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.

 

On October 17, the Bureau of Consumer Financial Protection (“BCFP” or “Bureau”) issued its Fall  2018 regulatory agenda.  Notable highlights include:

  • Payday Lending Rule Amendments. In January 2018, the Bureau announced that it would engage in rulemaking to reconsider its Payday Lending Rule released in October 2017.  According to the Bureau’s Fall 2018 agenda, the Bureau expects to issue a notice of proposed rulemaking by January 2019 that will address both the merits and the compliance date (currently August 2019) of the rule.
  • Debt Collection Rule Coming. The Bureau expects to issue a notice of proposed rulemaking addressing debt collection-related communication practices and consumer disclosures by March 2019.  The Bureau explained that debt collection remains a top source of the complaints it receives and both industry and consumer groups have encouraged the Bureau to modernize Fair Debt Collection Practices Act (“FDCPA”) requirements through rulemaking.  The Bureau did not specify whether its proposed rulemaking would be limited to third-party collectors subject to the FDCPA, but its reference to FDCPA-requirements suggests that is likely to be the case.
  • Small Business Lending Data Collection Rule Delayed. The Dodd-Frank Act amended the Equal Credit Opportunity Act (“ECOA”) to require financial institutions to submit certain information relating to credit applications made by women-owned, minority-owned, and small businesses to the Bureau and gave the Bureau the authority to require financial institutions to submit additional data.  In May 2017, the Bureau issued a Request for Information seeking comment on small business lending data collection.  While the BCFP’s Spring 2018 agenda listed this item as in the pre-rule stage, the Bureau has now delayed its work on the rule and reclassified it as a long-term action.  The Bureau noted that it “intends to continue certain market monitoring and research activities to facilitate resumption of the rulemaking.”
  • HMDA Data Disclosure Rule. The Bureau expects to issue guidance later this year to govern public disclosure of Home Mortgage Disclosure Act (“HMDA”) data for 2018.  The Bureau also announced that it has decided to engage in notice-and-comment rulemaking to govern public disclosure of HMDA data in future years.
  • Assessment of Prior Rules – Remittances, Mortgage Servicing, QM; TRID up next. The Dodd-Frank Act requires the Bureau to conduct an assessment of each significant rule adopted by the Bureau under Federal consumer financial law within five years after the effective date of the rule.  In accordance with this requirement, the Bureau announced that it expects to complete its assessments of the Remittance Rule, the 2013 RESPA Mortgage Servicing Rule, and the Ability-to-Repay/Qualified Mortgage Rule by January 2019.  At that time, it will begin its assessment of the TILA-RESPA Integrated Disclosure Rule (TRID).
  • Abusiveness Rule? Consistent with recent statements by Acting Director Mick Mulvaney that while unfairness and deception are well-established in the law, abusiveness is not, the Bureau stated that it is considering whether to clarify the meaning of abusiveness through rulemaking.  The Bureau under former Director Richard Cordray rejected defining abusiveness through rulemaking (although the payday rule relied, in part, on the Bureau’s abusiveness authority), preferring instead to bring abusiveness claims in enforcement proceedings to establish the contours of the prohibition.  Time will tell if the Bureau will follow through on this.

Continue Reading BCFP’s Fall 2018 Regulatory Agenda

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 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.

The Consumer Financial Protection Bureau (“CFPB”) has issued its first No-Action Letter (“No-Action Letter” or “Letter”) in response to a request from Upstart Network, Inc. (“Upstart”). The No-Action Letter means that CFPB staff currently has no intention of recommending enforcement or supervisory action against Upstart. This decision is limited to the application of the Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, to Upstart’s automated model for underwriting applicants for unsecured, non-revolving credit (“automated model”).

Upstart is an online lending platform that, working with a bank partner, uses alternative data to facilitate credit and pricing decisions for consumers with limited credit or work history. In addition to relying on traditional credit information, Upstart uses non-traditional sources of information to evaluate a consumer’s creditworthiness. For instance, Upstart might look at an applicant’s educational information, such as school attended and degree obtained, and the applicant’s employment to determine financial capacity and ability to repay. Upstart submitted a Request for No-Action Letter (“Request”) in relation to its automated model to the CFPB pursuant to the agency’s no-action letter policy.

According to the CFPB, the no-action letter policy is intended to facilitate consumer-friendly innovations where regulatory uncertainty may exist for certain emerging products or services. In practice, however, the process has presented significant challenges for companies that might seek to benefit from it. Continue Reading CFPB Issues No-Action Letter to Alternative Credit Lending Platform

It appears that the Consumer Financial Protection Bureau’s (CFPB) controversial indirect auto initiative may be over.  Before the holidays, the CFPB issued a blog post setting forth its fair lending priorities for 2017.  It identified those priorities as Redlining, Mortgage and Student Loan Servicing, and Small Business Lending.  Not only was indirect auto lending not listed, but the CFPB appeared to go out of its way to indicate it was moving away from this issue.   Continue Reading Is the CFPB’s Indirect Auto Initiative Over?

The Consumer Financial Protection Bureau (CFPB) marks its fifth birthday having made a substantial mark on the consumer financial services marketplace. To mark this event, we have compiled a retrospective of the CFPB’s first five years. The retrospective provides an overview of the CFPB’s actions in the realms of rulemaking, supervision, and enforcement. While it would be difficult to chronicle all of the CFPB’s activities over that period, the articles in the retrospective provide a snapshot of the rules the CFPB has written or proposed, the supervision program it has implemented, and the enforcement actions it has taken across the landscape of consumer financial services. Some of the articles appeared previously on this blog, others appeared as Mayer Brown Legal Updates, and many are new analyses or summaries of the CFPB’s actions.  Read the retrospective, available here.

 

On June 27, 2016, a New York federal jury found that a bank and its affiliated mortgage company violated the Fair Housing Act, the Equal Credit Opportunity Act, and the New York City Human Rights Law by intentionally marketing to African-American and Hispanic homeowners predatory loans with default interest rates of 18 percent.

In 2011, eight homeowners filed suit in the Eastern District of New York, claiming that between 2004 and 2009 the bank “aggressively originated” no income refinancing loans with unfavorable terms to them because they were minority borrowers.

According to the 2014 amended complaint, the bank marketed NINA (No Income No Assets) loans to homeowners with low credit scores but substantial equity in their houses. When issuing these loans, the bank did not consider the homeowners’ ability to repay but valued the loan based on the home’s equity. Homeowners could be charged an interest rate of 18 percent if they were late by 30 days in making a single payment.

The homeowners alleged they were purposely targeted for these loans because of their poor credit and resulting likelihood of default, and that this practice had a disparate impact on African-American and Hispanic borrowers. Specifically, the complaint stated that “[s]ince black and Latino individuals are disproportionately represented among persons with low credit scores, [the bank’s] marketing of these abusive loans to this population ensured that the loans would have their greatest impact on minority homeowners.” The jury found that the bank’s practices constituted violations of the federal fair lending laws and the New York state law.

Six of the plaintiffs were awarded a combined $950,000 in damages, while the jury found that the remaining two homeowners waived their claims upon modifying their loans and were not eligible for damages. The bank has asserted its plan to appeal the decision.

Legal Services NYC, who represented several of the homeowners, stated that the case marks the first time a jury has held a bank liable for reverse redlining.

Lenders that offer loans to consumers with impaired credit should consider evaluating their practices for potential reverse redlining risk.

*Mrs. Moyer is not admitted in the District of Columbia. She is practicing under the supervision of firm principals