At an industry fair lending conference last week, officials from the U.S. Department of Justice (“DOJ”), the CFPB, and the U.S. Department of Housing and Urban Development (“HUD”) outlined fair lending priorities for their agencies. These represent the first remarks by these regulators following the DOJ’s announcement of its major new “Combatting Redlining Initiative” on October 22, 2021, and it was the topic of each of their presentations. Although the DOJ officials’ remarks largely reflected the press release concerning the new anti-redlining initiative, a few new revelations came to light related to both DOJ’s initiative and the CFPB’s general and fair lending priorities under its new Director Rohit Chopra.
DOJ. Keynote speaker Kristen Clarke, the new Assistant Attorney General (“AAG”) for the DOJ’s Civil Rights Division, explained the agency’s “Combatting Redlining Initiative” and partnership with other federal and state agencies. She stated that fair lending is “one of most significant issues of our time,” and that the Civil Rights Division is “compelled to tackle this issue [of redlining] head-on” because of the “widespread practice” in the lending industry and the fact that large homeownership disparities still exist in the U.S. along racial, ethnic and national origin lines.
AAG Clarke explained that the DOJ’s new initiative is the “most aggressive and coordinated effort” to address redlining to date. She noted that the agency will work with the CFPB, HUD, prudential regulators, and U.S. Attorneys’ Offices and state attorneys general to carry out its initiative using a “whole of government” approach to root out redlining practices on a broad geographic scale.
AAG Clarke further explained that DOJ plans to investigate lenders of all types and sizes for redlining practices, including non-depository institutions that now originate the majority of residential mortgages in the U.S, and noted that several investigations are already underway. She also discussed the list of factors used by the DOJ to determine whether a lender is engaged in redlining activities.
Furthermore, AAG Clarke dwelt on the recent Cadence Bank and Trustmark National Bank redlining settlements, stating that the significance of those settlements is not just about the dollar amount, but DOJ’s goal to repair “decades of discrimination.” She also noted that redlining settlements can ultimately benefit the health of institutions and their surrounding communities.
AAG Clarke further noted that DOJ seeks to work “cooperatively and collaboratively” with institutions to address the “deep-seated” redlining problem and wants to make a “positive and lasting impact”on the state of fair lending in the U.S. She also noted that the DOJ will continue to pursue investigations and enforcement actions when discrimination is detected in underwriting and pricing in other types of lending beyond mortgage lending, broadly including “all types of discrimination acs the lending process and credit markets.”
In a separate panel, Jon Seward, who is Principal Deputy Chief of the Housing and Civil Enforcement Section, Civil Rights Division at DOJ, indicated that “in the not too distant future,” DOJ plans to announce an enforcement action against a non-depository institution. Although the CFPB filed a redlining lawsuit against Townstone Financial, Inc., a nonbank mortgage lender, in 2020, the DOJ has not previously pursued redlining allegations against nonbanks, so this will break new ground for that agency.
CFPB. Patrice Ficklin, Fair Lending Director of the CFPB, was also a keynote speaker. She began her remarks by noting the profound impact the COVID-19 pandemic has had on low- and moderate-income communities and people of color, and the CFPB’s goal to promote equitable and inclusive economic recovery for all consumers.
Director Ficklin proceeded to outline the Bureau’s three key priorities under new Director Chopra’s leadership:
- Stimulate greater competitive intensity in the consumer financial services market. She noted that greater competitive intensity would benefit individuals and families, citing the “dearth of competition” in the mortgage refinance market for individuals of color. In keeping with Director Chopra’s priorities honed during his recent tenure as an FTC commissioner, the CFPB will pay close attention to practices that may hamper competition by “dominant incumbents,” including those in Big Tech.
- Sharpened focus on repeat offenders that violate agency or court order. Director Ficklin noted that the Bureau has entered into a substantial number of consent orders and will closely monitor compliance with them. When needed, the CFPB will work closely with state and federal regulators to address non-compliance and fashion appropriate remedies.
- CFPB will look for ways to restore relationship banking in an era of Big Data. As artificial intelligence and machine learning credit models proliferate, there is less transparency into how credit decisions are made through “black boxes” today, and sometimes those practices can reinforce bias and discrimination. According to Director Ficklin, preserving relationship banking is “crucial to our nation’s resilience and recovery, particularly during times of stress.”
Director Ficklin then outlined the Bureau’s fair lending priorities:
- Redlining. She noted that redlining has been a top priority since the Bureau’s inception in 2011 and both the Trump and Biden administrations, and that the CFPB intends to take “fresh approaches,” citing the DOJ’s anti-redlining initiative. She also underscored Director Chopra’s remarks at the DOJ press conference announcing the initiative that the CFPB will focus on digital redlining going forward, including concerns about “black box” algorithms that may reinforce biases that already exist.
- Appraisal bias. She noted this was one of Director Chopra’s key priorities. She explained that home valuations have traditionally been based on human judgment and discretion, and additional objective controls are needed. The CFPB has already held meetings with industry representatives concerning the policies, procedures and controls currently in use to better understand valuation issues. The Bureau is also partnering with the FHFA and prudential agencies on a long-standing rulemaking for QC standards for automated valuation methods stemming from a requirement in the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which is currently in the pre-rule stage. An interagency taskforce established in June by President Biden is expected to issue a report with recommendations in the future.
- Special purpose credit programs (“SPCPs”). Also a top priority of Director Chopra, the CFPB seeks to promote usage of SPCPs to increase equitable access to credit. Ms. Ficklin noted the Bureau’s December 2020 guidance on SPCPs and encouraged lenders to reach out to CFPB to discuss plans to launch an SPCP.
- Small business lending. The CFPB issued a notice of proposed rulemaking that would implement Section 1071 of the Dodd-Frank Act in September 2021, and Ms. Ficklin encouraged public comments, which are due on January 6, 2022. She noted that the Bureau also launched a small business webpage on its website, including a “tell your story” portal for small business applicants to share their stories about applying for credit to help the CFPB better understand the small business lending market.
- Limited English Proficiency (“LEP”) consumers. She noted that LEP individuals face unique challenges in learning about and accessing consumer financial products and services because disclosures are generally not available in non-English languages. She briefly explained the CFPB’s LEP guidance issued in January 2021 that sought to provide better guidance to the industry on serving LEP consumers, and in September 2021, the Bureau’s publication of a blog post on how mortgage lenders can better serve LEP borrowers.
- Focus on unfairness and discrimination in examinations and supervision. Ms. Ficklin stressed that violations of law will not be tolerated, especially during the pandemic. In the CFPB’s quest to advance racial and economic equity, the Bureau has now increased resources targeted toward small business lending. The CFPB will also pursue “other illegal practices outside of ECOA and HMDA,” with the goal of using its authority to narrow the racial wealth gap and ensure markets are clear, transparent and competitive. Again, Director Chopra’s focus on anticompetitive market behavior appears to be evident in her remarks.
HUD. David Enzel, who is the General Deputy Asst. Secretary for Fair Housing, at HUD, also expressed his concerns about redlining practices. He noted that HUD maintains a dedicated team in Washington focused on that topic and that several “significant issues” are currently underway at the agency. Mr. Enzel encouraged proactive use of “second look” review programs for both credit applications and low appraisals and close review of advertising practices for intentional and unintentional bias, especially those that are digital and custom-tailored to individuals, which can sometimes be based on race and ethnicity factors.