A district court has dismissed a challenge to the Consumer Financial Protection Bureau’s (“CFPB”) repeal of the underwriting provisions of its 2017 payday rulemaking. The CFPB’s payday lending rule has a long and tortured history. First promulgated in 2017, the rule had two main prohibitions—a prohibition on making payday loans without assessing a borrower’s ability to repay (the “underwriting provisions”) and a prohibition on attempting to withdraw funds from a payday customer’s account without customer consent after two consecutive failed withdrawal attempts (the “payment provisions”). Shortly after the rule was promulgated, two industry trade groups sued to challenge both aspects of the rule. Then CFPB leadership changed and the parties agreed to stay the rule’s compliance date while the CFPB considered what changes, if any, to make to the rule. In 2020 the then-new leadership repealed the underwriting provisions of the rule, but left intact the payment provisions. Industry’s suit was thus limited to the still-extant payment provisions; a district court has upheld those provisions against the industry groups’ challenge but the compliance date has been stayed further pending resolution of the trade groups’ appeal.

In the meantime, an association of community and economic development organizations sued to challenge the 2020 repeal of the underwriting provisions of the original rule. That lawsuit has now been dismissed for lack of standing, with the district court finding that the plaintiff association had not suffered any cognizable harm due to the repeal of the underwriting provisions. Of course, in the interim, CFPB leadership has changed again; it may be that the CFPB will again seek to promulgate some type of underwriting restrictions. Even without the payday rule, the CFPB has made clear that credit products that “are not underwritten based upon the likely ability of the consumer to make the required (or, in the case of adjustable rate products, potentially required) payments over the term of the loan” may reflect increased risk of unfair, deceptive or abusive acts or practices.

So where do things stand?

  • The underwriting provisions of the original payday rule have been repealed and the legal challenge to that repeal has been dismissed. So the underwriting provisions are no more. But of course, that dismissal may be appealed and new CFPB leadership may again seek to impose underwriting provisions through a new rulemaking. And the CFPB might still pursue certain conduct through its general UDAAP authority.
  • The payment provisions have been upheld. But the compliance date of those provisions has been stayed pending resolution of the industry trade groups’ appeal of that decision.
  • Bottom line—over four years after the rule was promulgated none of its provisions are currently in effect.

Climate change is a serious threat to the US housing finance system. That is the conclusion reached by the Federal Housing Finance Agency (“FHFA”) in a December 27th statement. In the statement, Acting FHFA Director Sandra L. Thompson recognizes that Fannie Mae, Freddie Mac, and the Federal Home Loan Banks have an important leadership role in addressing that threat, and the agency is instructing those entities to designate climate change as a priority concern and actively consider its impacts in decision making.

Pursuant to this instruction to treat climate change as a priority, FHFA added resiliency to climate risk as one of its assessment criteria in its 2022 Scorecard for Fannie Mae and Freddie Mac (collectively, the “Enterprises”), and their joint venture Common Securitization Solutions. FHFA developed this scorecard concept in 2012 as a way to evaluate its regulated entities’ governance structure and ensure they are maintaining safety and soundness while meeting their public charter purposes. The scorecard includes specific objectives that communicate FHFA’s priorities and expectations for the Enterprises. By adding a climate change resiliency assessment to the scorecard, FHFA is committing to treat climate change impacts as a priority in its oversight of the housing finance system. Last year, FHFA updated its 2021 Scorecard to include a natural disaster assessment, which required the Enterprises to monitor risks and exposures to their books of business from natural disasters. The FHFA did not include the natural disaster assessment in the new 2022 Scorecard, presumably in lieu of the requirement to ensure each Enterprise is resilient to climate change. Acting Director Thompson’s statement also briefly noted that FHFA is enhancing its agency-wide monitoring and supervision of climate change issues.

The statement is the latest in a series of actions FHFA has taken to address the risks that climate change poses to the US housing finance system. As we detailed in Mayer Brown’s prior Legal Update, the FHFA released a Request for Input (“RFI”) on the issue in January 2021. In addition, as referenced in Acting Director Thompson’s statement, FHFA is a member of the Financial Stability Oversight Council (“FSOC”), which recently reported on and detailed its members’ efforts to manage climate-related financial risk. Acting Director Thompson committed, in the recent statement, to working with other federal agencies through FSOC to address climate change and its impacts.

