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Melanie Brody is a partner in Mayer Brown’s Washington DC office and a member of the Consumer Financial Services group. She concentrates her practice on federal and state government enforcement matters, primarily for banks, mortgage lenders, auto lenders, credit card issuers, student lenders and other financial service providers. She represents clients in investigations, examinations and enforcement actions by the US Department of Justice, Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Federal Reserve Board, Department of Housing and Urban Development, Federal Trade Commission, state banking regulators and state attorneys general.

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On February 22, the Third Circuit sidestepped the Supreme Court’s 2017 holding in Henson v. Santander Consumer USA Inc. and found that a purchaser of defaulted debt qualified as a debt collector under the Fair Debt Collection Practices Act.

In Barbato v. Greystone Alliance, the Third Circuit considered whether an entity that purchased charged off receivables and outsourced the actual collection activity was subject to the FDCPA.  In analyzing the issue, the court explained that the FDCPA’s definition of the term debt collector has two prongs, and if an entity satisfies either of them, it is a debt collector subject to the Act.  Under the “principal purpose” prong, a debt collector includes any person who “uses any instrumentality of interstate commerce or the mails in any business the principal purpose of is the collection of any debts.”  Under the “regularly collects” prong, a debt collector includes any person who “regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”

The defendant in Barbato, Crown Asset Management, purchased defaulted debt and outsourced the collection function to a third party.  After being sued for allegedly violating the FDCPA, Crown argued (among other things) that under the Supreme Court’s decision in Henson, the Act did not apply to it because Crown owned the debts and thus did not regularly seek to collect debts owed to another.  In response to this argument, the Third Circuit explained that while Henson clarified the scope of the “regularly collects” definition, the Supreme Court “went out of its way in Henson to say that it was not opining on whether debt buyers could also qualify as debt collectors under [the principal purpose prong].” Continue Reading Third Circuit Holds that Debt Purchasers Can Qualify as Debt Collectors

Possibly hinting toward a revival of fair lending enforcement following a recent lull, the OCC’s Ombudsman recently declined a bank’s appeal of the OCC’s decision to refer the bank to both DOJ and HUD for potential Fair Housing Act violations.

The OCC’s Ombudsman oversees an infrequently used program for banks that desire to appeal agency decisions and actions.  In 2018, a bank appealed the determination of the OCC’s supervisory office that the bank may have engaged in a pattern or practice of discrimination on the basis of race, national origin, or sex in violation of the Fair Housing Act.

The Ombudsman reviewed the bank’s appeal under Section 2-204 of Executive Order 12892 and DOJ guidance from 1996 describing the circumstances that qualify as a “pattern or practice” meriting a referral.  Under Executive Order 12892, when the OCC receives “information from a consumer compliance examination…suggesting a violation of the Fair Housing Act,” it must forward that information to HUD. If the information indicates a possible pattern or practice of discrimination in violation of the Act, the OCC must also forward it to DOJ. After examining the information, HUD may choose to pursue an administrative enforcement action and DOJ may choose to pursue legal action.

Significantly, in ruling on the bank’s appeal, the Ombudsman determined that the OCC is only required to have information suggesting a possible pattern or practice of Act violations in order to forward that information to HUD  or DOJ pursuant to Executive Order 12892.  In other words, the OCC is not required to meet evidentiary standards that would otherwise be applicable in court. According to the Ombudsman’s decision, DOJ conducts its own investigation of information forwarded by the OCC and directs bank regulatory agencies that they need not have “overwhelming proof” of an “extensive pattern or practice of discrimination” before making a referral.

Appeals to the Ombudsman rarely involve fair lending matters. The last bank appeal involving fair lending occurred in 2011, and involved a community bank that the OCC believed had engaged in racial redlining. The Ombudsman agreed with the supervisory office’s referral in that case as well. More recently, banks have used the Ombudsman’s office to challenge various matters requiring attention in examination reports, with many focusing on ratings assigned during Shared National Credit examinations.

