You’ve heard the news. CFPB Director Richard Cordray has stepped down. While we don’t yet know for sure exactly what this will mean for the CFPB’s enforcement efforts going forward, we can certainly expect some change.But if you think this means you can relax your compliance vigilance, think again. This is especially true when it comes to fair lending. While swings in the degree of fair lending enforcement may change, the underlying principles will remain, and a financial institution’s activities during periods of lax enforcement will likely be scrutinized when the pendulum swings back the other way.
To help you with that, it can be instructive to look at examiners’ past efforts to promote and enforce fair lending practices. The CFPB’s 2016 Fair Lending Report reviews the bureau’s fair lending enforcement from the past year, showing you what you can expect from fair lending oversight in the months to come.
In 2016, CFPB enforcement actions resulted in offending institutions having to pay approximately $46 million in fines and penalties. The most notable of these was BancorpSouth Bank—which had to pay a total of $10.6 million in penalties and restitution payments for illegal redlining, mortgage underwriting, and pricing discrimination. Another notable one is Toyota Motor Credit Corporation. TMCC had to pay nearly $22 million in restitution payments for charging higher interest rates to African-American, Asian, and Pacific Islander borrowers.
The CFPB’s Fair Lending report includes the findings from the bureau’s many Fair Lending supervision activities throughout 2016. The bureau’s examinations revealed several areas where institutions tend to be lacking in their fair lending compliance programs.
The first area is Home Mortgage Disclosure Act (HMDA) data reporting. CFPB examiners found that several institutions improperly reported actions taken on loans or applications. Regulation C requires financial institutions to submit data they collect and record, as well as any type of action taken on reportable transactions. This is a good reminder to use proper care when inputting your data, especially when it comes to the action code.
There are some HMDA changes coming in 2018. The new amendments clarify certain key terms, such as multifamily dwelling, temporary financing, and automated underwriting system. The amendments also clarify the definition of a reporting error, modify public loan-level HMDA data, and add 25 new data fields that need to be collected and reported. This means that next year examiners will be looking closely at your HMDA collecting and reporting practices. You’ll want to make sure you give HMDA the attention it deserves so you can show that you’re on top of the new changes and so that you have no fair lending issues related to HMDA.
The second area is language services for limited English proficient, or LEP, consumers. Dodd-Frank, ECOA, and Reg. B all require institutions to “ensure the fair, equitable, and nondiscriminatory access to credit” and to “promote the availability of credit.” To accomplish this, many institutions provide services in languages other than English.
Generally, these services were found to be compliant with fair lending regulations. However, the report noted several cases where institutions’ treatment of LEP consumers presented risk. For example, an institution marketed only some of its credit card products to Spanish-speaking consumers, while marketing several additional credit card products to English-speaking consumers. This resulted in discrepancies in treatment, which can land an institution in hot water in a fair lending examination.
The third area is redlining. Redlining is the practice of limiting credit access in certain areas or neighborhoods. The report stated that institutions with strong compliance programs examine lending patterns regularly, look for significant disparities, and carefully monitor marketing campaigns and programs. As we’ve already mentioned, BancorpSouth failed to carefully evaluate this activity, and paid the price.
To wrap up the report, the CFPB reviewed the changes that are coming for fair lending regulations, and outlined its supervisory priorities for 2017. In coming exams, the CFPB will be focused on three areas of fair lending: redlining, mortgage and student loan servicing, and small business lending. For redlining, examiners will be scrutinizing lenders to see whether they have intentionally discouraged prospective applicants from minority neighborhoods. With mortgage and student loan servicing, examiners will be concerned with determining whether race, ethnicity, age, or gender plays a role in a borrower’s difficulty in working with a lender. And finally, with small business lending, the CFPB will be taking an in-depth look at how small business owners, especially women-owned and minority-owned businesses, can better access lending.
If you haven’t already, now is the time to review your institution’s fair lending program. Make sure your policies and practices are up to date and that you address any problem areas before your examiner does.