Supreme Court Rules that Cities Can Sue Banks for Predatory/Discriminatory Lending
The U.S. Supreme Court has ruled, by a 5-3 majority, that the city of Miami was authorized to bring lawsuits based on allegations that banks engaged in financial-crisis-era discriminatory lending. The city alleged that the banks had intentionally and disproportionately issued risky mortgages on unfavorable terms to minority borrowers. That led, the city said, to segregation and foreclosures, resulting in falling property values and damage to its property tax base.
The Court ruled that the Fair Housing Act conferred standing on the city to sue the banks because Congress had meant to include cities among the "aggrieved parties" who can assert claims under the law. The city will have to establish that the banks caused direct harm to the city, which may be a very difficult standard to meet. The Court has remanded the case back to the appellate court to review whether the banks' alleged misconduct has a "direct relation" to the injuries alleged. That decision will determine whether the lawsuit can ultimately go forward. Several other local governments in Illinois, Georgia, and California are pursuing similar claims against mortgage lenders.
CFPB Report Outlines Best Strategies for Promoting Diversity and Inclusion in the Mortgage Industry
The Consumer Financial Protection Bureau (CFPB) has released a report that outlines a number of strategies for promoting diversity and inclusion (D&I) in the mortgage industry, presents the business case for diversity, and provides current D&I approaches and practices used in the industry.
D&I has been a foundational principle of the CFPB since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Specifically, Section 342 of the Act created Offices of Minority and Women Inclusion (OMWI) at all federal financial regulatory agencies, including the CFPB. OMWIs are responsible for promoting diversity and inclusion in employment and procurement practices at their own agencies, and within the financial entities they regulate. Pursuant to that mission, the April 27, 2017, report came out of a roundtable meeting from CFPB’s OMWI which included representatives from larger and smaller banks, nonbank financial companies, and federal agencies.
The report first highlights the notion that a diverse and inclusive workforce is important to help mortgage industry participants attract and retain the talent and perspective necessary to solve complex issues, create innovative solutions, and improve business outcomes.
Next, the report shares strategies and best practices for creating a D&I program, including:
- Sustaining a D&I program requires “buy-in” and accountability from leadership. A top-down approach reduces organizational resistance and causes employees to more likely understand the company’s position and be an active participant in D&I efforts. In addition, proper accountability creates a focus that directs D&I efforts to the goals set by management and enhances the organization’s likelihood of achieving its goals.
- The need to clearly define “diversity and inclusion” so that both employees and consumers can more clearly understand the broad nature of D&I programs and be able to see themselves included in such definitions.
- The need to make the business case for diversity, which includes diversifying workforces and employee bases in order to more effectively meet the needs of diverse consumers, as well as capitalize on a robust and diverse talent pool. More specifically, the report notes that when the diversity of the workforce is aligned with the demographics of targeted consumers, there is a greater likelihood of increasing business opportunities.
- The importance of data, as data collection and analysis play an integral role in supporting many D&I programs. The report explains that understanding the demographics of an organization’s workforce is key to ensuring that it reflects the available talent pools as well as customer bases.
In addition to the CFPB OMWI, the Bureau plans to work with the other OMWIs to host additional roundtables that will expand upon the business case for diversity and inclusion. The report concludes by encouraging entities to develop a D&I program that best fit their needs.
CFPB Spring 2017 Supervisory Highlights Focuses on Mortgage Origination/Servicing, Student Loan Servicing Deficiencies, Service Provider Exams
The CFPB recently released Spring 2017 edition of Supervisory Highlights covers supervisory activities generally completed between September and December 2016. The report indicates that supervisory resolutions resulted in restitution payments of approximately $6.1 million to more than 16,000 consumers and notes that “[r]ecent non-public resolutions were reached in several auto finance origination matters.” It also indicates that recent supervisory activities have either led to or supported five recent public enforcement actions, resulting in more than $39 million in consumer remediation and $19 million in civil money penalties. The five enforcement actions are described in the report. (They include the CFPB’s March 2017 consent order with Experian and its December 2016 consent order with Moneytree.)
