CFPB’s Rulemaking Agenda Provides Glimpse into 2020

Photo by Michael Longmire on Unsplash

The CFPB’s 2020 Rulemaking Agenda provides a preview of the Bureau’s intended rulemaking activities for 2020.  Here are the highlights of what we can look forward to in 2020:


Business Lending Data (Pre-rule Stage):  Under Dodd Frank and the Equal Credit Opportunity Act, the CFPB has rulemaking authority to require lenders to collect and submit data concerning credit applications made by women-owned, minority-owned and small businesses.  The Bureau intends to hold a symposium on small business data collection in 2020. 


Higher-Priced Mortgage Loan Escrow Exemption (Pre-rule Stage): The Bureau is conducting preliminary analysis for rulemaking which would exempt certain lenders and higher priced mortgage loans from the FRB rule requiring the establishment of escrow accounts for payment of property taxes and insurance payments.


Debt Collection Rule (Proposed Rule Stage): The Agenda does not provide any further hints as to when a final rule will be published but does acknowledge that the Bureau is conducting consumer testing of disclosures related to time-barred debt.  Proposed Section 1006.26(c) was reserved for that purpose.  The Agenda indicates that, after testing, the Bureau will assess whether to publish a supplemental Notice of Proposed Rulemaking related to time-barred debt disclosures.  No anticipated date for a final rule is included in the Agenda which may suggest a delay to allow the Bureau to include the time-barred debt provisions before publication of the final rule.


Home Mortgage Disclosure Act Data (Proposed Rule Stage):  The Bureau has indicated new proposed rules will be forthcoming as to the publication of HMDA data, as well as the collection and reporting of data points.  The anticipated date for the NPRM is mid-summer.


Payday Lending (Final Rule):  As many recall, the CFPB rolled back the final rule issued in 2017 after a change in leadership.  The CFPB now anticipates publishing its new rule in the Spring of 2020.

Debtor’s Actions Immediately After Default Doom Time Barred ECOA Claim

By Zachary Dunn
October 25, 2017

An unpublished opinion from the Sixth Circuit provides a useful application of the statute of limitations to bar a debtor’s claims under the Equal Credit Opportunity Act, 15 U.S.C. § 1691e (“ECOA”).  In Guy v. Mercantile Bank Mortg. Co., 2017 U.S. App. LEXIS 19329 (6th Cir. 2017), the Guys, a married African-American couple, owned and operated separate businesses.  Id. at *1-2.  Each business received a loan from Mercantile Bank Mortgage Company (“Mercantile”) through one loan officer, Pat Julien, in 2000 and 2006, respectively.  Each loan was subsequently refinanced at least once through Julien.  Id. at *2. 

 

When Julien left Mercantile in 2006, the Guy’s accounts were transferred to a different loan officer.  The Guys alleged that they began receiving different treatment after their loans were transferred, and Paula Guy, one of the plaintiffs, wrote a letter to Mercantile expressing her concern that black clients were “being treated differently” than they had been under Julien.  Id.  Mercantile changed its policies between 2006 and 2009, and began to “aggressively enforce standards it had ignored for years” with the goal, the Guys alleged, of “eliminat[ing] minority business borrowers.”  Id. at *2-3.

 

In January 2008, Mercantile “pulled the funding” on the Guys’ projects and accelerated the debt, citing alleged payment delinquencies and past-due real-property taxes.  While the bank previously accepted late payments during a “grace period,” Mercantile did not accept any late payments from the Guys after January 2008, and Mercantile eventually seized the Guys’ real property, foreclosed on other collateral, garnished their wages, and obtained a deficiency judgment against them. Id. at *3.

 

The Guys initially sought legal representation in 2008, but did not retain counsel.  The Guys did not pursue their claims against Mercantile until 2015, when they filed suit alleging Mercantile’s adverse loan actions “were pretextual and that Mercantile terminated its lending relationship with them, at least in part, because of their race.”  Id. at *4.  The district court noted that Mercantile disclosed emails though discovery which “arguably show racial animus,” but dismissed the Guys’ complaint as barred by the statute of limitations.  Id.  The Guys appealed, arguing that the statute of limitations was extended by the discovery rule or by the doctrine of fraudulent concealment.