It’s difficult to predict whether this recent Ombudsman ruling is  a harbinger of more vigorous fair lending supervision.  Banks should take note, however, that the OCC is conducting Fair Housing Act examinations and willing to refer matters to HUD and DOJ based solely on information “suggesting a possible pattern or practice” of violations.

 

The Consumer Financial Protection Bureau recently proposed amendments to its earlier policy for issuing no-action letters, and proposed a process for participating in a so-called regulatory “sandbox,” which would provide certainty in or exemptions from complying with certain federal consumer protection laws. Comments on the proposals are due by February 19, 2019.

Read more in Mayer Brown’s Legal Update.

Federal redlining enforcement has waned in recent years, but redlining risk has not disappeared.  On October 4, two consumer advocacy groups, the National Fair Housing Alliance and the Connecticut Fair Housing Center, filed a law suit accusing a Connecticut-based bank of unlawful discrimination against minority homebuyers. The suit alleges that Liberty Bank, a state-chartered bank headquartered in Connecticut, violated the Fair Housing Act by engaging in “redlining,” a term that refers to the practice of declining to lend to residents of predominantly minority neighborhoods.

According to the complaint, Liberty Bank avoided making loans in minority communities, denied minority loan applicants at higher rates than white applicants, and discouraged minority applicants from applying for credit. The complaint also accuses the bank of gerrymandering its Community Reinvestment Act assessment areas by carving out minority and low-income communities in order to avoid lending in those areas and to manipulate its lending statistics. Further, the complaint alleges that among top state lenders, “Liberty Bank has the widest racial lending disparities in refinance denials for African-American and Latinx applicants compared with white applicants, and it fails to provide refinance loans to communities of color at a rate that outstrips its peers at a statistically significant level.”

In addition to a lengthy list of statistical allegations, the complaint includes the results of in-person investigations conducted by plaintiffs at several bank branches. Specifically, the complaint alleges that plaintiffs sent six sets of testers to bank branches to inquire about obtaining mortgage loans.  In each test, a minority loan applicant and a white control applicant with similar credit and income characteristics visited a branch to inquire about the possibility of obtaining a loan.  According to the complaint, bank loan officers discouraged the minority testers from seeking loans, provided minority testers with significantly less information than the white control testers, and offered the minority testers less favorable terms than the white testers. The complaint seeks declaratory relief, injunctive relief, and money damages.

While the Trump administration has scaled back on fair lending and other enforcement actions against consumer credit providers, Democratic state attorneys general have promised to vigorously enforce state and federal laws to “ensure fairness and deter fraud.”  The lawsuit against Liberty Bank suggests that consumer advocacy groups may become more active on these issues as well.

 

*Daniel Pearson is not admitted in the District of Columbia and is practicing under the supervision of firm principals.

The Summer 2018 edition of Supervisory Highlights –the first one the BCFP has issued under Mick Mulvaney’s leadership – is much the same as previous editions. In it, the Bureau describes recent supervisory observations in various industries, and summarizes recent public enforcement actions as well as supervision program developments.

One aspect of the report that is notably different, however, is the introductory language. In prior regular editions of Supervisory Highlights, the report’s introduction would emphasize the corrective action that the Bureau had required of supervised institutions. It would highlight the amount of total restitution to consumers and the number of consumers affected by supervisory activities, and would note the millions of dollars imposed in civil money penalties.

This new version eliminates all of that discussion from the introduction. Instead, the Bureau has added language emphasizing that “institutions are subject only to the requirements of relevant laws and regulations” and that the purpose of disseminating these Supervisory Highlights is to “help institutions better understand how the Bureau examines institutions” to help industry limit risks to consumers.

The first sentence of the report, which in previous iterations used to say that the Bureau is “committed to a consumer financial marketplace that is fair, transparent, and competitive, and that works for all consumers” now says the Bureau is committed to a marketplace that is “free, innovative, competitive, and transparent, where the rights of all parties are protected by the rule of law, and where consumers are free to choose the products and services that best fit their individual needs.”