The report includes the following:
Mortgage origination. The report discusses compliance with the Regulation Z ability-to-repay (ATR) requirements, specifically how examiners assess a creditor’s ATR determination that includes reliance on verified assets rather than income. It states that to evaluate whether a creditor’s ATR determination is reasonable and in good faith, examiners will review relevant lending policies and procedures and assess the facts and circumstances of each extension of credit in sample loan files. After determining whether a creditor considered the required underwriting factors, examiners will determine whether the creditor properly verified the information it relied upon to make an ATR determination. When a creditor relies on assets and not income for an ATR determination, examiners evaluate whether the creditor reasonably and in good faith determined that the consumer’s verified assets were sufficient to establish the consumer’s ability to repay the loan according to its terms in light of the creditor’s consideration of other required ATR factors (such as the consumer’s mortgage payments on the transaction and other debt obligations). The report states that in considering such factors, a creditor relying on assets and not income could, for example, assume income is zero and properly determine that no income is necessary to make a reasonable determination of the consumer’s ability to repay the loan in light of the consumer’s verified assets. (The report notes that a creditor that considers monthly residual income to determine repayment ability for a consumer with no verified income could allocate verified assets to offset what would be a negative monthly residual income.)
The report also discusses a creditor’s reliance on a down payment to support the repayment ability of a consumer with no verified assets or income. It states that a down payment cannot be treated as an asset for purposes of considering a consumer’s assets or income under the ATR rule and, standing alone, will not support a reasonable and good faith determination of ability to repay. The report also indicates that even where a loan program as a whole has a history of strong performance, the CFPB “cannot anticipate circumstances where a creditor could demonstrate that it reasonably and good faith determined ATR for a consumer with no verified income or assets based solely on down payment size.”
Mortgage servicing. The report indicates that examiners continue to find “serious problems” with the loss mitigation process at certain servicers, including “one or more servicers” that after failing to request additional documents from borrowers needed to obtain complete loss mitigation applications denied the applications for missing such documents. In particular, examiners found that “one or more servicers” did not properly classify loss mitigation applications as facially complete after receiving the documents and information requested in the loss mitigation acknowledgment notice and failed to provide the Regulation X foreclosure protections for facially complete applications to those borrowers. Examiners also determined that “servicer(s)” violated Regulation X by failing to maintain policies and procedures reasonably designed to properly evaluate a loss mitigation applicant for all loss mitigation options for which the applicant might be eligible. Another servicing issue observed by examiners was the use of phrases such as “Misc. Expenses” or “Charge for Service” on periodic statements. Examiners found such phrases to be insufficiently specific or adequate to comply with the Regulation Z requirement to describe transactions on periodic statements.
Student loan servicing. Examiners found that “servicers” had engaged in an unfair practice by failing to reverse the financial consequences of an erroneous deferment termination, such as late fees charged for non-payment when the borrower should have been in deferment, and interest capitalization. Examiners also found that “one or more servicers” had engaged in deceptive practices by telling borrowers that interest would capitalize at the end of a deferment period but, for borrowers who had been placed in successive periods of forbearance or deferment, capitalized interest after each period of deferment or forbearance. Although the CFPB provides no support for this statement, it asserts that “[r]easonable consumers likely understood this to mean interest would capitalize once, when the borrower ultimately exited deferment and entered repayment.”
Service provider examinations. We recently blogged about the announcement made at an American Bar Association meeting by Peggy Twohig, the CFPB’s Assistant Director for Supervision Policy, that the CFPB had begun to examine service providers on a regular, systematic basis, particularly those supporting the mortgage industry. In the report, the CFPB discusses its plans to directly examine key service providers to institutions it supervises. It states that its initial work involves conducting baseline reviews of some service providers to learn about their structure, operations, compliance systems, and compliance management systems. The CFPB also confirms that “in more targeted work, the CFPB is focusing on service providers that directly affect the mortgage origination and servicing markets.” The CFPB plans to shape its future service provider supervisory activities based on what it learns through its initial work.
Fair lending. The report indicates that as of April 2017, examiners are relying on updated proxy methodology for race and ethnicity in their fair lending analysis of non-mortgage products. The updated methodology reflects new surname data released by the U.S. Census Bureau in December 2016.
Spike and trend complaint monitoring. The report indicates that, for purposes of its risk-based prioritization of examinations, the CFPB is now continuously monitoring spikes and trends in consumer complaints. To do so, the CFPB is using an automated monitoring capability that relies on algorithms to “identify short, medium, and long-term changes in complaint volumes in daily, weekly, and quarterly windows.” The CFPB states that the tool works “regardless of company size, random variation, general complaint growth, and seasonality” and is intended to be an “early warning system.” Unfortunately, the validity of the complaints does not seem to factor into the algorithm.