 

The Sixth Circuit disagreed with the Guys on each issue, and affirmed the judgment of the district court.  The court began by noting that while the discovery rule will generally toll the running of a statute of limitations until a plaintiff discovers or should have discovered his or her injury, the US Supreme Court has “been at pains to explain that discovery of the injury, not discovery of the other elements of a claim, is what starts the clock.” Rotella v. Wood, 528 U.S. 549, 555, 120 S. Ct. 1075, 145 L. Ed. 2d 1047 (2000).  The Guys were injured, and knew they were injured, when Mercantile took adverse lending actions against them.  Those injuries took place in 2008 and 2009, making the Guys’ claims barred by the statute of limitations.  The court went on to hold that even if the discovery rule applied to the ECOA, the Guys sought legal representation in 2008, shortly after the adverse lending actions occurred, which indicated they “were not only aware of their injuries but also that legal recourse might be available.” Id. at *7.

 

The court also found that the Guys’ claims could not survive under the doctrine of fraudulent concealment.  In order to toll the statute of limitations based on fraudulent concealment, a plaintiff must prove that: “(1) [the] defendant[] concealed the conduct that constitutes the cause of action; (2) defendant['s] concealment prevented plaintiffs from discovering the cause of action within the limitations period; and (3) until discovery, plaintiffs exercised due diligence in trying to find out about the cause of action.”  Id. at *7 (citations omitted).  While false statements that conceal facts respecting the merits of a plaintiff’s claims may serve as a basis for equitable tolling, “such relief is warranted only when the defendant's allegedly fraudulent statements constituted a plausible explanation that lulled the plaintiffs into not filing their claims sooner.”  Id. at *8.  Here, the Guys admitted in their complaint that they immediately doubted the veracity of Mercantile’s stated reasons for calling their loans, which demonstrated that they were not “lulled” into not filling their complaint sooner.

 

As this case makes evident, a debtor’s actions immediately after an adverse lending decision can have decisive implications for his or her claims.  If a debtor files a lawsuit under ECOA for actions which took place years earlier, seeking discovery into his or her actions immediately after the adverse lending decision may prove useful.


Zachary Dunn is an attorney practicing in Smith Debnam's Consumer Financial Services Litigation and Compliance Group. 

Guest Post: CFPB Issues Request for Information Regarding Small Business Lending

By Vanessa Garrido

The CFPB has issued a Request for Information (RFI) to collect data that will shed light on how small businesses engage with financial institutions, with a particular focus on women-owned and minority-owned small businesses. Of the estimated 27.6 million small businesses in the United States, over 7 million of these businesses are minority-owned and over 8.4 million are women-owned. In order to learn more about how to encourage and promote small businesses, “it is vitally important to fill in the blanks on how small businesses are able to engage with the credit markets.”  Prepared Remarks of CFPB Director Richard Cordray at the Small Business Lending Field Hearing, CFPB (May 10, 2017),The RFI was issued pursuant to Section 1071’s business lending data collection rule under the Dodd-Frank Act which modifies the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses.

The purpose of the business lending data collection rule is to:

• Fill existing gaps in the general understanding of the small business lending environment;
• Identify potential fair lending concerns regarding small business, including women-owned and minority-owned small business;
• Facilitate enforcement of fair lending laws; and
• Identify the needs and opportunities for both business and community development.

In an effort to collect and report on small business lending data, the CFPB seeks comment on:

• How the lending industry defines small business and how that affects their credit application processes;
• The particular data points that financial institutions are compiling and maintaining in the ordinary course of business concerning their small business lending, the sources of information that financial institutions rely on in obtaining this data, and any challenges financial institutions foresee in collecting and reporting this data;
• How financial institutions integrate data collection into their application process;
• The ability to measure accurately the prevalence of lenders and the products they offer;
• Roles that marketplace lenders, brokers, dealers and other third parties may play in the application process for loans;
• Whether certain classes of financial institutions should be exempt from the requirement to collect and submit data on small business lending;
• Any financial products that finance small business, in addition to term loans, lines of credit, and credit card products; and
• Ways to protect the privacy of applicants and borrowers, as well as the confidentiality interest of financial institutions that are engaged in the lending process.

Comments are due on or before July 14, 2017.

 Vanessa Garrido is a rising third year law student at Wake Forest University and is clerking with Smith Debnam Narron Drake Saintsing & Myers, LLP.

