The CFPB was active in 2014, and 2015 appears to be similarly full of new detailed requirements that will affect a large number of financial institutions engaged in mortgage, auto, and student lending, as well as other forms of consumer credit.
A look back at 2014 begins with the Consumer Financial Protection Bureau’s (CFPB’s) third annual Fair Lending Report to Congress highlighting its work during the year. Released in April 2015, the report describes the CFPB’s efforts to “identify and combat discrimination through research, supervision, enforcement, consumer education, industry guidance and outreach, rulemaking, and interagency engagement,” as stated by Patrice Ficklin, the Director of the CFPB’s Office of Fair Lending and Equal Opportunity. (pg.4)
The CFPB's Fair Lending Report lays out the priorities of the CFPB over the past year, describes how these priorities were developed, and provides insight into where it is headed this year.
In 2014, the CFPB’s key supervision and enforcement priorities continued to be mortgage lending and indirect auto lending. Also on the CFPB’s radar in 2014 and extending into 2015 are credit cards, student loans, and the proposed rule to update the Home Mortgage Disclosure Act (HMDA) regulations to require, among other things, lenders to submit new information as part of their HMDA data.
What is the Risk-Based Prioritization Approach?
To help determine the fair lending areas that may cause consumers the greatest harm, the CFPB uses a “risk-based prioritization approach” to assess qualitative and quantitative factors at the institution, product, and market levels. The factors considered include:
- Complaints and tips – The CFPB reviews fair lending complaints and tips received from consumers, advocacy groups, whistleblowers, and government agencies, in addition to considering public and private fair lending litigation.
- Supervisory and enforcement history – The CFPB reviews previous fair lending work that it and other regulators conducted. It also considers results from prior fair lending reviews of institutions, institutions’ compliance with prior enforcement actions (including remediation efforts), and self-identified fair lending issues raised by institutions. In 2014, it directed institutions to provide approximately $224 million in remediation to about 303,000 consumers.
- Quality of lenders’ compliance management systems – As stated in the report, “The key consideration is that the lower the quality of an institution’s fair lending compliance management system, the higher the institution’s fair lending risk to consumers.” One of the key components comprising a well-developed quality compliance management system is the inclusion of periodic statistical analyses of loan-level data to assess whether potential disparities exist on a prohibited basis in regards to pricing, underwriting, and other decisions involving lending and credit. The CFPB recognizes that “the appropriate scope of an institution’s fair lending compliance management system will vary based on its size, complexity, and risk profile.” (pg. 14)
- Data analysis – The CFPB’s prioritization approach is “driven by quantitative data analysis that evaluates developments and trends at the institution and market levels.” For instance, the CFPB analyzes data, such as HMDA data, in identifying “those lenders that appear to deviate significantly from their peers in, for example, the extent to which they provide access to credit in communities of color.” (pg. 14)
- Market insights – Consumer financial markets, products and services are monitored to identify emerging developments and trends. For example, the new rules affecting mortgage loan originator compensation may necessitate increased focus on mortgage lenders’ business models and pricing policies and the associated potential for fair lending risks.
Mortgage Lending in 2014
In the mortgage lending area, as with other lending areas, institutions are reviewed for potential violation of the Equal Credit Opportunity Act (ECOA). These ECOA-targeted reviews typically include statistical analyses of the institution’s data to assess whether potential disparities exist on a prohibited basis. ( pg. 15) As of the publication of the report, ECOA-targeted reviews under the CFPB’s Fair Lending supervision program have encompassed institutions comprising approximately 40% of the applications and originations reported under HMDA. (pg. 9) Redlining, underwriting, and pricing have been the main focus areas for potential fair lending risk. Data integrity and validation of HMDA data are also of heightened concern and central to evaluation efforts and the ability to ensure fair lending compliance.
Reviews which result in the CFPB believing that a creditor has violated ECOA must be referred to the Department of Justice (DOJ). In the mortgage lending area, the CFPB’s referrals to the DOJ included potential discrimination claims on the basis of gender, marital status, race, national origin, age, and receipt of public assistance. One 2013 settlement with a bank provided for the distribution of $35 million dollars in relief to minority borrowers. In 2014, the CFPB coordinated with the DOJ and the settlement administrator in this case to facilitate the distribution of the funds.