The Enterprises’ statutory purposes are to provide stability to the secondary mortgage market, provide ongoing assistance to that market, and promote access to mortgage credit, specifically by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing. Because of these purposes, the Enterprises may be more constrained than purely private enterprises, to the extent they are called upon to target their loan purchases in areas with the highest severity of risk of severe climate change (which of course may affect the pricing for those purchases). Moreover, as noted by commenters who responded to FHFA’s RFI earlier in the year, low- and moderate-income borrowers are the most vulnerable to effects from climate change, and to changes in policy and pricing to address climate change. In order to continue fulfilling their statutory purposes, the Enterprises may be caught between minimizing risk of loss due to climate change and not negatively affecting those borrowers.

Earlier this week, the Consumer Financial Protection Bureau (“CFPB”) won an important court ruling in a long-running case against student loan securitization trusts. The case has a long (and for the CFPB, somewhat ignoble) history. The CFPB first filed suit against 15 Delaware statutory student loan securitization trusts (the “Trusts”) in September 2017. The complaint alleged that the Trusts, through the actions of their servicers and sub-servicers, engaged in unfair and deceptive debt collection and litigation practices. Along with the complaint, the CFPB filed a purported consent judgment that the CFPB represented to the Court had been executed by the defendants. As we’ve previously discussed, in an embarrassing setback, the district court denied the CFPB’s motion to enter the consent judgment, finding that the attorneys who executed it on behalf of the defendant Trusts were not authorized to do so by the proper trust parties (and that, with respect to at least some of the Trusts, the CFPB knew that the proper parties had not consented). The CFPB was therefore left to litigate a case that it thought it had settled. Subsequently, after the Supreme Court held that the CFPB’s structure was unconstitutional because it was headed by a single director removable by the President only for cause, the district court dismissed the CFPB’s case without prejudice, holding that the CFPB did not have the power to bring the case when it did due to its structural defect. We discussed that ruling here.

After the CFPB’s case was dismissed, three important things happened. First, the agency filed an amended complaint. Second, the Supreme Court decided Collins v. Yellen, which addressed the validity of the Federal Housing Finance Agency’s actions while that agency was headed by a single director removable only for cause. Third, the CFPB’s case against the Trusts was re-assigned to a new judge. That new judge recently denied the renewed motions to dismiss in the case, making two key rulings in the process.

First, the court ruled that Collins changed the law and held that “an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed,” unless it can be shown that “the agency action would not have been taken but for the President’s inability to remove the agency head.” Applying that standard, the district court found that the removal restriction did not impact the CFPB’s decision to bring and continue litigating its case against the Trusts.

Second, the district court ruled that, at least at the motion to dismiss stage, the CFPB had properly asserted claims against the Trusts. It is this aspect of the court’s ruling that may have broad ramifications for securitization trusts. Various Trust parties that moved to dismiss the case had argued that the CFPB could not properly assert claims against pass-through securitization trusts because such trusts are not “covered persons” under the CFPB’s authorizing statute. That statute provides that the CFPB can only seek to enforce prohibitions against unfair, deceptive and abusive acts and practices against “covered persons,” a term defined as anyone who “engages in offering or providing a consumer financial product or service” (emphasis added). The Trust parties argued that as pass-through entities with no employees the Trusts could not “engage” in providing a consumer financial product or service and the only proper defendants are the entities that do so directly (in this case, the servicers and sub-servicers). When the district court first dismissed the CFPB’s claims for the constitutional reasons discussed above, the court noted that “it harbors some doubt that the Trusts are ‘covered persons’ under the plain language of the statute.” That comment, of course, was dicta, since the court had decided to dismiss the case on other grounds. But with a new judge assigned to the case, the district court came to a different conclusion. Relying on dictionary definitions of the term “engage,” the district court held that by contracting with others to service and collect student loans, which the court described as “core aspects of the Trusts’ business model,” the Trusts had “engaged” in those acts and were thus covered persons. Whether this holding withstands the scrutiny of further litigation, and whether other courts adopt its reasoning, will have important implications for both the CFPB and for the securitization industry more generally. We will continue to monitor this action and report noteworthy developments.

