15 Key Insights from the CFPB Fair Lending Report [Part Two]

The CFPB released their annual Fair Lending Report to Congress earlier this summer. Here is the second part of our two-part blog about the regulatory insights gained from the 2018 Fair Lending Report.

Last week, we published the first of our two-part series about insights we learned from the CFPB's recently released 2018 Fair Lending Report. This is the second installment of that article.

Learn 8 more insights from the CFPB's Annual Fair Lending Report!

In the last post, we covered the following points:

1. It's not clear what name or brand the Bureau is using going forward.
2. Under this administration, the Bureau is reinterpreting its mandate.
3. The Bureau revealed that 45 million Americans are credit invisible or lack credit history.
4. There may be different credit scoring models in the future.
5. The Bureau is serious about re-evaluating its approach to disparate impact.
6. The Bureau is actively fostering internal innovation.
7. There is a long way to go in building relationships with FinTechs.

In the rest of this post, you'll learn the details on the next important lessons from the Fair Lending Report. Let's get into it...

8. Indirect auto lending is no longer the purview of the Bureau.

As of May 2018, the CFPB no longer has the authority to review indirect auto lenders for compliance with ECOA. The report barely mentioned this big change to their enforcement and supervision authority. 

Back in 2013, the CFPB released a bulletin about their approach to regulating indirect auto lenders. Just last spring, Congress passed a resolution invalidating that bulletin using the Congressional Review Act, which President Trump signed. 

The Congressional Review Act states that Congress can disapprove an agency rule within 60 legislative session days of the rule’s publication.

However, here are some lingering questions about whether Congress was legally allowed to invalidate the bulletin, due to both the definition of the bulletin and the timing of the revocation. There is some debate about whether the CFPB’s bulletin qualifies as a formal rule, or whether it’s discretionary agency guidance. In addition, this bulletin was never published in the Federal Register, so it doesn’t have a publication date in the traditional sense. Congress is arguing that, since it was never published, the clock never started ticking. Others disagree, saying that since it was never published, Congress isn’t authorized to invalidate the bulletin.

In this case, Congress took a fairly broad view of their Congressional Review Act authority.

It also presents some interesting questions to financial institutions that are using indirect auto lenders:

• If the indirect auto lenders aren’t liable for Fair Lending risks related to pricing, what about their partner financial institutions? 
• Can the CFPB simply re-issue the same bulletin and get back into indirect auto lending enforcement, if they had the appetite for it?

The Bureau is still looking into the models used in auto lending...but more on that in the next section.

9. The Bureau is focused on risks in mortgage lending, small business lending, and student lending.

When it comes to Fair Lending supervision and enforcement, the Bureau is focused on student lending, mortgage lending, and small business lending in particular. Redlining remains a top priority, and so does HMDA (more on that later).

Here’s what the Bureau had to say about these priorities:

1. Student Loan Origination: The Bureau is focused on determining if there is discrimination in policies and practices governing underwriting and pricing for student loan origination.
   
   
2. Debt Collection and Model Use: The Bureau is working to determine if there is “discrimination in policies and practices governing auto servicing and credit card collections, including the use of models that predict recovery outcomes.”
   
   
3. Mortgage Lending:

In mortgage lending originations, the Bureau is focused on: 

• “Redlining and whether lenders intentionally discouraged prospective applicants living in or seeking credit in minority neighborhoods from applying for credit; 
• “Assessing whether there is discrimination in underwriting and pricing processes as well as steering; and 
• “HMDA data integrity and validation (supporting ECOA exams) as well as HMDA diagnostic work (monitoring and assessing new rule compliance)."

In mortgage servicing, the Bureau is focused on:

• “Whether there is discrimination in the default servicing processes at particular institutions, and focused on whether there are weaknesses in fair lending-related compliance management systems.”
• Enforcement activity in 2018 addressed “potential discrimination in mortgage lending, including the unlawful practice of redlining.”
  
  

4. Small Business Lending:

When it comes to Small Business Lending, the Bureau is assessing if:

• “There is discrimination in application, underwriting, and pricing processes, 
• “Creditors are redlining, and 
• “There are weaknesses in fair lending related compliance management systems.”

This isn’t a huge departure from past initiatives, but the focus on Small Business Lending is an interesting development. We’ll talk more about that next week.

[Read Also: Absolutely Everything You Need to Know about Fair Lending Risk Assessments]

10. The Bureau will again consider the additional data that would be collected about lending to women-owned, minority-owned, and small businesses.

For the past few years, the CFPB has toyed with the prospect of requiring additional data from lenders about their business lending activities, particularly for women-owned, minority-owned, and small businesses, in accordance with Section 1071 of the Dodd-Frank Act. 

