If you have anything to do with Fair Lending in your company, you have no doubt heard the news about the recent change at the CFPB with regard to Mulvaney’s decision to strip the Fair Lending Office of enforcement duties and move those duties to the Supervision and Enforcement Division. I have received numerous phone calls and emails about this change, so I am sharing those collective thoughts with you.
As someone who has worked in both the consumer advocate world, the mortgage industry for over 30 years and was born and raised in the land of politics, Maryland, I generally feel pretty tuned in to all sides of this equation. So here is my prognostication on the future of Fair Lending enforcement.
The Office of Fair Lending was stripped of its enforcement powers, and this enforcement power moved to another division which is “Supervision and Enforcement,” now called “Supervision and Enforcement & Fair Lending. Mulvaney’s theory is that now all enforcement action is under one division versus separate enforcement action that was previously allowed just for the Fair Lending division.
The bureau has been known for showing lenders what they need to do via enforcement action versus just laying it out to lenders. In my opinion, this has always been the wrong approach. If you tell lenders what you want from them in clear terms, they will deliver. If they do not deliver than that is on them, and they deserve the penalty for not playing by the rules. Pretty simple! After all, compliant lenders would love nothing more than to get rid of the “bad players” in the lending industry.
What lenders strive to avoid is making a decision to the best of their collective knowledge and then find out it is the wrong decision which subsequently results in huge fines. The FDIC and the OCC examiners are known for explaining to the lender what they are doing wrong, telling them to fix it and then checking back in to make sure that they have. If the depository does not comply with or fix the issue, they get a fine or more supervision. I believe that this type of guidance is a better approach and ultimately results in stronger outcomes for the consumer and lender.
What Will the Future Bring?
Consumer Advocate’s General Position: The position of the consumer advocates is that this change will have a profound and detrimental impact on minority and underserved communities where progress in access to credit, and fair and equitable credit terms were just beginning to improve. The fear is that lenders will be more likely to revert to practices that resulted in predatory lending issues before the crisis.
Lender’s General Position: The lenders believe that because of the crisis the pendulum swung too hard the other way and as a result, they are being targeted for enforcement actions that are neither sound or fair. Therefore, they have hope that this move will result in less stringent regulation that is fair but does not go over the top. After all, good lenders do want to do the right thing.
The Truth is Somewhere in the Middle!
There is no doubt in my mind that the stripping of enforcement action in the Fair Lending Division, which will now be housed in the supervision and enforcement division (not gone), will cause delays in enforcement actions. After all, if any of you have worked for Government, been involved in Government or grew up around it, you are fully aware of the awful bureaucracy that exists in trying to get anything done. The Fair Lending division will now need to petition the enforcement division to take on the cases that they believe are egregious to the consumer.
Some lenders think that because of this move they do not need to focus on fair lending regulation in their company, so they are going to put it on the back burner, roll the dice, and gamble that they are right. I hope that if you lead a lending organization, you are not that naïve. The CFPB may change a bit, but they are here to stay and represent a clearly bi-partisan issue. Who is going to vote to disband an agency overseeing consumer protection? Sticking your head in the sand will not change that or make it go away.
So lenders cheer! But should they? Not necessarily. Any lender who has been under review, received enforcement action or has been involved in litigation will tell you that it is a brutal process. Countless hours of employee time is spent gathering information, attorney fees are expensive, and the consultants that need to be brought in are costly as well. When you take away authority from a division that can investigate and enforce and move the enforcement piece to another division, you have elongated the process and cost your business more money. It is always better to find out what you are doing wrong, produce strategies to correct it and get on with your day.
Trust me when I tell you that you can be compliant and make MORE money! So just do it!
Another piece to the puzzle that gets left out is the voracious appetite of the States regarding Fair Lending issues. Many of my clients are surprised to find out that there is Federal Fair Lending Regulations (ECOA & The Fair Housing Act) AND State Fair Lending Regulation. A lender must pay attention to them both, and if you are a multi-state lender, this can be a tedious process.
The state regulators are also closer to the action. When the CFPB came along, they were able to pass on the infractions of a lender in their state, to the Fair Lending division who was then able to investigate further and potentially take action against the lender. This sharing of knowledge allowed the state to direct their resources to other things and let the CFPB deal with the lender.
In my opinion, the States will now take a stronger position and litigate locally because fair lending and consumer protection are viewed as a high priority item to many states. Of course, what this means for lenders is not good either. Imagine being a lender in 20 states. Several of those states decide that they do not like something you are doing, or are failing to do. Previously, they may have bumped that up to the CFPB and let them handle. If they do not have faith that this can be resolved promptly, guess what? Instead of dealing with one entity, the CFPB, regarding your issue, you now have to deal with each State and likely the CFPB as well. More costs to your bottom line than the former way? You Bet!
So here is my advice. Your company should have strong Fair Lending practices and strategies in place, and your company should be able to demonstrate strong oversight of those practices. Do the right thing, and you will have little to worry about!