 

Earlier this week, the Consumer Financial Protection Bureau released the Fall 2021 edition of its Supervisory Highlights (“Supervisory Highlights” or “Report”). This marks the first edition issued under Director Rohit Chopra, President Biden’s pick to head the agency. The press release accompanying this edition of Supervisory Highlights cites “wide-ranging violations of law” and asserts that “irresponsible or mismanaged firms harmed Americans during the COVID-19 pandemic,” statements that signal that the Chopra-led Bureau is taking an aggressive approach to supervision and is scrutinizing supervised entities closely.

Supervisory Observations

This edition of Supervisory Highlights covers examinations completed between January 2021 and June 2021 and identifies violations in eight areas: credit card account management, debt collection, deposits, fair lending, mortgage servicing, payday lending, prepaid accounts, and remittance transfers. As is the Bureau’s common practice, the Report refers to institutions in the plural even if the related findings pertain to only a single institution.

  • Credit Card Account Management. The Report details several findings related to credit cards, including violations of Regulation Z and the prohibition against unfair, deceptive, and abusive acts and practices (“UDAAPs”). With respect to Regulation Z, Bureau examiners determined that creditors failed to comply with requirements related to billing errors. Specifically, the Bureau details alleged failures concerning the timing of resolving notices of billing errors (within two complete billing cycles), reimbursing late fees when payment had not been credited to an account, and conducting reasonable investigations based on consumer allegations of missing payments and unauthorized transactions. The Report indicates that creditors are working to identify and remediate affected customers and develop training on Regulation Z’s billing error resolution requirements for employees.

The Bureau also alleged deceptive practices relating to the marketing of credit card bonus offers in two separate instances. First, examiners determined that credit card issuers engaged in deceptive acts by failing to provide advertised bonuses to existing customers who satisfied the bonus program requirements of opening a new account and meeting the spending requirements. Moreover, the Bureau noted that issuers failed to ensure employees followed procedures to enroll existing consumers correctly. Second, the examiners determined that issuers also engaged in deceptive acts when their advertising to consumers failed to disclose or adequately disclose material information about qualifying for the bonus. In this situation, the bonus was tied to applying for the card online, so consumers who otherwise satisfied advertised requirements, but applied through a different channel, did not receive the bonus. In response to these findings, issuers are modifying applicable advertisements and undertaking remedial and corrective actions.

  • Debt Collection. According to the Report, examiners found that larger participant debt collectors were at risk of violating the Fair Debt Collection Practices Act (“FDCPA”) as it relates to using false representations or deceptive means to collect a debt. The Report explained that debt collectors, in the context of discussing the consumer restarting a payment plan, represented that making the final payment of the plan would improve the consumer’s creditworthiness. The Bureau, however, indicated that this could lead the least sophisticated consumer to assume that deleting derogatory information would result in improved creditworthiness, when in fact numerous factors influence a consumer’s creditworthiness and making a final payment may not necessarily improve a person’s credit score. As a result of the findings, the debt collectors revised their FDCPA policies and procedures and enhanced their training and monitoring systems.

Continue Reading First CFPB Supervisory Highlights Issued Under Director Chopra Cites “Wide-Ranging Violations of Law”

Earlier this week, the U.S. Department of Housing and Urban Development (HUD)’s Office of General Counsel (OGC) published guidance on the Fair Housing Act’s treatment of Special Purpose Credit Programs (SPCPs). An SPCP is a tool that lenders can use to target underserved communities without violating the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B’s anti-discrimination provisions. The SPCP provisions of ECOA and Regulation B expressly permit lenders to consider otherwise-prohibited characteristics, such as race and national origin, if they are providing “special purpose credit” to meet special social needs or to benefit economically disadvantaged persons.