CFPB Issues its Annual Fair Lending Report and Sets its 2017 Agenda

The CFPB has issued its 2016 Fair Lending Report which provides a summary of the Bureau’s efforts in fair lending for 2016.  The Report also includes an indication of the Bureau’s fair lending priorities for 2017.  Here are the highlights:

·        A Risk Prioritization Approach. The Report confirms that the Bureau takes a risk-based prioritization approach to supervisory and enforcement.  Risk based prioritization considers several factors including cooperation with the Bureau’s special population offices, consumer complaints, tips and leads from advocacy groups, whistleblowers and other governmental agencies, supervisory and enforcement history and, of course, analysis of HMDA and other data.

·        2016 Fair Lending Activities.  The Report indicates that its 2016 focus was on mortgage and indirect auto lending, as well as credit card account management.  While the Bureau is expected to continue investigations in these three areas, it will also increase its focus on other segments of consumer credit.

·        2017 Fair Lending Priorities. Based upon this approach, the Bureau intends to increase its focus in the areas of redlining, mortgage and student loan servicing and small business lending.

·        Mortgage and Student Loan Servicing. The Report expresses concerns as to whether student loan and mortgage servicers are handling workouts and loss mitigation differently with customers based upon their race, ethnicity, sex or age.

·        Small Business Lending.  Dodd Frank charges the CFPB with ensuring that women owned and minority businesses have fair access to credit.  The CFPB intends to begin exercising small business lending supervisory authority to ensure fair access to credit.

·        Fair Lending Supervisory Observations.  The Report recaps examination observations which were previously provided by the CFPB in its 2016 Summer and Fall Supervisory Highlights and reported previously.

·        Redlining.  While we are not going to rehash all of the 2016 Supervisory Highlights, the Bureau’s observations as to redlining bear repeating. The Report indicates the factors considered by the CFPB is assessing redlining risk and provides the following laundry list:

o   Strength of the institution’s compliance management system including its underwriting policies and guidelines;

o   Unique attributes of the relevant geographic area, including population demographics, credit profiles and the housing market;

o   Lending patterns including applications and originations with and without purchased loans;

o   Peer and market comparisons;

o   The institution’s physical presence in the area (full service branches, ATM only branches, brokers and loan production offices, etc.) as well as the services offered;

o   Marketing;

o   Mapping;

o   CRA assessment area and market area more generally;

o   The institution’s lending policies and procedures record;

o   Additional, miscellaneous evidence (including whistleblower tips, loan officer diversity, testing, and comparative file reviews); and

o   An institution’s explanation for apparent disparate treatments.

·        Ongoing Investigations.  The Bureau’s ongoing investigations and referrals to DOJ include discrimination in mortgage and auto lending, as well as discrimination in credit card account management.

Based upon the Report and prior announcements regarding fair lending prioritization from the Bureau in the past several months, mortgage and student loan servicers should be re-examining their policies and procedures as to loss mitigation and workouts to ensure their practices are consistent with the Equal Credit Opportunity Act and other fair lending mandates.

Two More Banks Fall to Redlining Consent Orders

The Department of Justice has entered into a proposed consent order with two Ohio based banks resolving allegations that the banks engaged in a pattern or practice of redlining in their mortgage lending practices by “structuring their businesses to avoid the credit needs of majority black neighborhoods” in four Ohio and Indiana MSAs. The banks, Union Savings Bank and Guardian Savings Bank, are both headquartered in Cincinnati Ohio and share common ownership and management.  The consent orders come just a few weeks after the CFPB reinforced its emphasis on fair lending violations.  The consent order, if approved, requires the banks to invest $7 million in loan subsidies and spend at least $2 million in advertising, outreach, financial education and community partnerships in the Cincinnati, Columbus, Dayton and Indianapolis metropolitan areas. The consent order additionally requires Union Savings Bank to add two full-service branches and Guardian Savings Bank to add one loan production office to serve the majority African American neighborhoods in their MSAs.

The complaint alleged that the banks violated both the Fair Housing Act and the Equal Credit Opportunity Act by serving the credit needs of predominantly white neighborhoods to a significantly greater extent than they served the credit needs of majority African American neighborhoods.  The complaint alleged that both banks engaged in a race-based pattern of locating branches, noting that all of the banks’ branches were in majority white census tracts and that statistical analysis of their loan applications revealed significant disparities in their loan activities when compared to similar lenders in the same MSAs.

