The FRB recently hosted a fair lending “hot topics” webinar in conjunction the DOJ, HUD, CFPB, FDIC, OCC, and NCUA. The seven agencies discussed fair lending developments, including the revised HMDA reporting requirements, compliance management for consumer loans, and various issues related to fair lending complaints, investigations, and enforcement.
HMDA and Revised Regulation C:
Eric Wang, Deputy Fair Lending Director of the CFPB’s Office of Fair Lending and Equal Opportunity, emphasized that the CFPB is currently updating its HMDA exam procedures and that the industry should be “on the lookout” for the revised “Getting it Right” guide. He noted that the new HMDA requirements expand reporting to include 48 data elements (from 23, of which 14 have been modified), and 110 data fields (from 39). Addressing industry outcry, Wang confirmed that file resubmission will not be required based upon overall error rates. Instead, resubmission will be required where the error rates of individual fields exceed applicable thresholds. The new data resubmission guidelines also include error tolerances for certain data fields.
Wang stated that the Bureau’s 2018 examinations will prioritize whether entities have made “good faith efforts” to comply with revised Regulation C. Good faith may be shown by the creation of an implementation plan or updates to policies and procedures. Wang reiterated that after the revised rule takes effect, the Bureau’s role will be “diagnostic and corrective, not punitive;” however, he refused to confirm whether the CFPB will use all HMDA data fields in its examinations. He stated that the CFPB has not prioritized “key fields” because it “would like to maintain the flexibility to examine all HMDA data fields [for] accuracy.” Vonda Eanes, Director for CRA and Fair Lending Policy at the OCC, confirmed that all agencies will have access to all HMDA data and, despite the OCC, FDIC and FRB joint guidance prioritizing 37 “key fields,” the OCC “expects to leverage all the additional HMDA data fields” in its fair lending risk analysis.
Notably, the panel failed to clarify the impact of Regulation C’s changes upon lenders’ CRA obligations. Although cautioning that no final decision has been made, Eanes confirmed that the OCC, FRB, and FDIC are considering the issuance of interagency guidance that recognizes the expanded mandatory reporting in revised Regulation C. In particular, for lenders with a sufficient number of originations, the reporting of open end lines of credit is no longer optional. Additionally, the definitions of dwelling, reverse mortgage, and manufactured home have changed. Reporting under the new HMDA data elements is required for applications on which final action is taken on or after January 1, 2018, except that for applicant demographic data the institution has the option to report under the requirements in effect at the time of application or under the 2018 rule requirements regardless of when the application was taken.
Indirect Auto Finance:
Matthew Nixon, Program Director of the NCUA’s Office of Consumer Financial Protection and Access, refused to state whether the NCUA will focus on any “hot topic” fair lending issues in 2018, but noted that it anticipates examinations will reflect the agency’s current focal points—45% related to specific concerns noted by district examiners or regional offices, 20% related to pricing disparities, 30% related to HMDA data integrity, and 5% related to follow-on work from the previous year. When prompted during the question and answer segment, NCUA noted that examinations are risk focused and indirect auto lending programs are reviewed on a case-by-case basis according to the entity’s risk profile (which includes compensation structure, complaints received, input from the district examiner, and oversight and monitoring practices). The NCUA noted that virtually all exams included cursory review of indirect auto lending programs, but only about 10% resulted in more intensive review.
Compliance Management for Consumer Loans:
Katrina Blodgett, Counsel in the FRB’s Fair Lending Enforcement Section of the Division of Consumer and Community Affairs, noted that the FRB engages in risk-focused supervision and expects that an entity’s CMS provide oversight commensurate with the level of pricing discretion provided by each consumer loan program. The FRB expects that an entity clearly communicate the basis for any exceptions offered to its loan officers, including waiving, reducing, or increasing fees. Blodgett encouraged the use of rate sheets to track all exception variables and advised that rate sheets should be reviewed as part of monthly compliance meetings. Moreover, loan officer training should include the proper use of rate sheets. Tara Oxley, Chief of Fair Lending and CRA Examinations at the FDIC, emphasized that fair lending monitoring programs should be conducted portfolio-wide and only limited to a branch-specific analysis where policies and procedures differ across branches. According to Oxley, an entity’s review must include an analysis of its lending data and its pricing exceptions and overrides, regardless of entity size or complexity.
Investigations and Enforcement:
Jacy Gaige, HUD’s Director of the Office of Systemic Investigations, reviewed the agency’s roughly 1,000 fair lending complaints in 2016. Gaige noted that the most common policy-related complaints involved requiring cosigners or unnecessary documentation for applicants with disability income, such as a doctor’s note that a disability is likely to continue. Gaige emphasized that lenders may face FHA liability where unclear policies and procedures create confusion or delay regarding application requirements or where extra help (friendlier service and quicker callback times) are provided for some individuals as compared with protected classes.
With parental leave, HUD has found that lenders have been impermissibly requiring a parent to return to work before income may be counted or impermissibly requiring a letter that an employer expects the employee to return to work. Lenders have also made statements that applicants may change their mind about returning to work or that many people do not return to work after having a baby. Gaige noted that in these situations, elevated damages may be available on account of the emotional distress associated with an early return to work.
Common complaints also included allegations that lender policies allow investor loans for small rental properties but not for group homes (which often include persons with disabilities), prohibit lending on Native American reservations, prohibit lending to those persons with less than $500,000 or more in collateral, or prohibit lending in a specific community based on the false perception of the prevalence of fraud. Novel complaints include lenders’ use of social media to target specific geographic areas or individuals (including use of a network’s parent/non-parent designation).
Marta Campos of the DOJ Civil Rights Division provided no indication of what new direction, if any, the DOJ will take in 2018. Her comments were limited to the BancorpSouth Bank joint investigation with the CFPB, which settled in June 2016. In response to a public question highlighting the dated settlement, Campos stated that there “may be” similar cases coming down the pike. She noted that lenders’ CMS programs should be able to detect similar redlining and underwriting red flags identified in Bancorp.