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.
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|
* 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.
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.
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.
On October 19, 2021, the Consumer Financial Protection Bureau (“CFPB”) issued its first enforcement action under newly-confirmed Director Rohit Chopra, taking aim at a company that the CFPB found to misuse its position of market dominance. The nature of the CFPB’s claims and the manner in which they were presented is telling of the CFPB’s likely approach to enforcement under Chopra. The agency issued a consent order against JPay, LLC, which the order describes as a company that contracts with federal, state and local departments of corrections (“DOCs”) around the country to provide various products and services, including debit cards provided to individuals upon their release from incarceration. The debit cards may contain the consumer’s own funds from commissary or other accounts and may also contain Gate Money—funds provided by the government to the individual to help ease the transition upon release from incarceration. The consent order focuses on the company’s practices related to such debit cards. Continue Reading Chopra Makes a Statement About Markets (Both Literally and Figuratively)
The New York Department of Financial Services (NYDFS) has issued “pre-proposed” rules under New York’s commercial financing disclosure law that was enacted at the end of 2020. The pre-proposed rules are 45 pages long and were posted on the NYDFS website on September 21. Comments on the pre-proposed rules are due by October 1. There will be a longer comment period once a proposed rule is published in the State Register. The NYDFS aims to finalize the rules before the law takes effect on January 1, 2022.
The pre-proposed rules give the state’s commercial financing disclosure law, colloquially known as the “NY TILA,” the formal name of the “Commercial Finance Disclosure Law (CFDL).” The pre-proposed rules also define terms and provide detailed requirements for the content and formatting of the CFDL-required disclosures. The proposed definitions borrow heavily from, but do not exactly mirror, those under the California Department of Financial Protection and Innovation’s (DPFI) proposed rules to implement its own commercial financing disclosure law. The lack of uniformity between the two states’ regulations will complicate compliance for commercial financers subject to both laws. Where the NYDFS rules borrow most substantially from the California rules, the NYDFS tends to draw from the prior version of those rules, before the DFPI’s second round of modifications issued August 9, 2021. This raises the question of whether the NYDFS will incorporate California’s latest modifications when the NYDFS issues the next version of its proposed rules. Continue Reading NYDFS Issues Pre-Proposed Rules to Implement New Commercial Financing Disclosure Law
On September 7, 2021, the CFPB announced that it had entered into a consent order with an education finance nonprofit (“nonprofit”) in connection with the nonprofit’s offering of income share agreements (“ISAs”). In the consent order, the CFPB asserted that ISAs are extensions of credit covered by the Consumer Financial Protection Act and the Truth in Lending Act (“TILA”) as well as TILA’s requirements with respect to “private education loans.” Because the CFPB asserts in the consent order that it views the nonprofit’s ISAs as credit, the CFPB takes the position that they are also subject to numerous other federal consumer financial protection laws that impose requirements and restrictions on student loan products. This consent order has significant implications for those in the ISA market, as it indicates how the CFPB views re-characterization for ISAs and similar products. Continue Reading CFPB Finds that Income Share Agreements are Credit Products
Today the Bureau finally released its long-awaited proposed rulemaking on small business lending data collection. Section 1071 of the Dodd-Frank Act mandated that the CFPB collect data about small business lending to facilitate enforcement of fair lending laws.
After ten years of fits and starts on this topic, the Bureau ultimately was pressured by a lawsuit filed against it to make forward progress on a proposal. As we previously reported, a court settlement last year mandated a timeline for the CFPB to take certain steps to initiate a Section 1071 small business lending data collection rulemaking. Among other steps, the settlement required the CFPB to convene a Small Business Advocacy Review panel (“Panel”) by October 15, 2020. The Panel met and provided feedback on the CFPB’s proposals under consideration and released its report in December.
The 918-page proposed rule issued today is the culmination of years of research and CFPB engagement with stakeholders. Continue Reading CFPB Issues Proposed Small Business Lending Rule
Nearly four years after the Consumer Financial Protection Bureau (“CFPB”) first promulgated its rule regulating payday loans, a federal district court in Texas upheld the payment provisions of the rule against various constitutional and other challenges. The court, which had previously stayed the rule’s original compliance date, also provided that the provisions would become effective in 286 days—on June 13, 2022. Continue Reading CFPB Payday Rule Upheld