The consent order requires the banks engage an independent third party compliance management system consultant to assist in reviewing and revising their policies and practices to insure compliance with fair lending laws.  The Consent Order additionally requires that the banks:

• Conduct a detailed assessment of their policies and practices regarding “branch locations; loan officers’ solicitation of applications, including the geography covered by loan officers; product availability at branch locations; loan officers; assignment, training, oversight, and compensation; marketing; and fair lending compliance monitoring.”
• Submit a plan that includes a program for ongoing fair lending statistical monitoring of loan applications and originations, including statistical peer analysis of applications and originations from majority African American census tracts.
• Provide training to all employees with significant involvement in mortgage lending to insure their activities are conducted in a non-discriminatory manner and address the Fair Housing Act and the Equal Credit Opportunity Act and that the banks document employees’ participation and proficiency.
• Prepare a credit assessment of the needs of majority African American census tracts within their MSAs including analysis of demographic and socioeconomic data of those tracts, an evaluation of the credit needs and lending opportunities in those neighborhoods and a review of affordable loan products offered by other lenders and how products with those features can be adopted by the banks.
• Expand into majority African American neighborhoods.  Specifically, the Order requires Union Bank to open two new branches in majority African American tracts and requires Guardian to open one loan production office in a majority African American tract.
• Partner with local community based organizations or government organizations to provide residents in majority African American census tracts with loan products.  The banks are required to spend $750,000.00 over the term of the Consent Order.
• Advertise and conduct outreach in majority African American census tracts to effectively communicate the availability of the Loan Subsidy Program required by the Consent Oder and generate applications for mortgage loans from qualified residents in the majority African American census tracts.  The banks are required to spend $625,000 over the term of the Consent Order.
• Develop and Implement a consumer financial education and credit report program which includes the sponsoring of a minimum of twelve financial education events a year and the provision of a program for credit establishment or repair assistance to residents of majority African American census tracts.
• Provide a minimum of $7 million dollars in loan subsidies to residents and small businesses operating in majority African American census tracts within the banks MSAs.
• Maintain records relating to their compliance with the Consent Order and provide annually their HMDA data and a report as to their compliance to the Department of Justice to assist it in monitoring the banks’ compliance with the Order.

The Consent Order will remain in effect for 63 months.  A couple of other points worth noting:

• As with most consent orders, the order is made without any admission of liability;
• The DOJ’s findings are based upon a review of the banks’ HMDA data and a comparison of that data with HMDA data from other banks operating in the same MSAs.  Of particular note are allegations in the complaint comparing the percentage of mortgage applications generated and loans originated by both banks in majority black tracts compared with other “comparable lenders” in the same MSAs in the same time period; and
• The MSAs in question are in metropolitan areas which are highly segregated.  This undoubtedly makes these MSAs areas and others that are similar in racial makeup areas of focus for the DOJ.

CFPB Hones Its Fair Lending Agenda for 2017

A recent blog post from the CFPB indicates it will focus its Fair Lending efforts in three directions in 2017.  According to the post, the CFPB will increase its focus on: (a) redlining; (b) mortgage and student loan servicing; and (c) small business lending. 

Redlining. The Bureau’s has shown a renewed interest in redlining claims in the past two years.  In 2017, the Bureau “will continue to evaluate whether lenders have intentionally avoided lending in minority neighborhoods.” 

Mortgage and Student Loan Servicing. The Bureau’s turn to the mortgage and student lending markets is likely to take up where its focus on auto lenders and credit card providers left off.  The Bureau has indicated it will determine “whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a solution with the servicer because of their race or ethnicity.”  Entities in these markets should pay close attention to the Bureau’s recent use of mystery shoppers in other fair lending investigations. 

Small Business Lending.  Finally, the Bureau’s focus on small business lending should come as no surprise.  Its last two rule making agendas have included small business lending. Currently, the CFPB’s efforts have been in the pre-rule making stages, but it would not be surprising to see their “research” include examinations results as they move towards developing proposed regulations.

CFPB Issues Fall Agenda

The CFPB published its Fall 2016 Rulemaking Agenda last week. The Agenda, which is a federal requirement, was issued in the “early fall” and therefore does not take into account the effect the election may have on the CFPB or its current configuration. While the Agenda is worth monitoring and provides insight into the CFPB’s hot button issues, there is no certainty as to what the next six months will hold.

Payday Lending: As most know, the CFPB published its proposed rule on July 22, 2016. The Comment period ended on October 7, 2016. The rule has met significant opposition and it is telling that no further estimation or target dates have been set by the CFPB for a final rule.

