The Federal Reserve System, through its Consumer Compliance Outlook platform, recently hosted its annual Fair Lending Interagency Webinar. During the session, a variety of fair lending topics were discussed, including redlining, appraisal bias, and Special Purpose Credit Programs (SPCPs), as well as supervision and enforcement-related updates. Presenters included representatives from the following federal agencies: Consumer Financial Protection Bureau (CFPB), Department of Housing and Urban Development (HUD); Department of Justice (DOJ); Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA); Federal Reserve Board (FRB); National Credit Union Administration (NCUA); and Office of the Comptroller of the Currency (OCC).
The CFPB and HUD both focused much of their discussion on appraisal bias and the joint work being done to address discrimination in valuations. Both agencies are leading initiatives through the Property Appraisal and Valuation Equity (PAVE) Taskforce. The CFPB and HUD are working to create guidance on ECOA’s application to the appraisal industry, and develop updated examination guidance to ensure lenders are taking appropriate steps to identify and reduce the risks of discriminatory appraisal practices. The agencies also urge lenders to review and update their policies for reconsideration of value, and that lenders be prepared to provide borrowers with clear, actionable information about how to raise concerns with an appraisal if they believe a home was undervalued. Further, the CFPB commented on the joint rulemaking efforts focused on automated valuation models (AVMs), and solicited feedback from the industry on how AVMs are used and what safeguards would help reduce the risk of digital redlining. We previously reported on the CFPB addressing the issue of algorithmic bias in home valuations in connection with the joint rulemaking.
The FHFA, along with Freddie Mac and Fannie Mae, has extensively studied appraisal bias and disparities over the past few years. The FHFA discussed a recent blog post on appraisal bias based on aggregate statistics from its Uniform Appraisal Dataset (UAD). The agency found minority neighborhoods had a difference of over 40% more appraisals coming in under contract price in 2021, when compared to appraisals in white neighborhoods. (We previously discussed the FHFA’s use of the UAD to assess appraisal bias.) The UAD standardizes various data elements regarding an appraisal and is a valuable tool for comparing the valuation of homes across neighborhoods and cities.
During the webinar, the OCC took time to encourage banks to use SPCPs. The agency reiterated HUD’s guidance from last year that SPCPs that comply with Equal Credit Opportunity Act (ECOA) do not violate the Fair Housing Act. For banks over the $10 billion threshold for CFPB supervision, the OCC encouraged discussing the plan with the CFPB. The OCC commented on experiences they have with lenders that are hesitant or have drafted inappropriate plans. For example, some lenders have attempted to create plans with less favorable terms than mainstream products (i.e. higher pricing). The agency is working with lenders to create more helpful plans that will expand access to credit using modified credit policies and more comparable loan terms.
The NCUA remarked on the two letters to credit unions issued this year – one letter supporting the use of SPCP’s and one letter addressing fair lending violations that the agency has found during recent examinations. The agency shared that over 100 fair lending violations have been found in 2022, mostly consisting of Regulation B notification violations. It was noted that the increase in recent findings was due, in part, to the NCUA’s transactions testing, which began in 2019.
The FDIC focused on issues that are referred to the Department of Justice and recent trends in referrals. Over the last two years, FDIC examiners have found violations related to redlining, pricing, and underwriting. The agency also noted an increase in fair lending issues associated with third party activity, including improper use of marital status on online platforms and pricing discrimination through indirect auto lending. The agency described situations in which it “must” refer violations to the DOJ for further investigation. For example, in one disparate impact case against a student loan lender, the FDIC took the position that a referral was required to be made because the bank was allegedly discouraging or denying applications from students attending historically Black colleges and universities. Further, the agency explained the factors it considers during redlining investigations, which include branching, marketing and outreach efforts, and the demographics of the bank’s Community Reinvestment Act assessment area.
The FRB and DOJ discussed redlining issues and trends in enforcement. Examiners and investigators consider all facts and circumstances, including trends over time or past fair lending issues with a particular lender. The agencies will also take into account updated census data, which provide demographic information about different census tracts. The DOJ touched on a number of recent redlining enforcement actions, including a case where a bank was found to have focused its lending and marketing efforts based on geographical boundaries that excluded Black and Hispanic neighborhoods.
Ultimately, all participating regulators expressed concern with fair lending risks across the banking and housing industries and are working to resolve these issues. Regarding redlining risk, the agencies have and will continue to use HMDA data to compare the applications received by, and lending level of, creditors in minority areas, and lenders with lower levels of applications and loans are at risk of a redlining examination. We note that it is important for lenders to conduct assessments using HMDA data to determine if they need to alter their practices.
Finally, the CFPB stated it will rely on UDAAP authority to go after appraisal bias and other forms of discrimination if the discriminatory actions fit within the UDAAP framework. Other agencies commented that they will coordinate with the CFPB and work to ensure institutions under their supervision follow CFPB guidance relating to fair lending issues.