Fair Lending   Industry Insight   

Fair Lending Lull Not a Cause for Complacency

Federal regulators have demonstrably slacked off enforcement of fair lending compliance in recent years.

Federal enforcement could rebound as old issues related to fair lending—such as redlining—gain momentum in the near future, and as relatively new issues—such as concerns about fair servicing—gain traction. Despite the current lull in federal fair lending scrutiny, several states are stepping in to fill the gap. Further, when regulators have taken enforcement action against lenders, they consider as evidence records going back many years and not just the lenders’ one prior examination cycle. This makes it all the more imperative for lenders to make sure their policies and procedures adhere to the letter and spirit of all such regulations.

Federal referrals trending down

A survey of referrals by bank regulatory agencies to the Department of Justice clearly indicates the downward trend engendered by a noticeably pro-business environment. (“Looking Back and Forward” presentation by Bill Dedman at the CRA & Fair Lending Colloquium in Orlando on November 11, 2019).

  • In 2001-2008, the FDIC referred 12 fair lending cases; in 2009-2016, 46 cases; in 2017-2018, two cases.
  • In 2001-2008, the Federal Reserve referred eight fair lending cases; in 2009-2016, 19 cases; in 2017-2018, zero cases.
  • In 2001-2008, the Office of the Comptroller of the Currency referred zero fair lending cases; in 2009-2016, four cases; in 2017-2018, two cases.

Perhaps most interesting are the statistics related to the Consumer Financial Protection Bureau which came into existence in 2011. By 2016, it had referred 26 fair lending cases to the Department of Justice. Through 2018, it had referred only one.

On the surface, then, it would be easy to conclude that the federal government is much more apt now to give lenders relatively lenient scrutiny than in the past—and thus lure lenders into complacency.

What is past is prologue

Such potential complacency could be extremely dangerous.

For example, a close reading of the CFPB’s Fair Lending Report, as issued in September 2019 (the end of the government’s 2018 fiscal year), shows that it implemented enforcement actions against four lenders in 2018: one was a settlement for alleged redlining and pricing discrimination in mortgage lending; one for overcharging African-Americans and Hispanics on automobile loans; another one for overcharging various minority customers on automobile loans; and another for overcharging minority borrowers on mortgage loans. Then, in the CFPB’s report issued February 3, 2020, the Bureau reported filing in 2019 a fair lending action against Freedom Mortgage for HMDA and RegC violations and referring one matter to the DOJ about discrimination pursuant to Section 706(g) of the ECOA.

Granted, the CFPB in its report says that it has worked to oversee compliance with enforcement orders that it and federal courts issued “in prior years.” However, the CFPB acknowledged that, at the end of fiscal year 2018, it “has a number of pending investigations” in progress. The message is clear: the federal government has not entirely abdicated enforcement of fair lending laws and regulations.

Equally relevant is evidence that federal investigators are apt to review lenders’ records going back much before a single inspection cycle to make a case of discrimination. In August, the Department of Justice settled a suit it brought against a Midwestern bank for redlining violations against a predominantly African-American population.

The DOJ investigators accused the bank of violating the Fair Housing Act and the Equal Credit Opportunity Act. To make their case, they produced evidence taken from the bank’s Home Mortgage Disclosure Act statistics for each year between 2011 and 2017—or seven years’ worth of records (DOJ Article here).

The message here: records do not go away with time.

States, others take up the slack

Meanwhile, it has become apparent that some state law enforcement agencies feel compelled to take up the slack caused by the perceived hands-off policy of the federal CFPB. At least five states have formally established their own “mini-CFPBs” within their state attorney general’s office.

Of note, the Pennsylvania attorney general, through its consumer finance protection directorate, in September opened a redlining investigation related to reports that white borrowers in Philadelphia received 10 times as many conventional mortgage loans as African-Americans in the same geographic area. (Inside Mortgage Finance (imfpubs.com) on 9/11/19 – “Pennsylvania AG Targets Redlining”).

Hand in hand with this trend by the state attorneys general, it should come as no surprise that the private law sector sees a niche which they can fill. As the states boost their efforts to backstop the federal regulators, law offices may see an opportunity to represent lenders against accusations of fair lending violations. In other words, enough pressure by states has created a market for law offices to exploit. A recent example of this is the report that the national law firm O’Melveny and Myers LLP launched a new practice group specifically to represent companies and others targeted by state attorneys general in regulatory enforcement actions, including those involving financial services. (Law 360 – “O’Melveny Launches State Regulatory Defense Group” — Article).

Old issues new again

Again, a close reading of CFPB’s year-end fair lending report reveals that, at least on paper, the agency continues to focus on specific areas. Discussed are mortgage originations, including underwriting and steering, redlining, debt collection and monitoring, student lending, including underwriting and pricing, and more.

Put succinctly, the bureau’s report says: “Supervision activities in 2018 ranged from assessments of institutions’ fair lending compliance management systems to in-depth reviews of products or activities that may pose heightened fair lending risks to consumers. As part of its fair lending supervision program, the Bureau conducted three types of fair lending reviews: ECOA baseline reviews, ECOA targeted reviews, and HMDA data integrity reviews.”

It’s plain to see that such reviews remain high on CFPB’s professed agenda. As a result, financial institutions cannot afford to put their fair lending programs on the back burner.

Emerging issue: Fair servicing

Relatively new to the stage, and bringing with it considerable uncertainty, is the issue of fair servicing—that is, being able to demonstrate that an institution’s responses to various adjustments once loans are made are, themselves, administered fairly and transparently.

This is a wide open area in which currently there are no set standards. Different types of loans may engender different types of servicing responses. A default on an automobile loan, for example, may result in a simple repossession of the car. But a default on a mortgage loan usually calls for other actions, such as potential loan modifications, rate adjustments, or even forgiveness of some payments—the last option is foreclosure. Default on credit cards may result in other responses—maybe debt consolidation or other options.

The point is, however loan servicing is applied, it has to be done, somehow, in accordance with fair lending laws and regulations. That could mean documenting all decisions and reasons for those decisions. It almost certainly will mean establishing methods to collect, analyze, and present in a reasonably easy way the potentially huge data set in a given institution.

For some institutions with relatively few loan servicing situations, this conceivably could be done manually or occasionally with third-party help. For large servicers, new technological solutions may be the answer. In any case, fair servicing as a regulatory issue has come over the horizon and is approaching fast.

A lull is just a lull

Federal fair lending regulators are not going away, even if, at present, their focus is less on enforcement than it used to be. State attorneys general in some areas are filling the enforcement gap. The old fair lending issues also are not going away, and at least one new issue—fair servicing—is gaining recognition.

All of which is to say: Lenders should make sure all their fair lending policies, procedures, and documentation remain fresh, are actively used, and are effective. Now is not the time to be complacent.

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Ed Kramer

Senior Advisor

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