The CFPB recently issued its annual fair lending report covering its fair lending activity in 2022.

In the report’s discussion of the CFPB’s risk-based approach for prioritizing fair lending supervisory and enforcement activity, the CFPB indicates that in 2022, much of its supervision efforts focused on mortgage origination and pricing, small business lending, policies and procedures regarding geographic and other exclusions in underwriting, and the use of automated systems and models.  The CFPB also identifies the following specific issues:

  • Mortgage origination—redlining (intentional discrimination against applicants and prospective applicants living or seeking credit in minority neighborhoods, including by discouragement);  assessing potential discrimination in underwriting and pricing processes; assessing whether lenders are illegally steering applicants on a prohibited basis; and HMDA data integrity and validation reviews (both as standalone exams and in preparation for Equal Credit Opportunity Act (ECOA) exams that follow).
  • Small business lending—assessing whether there are disparities in application, underwriting, and pricing processes, redlining, and whether there are weaknesses in fair lending-related compliance.

In addition, the CFPB noted that in 2022 it investigated potential discrimination in the credit card, payday loan, and student loan markets, although it did not provide specifics, and that more generally it looked into practices targeting vulnerable populations for evidence of ECOA and UDAAP violations. 

While it continues to be the CFPB’s position that the ECOA applies to prospective applicants, the CFPB’s position was rejected by a federal district court in the CFPB’s enforcement action against Townstone Mortgage (Townstone).  The CFPB’s lawsuit against Townstone represented the Bureau’s first ever redlining complaint against a nonbank mortgage company.  The district court ruled in April 2023 that a redlining claim may not be brought under the ECOA because the statute only applies to applicants.  The CFPB has appealed the decision to the Seventh Circuit  and recently filed its opening brief.

The report’s discussion of fair lending enforcement actions indicates that in 2022, the Bureau announced one fair lending enforcement action which involved alleged discouragement of prospective applicants and redlining by a mortgage lender.  The CFPB also referred five matters to the Department of Justice (DOJ) involving alleged ECOA violations, with four matters involving alleged redlining in mortgage lending and one matter involving discrimination in underwriting mortgage loans on the basis of receipt of public assistance income. 

The report also indicates that in 2022, four agencies (FDIC, NCUA, FRB, and CFPB) collectively made 23 referrals to DOJ involving alleged discrimination in violation of the ECOA and that this represented a 91 percent in such referrals from 12 in 2020. 

In the concluding section of the report titled “Looking forward: the future of fair lending,” the CFPB indicates that it is focused on the risks that the increased use of advanced and emerging technologies in financial services presents to individual consumers, small businesses, communities, and the market as a whole.  The CFPB observes that advanced algorithm technologies are now often used throughout the entire life cycle of financial services products, “beginning with the sophisticated digital marketing that targets individual consumers, continuing to the fraud screens and underwriting models that determine who gets offered credit and at what price, and finally to the chatbots and behavioral analytics that increasingly govern consumers’ experience post-origination.”  It also indicates that the risks presented by advanced algorithm technologies, “combined with digital marketing techniques that allow firms to target consumers with surgical precision and to leverage dark patterns, can have the potential to create an unfair marketplace that harms consumers and law-abiding institutions.”   

The CFPB indicates that it “has increased its expertise in data science and analytics to ensure that [it] can identify fair lending violations at each stage of the credit [cycle.]”  It also indicates that it “will continue to dedicate and develop resources to dive deeply into how financial institutions are using, understanding, testing, and improving these [advanced and emerging] technologies throughout the entirety of the credit cycle.”

On August 16, 2023, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “Shining a Bright Light on Digital Dark Patterns.”  Click here to register.