The CFPB has recently issued two guidance documents regarding creditors’ obligations to provide non-discriminatory access to credit for mortgage applicants relying on public assistance income from Social Security Disability Income and HUD’S Section 8 Housing Choice Voucher (HCV) Homeownership Program. In both guidances, the CFPB warns against disparate treatment and disparate impact as potential violations of ECOA.
Indirect Auto Lending in 2014
In terms of auto finance, the CFPB’s focus is indirect auto lending, and in particular, discretionary dealer markup and discrimination resulting from compensation policies that allow auto dealers to help set loan prices. As with mortgage lending, the CFPB oversees and enforces compliance with ECOA in indirect auto lending. In 2014, the CFPB’s referrals to the DOJ in the auto finance area included potential discrimination claims on the basis of race and national origin.
Additional “hot topics” in the auto lending arena include:
- A recently published rule by the CFPB to extend its supervisory authority to larger nonbank auto finance companies, specifically companies that make, acquire, or refinance 10,000 or more loans or leases in a year. Published on June 10, 2015, the rule Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service will take effect 60 days after publication in the Federal Register.
- The use of a proxy methodology for the CFPB to address unidentified race and ethnicity of applicants/borrowers. While acknowledging critical responses to the September 17, 2014 White Paper Using Publicly Available Information to Proxy for Unidentified Race and Ethnicity, the CFPB remains committed to the continued development of the proxy methodology. (pg. 40) See also Dr. Carole Amidon's assessment of CFPB's methodology in a previous ERS Group blog.
Other Credit Areas in 2014
In addition to mortgage lending and auto finance, the CFPB also referred potential ECOA violations to the DOJ in the areas of credit cards and student lending. Across all credit areas, the CFPB referred a total of 15 potential credit discrimination matters to the DOJ in 2014.
Looking Ahead to Finalization of the HMDA Rule
Looking ahead, a key area to follow is the CFPB’s proposal to expand financial institutions covered under HMDA reporting requirements, to increase certain lenders’ reporting frequency of HMDA data, and to require lenders to submit new information under HMDA. Before the commenting period closed at the end of October 2014, the proposal engendered over 400 comments, and is expected to be finalized in July of this year. The proposed rule Home Mortgage Disclosure Act (Regulation C) is available in the Federal Register.
Under the proposal, both depository and non-depository institutions that meet the “financial institution” criteria and originate at least 25 covered loans in the prior year, excluding open-end lines of credit, would be required to report HMDA data. It is anticipated that this proposed change in HMDA coverage would increase the number of non-depository institutions covered by HMDA by as much as 40 percent, and increase the number of reported originations and applications under potential review.
For most financial institutions (those reporting at least 75,000 covered loans, applications, and/or purchased covered loans, combined, annually), the new rules would require submission of HMDA data on a quarterly rather than annual basis. The CFPB believes that “timelier data would improve the ability of the Bureau and the appropriate agencies to identify current trends in mortgage markets, detect early warning signs of future housing finance crises, and determine, in much closer to “real time,” whether financial institutions are fulfilling their obligations to serve the housing needs of communities in which they are located, and to assist public officials in their determination of the distribution of public sector investments in a manner designed to improve the private investment environment.” (79 FR 51734) HMDA data made available to the public will still be released on an annual basis.
If adopted, this proposal would require lenders to provide 37 new data fields as part of their HMDA data submission. Some of the new data fields (17 fields) are part of the Dodd-Frank requirements while others (20 fields) proposed by the CFPB are to address “data gaps.”(79 FR 51733) The additional data fields include borrower/applicant age and credit score, information relating to the points and fees payable at origination, the difference between the annual percentage rate (APR) associated with the loan and a benchmark rate or rates for all loans. The CFPB believes this “will yield more consistent and useful data and better align [the HMDA regulations] with the current housing finance market” (79 FR 51733) and help to better assess the fair lending risk from underwriting or pricing. In particular, the benefit of having borrower/applicant age information is specifically mentioned as current “HMDA data lack a direct means of measuring the age of applicants, which limits the ability of government agencies and community groups to monitor and enforce the ECOA and Regulation B against age discrimination in mortgage markets.” (79 FR 51841)