The CFPB released their annual fair lending report on December 4, 2018. This report is mandated by Congress as a means to report fair lending “happenings” by the agency. This report covers 2017 and the actions brought against lenders and financial institutions.
It is no secret that the CFPB/BCFP has been laying low this year, but don’t take that as a sign that strategies and refinement are not occurring behind the scenes. In fact, with the Congress taking a Democratic majority and the Head of the Financial Services Committee now being a known consumer advocate, Maxine Waters, lenders can expect some waking up of the bureau.
In my opinion, the bureau is waiting for the 2018 HMDA data to be submitted throughout the first quarter of next year. This data more than doubles what was previously reported by lenders and is so granular that patterns of practice undetectable before will begin to emerge. HMDA data prior to 2017 was not sufficient to launch reasonable claims against a lender. However, the 2018 data is more than sufficient to detect problematic fair lending practices such as Redlining and Pricing Disparity.
It is also important to understand that the bureau has the ability to “look back” over previous years. This means that if a pattern is detected from the 2018 data, they have the ability to request the same data from previous years. This is perhaps the most frightening part for lenders who know that pricing disparity was an issue and has since been corrected. Combine this with AI (Artificial Intelligence) and Data Scientist analysis, and you have a game changer.
The annual report highlights the fact that the bureau still has a strong focus on mortgage lending, but is also closely watching credit card practices, payday lending, student loans, small business lending, and mortgage servicing. If you are responsible for any of these divisions, now is the time to get a good handle on your data and understand the story that it tells.
As stated in the Bureau’s press release:
“As the report explains, in 2017 the Bureau:
- announced enforcement actions to address discrimination by a banking its credit card lending, and against a mortgage lender that failed to report accurate data about the applications it received and loans it made to consumers
- monitored lenders and servicers for compliance with the anti-discrimination laws under the Bureau’s jurisdiction
- issued a “no-action” letter to a company that uses alternative, or non-traditional, data to make credit and pricing decisions to support innovation and enable people with limited credit history, among others, to obtain credit or obtain credit on better terms
- led efforts to collaborate with other federal banking regulators to issue new guidelines on how examiners evaluate whether covered mortgage lenders are reporting accurate data
- communicated information on fair lending to the public at large, including industry, consumer and civil rights group, and other stakeholders, through blog posts, Supervisory Highlights reports and serving as presenters and panelists at a record number of events
We accomplished much in 2017, and continue to advance the Bureau’s fair lending work.”
If you read the 40-page report, you will note that both Director Mulvaney and Fair Lending Chief Ficklin state that the bureau is still focused on fair and equitable lending. They gather information at the bureau and from other agencies to prioritize examinations. “The fair lending prioritization process incorporates a number of additional factors as well, including consumer complaints; tips and leads from advocacy groups, whistleblowers, and government agencies; supervisory and enforcement history; and results from analysis of HMDA and other data.
The Bureau, along with the FTC, DOJ, HUD, FDIC, FRB, NCUA, OCC, and the Federal Housing Finance Agency, comprise the Interagency Task Force on Fair Lending. The Task Force meets regularly to discuss fair lending enforcement efforts, share current methods of conducting supervisory and enforcement fair lending activities, and coordinate fair lending policies.”
Redlining seemed to be the hot topic for Mortgage Lending in 2017 and continues this year as well. The FDIC is particularly active in this area for bank-owned mortgage companies.
Yet other items were revealed as issues in exams, that were not brought to public litigation. Following is a sampling from the Bureau, FDIC, FRB, OCC, & NCUA. Specifically addressed are:
12 C.F.R. § 1002.4(a): Discrimination on a prohibited basis in a credit transaction.
12 C.F.R. § 1002.5(b): Improperly inquiring about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction.
12 C.F.R. § 1002.7(d)(1), (d)(6): Improperly requiring the signature of an applicant’s spouse or other person if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested; improperly imposing requirements upon an additional party that the creditor is prohibited from imposing upon an applicant.
12 C.F.R. § 1002.9(a)(1), (a)(1)(i), (a)(2), (b), (b)(2), (c)(1)(i): Failure to provide notice to the applicant 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer or adverse action on the application; failure to provide appropriate notice to the applicant 30 days after taking adverse action on an incomplete application; failure to provide sufficient information in an adverse action notification, including the specific reasons for the action taken.
12 C.F.R. § 1002.12(b)(1): Failure to preserve records of actions taken on an application or of incompleteness.
12 C.F.R. § 1002.13(a)(1)(i), (b): Failure to request information on an application regarding an applicant’s ethnicity, race, sex, marital status, and age, or note, to the extent possible, the ethnicity, race, and sex of an applicant on the basis of visual observation or surname if not provided by the applicant. NOTE: The Report mentions that the proxy methodology of BISG has been implemented. This proxy methodology assigns the “likelihood” that a person is a certain race, sex or ethnicity based on surname and census information. When the Bureau uses this method because the lender did not provide the real information, it could result in false positive results. Therefore, it is important that lenders do their best to provide real information about the client vs. leaving the decision to a proxy software.
12 C.F.R. § 1002.14(a), (a)(2): Failure to routinely provide an applicant with a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling, and/or failure to provide an applicant with a copy of an appraisal report upon an applicant’s written request.
12 C.F.R. § 1002.9(a)(1)(i): Failure to provide notice to the applicant 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer or adverse action on the application. 12 C.F.R. § 1002.13: Failure to request and collect information for monitoring purposes.
Under Dodd-Frank, the bureau is required to perform educational outreach to industry, bar associations, consumer advocates, civil rights organizations, academia, and other government agencies, to help educate and inform stakeholders about fair lending.
They do this through their blog, email campaigns to consumers and the Interagency Task Force, which is composed of the prudential regulators. The Task Force meets regularly to discuss fair lending oversight and also offers a quarterly update based on their strategies. I strongly recommend that all compliance professionals listen to these webinars.
The report is not Earth-Shaking, but it does illuminate that they are still focused on Fair Lending and Mortgages. This message combined with the lethal amount of data they will require of lenders through HMDA should be an alert to all lenders to take the time to look at their data for pricing disparity and redlining issues.
One of the enforcement actions I found particularly interesting was that of American Express. While this is about credit cards, it could be just as easily overlayed onto mortgage origination. Following is the excerpt from the report:
“Through the course of a supervisory review, the Bureau concluded that, from at least 2005 to 2015, American Express’s Puerto Rico cards had different, and often worse, pricing, rebates, promotional offers, underwriting, customer and account management services, and collections practices than its U.S. cards. These differences spanned the product lifecycle and included: charging higher fees and interest rates and offering less advantageous pricing on promotional offers; imposing more stringent credit score cutoffs and lower credit limits; applying certain inferior servicing policies; and requiring more money to settle debt.”
This makes me say Hmmmm! Is it possible that lenders who vary state to state, or states to American territories may have the same issue? It is certainly worth considering and a good time to build strong business justifications if you have this practice.
And remember that the quality of your Fair Lending Training is paramount to your success. Not to brag, but our fair lending training was created because the available options were too “regulatory compliance heavy” vs. “what does it mean for me”. Our training is geared towards the field person by engaging them and helping them to understand why certain behaviors and practices should be considered. After all, the new HMDA data will drill down to the individual originator and their individual practices, so training and preparing them for fair lending issues, and mystery shoppers is the most important thing you can do to assist them and your company.