TRID: The CFPB published its proposed amendments to TRID in the form of a Notice of Public Rulemaking in July 2016.The proposed amendments “memorialize the Bureau’s informal guidance on various issues and include clarifications and technical amendments.” The comment period expired October 18, 2016 and the Bureau has set a target date of March 2017 for publication of the Final Rule.


Overdrafts: Since at least the spring of 2015, the CFPB has indicated that they are conducting research to assess whether rulemaking is warranted. Since then, the CFPB does not appear to have made much public headway. The Fall Agenda, like its recent predecessors, indicates the Bureau is still engaged in pre rule making activities. The Rulemaking Agenda bumps the target date for further activity from August 2016 to January 2017 for further pre-rule making activity.

Debt Collection: One of the biggest stories that remains is when a proposed rule as to debt collection will be issued. The CFPB has not committed to a time line but has made progress. In a surprise to many, the CFPB has bifurcated the process by addressing third party and first party collections separately. A SBREFA Panel was convened as to the CFPB’s third party debt proposal in August 2016 and the CFPB continues to meet with interested parties. A proposal as to first party collections is the next likely step. The CFPB estimates further pre-rule activities in February 2017.

Arbitration: The CFPB published its proposed Arbitration Rule in the form of a Notice of Public Rulemaking in May 2016 and has targeted February 2017 for a final rule.

Women owned, Minority owned and Small Business Data Collection: The CFPB is in the early stages of developing rules to require financial institutions to report information about their lending to women-owned, minority owned and small businesses. The CFPB has indicated a desire to model any data collection after their recently released HMDA Rules. Pre-rule activities are expected to continue in the first part of 2017.

Supervision of Larger Participants in Installment Loan and Vehicle Title Loan Markets: The CFPB is considering rules expanding its larger participants supervision to include consumer installment loans and vehicle title loan markets. The Bureau is also considering “whether rules to require registration of these or other non-depository lenders would facilitate supervision”. The CFPB has targeted May 2017 for pre-rule activities.

CFPB Monthly Complaint Report Focuses on Credit Card Accounts

The CFPB issued its monthly report on consumer complaints this week. The report is a high level snapshot of trends in consumer complaints. The Report provides a summary of the volume of complaints by product category, by company and by state. Additionally, it highlights a product type. The product “spotlight” rotates monthly. This month’s report highlights credit card account complaints which was last in the “spotlight” in October 2015.

 Complaint Volume by Product

• The three products which yield the highest volume of complaints on a three month average remain debt collection, mortgage and credit reporting;
• A trend worth noting is that the number of debt collection complaints remains almost flat;
• Student loans indicated the highest increase in change from last year– a 62% increase when compared to 2015; and
• Payday loan complaints showed the greatest decrease from last year – a 15% decrease when compared to 2015.

Highlighted Product: Credit Card Accounts

Credit card providers and servicers should pay close attention to this month’s report as it highlights what are likely to be points of emphasis with regulators in upcoming examinations – particularly with regard to fair lending concerns, application of payments and assessment of fees and adequate explanation of terms. 

• As was the case when credit cards were last in the spotlight, the most common complaint involves billing disputes. Consumers remain confused as to how and when late fees can be assessed. 16% of all credit card complaints are categorized by the CFPB as involving billing disputes. Specifically:
• According to the Report, consumers complain about how payments are being applied, particularly to accounts where there are multiple balances because of balance transfers, cash advances and deferred interest purchases. The majority of these complaints appear to emanate from confusion about the terms of use.
• Consumers also complain about the application of fees and additional costs associated with their credit cards, particularly the application of late fees.

• The Report also highlights complaints about credit decisions. Both initial credit decisions and servicing changes are frequent subjects of complaints. Specifically, the Report observes concerns with adverse actions and the negative impact that negative items in credit reports have on consumer’s creditworthiness;
• Deferred interest programs also are a source of complaints with consumers stating that the terms of the programs are not adequately explained;
• Another issue highlighted by the CFPB is the concern with credit card accounts being closed without notice due to concerns by the credit card companies as to fraud and identity theft.

So what might the credit card industry expect to see from regulators? Based upon the current complaint trends, the credit card industry is likely to continue to see a continued focus on to their application of credit card payments, as well as scrutiny as to the accuracy of their disclosures regarding special promotions. It would also not be surprising to see examiners scrutinize credit card products in their fair lending examinations based upon the volume of complaints concerning credit decisions.