CFPB Proposes Revisions to HMDA Final Rule
The CFPB has proposed substantive changes and technical corrections to the 2015 Home Mortgage Disclosure Act (HMDA) Final Rule (Final Rule) amending Regulation C. The proposal, which is discussed in more detail here, would clarify certain key terms under the Final Rule, including temporary financing, automated underwriting system, multifamily dwelling, extension of credit, income, and mixed-use property.
The proposal also:
- describes the CFPB’s plans to create an online geocoding tool to avoid errors in the reporting of census tracts and provide protection from HMDA or Regulation C liability if the tool is used as intended
- provides clarification regarding the selection and reporting of ethnicity and race information
- clarifies reporting issues with respect to Regulation Z disclosures
- provides guidance on reporting multiple credit scores
- clarifies how the reporting thresholds apply and expressly permits voluntary reporting by financial institutions that do not meet the reporting thresholds
- establishes transition rules for the loan purpose and loan originator identifier data points
Most of the proposed amendments would take effect on January 1, 2018. Interested parties should assess if programming and operational changes that would be necessary based on the proposals can be appropriately completed by January 1, 2018.
CFPB Identifies 2017 Priorities In Annual Fair Lending Report
In its new annual report covering its fair lending activities during 2016, the CFPB has identified the following three areas on which it “will increase our focus” in 2017:
- Redlining. The CFPB “will continue to evaluate whether lenders have intentionally discouraged prospective applicants in minority neighborhoods.”
- Mortgage and Student Loan Servicing. The CFPB “will evaluate whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a new solution with the servicer because of their race, ethnicity, sex, or age.”
- Small Business Lending. “Congress expressed concern that women-owned and minority-owned businesses may experience discrimination when they apply for credit, and has required the CFPB to take steps to ensure their fair access to credit. Small business lending supervisory activity will also help expand and enhance the Bureau’s knowledge in this area, including the credit process; existing data collection process; and the nature, extent, and management of fair lending risk.”
The three 2017 priority areas are the same as those identified by Patrice Ficklin, Associate Director of the CFPB’s Office of Fair Lending, in her December 2016 blog post that outlined the CFPB‘s fair lending priorities for 2017. However, unlike Ms. Ficklin’s blog post, the fair lending report includes the CFPB’s plans to ramp up its small business lending supervisory activity.
The report states that in 2016, CFPB fair lending supervisory and public enforcement actions resulted in approximately $46 million in remediation. In the report’s section on supervisory activities, the CFPB reviews information previously provided in its June 2016 Mortgage Servicing Special Edition of Supervisory Highlights and its Summer 2016 and Fall 2016 editions of Supervisory Highlights. In the section on enforcement, the CFPB reviews several fair lending public enforcement actions and its implementation of several consent orders. The report also discusses HMDA warning letters sent by the CFPB in October 2016 and notes that in 2016, the CFPB referred eight matters to the Department of Justice. The CFPB states that at the end of 2016, it had a number of pending redlining investigations as well as a number of pending investigations in other areas. It is unclear how much collaboration between the CFPB and the Department of Justice will occur in the Trump administration.
In the section on rulemaking, the CFPB discusses its final rule amending Regulation C (which implements HMDA) and related HMDA/Regulation C developments. The CFPB also discusses the status of the new uniform residential loan application, the collection of race and ethnicity information under Regulation B, and its March 2017 proposal regarding amendments to Regulation B to facilitate Regulation C compliance and address other issues.
In discussing its progress in developing rules on the collection of small business lending data to implement Section 1071 of Dodd-Frank, the CFPB tracks verbatim much of what was stated in last year’s fair lending report. (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.) As it did last year, the CFPB states that the first stage of its Section 1071 work will be focused on outreach and research, after which it “will begin developing proposed rules concerning the data to be collected and determining the appropriate procedures and privacy protections needed for information-gathering and public disclosure.” The report again states that the CFPB “has begun to explore some of the issues involved in the rulemaking, including engaging numerous stakeholders about the statutory reporting requirements.” This year’s report adds the statement above that the CFPB intends to use its future small lending supervisory activity to “help expand and enhance the Bureau’s knowledge in this area, including the credit process; existing data collection processes; and the nature, extent, and management of fair lending risk.”
Two other sections of the report discuss the CFPB’s coordination with other federal agencies on fair lending issues and outreach to industry and consumers (such as through speaking engagements and roundtables, blog posts, and supervisory highlights). The last section of the report is intended to satisfy certain ECOA and HMDA reporting requirements, including providing a summary of other agencies’ ECOA enforcement efforts and reporting on the utility of certain HMDA reporting requirements.