with varying state regulations; (ii) litigation-related concerns including the “valid when made” doctrine and “true lender” issues; (iii) ability to obtain industrial loan company charters; and (iv) emerging federal initiatives such as the Office of the Comptroller of the Currency’s (OCC) special-purpose national bank charter, fragmented coordination among federal regulators, and the Consumer Financial Protection Bureau's (CFPB) “no-action letter” policy.
- Consumer protection issues. The report identifies several consumer protection concerns related to fintech lending, including issues related to transparency in small business lending; data accuracy and privacy, particularly with respect to the use of alternative data in underwriting; and the potential for high-cost loans due to lack of competitive pressure.
- Use of alternative data. The report discusses fintech lenders’ practice of using alternative data, such as on-time rent payments or a borrower’s alma mater and degree, to supplement traditional data when making credit decisions. GAO notes that while there are potential benefits to using alternative data—including expansion of credit access, improved pricing of products, faster credit decisions, and fraud prevention—there are also a number of identified risks, such as fair lending issues, transparency, data reliability, performance during economic downturns, and cybersecurity concerns.
The GAO concludes by recommending that U.S. federal financial regulators, including the CFPB, Federal Reserve Board of Governors, Federal Deposit Insurance Corporation, and the OCC communicate in writing with fintech lenders and their bank partners about the appropriate use of alternative data in the underwriting process. According to the report, all four agencies indicated their intent to take action to address the recommendations and outlined efforts to monitor the use of alternative data.
On May 8, the House voted to repeal, under the Congressional Review Act (CRA), CFPB Bulletin 2013-02 (Bulletin) on indirect auto lending and compliance with the Equal Credit Opportunity Act (ECOA). As previously covered by InfoBytes, the Senate approved the resolution on April 18 and the White House issued a Statement of Administrative Policy supporting the Senate resolution; it is expected that President Trump will sign the measure soon.
If the measure is successful, this would be the first time that Congress has used the CRA to repeal a regulatory issuance outside the statute’s general 60-day period. In December 2017, the Government Accountability Office (GAO) issued a letter to Senator Pat Toomey (R-Pa) stating that “the Bulletin is a general statement of policy and a rule” that is subject to override under the CRA, which allowed for the Senate to introduce the resolution measure years after the CFPB released the Bulletin.
On April 18, the Senate voted to strike down, under the Congressional Review Act, the CFPB’s Bulletin 2013-02 (Bulletin) on indirect auto lending and compliance with the Equal Credit Opportunity Act (ECOA). The vote follows a December 2017 letter issued by the Government Accountability Office (GAO) to Senator Pat Toomey (R-Pa) stating that the Bulletin is a “general statement of policy and a rule” that is subject to override under the Congressional Review Act (CRA). As previously covered by InfoBytes, GAO reasoned that the CRA’s definition of a “rule” includes both traditional rules, which typically require notice to the public and an opportunity to comment, and general statements of policy, which do not. GAO concluded that the Bulletin meets this definition “since it applies to all indirect auto lenders; it has future effect; and it is designed to prescribe the Bureau’s policy in enforcing fair lending laws.” The measure has been sent to the House and is expected to be voted on soon. On April 17, the White House issued a Statement of Administrative Policy which supported the Senate resolution nullifying the guidance, stating that if the resolution were to be presented to the president, his advisors would recommend he sign it. If the measure is successful, this would be the first time that Congress has used the CRA to repeal a regulatory issuance outside the statute’s general 60-day period.
On April 3, the U.S. Treasury Department released recommendations to the Federal Reserve Board, the FDIC, and the OCC (CRA regulators) on suggestions for modernizing the Community Reinvestment Act (CRA). As previously covered in a Buckley Sandler Special Alert, Treasury released a report last June indicating that the CRA should be modernized to better target statutory and regulatory responses to financial risks faced by U.S. consumers and ensure that the benefits of the CRA investments are aligned with the needs of the communities being served. Last month the Government Accountability Office (GAO) released a report recommending Treasury consider GAO’s findings when conducting its review. (See previous InfoBytes coverage here.)
The April memorandum of recommendations addresses findings from Treasury’s comprehensive assessment of the CRA framework and focuses on four key areas: assessment areas, examination clarity and flexibility, the examination process, and bank performance. Specifically, the recommendations include (i) updating the definitions of “geographic assessment areas to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors”; (ii) improving the flexibility of the CRA examination process to increase clarity in examiner guidance and improve evaluation criteria to increase CRA rating determination transparency and effectiveness; (iii) addressing the timing and issuance of performance evaluations to increase banks’ accountability when planning CRA activity; and (iv) identifying performance incentives to encourage banks to meet the credit and deposit needs of their entire communities, including low- and moderate-income areas. The memorandum solicited input from stakeholders such as consumer advocacy groups, financial industry members, and the CRA regulators.