FDIC Launches Survey Regarding Small Business Lending Practices

The FDIC has launched a web based survey of roughly 2,000 randomly selected FDIC-insured banks regarding their small business lending practices.  This comes on the heals of the CFPB revelation that small business lending is also on their rulemaking agenda.  In May, the CFPB announced that it was in the very early stages of implementing Section 1071 of the Dodd Frank Act which amends the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women owned, minority owned and small businesses. 

At the end of June, the FDIC issued a press release announcing their survey.  As its  rationale, the FDIC states that “[s]mall business lending is an important way that banks help meet their communities' needs, especially for the many banks that primarily focus on commercial rather than consumer lending…Despite the importance of small businesses to the U.S. economy and the importance of bank lending to small businesses, there is little high quality data on small business lending by banks. The FDIC Small Business Lending Survey (SBLS) is designed to help fill in this information gap.”  The survey also includes questions concerning consumer transactions which are responsive to a Congressional mandate to learn more about bank efforts to bring unbanked individuals into the conventional finance system. Responses to the survey are due August 10^th.

The purpose of the survey is the provide insight into many aspects of small business lending, including nationally representative information on the general characteristics of small business borrowers, the types of credit sought and offered, and the relative importance of small business lending to banks of different sizes, business models and location.  The survey is broken down into six sections; (a) questions concerning the 2015 small business borrowers at the surveyed institution; (b) questions concerning the 2015 total loan originations of the surveyed institution; (c) questions concerning commercial and industrial loan originations of the institution in 2015; (d) questions concerning outstanding commercial and industrial  loans reported on the institutions call report in 2015; (e) questions concerning the small business “commercial and industrial lending competition, practices and applications” for the surveyed institution; and (f) consumer account offerings and policies.

CFPB Issues its Summer Supervisory Highlights

The CFPB published its Summer Supervisory Highlights last week, highlighting examinations that were conducted between January 2016 and April 2016 across various financial products.  The Report comes on the heels of a Supervisory highlight report devoted entirely to mortgage servicing. The Report highlights key findings made by the CFPB and provides insight into the current focus of examiners.  The Report highlights a number of technology failures and covers auto finance, debt collection, mortgage origination, payday lending and fair lending.  The CFPB noted the following issues worthy of mention:

AUTO FINANCE

The Report makes two specific observations and one very general observation.  As suggested in other recent CFPB activity, the CFPB is scrutinizing add on products and the representations made by lenders regarding the same.  Specifically, the Bureau noted that add on products and specifically, gap coverage products, should be accurately described. The CFPB also noted that one or more auto lenders engaged in deceptive practices when allowing consumer to defer payments in that they omitted details as to how interest would accrue and how payments would be applied as a result of the deferral. 

The Bureau also noted compliance management system weaknesses in one or more examinations.  Specifically, the Bureau noted the following deficiencies and auto lenders, both direct and indirect, should take note:

·      Failure to raise compliance-related issues to the institution’s board of directors or their principal;

·      Failure to monitor and correct business line practices to align with federal consumer financial law;

·       Failure to adequately track training completed by employees and the Board;

·       Failure to follow up on consumer complaints; and

·      Failure of compliance audits to highlight deficiencies in the consumer complaint response process.

DEBT COLLECTION

· Banks and other original creditors who sell debt should carefully review their technology and their use of coding.  The Bureau noted that, as a result of coding errors, one or more debt sellers sold accounts which were in bankruptcy, accounts that were products of fraud and accounts that had been paid in full.

· The Bureau also found that one or more debt collectors made false representations to collect debt. Particularly, the Bureau noted instances of debt collectors making representations that down payments were required to establish a repayment plan and that use of a checking account was the only option for repayment.  In both instances, the debt collector’s policies and procedures did not support the representations and the Bureau concluded that the practice was deceptive.

MORTGAGE ORIGINATION

The majority of the Report is devoted to mortgage origination issues and reflect some of the struggles faced by lenders since the implementation of TRID.  Specifically, the Bureau’s examinations indicated that:

·       One or more lenders incorrectly calculated the amount financed on loans with discount credits and subsequently incorrectly calculated the finance charge on the same loans, resulting in a negative finance charge and an amount financed that exceeded the stated loan amount;

·       One or more lenders offering bridge loans failed to accurately disclose the interest payments due to a software failure;

·       One or more institution demonstrated weak oversight of their automated systems, including inadequate testing of codes that calculate the finance charge and the amount financed when originating residential loans to consumers.

