On July 28, 2020, the CFPB issued a request for information (“RFI”) seeking public input on how best to create a regulatory environment that expands access to credit and ensures consumers and communities are protected from discrimination in all aspects of credit transactions. The Bureau issued the RFI in lieu of a symposium it had planned to host this fall on Equal Credit Opportunity Act (“ECOA”) issues.
Concurrently, CFPB Director Kathleen Kraninger issued a blog post (entitled “The Bureau is taking action to build a more inclusive financial system”) explaining that the Bureau seeks to play a leading role in the national conversation about racial inequality by taking action concerning fair treatment and equitable access to credit. Toward that end, the CFPB is “taking steps to help create real and sustainable changes in our financial system so that African Americans and other minorities have equal opportunities to build wealth and close the economic divide.” According to Director Kraninger, issuance of the RFI – with the goal of establishing clear standards to help minorities – is the first step in that effort.
The information sought in the CFPB’s RFI is designed to help the Bureau explore ways to promote access to credit, identify opportunities to prevent credit discrimination, encourage responsible innovation, and address regulatory uncertainty. In particular, the Bureau seeks to explore “cutting-edge issues” at the intersection of fair lending and innovation and develop “viable solutions” to regulatory compliance challenges financial institutions face in complying with ECOA and Regulation B. Specifically, the CFPB seeks public comment on whether it should provide additional clarity or guidance on the following issues:
- The CFPB’s approach to disparate impact analysis under ECOA and Regulation B
- Ways in which creditors may be encouraged to provide assistance, products or services to limited English proficiency (“LEP”) borrowers
- How to facilitate greater usage of special purpose credit programs
- Suggestions to encourage the use of affirmative advertising to traditionally disadvantaged consumers and communities
- Recommendations for better meeting the credit needs of small businesses, particularly minority-owned and women-owned firms
- The CFPB’s interpretation of ECOA’s prohibition on discrimination on the basis of sex following the U.S. Supreme Court’s recent decision in Bostock v. Clayton County
- The scope of federal preemption of state law when it is inconsistent with ECOA and Regulation B
- Situations in which creditors seek to ascertain the continuance of public assistance benefits in underwriting decisions
- Credit underwriting when decisions are based in part on models using artificial intelligence or machine learning
- Adverse action notice requirements
In our view, these are appropriate questions for the CFPB to be asking the industry concerning both old and new issues presented by ECOA and Regulation B, and the industry would certainly benefit from more clarity from the Bureau concerning how to proceed concerning some of the issues. For example, few institutions have availed themselves of special purpose credit programs that have long been offered under Regulation B because of the uncertainty of how such programs will be treated by examiners post-implementation, so additional regulatory guidance or pre-clearance by the Bureau of special purpose credit programs may alleviate that concern. A more recent illustration is the increasing use of machine learning (“ML”) and artificial intelligence (“AI”) across a range of functions. Additional guidance from the CFPB would be useful in terms of how these innovative methodologies can be further leveraged in credit underwriting while not running afoul of ECOA and Regulation B. As the Bureau pointed out in its recent blog post concerning use of adverse action notices when using AI/ML, “industry uncertainty about how AI fits into the existing regulatory framework may be slowing its adoption, especially for credit underwriting.” Although we detect significant consumer advocate skepticism of AI/ML models, our view is that such models can be superior to traditional logistic regression models, and in fact produce results that are more tailored to individual consumers’ circumstances than traditional models can. So long as appropriate attention is paid to variable selection in the model development process, we do not believe there should be any inherent fair lending problem with the use of AI/ML models, and it would be extremely helpful for the Bureau to set forth “rules of the road” for how AI/ML models should be developed and validated to avoid fair lending concerns.
How best to serve LEP individuals is another topic that would benefit from additional Bureau guidance. The CFPB last issued meaningful LEP guidance in its Supervisory Highlights Fall 2016 edition, which appeared to open the door to the concept that it may be permissible for financial institutions to advertise and market their products in non-English languages without the entire product being originated and serviced in a foreign language (as some previous enforcement actions had implied). Importantly, the Bureau noted that in some examinations, it required financial institutions to provide “clear and timely disclosures to prospective consumers describing the extent and limits of any language services provided throughout the product lifecycle.” That statement appears to indicate that, from the CFPB’s perspective, a successful path to advertising and marketing in non-English languages is one that contains a clear disclosure concerning which parts of the product experience are and are not in a foreign language. Regulatory guidance clarifying that approach would be tremendously helpful to the financial services industry, especially to provide more concrete guidance about the content, location and timing of such disclosures. It is noteworthy that on July 29, the CFPB held an invitation-only virtual roundtable with consumer advocates and industry representatives, attended by Director Kathy Kraninger, to discuss potential guidance the CFPB may issue with respect to serving LEP customers. Chris was one of only two private sector attorneys who attended this roundtable, and he will be posting a separate blog about it soon.
On the other hand, it may be difficult for the CFPB to provide additional clarity on the subject of the disparate impact theory under ECOA. As background, the CFPB issued a bulletin in 2012 (Bulletin 2012-14, Fair Lending) confirming that it planned to apply a disparate impact test in exercising its supervisory and enforcement authority under ECOA and Regulation B. After Congress overrode the Bureau’s indirect auto finance bulletin in 2018 under the Congressional Review Act, there were statements by the Bureau that suggested an intention to re-evaluate the disparate impact doctrine. Although the CFPB last noted an ECOA disparate impact rulemaking in its Fall 2018 rulemaking agenda, that item was noticeably absent from the 2019 and 2020 agendas, so such a rule does not appear to be in the Bureau’s near-term plans. But the range of possible outcomes here is wide – from declaring that there is no disparate impact liability under ECOA at all (which is the result we believe most appropriate from the language in ECOA itself) to adopting something similar to HUD’s current proposed disparate impact rule under the Fair Housing Act, to adopting something more like the previous HUD rule. Moreover, this seems likely to be a matter of significant disagreement, so it will be interesting to see what the Bureau does in wading into this highly contentious subject.
Financial institutions that seek to submit comments to the CFPB concerning one or more of these issues should carefully parse through each set of questions to determine whether additional clarity provided by the Bureau may create benefits or burdens. It is advisable to conduct these analyses through legal counsel and/or trade groups.
The preamble to the RFI notes that the questions posed are not intended to be exhaustive, and that the CFPB welcomes “additional relevant comments” on these topics. Comments on the RFI will be accepted for 60 days after publication in the Federal Register.