One year ago, the CFPB released an Advisory Opinion to clarify the requirements for SPCPs. To qualify for the protections of an SPCP under ECOA and Regulation B, a for-profit lender must develop and implement a written plan that identifies the class of persons the SPCP is designed to benefit and sets forth the lender’s procedures and standards for extending credit under the program. For a program to qualify as an SPCP, its purpose must be to extend credit to a class of persons who, under the lender’s customary standards of creditworthiness, probably would not receive such credit or would receive it on less favorable terms than are ordinarily available to other applicants applying to the lender for a similar type and amount of credit. The Advisory Opinion provided additional detail regarding how lenders can satisfy these requirements in implementing an SPCP.

Despite clarification and encouragement from the CFPB, some mortgage lenders have remained hesitant about implementing SPCPs because the Fair Housing Act does not contain an analogous SPCP concept for mortgage lending. Since the Fair Housing Act does not specifically address SPCPs, and HUD had previously been silent on this issue, some mortgage lenders have been concerned about potential regulatory risk under the Fair Housing Act in creating an SPCP.

Now, for the first time, HUD OGC has provided confirmation that SPCPs that are carefully tailored and targeted to meet ECOA and Regulation B’s requirements generally will not constitute discrimination under the Fair Housing Act. The OGC’s primary reasons for reaching this conclusion are described below:

  • Purpose of FHA. The OGC explains that the Fair Housing Act not only prevents discrimination but includes an affirmative provision requiring the federal government to take a proactive role in redressing longstanding housing discrimination. The Fair Housing Act specifically requires HUD and other agencies to administer programs “affirmatively to further the purposes” of the Fair Housing Act. Thus, one of HUD OGC’s justifications for concluding that SPCPs generally do not violate the Fair Housing Act is Congress’s purpose in enacting the Fair Housing Act.
  • Harmonious Co-Existence. The OGC references a rule of statutory construction, which states that two statutes that regulate the same topic should be interpreted in a manner that harmonizes them so that they are both given their fullest effect. In this case, the Fair Housing Act and ECOA both prohibit certain discriminatory mortgage lending practices. Furthermore, since FHA and ECOA have harmoniously co-existed for more than forty years, the OGC concludes that these texts should be read together and operate in complementary ways.
  • Legislative History. In support for its position that SPCPs do not violate the Fair Housing Act, the OGC delves into the legislative history of the Fair Housing Act and ECOA. Congress first passed the Fair Housing Act in 1968, and it later enacted ECOA in 1974. The OGC emphasizes that Congress enacted ECOA within the context of an already existing Fair Housing Act statute. When Congress amended ECOA in 1976, the OGC argues that Congress recognized that the Fair Housing Act and ECOA provided overlapping protections in certain credit transactions. In the ECOA amendment, Congress explicitly prohibited a party from recovering for a violation based on a single transaction under both ECOA and the Fair Housing Act. OGC surmises that Congress intended the Fair Housing Act and ECOA to co-exist and complement each other rather than create additional conflict.
  • US Department of Justice’s Enforcement of the Fair Housing Act and ECOA. The OGC points to how the U.S. Department of Justice (DOJ), an agency charged with the enforcement of both the Fair Housing Act and ECOA, has treated SPCPs as a way to remedy the alleged exclusion of communities of color, rather than as a form of discrimination under the Fair Housing Act. The OGC points to a DOJ redlining settlement agreement in which the target bank agreed to establish at least one SPCP to benefit residents of majority-minority tracts. The OGC indicates that this settlement is an example of harmonious enforcement of the Fair Housing Act and ECOA, which—according to the OGC—is consistent with Congress’s purpose for the two federal fair lending statutes.

HUD’s guidance is a positive step in providing lenders who wish to implement SPCPs additional regulatory assurance. In connection with the release of the OGC guidance, HUD’s Office of Fair Housing and Equal Opportunity (FHEO) also published a memorandum affirming OGC’s guidance and specifically encouraging lenders to “seriously consider establishing Special Purpose Credit Programs that are consistent with the antidiscrimination and affirmative provisions of the Equal Credit Opportunity Act, Regulation B, and the Fair Housing Act.”

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 If you are interested in setting up an SPCP, please don’t hesitate to contact us for assistance.

