Three Things to Know About PPP Fair Lending Scrutiny
In response to the COVID-19 pandemic, the Consumer Financial Protection Bureau (CFPB) recently announced that it will adjust its supervision program by rescheduling a portion of its planned examination work. Instead, the agency will conduct prioritized assessments, which it describes as higher-level inquiries intended to cover a greater number of institutions and help the CFPB ensure that entities are attentive to practices that may result in consumer harm. Among the areas the CFPB intends to prioritize is compliance by Paycheck Protection Program (PPP) lenders with the fair lending laws. This Advisory answers some common questions from PPP lenders who may receive CFPB requests for assessments.
Why is the CFPB Assessing PPP Lending?
Because Congress established the PPP as an expansion of the Small Business Administration's 7(a) loan program and, the SBA maintains oversight of PPP lenders. At the same time, the CFPB has announced that it will assert its supervisory authority under 12 U.S.C. § 5515 to conduct assessments of large banks and credit unions that participated in the PPP. Specifically, the CFPB intends to ensure compliance with the Equal Credit Opportunity Act, as implemented by Regulation B, which covers business credit and prohibits creditors from discriminating against any applicant on the basis of a factor that is not related to creditworthiness (e.g., race, national origin, sex). According to the CFPB, it has reviewed and analyzed current COVID-related market developments and determined that PPP lending was among the issues that were most likely to pose a risk to consumers.
How will the CFPB Assess PPP Lenders' Compliance with the ECOA?
The CFPB historically has relied on a combination of qualitative and quantitative data to assess potential fair lending harm to consumers and where to focus its supervisory and enforcement efforts. The CFPB's quantitative data analysis consists of the evaluation of trends in particular loan products and comparisons of data with peer institutions. For PPP lending, such quantitative data analysis could include proprietary information collected by the SBA or detailed loan-level data made publicly available by the SBA and Treasury. The CFPB may analyze such data to identify whether indications exist that a PPP lender may have engaged in a discriminatory pattern or practice.
Qualitative data includes information received through consumer complaints, whistleblowers, and other third parties. In addition, the CFPB's Associate Director of Supervision, Enforcement & Fair Lending recently stated that the CFPB is requesting the following information to assess potential fair lending risk created by lenders participating in the PPP:
- The steps a lender is taking to ensure it complies with fair lending laws when implementing the PPP;
- Any additional restrictions a lender has placed on PPP loans beyond what is required by the SBA; and
- The steps a lender is taking to ensure the lender complies with Regulation B's adverse action notice requirements.
How Can PPP Lenders Assess Their Exposure?
The CFPB has already begun requesting assessments of financial institutions' PPP lending and, as in the past, is likely to follow a data-driven approach and prioritization by assessing the largest participants in the PPP program first and then proceeding down the list. To assess their potential exposure and prepare for the CFPB's prioritized assessments, PPP lenders should consider the following:
- Evaluating the factors considered in developing the institution's PPP lending program, including the policies, procedures, and controls to mitigate fair lending risk;
- Analyzing whether any aspect of its PPP lending program could be viewed as restricting access to certain prospective PPP borrowers;
- Evaluating the institution's compliance with, and recordkeeping relating to, Regulation B's adverse action notice requirements; and
- Retaining an economic consultant to conduct statistical analyses of data available to the institution.
PPP lenders evaluating these issues should consider memorializing their findings in preparation for CFPB assessment requests. In addition, given the interest from private litigants relating to the PPP, financial institutions should take steps to assure that privilege attaches to any work product to help protect the institution in the event of future third-party litigation or government enforcement.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.