Last fall, the CFPB announced that they would delay their work on defining the data collection for lending to women-owned, minority-owned and small businesses in order to focus on HMDA. That wait appears to be over. In the June report, they announced that they will again begin looking at what additional data should be collected.

The Bureau now intends to begin work again on developing rules to implement section 1071. They are kicking off this work with a symposium about small business loan data collection. 

Details about the symposium have not yet been finalized, but will be available on the Bureau’s website.

11. Review of HMDA data continues to be primarily “diagnostic.”

As part of the CFPB’s so-called “Good Faith Provision,” the Bureau has indicated that they do not intend to penalize any financial institution that makes a good faith effort to comply with the new HMDA rule. 

In keeping with this approach, the Bureau has again noted that their review of HMDA data and compliance in 2018 was primarily diagnostic. This diagnostic work primarily consists of monitoring and assessing new rule compliance.

Please note that this Good Faith Provision is only confirmed through 2019. It remains to be seen if the regulators will continue to honor that in 2020, or whether enforcement for HMDA data-related errors will resume.

Here are few more articles about the HMDA changes that might be valuable to you:

• Do You Qualify for the HMDA Small Filer Exemption?
• How HMDA Plus Data is Changing Fair Lending Analytics
• 10 Things to Do After Submitting Your HMDA Data
• Your Quick Guide to the Recent HMDA Changes
• Why Do I Need a HMDA and CRA Transmittal Tool?

12. Much of the rule-making energy in 2018 was focused on HMDA, with the apparent intention to clarify the new HMDA rule and the exemptions.

As mentioned earlier, the Bureau spent a lot of time in 2018 on HMDA data and compliance. In particular, the CFPB is focused on clarifying the HMDA exemptions from the Economic Growth and Regulatory Relief Consumer Protection Act (EGRRCPA).

In addition, the Bureau “intends to engage in a rulemaking to reconsider various aspects of the 2015 HMDA Rule such as the institutional and transactional coverage tests and the rule’s discretionary data points.”

The CFPB’s recent 2018 Supervisory Report went over the potential HMDA changes in more detail, but essentially, they are concerned with ensuring the clarity of the rule and managing the burden of the additional data fields. We expect to be covering this topic in depth as it progresses, so stay tuned.

13. The new HMDA data query tool will be released later this year.

The CFPB also announced that the new HMDA data discovery tool will be released later this summer via the new HMDA Platform.

The old HMDA data tool - called the HMDA Explorer - was not compatible with the new data fields and had not been updated since 2013, according to the Report. The Bureau met with key industry leaders to learn what the new HMDA tool should include, and considered that in their redesign.

The new tool will be called the HMDA Data Browser.

14. Adverse Action notices are still very important.

In the Report, the CFPB also provides some insight into the top violations by category, even though they may not have resulted in any kind of enforcement action.

The most common violations are the following:

• 12 C.F.R. § 1002.4(a): Discrimination on a prohibited basis in a credit transaction. 
• 12 C.F.R. § 1002.9(a)(1), (a)(2), (b)(2), (c): Failure to provide notice to the applicant 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer or adverse action on the application; failure to provide appropriate notice to the applicant 30 days after taking adverse action on an incomplete application; failure to provide sufficient information in an adverse action notification, including the specific reasons for the action taken. 
• 12 C.F.R. § 1002.14(a)(2): Failure to routinely provide an applicant with a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. 

In particular, the Adverse Action notice is an area of note. This is something that was flagged by all the regulatory agencies. As you review your Fair Lending compliance risk, it would be valuable to check that your policies and procedures relating to Adverse Action notices are working as intended.

Related: 52 HMDA Filing Questions Answered by Compliance Experts

15. The Bureau conducted very little actual enforcement activity in 2018.

One of the most significant changes highlighted by the Fair Lending report is simply that there was no enforcement activity at all in 2018. You read that right.

While the number of enforcement actions is typically fairly low (less than 5 in every year except 2013), the fact that there were zero in 2018 is notable.

The number of referrals to the DOJ dropped to just one, the lowest since the CFPB was founded. For reference, there were 11 referrals in 2017, just one year prior.

What does this mean for financial institutions? At some level, it does mean that this version of the CFPB is not interested in enforcement the same way they have been. That may be a kind of relief for compliance professionals.

However, that is no excuse to de-value Fair Lending compliance. The CFPB is still conducting exams and reviewing behavior. Even if you don’t get slapped on the wrist, a finding can easily become a repeat finding if it’s not addressed. 

With the CFPB focused more on prevention and education now, financial institutions have a great opportunity to focus on proactive, innovative, and helpful compliance.

With a little more support and guidance from the regulators, this is a chance to get compliance culture in shape and move forward with improvements that are designed to help your company comply and grow.

Here is a free Fair Lending checklist to help you get started!

Related: How to Build a Strong Fair Lending & Redlining Compliance Management System