CFPB Announces 2017 Fair Lending Supervision and Enforcement Priorities: Redlining, Mortgage and Student Loan Servicing, and Small Business
In late April, the Consumer Financial Protection Bureau (CFPB) released its 2017 Fair Lending Report (Report) outlining both supervision and enforcement activities for 2016 as well as the agency's priorities for 2017. Even as uncertainty around the CFPB's future persists, the Report is a clear indication that the agency will continue its aggressive approach in enforcing the Equal Credit Opportunity Act (ECOA) and the Home Mortgage Disclosure Act (HMDA). Critically, the Report states that CFPB will increase its focus in the coming year on redlining, mortgage and student loan servicing, and small business lending.
The Report confirms that the agency will continue its "risk-based prioritization approach" to addressing perceived fair lending-related consumer harm, using a variety of data sources to determine which products, institutions, or industries should be areas of focus. These data sources include:
- Market monitoring;
- Reviews of consumer complaints;
- "Tips and leads" from advocacy groups, whistleblowers, and other government agencies;
- Analysis of the supervisory and enforcement history of institutions;
- Self-reported compliance issues; and
- Agency analysis of HMDA and other data.
At the institution level, CFPB will continue to focus on lenders' compliance management systems (CMS), ensuring that the systems are appropriate for each institution's size, complexity, and risk profile. The agency's previously released standards state that common features of appropriate fair lending CMS include:
- An up-to-date fair lending policy statement;
- Regular fair lending training for all employees involved with any aspect of the institution's credit transactions, as well as all officers and board members;
- Ongoing monitoring for compliance with fair lending policies and procedures, and appropriate corrective action if necessary;
- Ongoing monitoring for compliance with other policies and procedures that are intended to reduce fair lending risk (such as controls on loan originator discretion), and appropriate corrective action if necessary;
- Review of lending policies for potential fair lending violations, including potential disparate impact;
- Depending on the size and complexity of the financial institution, regular statistical analysis, as appropriate, of loan-level data for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction, to include both mortgage and non-mortgage products such as credit cards, auto lending, and student lending;
- Regular assessment of the marketing of loan products; and
- Meaningful oversight of fair lending compliance by management and, where appropriate, the financial institution's board of directors.1
The Report notes that CFPB's focus in the past several years on mortgages (both pricing and underwriting issues), indirect auto loans, and credit cards was a result of risk-based prioritization using the factors outlined above.
The Report states that in the coming year, CFPB will prioritize the following areas:
- Redlining – The inclusion of redlining as an increased area of focus for the agency signals that it likely will push ahead with the type of redlining theory announced in the watershed Hudson City Savings Bank case. Even though there are indications that the Department of Justice may not be as receptive to referrals in the current environment, it is important to note that CFPB has independent authority to enforce ECOA. In light of this authority, lenders should take note of the series of factors recited in the Report that have formed the basis of previous consent orders, including peer group HMDA data analysis, marketing, physical presence, CRA assessment area determinations, and lending policies and procedures, among others, and should consider whether current monitoring is sufficient to remain compliant.
- Mortgage and student loan servicing – The inclusion as a focus area of servicing in the two largest lending markets suggests lenders should ensure that servicing efforts are incorporated into any ongoing data analysis and auditing of servicing practices, whether by lenders themselves or third-party vendors.
- Small business lending – The Report states that Congress made enforcement of the fair lending laws with respect to women-owned, minority-owned, and small businesses a priority in the Dodd-Frank Act, which requires institutions to collect and submit related data to CFPB.2 While the report acknowledges that CFPB will need to rely on the expertise of and coordinate with other agencies, the inclusion of small business lending as an area of focus signals that the agency is now prepared to evaluate this area for fair lending purposes.
In addition to setting the priorities for the coming year, the Report includes several points of note for lenders:
- The Report's supervision and examination highlights state that CFPB "continues to encourage lenders to provide assistance" to consumers with limited English proficiency, while noting that institutions offering language services must do so in a manner that is beneficial to consumers and in compliance with ECOA and other applicable laws. The Report contains information regarding practices that did not result in supervisory or enforcement action, such as those of bilingual or multilingual customer service agents and translations of certain documents sent to borrowers (such as monthly statements and payment assistance forms). However, the practice of offering language services for certain products within a product type only (for example, providing documentation in Spanish for only certain credit cards) was found by CFPB to raise potential fair lending concerns. Lenders should carefully review any offerings provided in languages other than English to ensure they are provided on a non-discriminatory basis.
- The Report notes that as of January 1, 2018, HMDA-reporting institutions will be required to submit additional data points to the agency. These data points include age, credit score, debt-to-income ratio, combined loan-to-value ratio, property value, application channel, as well as a number of data points describing specific loan terms. The collection of these additional data points may lead to additional scrutiny of lender treatment of applicants in a number of product areas.
- The Report makes clear that CFPB will continue to pursue aggressively the supervision and enforcement of ECOA and HMDA, even as the House Financial Services Committee is considering legislation that would drastically alter the agency's future. As a result, covered financial institutions should continue to monitor their lending performance in all product areas (with specific emphasis on potential redlining exposure) and also should consider whether compliance programs in servicing and small business lending could be enhanced.
Consumer Financial Protection Bureau, Fair Lending Report of the Consumer Financial Protection Bureau at 13-14 (Apr. 2014).