Recent developments indicate that credit reporting concerns are likely to be at the forefront of the CFPB’s agenda in the coming months. Last month, CFPB Director Rohit Chopra spoke before the House Committee on Financial Services and discussed several key topics, including credit reporting issues. Earlier this month, the CFPB published a report called “Disputes on Consumer Credit Reports” that discusses trends in consumer credit disputes and how such disputes are resolved. Shortly after the CFPB published its report, a group of Democratic senators sent a letter to Director Chopra, urging the CFPB to address credit reporting issues within the industry. This blog post highlights some of the key points in Director Chopra’s testimony, the CFPB report, and Senate Democrats’ letter to Director Chopra.

Continue Reading Credit Reporting in the Crosshairs?

Mortgage servicers should prepare for increased scrutiny of their default servicing activities.  Earlier this week, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”), along with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and state financial regulators, issued a statement that the agencies would resume their full supervision and enforcement of mortgage servicers, ending the flexible approach the agencies announced at the onset of the COVID-19 pandemic.  This move is consistent with the Bureau’s March 2021 rescission of similar statements issued during the pandemic that provided temporary flexibilities to financial institutions. Continue Reading CFPB Announces Return to Mortgage Servicing Enforcement

Statistics obtained through a FOIA request confirm what everyone expected – an uptick in CFPB enforcement activity that coincides with the beginning of the Biden Administration. Last year, we reported on statistics showing the number of new enforcement investigations opened every fiscal year through FY2019. Those statistics showed that new enforcement investigations had dropped significantly the year that Mick Mulvaney took over the CFPB—from 63 new investigations in FY2017 to just 15 new investigations in FY2018. That number climbed slightly to 20 new investigations in FY2019, which roughly coincided with Kathy Kraninger’s first year in office. Recently released CFPB statistics show that those numbers continued to climb—54 new enforcement investigations were opened in FY2020 (which ended shortly before the election) and 64 new enforcement investigations were opened in FY2021, which included the last four months of Kraninger’s tenure and the eight months that Dave Uejio served as Acting Director.

As a frame of reference, the CFPB’s most active years were FY 2013 and FY 2014, when Enforcement opened 104 and 99 new investigations, respectively. Those were the CFPB’s early years, however, when it first gained its authorities and was ramping up its Office of Enforcement. From FY2012 (the first full fiscal year when the CFPB had enforcement authority) through the end of FY2017 (the end of Richard Cordray’s tenure), the CFPB averaged 72 new investigations per year.

Last year, we also noted that the number of matters referred to the CFPB’s Action Review Committee (“ARC”) had dropped sharply in FY2018 under Mick Mulvaney, from 58 in FY2017 to 24 in FY2018. The ARC is the process by which the CFPB decides whether legal violations uncovered in the course of a supervisory examination should be resolved via supervision (non-public resolution with no civil money penalties) or enforcement (public resolution, typically involving civil money penalties). As with enforcement investigations, recently released statistics show that the downswing in ARC referrals was temporary, with 39 referrals in FY2109 and 44 referrals in each of FY2020 and FY2021. Most strikingly, however, the percentage of ARC matters referred to enforcement (in whole or in part) increased sharply in FY2021 to a near-record high of 41%, as compared to an overall referral rate of 28% from FY2013-2020.

We expect these recent trends in increasing numbers of new enforcement investigations, driven in part by increased referrals from the ARC, to continue now that Rohit Chopra has been confirmed as the CFPB’s new Director.

Below is a table showing the number of ARC referrals and new enforcement investigations over the years:

Fiscal Year # ARC Matters # ARC Referrals to ENF (full or partial) % ARC Referrals to ENF (full or partial) # ENF investigations opened
2012*       48
2013 17 11 65% 104
2014** 51 19 37% 99
2015** 55 14 25% 45
2016** 46 15 33% 70
2017 58 9 16% 63
2018 24 7 29% 15
2019 39 7 18% 20
2020 44 11 25% 54
2021 44 18 41% 64

* The ARC process was implemented mid-FY2012 so we have not included statistics for that year.

** The CFPB has provided conflicting data about the number of enforcement investigations opened in these fiscal years.

On Monday, New York Governor Kathy Hochul signed legislation to expand the state’s community reinvestment law to cover nonbank mortgage lenders who are licensed in the state of New York. Effective November 2022, the New York Department of Financial Services (“DFS”) will begin considering nonbank lenders’ performance in meeting community credit needs. The new law requires the DFS to consider the lenders’ performance when DFS takes any action on an application for a change in control. DFS also may promulgate regulations to require a community reinvestment assessment in other situations, such as upon other applications or notices made to the DFS.