Ultimately, time will tell whether this is simply rhetoric or if the Bureau’s supervisory and enforcement posture will be dramatically different from that under Mulvaney’s predecessor. Continue Reading BCFP’s Latest Supervisory Highlights

On September 5, 2018, a coalition of 14 state attorneys general, led by North Carolina’s attorney general, Josh Stein, wrote to Acting BCFP Director Mick Mulvaney to express “grave concerns” that the BCFP may seek to abandon the federal government’s longstanding position that ECOA provides for disparate impact liability. A copy of the letter can be found here.

The letter appears to have been inspired by at least two relatively recent developments – the revocation of the then-CFPB’s March 2013 Indirect Auto Lending Bulletin and Acting Director Mulvaney’s public comments stating that the Bureau will be “reexamining” the requirements of ECOA.  The letter emphasized that the disparate impact theory has been critical to the effective enforcement of federal and state antidiscrimination laws and warned that the Attorneys General “will not hesitate to uphold the law” if the BCFP concludes that disparate impact is not available under ECOA.

At this point, it remains to be seen whether and how the BCFP will “reexamine” ECOA. The most likely approach would be for the Bureau to propose amendments to Regulation B that would remove the rule’s current language allowing for disparate impact liability.  This would likely prompt strong condemnation from the 14 Attorneys General who signed the letter (among others), and possibly litigation over whether the BCFP has the authority to gut disparate impact under ECOA given that the Supreme Court held in 2015 that the theory was viable under similar language in the Fair Housing Act.

On July 30, 2018, the U.S. Department of the Treasury issued its much-anticipated report on reshaping Fintech regulation.  “A Financial System That Creates Economic Opportunities — Nonbank Financials, Fintech, and Innovation,” available here, focuses on the regulation of financial technology and makes more than 80 recommendations related to Fintech and nonbank financial policy, including:

  • endorsing so-called regulatory sandboxes;
  • ending the CFPB’s small-dollar lending rule;
  • increasing consumers’ control over their data;
  • establishing a national data breach notification standard; and
  • endorsing the OCC’s Fintech charter proposal.

The report also proposes an approach to conforming some of the differences in state-by-state financial regulation and advocates for greater legal certainty in nonbank lending.  Stay tuned for Mayer Brown’s forthcoming analysis of the key aspects of the report.

 

On July 26, 2018, the Federal Reserve Board (“FRB”) announced the launch of a new publication called the Consumer Compliance Supervision Bulletin. Similar to the Bureau of Consumer Financial Protection’s (“BCFP”) Supervisory Highlights, the new publication summarizes examiners’ observations from recent supervisory activities and offers guidance on what supervised institutions can do to address consumer compliance risks. The first bulletin focuses on three areas: fair lending, unfair or deceptive acts or practices (“UDAP”), and recent regulatory and policy developments. Continue Reading Key Takeaways from the Fed’s July 2018 Consumer Compliance Supervision Bulletin

On June 20, the U.S. Department of Housing and Urban Development (“HUD”) published an advance notice of proposed rulemaking (“ANPR”) that seeks public comment on whether and how to amend its 2013 rule under the Fair Housing Act (“FHA”). The ANPR follows HUD’s May 10 announcement of its intention to formally seek public comment on the rule in light of the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., in which the Court recognized disparate impact as a cognizable theory under the FHA, but imposed meaningful limitations on the application of the theory.

The ANPR, together with the statement of Bureau of Consumer Financial Protection Acting Director Mick Mulvaney this spring that the Bureau would be “reexamining the requirements of ECOA” in light of “a recent Supreme Court decision” (i.e., Inclusive Communities), signals that the Trump administration is likely seeking to retreat from the Obama administration’s enthusiastic use of disparate impact liability in lending discrimination cases.

The Disparate Impact Rule and Inclusive Communities

HUD finalized its disparate impact rule in February 2013. The rule codified HUD’s Obama-era view that disparate impact is cognizable under the FHA. In contrast to disparate treatment claims, in which a plaintiff must establish a discriminatory motive, a disparate impact claim challenges practices that have a disproportionately adverse effect on a protected class that is not justified by a legitimate business rationale. The rule states that a practice has a “discriminatory effect” where “it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.” HUD explained that it had “consistently concluded” that facially neutral policies that resulted in a discriminatory effect on the basis of a protected characteristic violated the FHA, and that the rule merely “formalize[d] its longstanding view.” The rule also formalized a three-part burden-shifting test for determining whether a practice had an unjustified discriminatory effect.