In March, the Government Accountability Office ("GAO") issued a report addressing aspects of the fintech marketplace, including the benefits and risks for consumers; current regulatory oversight and challenges; and recommendations for federal action. The report notes that fintech products – such as payments, lending, wealth management, and distributed ledger technologies, among others – generally produce benefits to consumers in the form of lower costs and easier access. Nonetheless, fintech innovation comes with associated risks as certain products may not be covered by existing consumer protection laws, and the extent to which fintech providers are subject to federal and state oversight varies. According to the GAO, fintech providers note that complying with the “fragmented” federal and state requirements is “costly and time consuming.” The report emphasizes the need for regulators to increase collaboration to address key concerns in the fintech market, such as financial account aggregation. The GAO also highlights the efforts other jurisdictions have taken to increase fintech innovation and recommends U.S. federal agencies consider successful foreign regulatory approaches, such as “regulatory sandboxes,” which allow fintech companies to offer products on a limited scale with certain regulatory relief.
Of note, Arizona recently became the first U.S. state to introduce a “regulatory sandbox” for fintech products marketed and sold to Arizona consumers. See InfoBytes summary here.
On March 16, the Government Accountability Office (GAO) released a report identifying incentives to encourage financial institutions to provide banking services and small-dollar consumer loans in lower- and middle-income (LMI) communities. The report—issued in response to concerns raised by a 2015 FDIC survey, which found that “unbanked” or “underbanked” households tended to be located in LMI communities—assessed services provided by financial institutions in these areas, reviewed how regulators performed Community Reinvestment Act (CRA) evaluations, and solicited input from stakeholders such as consumer advocacy groups and financial industry members.
Currently, CRA evaluation procedures do not consistently require an assessment of banks’ provision of retail banking services or small-dollar, non-mortgage consumer lending. Rather, banks are evaluated for these criteria typically only “if consumer lending is a substantial majority of the lending or a major product of the institution, which generally is not the case across all institution types.” According to GAO’s report, a June 2017 Treasury report (previously covered in a Buckley Sandler Special Alert), indicated that the CRA should be modernized to better target statutory and regulatory responses to financial risks faced by U.S. consumers. Treasury announced plans to review the CRA, but a timeline is yet to be released. Meanwhile, GAO recommended—and Treasury concurred—that Treasury should consider the findings in this report when conducting its review. GAO also proposed several incentives for financial institutions, including the following:
- modifying lending and service tests conducted as part of the CRA examination process to focus more on how institutions are offering basic banking services and small-dollar, non-mortgage loans;
- expanding the scope of areas and entities assessed as part of the CRA examinations to capture more types of institutions, including all bank affiliates and nonbanks; and
- providing clarifying guidance about the examination process.
On February 27, the U.S. Government Accountability Office (GAO) released a report of recommendations to financial regulators on actions to take related to the compliance burdens faced by certain small financial institutions. The report is the result of a study the GAO initiated with over 60 community banks and credit unions (collectively, “institutions”) regarding which financial regulations were viewed as the most burdensome. Among others, the report includes a recommendation to the CFPB that it should assess the effectiveness of its TILA/RESPA Integrated Disclosure Rule (TRID) guidance and take affirmative steps to address any issues that are necessary. In a response to the GAO that is included in the report, the CFPB Associate Director David Silberman said, “the Bureau agrees with this recommendation and commits to evaluating the effectiveness of its guidance and updating it as appropriate.” Among other recommendations, the GAO highlights the need for the CFPB to coordinate with the other financial regulators on their periodic Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) reviews.
In addition to the compliance concerns with TRID disclosures, the GAO reports that the institutions also consider the data reporting requirements under HMDA, and the transaction reporting and customer due diligence requirements of the Bank Secrecy Act and related anti-money laundering laws the most burdensome. The GAO includes specific recommendations to the other financial regulators to strengthen and streamline regulations through the EGRPRA process.
- 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
- Jeffrey P. Naimon to provide “An update on key fair lending cases and the CRA and UDAAP rules” 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
- James C. Chou to discuss ransomware at NAFCU’s Regulatory Compliance & BSA seminar
- Elizabeth E. McGinn, Benjamin W. Hutten, and James C. Chou to discuss “The Evolving Regulatory Landscape: Third-party and cyber risk management” at the 2022 mWISE Conference
- James T. Parkinson to present a “Global anti-corruption update” at IBA’s annual conference