Similar to its federal counterpart, the Community Reinvestment Act, the New York law will require DFS to make a written record of a mortgage lender’s performance in helping to meet the credit needs of its entire community, including low and moderate income (“LMI”) neighborhoods, and consistent with safe and sound operation. This written assessment may be made available to the public upon request. “Community” is not defined, but we would expect this to be interpreted to mean the entire state of New York, with a particular focus on performance in LMI census tracts.

In assessing a mortgage lender’s record of performance, the DFS must consider certain factors, including:

(a)        What the lender did to ascertain the credit needs of its community, including the extent of its efforts to communicate with community members;

(b)       The extent of its marketing to the community;

(c)        The extent of its participation in community outreach, community development or redevelopment, and educational programs;

(d)       The extent of participation by the lender’s board or senior management in formulating its policies and reviewing its performance with respect to community credit needs;

(e)        Any practices intended to discourage application for types of credit offered;

(f)        The geographic distribution of the lender’s loan applications, originations, and denials;

(g)       Evidence of prohibited discriminatory or other illegal credit practices;

(h)       The lender’s record of opening and closing offices and providing services at offices;

(i)        The lender’s participation in governmentally insured, guaranteed or subsidized loan programs for housing;

(j)        The lender’s ability to meet various community credit needs based on its financial condition, size, legal impediments, local economic condition and other factors; and

(k)       Other factors that, in the judgment of the superintendent, reasonably bear upon the extent to which a lender is helping to meet the credit needs of its entire community.

Licensed mortgage lenders have some time to prepare for these DFS reviews, as the law does not become effective for another year. Licensed lenders should expect performance assessments to cover all aspect of their mortgage origination activities in New York, and should remain abreast of any regulations the DFS promulgates to interpret the law. Among other things, it may decide to limit the law’s application to licensees that originate a minimum number of loans annually, and may provide a numerical grading scale.

With the passage of this law, New York becomes the third state to include nonbank mortgage lenders in its community reinvestment assessments. In March of this year, Illinois Governor J.B. Pritzker signed into law the Illinois Community Reinvestment Act (“ILCRA”). The ILCRA applies not only to Illinois state-chartered banks and credit unions, but also to non-bank mortgage lenders licensed under the Illinois Residential Mortgage License Act that lend or originate 50 or more residential mortgage loans per year. The Illinois Department of Financial and Professional Regulation is engaging in rulemaking to develop the contours for performance assessments under the ILCRA.

The only other state that currently applies its community reinvestment laws to non-bank mortgage lenders is Massachusetts. Nonbank mortgage lenders who are unfamiliar with CRA examinations may wish to review Massachusetts’ CRA compliance website, because the Massachusetts law has been in effect for a number of years.  The Division of Banks examines licensed mortgage lenders making 50 or more home mortgage loans in the previous two calendar years, and publishes their ratings (outstanding, high satisfactory, satisfactory, needs to improve or substantial noncompliance) and performance evaluations online.

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We expect community credit needs to remain a focus of state legislation, with more states likely to adopt or expand their community reinvestment laws to cover nonbank mortgage lenders. Meanwhile, at the federal level, the three federal banking regulators that oversee the Community Reinvestment Act—the OCC, Fed, and FDIC—continue to work on modernizing their regulations, which apply only to banks and credit unions. While the Community Reinvestment Act only applies to insured depository institutions, politicians, consumer groups and federal regulators (including Federal Reserve Chairman Powell) have publicly supported an expansion to nonbanks on prior occasions. These legislative and regulatory developments are in line with recent state and federal enforcement actions for alleged redlining, which have expanded to include nonbank lenders. Nonbank mortgage lenders thus should expect the geographic distribution of their lending services to be a focal point of future examination.

Three federal agencies announced a coordinated settlement today with a Mississippi-headquartered bank for allegedly redlining predominantly Black and Hispanic neighborhoods in the Memphis, Tennessee area. The action was the result of the OCC’s examination of the bank’s lending activities from 2014 to 2016. The OCC found that the bank had engaged in a “pattern or practice” of discrimination in violation of the Fair Housing Act, which prompted OCC to refer the matter to the Department of Justice and CFPB for investigation last year.