The Report also noted failures to comply with the Fair Credit Reporting Act.  The Report indicates that one or more institutions failed to comply with the FCRA’s adverse action notice requirements.

PAYDAY LENDING

It should not come as a surprise to those following the proposed payday rules, the CFPB has concerns as to electronic fund transfers on small short term loans.  The Bureau’s examinations noted issues with compliance with the Electronic Fund transfer Act.  Specifically, the Report notes that one or more lenders’ loan agreements were ambiguous as to the acceptable range of amounts to be debited.  As a consequence, lenders were required to revise their loan agreements for new loans. For existing loans, the Bureau required one or more entity to notify borrowers of the amount of any new transfer that will vary from the amount of the previous or preauthorized amount before initiating the new transfer.

CFPB Employs “Mystery Shopper” Strategy in Fair Lending Investigation

The CFPB and the Department of Justice have partnered together to enter into a proposed consent order with BancorpSouth Bank which resolves allegations that the bank engaged in a pattern or practice of redlining in its mortgage lending practice, discriminated in its underwriting and pricing of certain mortgage loans to minorities, and implemented an explicitly discriminatory denial practice.  The investigation marks the first time that the CFPB has used testers or “mystery shoppers” to support an allegation of discrimination. The consent order, if approved, requires the bank to invest $4 million in a loan subsidies, pay $2.78 million in settlement to African-American consumers harmed by the bank’s practices, spend at least $300,000 on targeted advertising in majority-minority neighborhoods in its Memphis MSA, spend at least $500,000 on local partnerships with community or governmental organizations that provide financial literacy and pay a $3 million civil penalty.  The proposed consent order also requires the bank to extend credit offers to previously denied African-American consumers who were denied mortgage loans as a result of the bank’s allegedly discriminatory underwriting policies and add at least one additional branch in a majority-minority neighborhood in its Memphis MSA. 

The complaint alleges that between 2011 and 2013, the bank violated the Equal Credit Opportunity Act and Fair Housing Act. Both Acts prohibit discrimination based upon race, color and national origin.  The agencies alleged that the bank “discriminated in a number of distinct ways through virtually every stage of its lending process.” Complaint, ¶ 3. The complaint makes four key allegations against the bank.  First, the complaint alleges that the bank engaged in redlining in minority neighborhoods in its Memphis MSA. Id. at  ¶4. Secondly, the complaint alleges that the bank illegally discriminated against African-American mortgage applicants in its underwriting of loan by rejecting both their consumer and business purpose loans at significantly higher rates than those of “similarly situated non-Hispanic White applicants” (“White”).  Id. at  ¶5.  Thirdly, the complaint alleges that the bank discriminated against African-American applicants by charging them higher prices than similarly situated White applicants.  Id. at ¶6. Finally, the complaint alleges that the bank implemented a policy and practice that required its employees to treat mortgage applicants differently based upon their race.  Id. at ¶7. 

The bank, while neither admitting nor denying the allegations of the complaint, entered into the consent order “solely for the purpose of avoiding contested litigation with the United States and the Bureau, and to instead devote its resources to providing fair credit services to eligible borrowers with meeting their credit needs.”  The consent order further notes that prior to the entry of the Order, the bank engaged in a number of steps to improve its compliance management system which included:

• Implementing rate sheets to price loans originated by its Community Banking Department;
• Transitioning to centralized underwriting;
• Appoint a Chief Lending Officer with responsibility over the bank’s fair lending compliance program;
• Opening a full time service branch in a minority neighborhood in its Memphis MSA;
• Implementing enhanced fair lending training; and
• Monitoring pricing and underwriting outcomes on a quarterly basis.

Beyond the monetary remediation previously discussed, the consent order requires the bank:

• With the assistance of a third party independent compliance-management-system consultant, develop and submit for approval a written Fair Lending Compliance Plan which includes at a minimum:
• Steps to effectively and promptly revise and revise the bank’s current mortgage lending policies and practices to ensure compliance with ECOA and the FHA;
• Diversity policies and practices;
• Fair lending training on an annual basis to all lending personnel to ensure employees’ conduct themselves in a nondiscriminatory manner;
• Written policies and procedures which insure the bank provides equal information and assistance to all applicants regardless of race or other prohibited characteristics;
• A formal process for ongoing monitoring of defendant’s mortgage lending for compliance with ECOA and the FHA, including conducting periodic fair lending statistical analyses of loan pricing and underwriting outcomes;
• Internal regular audits of the bank’s mortgage lending at least annually; and
• Implementation or revision of a consumer complaint resolution program which addresses complaints alleging discrimination in mortgage lending.
• Implement policies and procedures for the pricing of all mortgage loans that exclusively base pricing on objective credit and borrower characteristics supported by a legitimate business need; and
• Maintain specific race neutral underwriting guidelines, policies and procedures for mortgage loans that are designed to ensure consistent application of legitimate underwriting criteria and avoid unlawful discrimination.