At the time HUD issued the rule, the nonprofit Inclusive Communities Project, Inc. was embroiled in a lawsuit against the Texas Department of Housing and Community Affairs, in which it brought a disparate impact claim under the FHA. After HUD issued the disparate impact rule, the Texas Department filed a petition for a writ of certiorari to the Supreme Court on whether the FHA recognized disparate impact claims. In its 2015 decision, the Supreme Court held that disparate impact claims are cognizable under the FHA, but the Court articulated a rigorous standard for a successful claim. The Court did not explicitly address the merits of HUD’s rule, nor did the rule form the basis of its holding.  Continue Reading HUD Seeks Public Comment on Disparate Impact Rule

 

On May 8, 2018, the United States Department of Justice and KleinBank reached a settlement agreement resolving allegations that the bank engaged in mortgage lending discrimination by failing to adequately serve predominantly minority neighborhoods (so-called “redlining”) in and around the Twin Cities of Minneapolis and St. Paul, Minnesota. The settlement resolves one of the only redlining investigations to ever land in court, and marks the Trump DOJ’s first fair lending settlement.

DOJ filed its complaint against KleinBank on January 13, 2017, one week before the inauguration of President Trump, suggesting that the Obama administration’s DOJ may have been concerned that the Trump administration would be disinclined to pursue fair lending cases aggressively. Given recent activities at the Consumer Financial Protection Bureau, this worry may have been well-founded.

The complaint alleges that, from 2010 until at least 2015, KleinBank intentionally avoided lending to residents of predominantly minority neighborhoods in the Twin Cities area because of the race or national origin of the residents of those neighborhoods. Specifically, the DOJ alleged that KleinBank carved majority-minority census tracts out of its Community Reinvestment Act assessment area, located its branch and mortgage loan officers in majority-white census tracts (and not majority-minority census tracts), and directed marketing and advertising predominantly toward residents in majority-white census tracts. While most targets of redlining claims have sought to settle the allegations in short order, KleinBank took the rare step of fighting the DOJ’s claims in litigation.

Prior to the settlement, on March 30, 2018, the district court handling the case adopted a magistrate’s recommendation that KleinBank’s motion to dismiss be denied. The magistrate’s report and recommendation are under seal, making it impossible to fully analyze the rationale underlying the decision. However, the court noted that contrary to KleinBank’s contention, the government had sufficiently plead the intent element of a disparate treatment claim by, among other things, alleging that the bank intentionally drew its assessment area to avoid minority areas and intentionally avoided marketing to such areas.

Under the settlement agreement, KleinBank is required to open (and operate for at least three years) one new full-service branch office in a majority-minority census tract. Redlining resolutions that require banks to open branch offices are noteworthy considering the rapid increase in online banking activities and the cost associated with opening a full service branch.

The settlement agreement also requires KleinBank to invest $300,000 through a special purpose credit program to increase the amount of credit it extends in minority neighborhoods. Further, the bank must invest another $300,000 in advertising, outreach, financial education, and credit repair in order to “assist in establishing a presence in majority-minority census tracts in Hennepin County.

A few aspects of this agreement stand out. First, the DOJ’s use of a settlement agreement rather than a consent decree is notable. Most DOJ cases are resolved using consent decrees, which are generally easier for the government to enforce. Second, many of the settlement agreement provisions are less onerous than the terms of other recent redlining settlements. For example, the agreement does not subject KleinBank to a civil money penalty, and provides for flexibility on the timing of the bank’s advertising and loan subsidy obligations.  This suggests that the Trump DOJ may be taking a more subdued approach to fair lending cases than did its predecessor.

Time will tell if the KleinBank settlement is a red herring or harbinger for more federal fair lending enforcement.