The bank allegedly denied residents of majority-minority and high-minority neighborhoods in Memphis equal access to mortgage loans, which the OCC said was evidenced through the bank’s mortgage application and origination activity, branching, loan officer operations, and marketing. As a result, the OCC assessed a $4 million civil money penalty.

In a separate but related action, the CFPB and the Justice Department together alleged that the bank violated the Fair Housing Act and Equal Credit Opportunity Act by avoiding mortgage lending in majority-Black and Hispanic neighborhoods, thereby discouraging prospective applicants residing in, or seeking credit for properties located in, these neighborhoods from applying for credit.

As evidence supporting these claims, the government pointed to the bank’s:

  • Branch locations.

Only four of the bank’s 25 branches in the Memphis area were located in majority-Black and Hispanic communities, whereas 50% of the census tracts in the Memphis MSA are majority-Black and Hispanic. According to the settlement, two of the four branches were originally in white neighborhoods and are only now in majority-minority neighborhoods because of shifting demographics. The bank also closed a limited-service branch located in a majority-minority neighborhood in 2015.

  • Loan officer assignments.

No loan officers were assigned to any of the four branches in majority-minority areas, so mortgage-lending services were not available to walk-in customers. The CFPB found it significant that the bank relied almost entirely on its loan officers (onsite at other branches) to conduct outreach to potential customers.

  • Inadequate monitoring.

Before the OCC began its exam in 2018, the bank did not conduct comprehensive fair lending risk assessments or establish internal governance to oversee fair lending.

  • Disproportionately low application volume.

From 2014 to 2018, other similarly situated lenders (i.e., “peer” financial institutions that received between 50% and 200% of the bank’s annual volume of applications) generated 2.5 times more home mortgage loan applications from majority-Black and Hispanic neighborhoods in the Memphis MSA than the bank.

As part of the CFPB/DOJ settlement, the bank is ordered to pay a $5 million penalty to the CFPB, which will credit the $4 million penalty collected by the OCC toward the satisfaction of this amount.  The bank also must invest $3.85 million in a loan subsidy program to assist borrowers purchasing properties in majority-Black and Hispanic neighborhoods in Memphis, and allocate $200,000 towards targeted advertising. It will also open a new lending office in a majority-Black and Hispanic neighborhood.

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We expect to see a significant uptick in fair lending enforcement from each of these agencies, as the Justice Department took this opportunity to announce the launch of its new “Combatting Redlining Initiative” today. The Department’s initiative will be led by the Civil Rights Division’s Housing and Civil Enforcement Section in partnership with U.S. Attorney’s Offices. One notable aspect of this initiative is that the Department specifically called out non-bank mortgage lenders, which were not traditionally the targets of redlining enforcement. The Department also noted its intention to increase coordination with State Attorneys General on potential fair lending violations.

For the CFPB’s part, today’s settlement marked the first fair lending enforcement action under new director Rohit Chopra, who has made clear that he will have a fair lending-focused agenda.  Earlier this week, news broke that Chopra will name Eric Halperin to head the CFPB’s enforcement division.  Halperin is a long-time civil rights lawyer who served under Tom Perez as a special fair lending counsel in the DOJ’s Civil Rights Division at a time when the DOJ was active in pursuing “reverse redlining” claims.  With Halperin’s civil rights background, we can expect to see even more attention given to fair lending enforcement.

We also can expect to see a return to strongly worded CFPB press releases. The Bureau’s announcement of the settlement characterizes the bank’s violations as “deliberate,” with Chopra stating that the bank “purposely excluded and discriminated against Black and Hispanic communities.” Although unrelated to the settlement, he also returned to a topic he has raised before—algorithmic bias: “The federal government will be working to rid the market of racist business practices, including those by discriminatory algorithms.”

With markedly increased attention at the federal level, and a promise of coordination with the states, all lenders should take note of today’s action and review their own application and origination activity as well as policies, procedures, and monitoring for compliance with fair lending laws.