Banks and other lenders should be aware that the CFPB has now embraced the use of “testers” or mystery shoppers – sending individuals (both white and African American) into branch offices to ascertain whether the testers were treated differently.  The CFPB contended in this matter that, in several instances, a Bancorp South Bank loan officer treated the African-American tester less favorably than a white counterpart with similar credit qualifications. 

CFPB Issues Annual Fair Lending Report

The CFPB has issued its annual Report summarizing its fair lending activities in 2015. The Report is comprehensive and lays out not only the activities of the Bureau but also its methodology in reviewing fair lending issues. For those not familiar, the Dodd Frank Act established an Office of Fair Lending and Equal Opportunity within the CFPB and charged it with “providing oversight and enforcement of Federal laws intended to ensure the fair, equal, and nondiscriminatory access to credit for both individuals and communities.” In doing so, the Office’s two primary tools are the Equal Credit Opportunity Act (“ECOA”) and the Home Mortgage Disclosure Act (“HMDA”).

 

While much of the Report has been previously discussed in prior blog entries, the key takeaways for lenders are as follows:

 

• The Bureau uses a risk based prioritization process to focus their enforcement and regulatory efforts on markets or products that represent the greatest risk for consumers. The Report confirms the Bureau is currently honed in on four products:
•  Mortgage Lending. Mortgage lending is a priority for the Office and they continue to focus on the HMDA data to identify risks in the areas of redlining, underwriting and pricing. In 2015, the Bureau resolved two public enforcement actions involving mortgage lending. 
• Indirect Auto Lending. The Report confirms that the Office remains focused on indirect auto lending and is conducting auto finance targeted ECOA reviews which generally include examination of three areas: credit approvals and denials, interest rates quoted by the lender to the dealer (“Buy Rates”) and any discretionary markup or adjustments to the Buy Rate. In 2015, the Bureau resolved two public enforcement actions involving discriminatory pricing and compensation.  
• Credit Cards. The Report suggests that this is a product which is receiving increased fair lending scrutiny. The Report indicates that the Bureau is “focused in particular on the quality of fair lending compliance management systems and on fair lending risks in underwriting, line assignment, and servicing,” including the treatment of consumers who indicate a preference to speak Spanish. 
• Small Business Lending. The Report indicates that the Bureau has begun targeted ECOA reviews of small-business lending and is focused on the quality of fair lending compliance management systems and on fair lending risks in underwriting, pricing and redlining.
• The Bureau is conducting three types of fair lending reviews:
• ECOA Baseline Reviews. The CFPB uses ECOA Baseline Reviews to evaluate how well an institution’s compliance management system identifies and manages fair lending risks. To this end, the Bureau updated their Baseline Review Modules in the CFPB Supervision and Enforcement Manual.
• ECOA Targeted Reviews. The CFPB uses Targeted Reviews to evaluate areas of heightened fair lending risks and generally focus on a specific line of business, including those identified above.
• HMDA Data Integrity Reviews. The CFPB makes no bones about it. HMDA data is a primary tool used to identify redlining issues.
•  The Report also summarizes the Bureau’s pending investigations:
• Mortgage Lending. The Report makes it abundantly clear that mortgage lending is among the Bureau’s top priorities and has focused its fair lending enforcement efforts on redlining practices. Currently, the Report indicates that it has a number of authorized enforcement actions in settlement negotiations and pending investigations.
•  Indirect Auto Finance. Similarly, the Bureau has prioritized discrimination resulting from discretionary loan pricing. The Report indicates the Bureau currently has a number of pending enforcement actions and several authorized enforcement actions in settlement negotiations.
• The Report also summarizes the new HMDA rule and indicates that the Bureau is in the pre rulemaking stage with respect to developing rules as to the collection of small business lending data as required by the Dodd Frank Act.